The US is sinking into depression, and as the result of globalization much of the rest of the world is being dragged along. Most people have never seen anything like this in their lifetimes. What they are witnessing is secular upheaval that will bring great change to beliefs, values and lifestyles. A new word is needed to describe it, as it is something much more than an economic depression. Maybe reconstruction will serve as the descriptive term for now.
Sowing the seeds of the coming reconstruction
Reconstruction means reorganizing and reestablishing, taking the pieces of what was old and re-fashioning them into something new. This new construction will owe its birth to the end of the cheap credit that has been the life blood of the U.S. economy, and the demand that people focus on something better. The stages in the death of the old order can be seen all around as greed gives way to fear, and euphoria turns into panic. Suspicion is running rampant.
The coming reconstruction will rise out of the current devastation after awhile. But right now, everywhere people look they see wave after wave of financial implosion. Falling home prices are driving homeowners to abandon their homes and their mortgages, and fire sale prices on foreclosed homes are driving prices into a steeper tailspin. Consumers are defaulting on their credit cards and auto loans, compelling banks to pull back on any more lending. These actions are sending the commercial real estate market into a downward spiral. Plummeting stock prices are signaling the destruction of hope for a better financial tomorrow. The panic on Wall Street is crushing Main Street businesses, paving the way for even more Wall Street panic.
Right now it's a vicious downward cycle. Soaring unemployment rates and extreme financial hardship have arrived for millions of people in the U.S. The losses to many investors are staggering with even more devastation looming on the horizon. Deflation and falling prices that reflect falling demand will exacerbate the pain and extend the downward spiral.
The US bailout is a joke. The assets the government plans to buy and then resell at a profit are worthless, otherwise there would be a market for them and willing buyers would have already emerged. As the government tries to prop up banks that should fail and stock prices that should sink, it will be crushed under their weight. The outlook is very dark, but this darkness is just the sort of environment in which a new day dawns.
This is not the end of the world, just the end of a really bizarre era
Out of the ashes of all this destruction, reconstruction will slowly begin. It is only the mighty that can experience such a great fall. And mighty America is still a repository of resources and knowledge. Americans have a long history of doing it right, and they will get it together again.
Once people stop defining themselves by their possessions they will be free to define themselves by their ideas, values and beliefs. Once they are freed from the need to impress each other by what they have, they can be impressive by who they are and what they can do. When they stop putting possessions first, they can start putting people first.
When greed is replaced by appreciation Americans can throw away their anti-depressants and become happier people. They can stop thinking of entertainment as having people over to admire their possessions and start thinking of it as a chance to be with people they care about to exchange genuine ideas and thoughts. They can again become involved in the commentary of life. When people are freed from the endless hunt for more money and possessions they will be able to effectively parent their children who will then be able to lead emotionally healthy and productive lives. They can teach their children manners and respect, and maybe remind themselves of how to be mannerly and respectful. People's possessions have become weapons they have used to define themselves against each other. When these possessions have been stripped away they will be free to again approach each other as equals.
When the energy of people is freed up from trying to get over on each other there is no end to how innovative and creative they can be. When wild spending changes into prudent saving they will have to take their intellects and resourcefulness out of storage and use them again. They will be called upon to be creative and innovate in their daily existences as well as in their vocations. When people stop being mindless consumers they can devote themselves to insight and understanding. Once they achieve this state, their possessions will again become meaningful as things to value and appreciate, rather than things to devalue and throw away.
Everywhere around there is evidence that nature abhors excess. When people give up excess they can become reunited with nature and experience the rewards of this union. They can once again have good mental and physical health. They can walk upon the earth and feel empowered by the simple fact of their existence. When they are no longer dazzled by the shine of their neighbor's new car, they will be able to see the beauty of a sunset, a wood or a baby bird. In the collapsing economy people constantly felt bad because there was always someone who had a bigger house or a better car than they did. In the new economy where cooperation and ability are the rubrics, anyone can achieve almost continuous positive feedback.
The end of the destructive phase
America is still in the destructive phase. Before the reconstruction can begin in earnest, the destruction of the old must be completed. Right now, people need to think about how to get through the destruction so that they have some resources to begin again. They need to be aware of the breadth and scope of the collapse. The U.S. is still facing bank failures on a massive scale. The FDIC has a list of troubled banks with about 150 institutions where depositors need to be rescued. The bill for that is estimated at something like $80 billion. But when this list of potential failures was made public it did not include any of the large banks that have already failed or been merged with other banks with the help of the FDIC.
There are actually way over 1,000 financial institutions at risk of failure with assets of several trillion dollars, an amount that vastly exceeds the budget of the FDIC. The only way for people to protect themselves is to hold hard assets that have traditionally been considered stores of value in crisis times. This list is topped by gold, farmland, and commodities that people cannot do without. These types of hard assets may also fall in value during the deflation ahead. The point is that they will fall in value less than other types of assets.
The government has told Americans that the bailout will solve their problems, but the bailout addresses even less than the tip of the iceberg. It doesn't include any of the costs for rescuing Fannie Mae and Freddie Mac and the other government sponsored entities that are also holding bad debts. Nor does it address the loan portfolios of Fannie and Freddie that are continuing to implode.
When consumers get the picture, commercial real estate will undergo the same kind of harsh reality that has hit residential real estate. And when consumers can no longer pay the minimum on their credit card debt, the issuers of that debt will also be looking for a bailout.
Many people have made a sterling effort to stay current on their mortgage payments. After they lose their jobs, these mortgages will also fall into default. More houses will appear on the market, further depressing the prices at which they can be sold. As house prices continue to spiral downward there is no incentive for anyone to pay a mortgage when their house is worth less than what is owed.
Can the government continue to bailout everybody as the financial situation worsens? Obviously not, since the people who are losing their jobs will no longer be paying into the tax base.
And to top it off, there is the $180 trillion derivative market. For years financial wizards have cooked up complex financial instruments that few have understood but many have invested in. All this is yet to be unwound.
The markets have declared that the government interventions aren't going to save the old system. It is clearly rotten to the core. It appears that the markets are going to bring down the system in spite of what the government does. This will speed the conclusion of the destructive phase.
Think of it as a huge group detox. While the toxins are being rid from the body there is a lot of storm and angst. But when it's over, everyone is going to feel a whole lot better.
About the author
Barbara is a school psychologist, a published author in the area of personal finance, a breast cancer survivor using "alternative" treatments, a born existentialist, and a student of nature and all things natural.