"We're all going long apples and boxes to sell them in."

- Richard F. Syron, Freddie Mac CEO

The last administration to preside over two recessions was the Nixon Administration. Coincidently, the Nixon Administration also had election scandals and record-low approval ratings.
Most notably the Nixon Administration oversaw the end of a disastrous war and an inflationary environment directly caused by it.

History is repeating.

"We are getting close to stall speed."

- Alan Greenspan when asked about the slowing economy

You would have to go back to 2002 to find as many negative economic reports as we saw this week. Here's a quick run-down of the highlights:

• Price Inflation is running at a 9.6% annualized rate this month, led by gasoline, clothing, airline tickets and prescription drugs.
  
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• Economic indicators hit a five-year low.
  
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• Federal Deficit hit an all-time high for November of $98.2 Billion, up 34.5% over last year.
  
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• Trade Deficit widened to $57.8 Billion in October.

But like most complex issues the real story is in the back pages, not the headlines. So let's take a step back and look at the deeper issues involved, the issues with a human face.





When it comes to an article about the macro-economic environment, everything begins and ends with the ongoing real estate debacle.

"We're only halfway through the housing shock," said Ethan Harris, chief U.S. economist at New York-based Lehman, the fourth- biggest U.S. securities firm by market value. "It's just a matter of time before the weakness spreads to the rest of the economy."[...]
U.S. office sales fell 70 percent in October from a year ago, industrial sales declined 24 percent, and retail and apartment sales dropped 50, according to New York-based research firm Real Capital Analytics Inc. The declines are the biggest since the company began keeping records in 2001.

Last year was the first nationwide decline in housing prices since the Great Depression.
That should be a scary enough fact, until you realize that almost every industry insider is predicting next year to be worse.

Existing home sales will drop 12 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million mortgage loans will default in 2008, up from about 300,000 this year.

1 million mortgage defaults is another scary number. Sure, you can blame the borrowers, or the lenders, or whoever you want, but you have to remember that each of those foreclosures effects a real, living, breathing family, including innocent victims that didn't borrow any money.

Social service agencies say homeless rates are on the rise not only as families lose their own homes to foreclosure but also as renters are evicted after their landlords default. Financial analysts warn that state and local governments will soon feel the pinch of sharply reduced property tax revenue. And counselors say divorces and reports of abuse are rising as families burdened by impending foreclosure take their stress out on one another. [...]
Especially hard hit are families that rent their homes from landlords facing foreclosure. RealtyTrac, a national real estate network that specializes in foreclosed properties, estimates that more than 20 percent of foreclosures involve investment properties; when landlords lose those properties, their tenants lose a roof over their heads with little warning.

All those families who are getting kicked out of their homes are ending up in front of charities, who simply don't have the resources to be able to handle the huge numbers.

Food banks around the country are reporting critical shortages that have forced them to ration supplies, distribute staples usually reserved for disaster relief and in some instances close.
"It’s one of the most demanding years I’ve seen in my 30 years" in the field, said Catherine D’Amato, president and chief executive of the Greater Boston Food Bank, comparing the situation to the recession of the late 1970s.

Even those families that aren't destitute are being forced to tap into their 401k's.

"In the last four or five months we have seen an absolute onslaught of people trying to do hardship withdrawals and loans out of 401(k)s," Mark Anderson, CFO of Granite City Electric, told CFO magazine in October. "What has happened with housing and the economy has really blown up for people at the lower end of the spectrum."

Those without significant 401k savings are turning to something even worse - credit cards.

Revolving Credit

If you think that Wall Street is going to show those distressed borrowers any mercy, then I would like to introduce you to something called a Foreclosure Mill.

The firms are typically small but may handle thousands of cases a year. Using computer software, they plug in variables such as a borrower's name, address and mortgage amount to generate a suit. Firms compete for business in part based on how quickly they can foreclose.
"In general, most of the firms that practice this kind of law do a very good job," said Peter Mehler, a Cleveland-area lawyer who handles foreclosures on behalf of mortgage servicers. But in the "gold rush" to get a piece of the growing business, some firms "have cut corners."
Lately, judges are faulting law firms for what has become a common practice: filing a foreclosure suit, in states that require them, without showing proof that the plaintiff actually holds the mortgage and has the right to foreclose.

You already know that each time a mortgage borrower defaults the holder of the mortgage losses money. However, what many people fail to realize is that most of those mortgage bonds aren't being held by the people that created the mortgages in the first place.
Those mortgages have been packaged up in a collateralized debt obligation called a mortgage-backed security (MBS) and sold to pension funds, insurance companies, foreign investors, and brokerages. In other words, many of those mortgages are being held by people like me and you in our 401k's. So as the economy deteriorates, and foreclosures sweep the nation, the value of that bond fund in your 401k will also decline along with the assets in your pension.






The Bush Administration spends many millions of your tax dollars every month to lie to you, so you should appreciate the effort. The CIA has nothing on the Bureau of Labor Statistics when it comes to torture. The BLS has learned how to torture numbers until they will say absolutely anything. For instance, one of the favorite torture methods the BLS uses is the Birth/Death Model.

The Birth/Death Model is a statistical model designed to catch the number of new businesses that are born and die every year, but aren't part of the normal jobs survey. Flaws are later corrected by comparing them to the IRS employment numbers. The problem with this method is obvious - it is backwards looking.

When the economy turns up it will under-report the number of jobs in the economy. When the economy turns down it will over-report the number of jobs in the economy - which is what is happening now.



Thus the BLS gives a false picture of the health of the labor market by injecting fictional jobs into the numbers. Another way the BLS tortures the numbers is by dropping people out of the labor force. According to the latest BLS report there are now nearly 1.6 million more people not counted in the labor force than there were last year.

Believe it or not, the MSM is finally starting to realize that the official numbers don't add up.

The new report concluded that personal income from wages and salaries grew at an annual rate of 1.6 percent in the second quarter, far below the 4.5 percent that had previously been estimated.
...the government would revise its estimate of the number of jobs created in the quarter, to as little as 50,000 a month from 126,000 a month.
Through October, the payroll survey estimated that 1.2 million jobs were added to the American economy.
The household survey, which is based on talking to a sample of workers, has shown a decline of 72,000 jobs so far this year.
“This tells us the payroll number is truly flawed,” Mr. Barbera said.

We've talked about the "stag" part of stagflation. Now let's talk about the "flation" part.
The Bush Administration has gone to incredible lengths to disguise how much monetary inflation it and his Wall Street buddies have injected into the economy.



A good example is the GDP of the 3rd quarter for 2007. The alchemists working on the government's economic numbers displayed their magic.

To arrive at this rate, the government had to assume that inflation during the quarter ran at an annualized rate of .8%. That is the lowest rate of inflation used to calculate U.S. GDP since the Eisenhower administration. With oil priced at almost $100 per barrel, gold futures trading over $800 per ounce, the dollar hitting record lows, and the Fed printing money like it is going out of style, the government has the nerve to claim that current inflation is the lowest it has been in half a century. Unbelievable!

Back in the real world, inflation is running a good deal more than 0.8%. Every time I go to the grocery store or fill up my gas tank I notice how inflation is a great deal more than 1% a year. But how much is it actually running at? Fortunately there are other measures of inflation than what the government puts out.

The latest Economist magazine puts the year-over-year dollar index of "all items" up 16.7%. They put the price of food up 31.6% year-over-years. So our government tells us that "core inflation" is running below 1%. And people take these figures seriously.

So if you used the annualized Economist numbers (that reflect the real world) rather than the government's inflation numbers (that reflect neo-con fantasy land) then the GDP growth for the last quarter would have been -12% annualized.

And yet despite all these shenanigans, price inflation is still showing up in the official numbers.






Wall Street isn't oblivious to what is happening to the consumer. They just don't care.

Merrill Lynch's North America economist David Rosenberg presented an almost unremittingly gloomy forecast for the US economy next year. "The US consumer is on the precipice of experiencing its first recessionary phase since 1991 - the last time we had the combination of high, punishing energy prices; weakening employment conditions; real estate deflation and tightening credit conditions" he said.
"We reiterate that real estate deflations are unique and have never ended well for the consumer, the credit market or the economy. We can identify only five periods post WWII when the real value of housing assets turned negative on a year-on-year basis. All of these time periods inevitably included a consumer downturn. Maybe it will be different this time, but we fail to see why," Mr Rosenberg concluded.

Now that's not to say everyone is heading towards hard times. The richest in America (or as Bush put it "My base. The have's, and the have more's") are doing quite well.