December 2, 2008

Recession or Depression 2009?

I have been watching the ongoing economic slowdown of the past few months with the belief that it was going to be a recession, likely a deep one similar to the last one America experienced in 1981-82. Now for the first time I'm growing increasingly fearful of a 1930's style depression, after reading the following article:

Credit card industry may cut up to two trillion dollars in lines over the next 18 months.

What has been happening so far is a period of deflation, which is the reduction of the supply of money and credit in the economy. This has been happening despite all of the governments bailouts, which the banks have been hoarding, instead of lending, as they all have growing bad debt (loan defaults).

The problem is our economy is consumption driven, at over 2/3rds of our total GDP, or gross domestic product. If the major credit card issuing banks are that afraid to lend, this destruction of two trillion in credit lines (basically unsecured loans), would mean a massive, forced decline in consumer credit spending by almost half! It means millions will have their credit cards cancelled by their banks at renewal time, or credit lines sharply reduced at any time.

Keep in mind that the credit card is America's second largest source of consumer liquidity, next only to your salary. It will be nearly impossible to spend ourselves out of a recession. Also keep in mind more and more people use their credit cards for health related emergencies not covered by insurance, or for basic necessities if they find themselves out of work, and we all know unemployment is rising and will likely continue to do so.

Home sales, automobile purchases, and big-ticket retail sales are almost exclusively done through the availability of credit. Cash is only used for the smaller necessities, like groceries, clothes, and gas. Save your economy by putting your neck deeper in the debt noose? You won't be able to even if you wanted to!

The only short term solution to this problem would be the government issuing another massive economic stimulus spending plan, sending us all another $500 check courtesy of Uncle Sam. But this will keep on growing the debt, which as stated in previous posts is unsustainable, and in the end will lead to an even greater crisis.

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