Pain without Gain

It always helps to compare life now with life during an earlier economic crisis that many Americans have already lived through. The Great Depression is an experience well beyond the life experience of all but our most senior citizens. So if you can remember what you and your family experienced when times were bad, you might get an idea of what this experience will be like in the near term… just expect the recovery to be much longer, because there was (is?) so much over-leveraging (too much borrowing) at every level this time, and getting back to solid ground will just take a lot longer.

For those of you around during the 1973 Arab Oil Embargo – when Middle Eastern exports were reduced because of Western support for Israel (there was a failed attempt by several Arab nations to invade Israel in October of that year) – you may recall gas rationing and long lines at the service station, there was significant job loss and a horrible stock market. We saw economic shrinkage (across the board reductions in jobs, gross domestic product, the stock market, etc.) in all three of the major industrialized areas of the time: U.S./Canada, Europe and Japan. Although we didn’t have nearly the same levels of borrowing or the technological paradigm shifts that we are experiencing today (especially in telecommunications, energy issues, etc.), we still felt the residual economic pain all the way through 1975.

My wife reminds me of the single can of soup that comprised lunch for two adults and a child… how when “meat” was “occasionally” served, it always seemed to be some form of old ground beef combined with “other.” I remember the macaroni and cheese days myself (almost every day?)... and the lines at the pump. Fleeting images now, but there are memories; it was a lot worse for many Americans. 1973-1975. That is the last time that all three major developed economic regions experienced negative growth at the same time… until now. Despite the recent assurances of Candidate McCain to the contrary, the fundamentals of our economy are so desperately wounded that we’re forced to spend hundreds of millions of taxpayer dollars to merely try to stop the bleeding.

While the U.S. saw recessions in both the early 1980s and 1990s, nothing like the current global meltdown has occurred since 1975. But, for those of you who missed the early 1970s, it doesn’t hurt to recall what even those later, much more minor, slowdowns felt like. Real estate prices crashed, jobs vanished and the stock market fell. The “dot-com” collapse at the turn of the century is still in most folks’ recent memory, yet that was but a mere flesh wound compared to the gaping lesions in our present economy. Economists define a recession as a contraction of gross domestic product (GDP – the value of all goods and services produced) for two or more consecutive quarters. Evaluate the numbers however you like… Boy are we there!

The “contraction” numbers used in these calculations aren’t corrected for population growth (note, Japan is actually experiencing negative population growth) or for a fall in the value of the underlying asset values (especially net of borrowing), so perhaps the technical definition of a recession is a form of denial. After all, a reduction of 1% in the GDP, doesn’t help Nevada where 47.2% of all homes are worth less than their mortgages. Recession or not, suffering is suffering. Remember the past.

The OECD recently stated that gross domestic product for its 30 member countries, representing democracies with market economies, was likely to fall by 0.3 percent in 2009. Specifically, it predicted that U.S. economy would contract next year by 0.9 percent, Japan's by 0.1 percent and the European area by 0.5 percent. The pain is global, but take a good look at how much higher the U.S. number is when compared to the average. We’re the ones with the subprime mortgage crisis, the huge foreclosure rate, which differentiate our economy from that of most (but not all) of the rest of the world.

The lesson is that we will recover, but that a wound requires healing time, and when the wound is severe enough, rehabilitation and healing take much longer. I hope our leadership will eventually take note of how international solutions taken by other nations might not be the right fix for the U.S. where the contraction is greater than the average and where there is one overwhelmingly differentiating reality to our side of the meltdown – the housing market collapse. No credit. Fewer jobs. And no home. One more thing in Southern California right now: devastating fires with incalculable suffering and damage. The new American dream – our nightmare.

I’m Peter Dekom, and I approve this message.