The Balance Sheet Recession: $4.2 Trillion Lost in Residential Real Estate Value. Yet Mortgage Debt Down by $140 Billion.
What we are experiencing is a balance sheet recession. The reality of our current economic funk is highlighted by the growing unemployment rate and the diminishing purchasing power of many Americans. What is going to make this economic crisis drag out like a painful Hollywood divorce is the inability to reconcile the past with our current reality. Take for example the nucleus of this recession, the housing bubble.
At the height of the bubble in 2006, residential real estate in the United States had a value of $24.25 trillion according to the Federal Reserve Flow of Funds report. Mortgage debt stood at approximately $10.54 trillion.
Fast forward to the second quarter in 2009 and look at the new values:
Real estate value (household and nonprofit): $20 trillion
Home mortgage debt: $10.4 trillion
We can chart this out:
American households have seen real estate values plummet by at least $4.2 trillion but mortgage debt has only fallen by $140 billion. This is the large predicament we now find ourselves in. Much of this is being corrected through the foreclosure process. Residential property values have fallen and either consumers live in an asset that is no longer worth a peak price, or lose the home so it is liquidated at a new market value.
$4.2 trillion has disappeared and needs to be reconciled. Many of the bailouts and the haphazard measures to prop up housing prices fail to acknowledge that there can be a significant probability that trillions of dollars were merely a mirage. That value is now being reflected without the special bubble lenses. However, the debt is still out there and reflecting optimistic valuations on the books of many banks. The FDIC is realizing this through the weekly failure of banks.
Household balance sheets are adjusting to the harsh new reality. The unemployment rate is officially at 10.2 percent, a spot that hasn’t been seen since the early 1980s when Disco was merely going out of fashion. Household income has also been declining:
Americans are now faced with a new form of austerity. Credit card offers are looking like a thing of the past. Forget about those home equity line home renovations or vacations. Many are dealing with this new reality not by choice, but by force. It is interesting to look at the Dow now over the 10,000 mark, a spot we hit over a decade ago. Think of a simple investment made in November 10, 1999:
$10,000 invested
Dow: 10,700
Gold: $300
Dividends excluded, your $10,000 invested in the Dow after 10 years has basically moved no where. At the spot price in 1999, $10,000 bought you 33.33 ounces of gold. Today that amounts to $36,663 for basically holding on to an old store of value. This out played an index of 30 of the biggest industrial powers, many now replaced like AIG. Am I saying go out and put all your money in gold? Of course not. But the truth of the matter is gold has gone up more in response to the massive spending and debt the U.S. has accumulated.
The unfortunate reality is the U.S. Treasury and Federal Reserve have figured out how to tax Americans without calling it a tax. Even though on a nominal level, Americans earn the same they did a decade ago, with the erosion of purchasing power the standard of living has fallen drastically. Gold is merely reflecting this new reality. The stock market is up because the sea is draining and our boat merely looks bigger given the current context. In reality, we are in the midst of an enormous tempest.
The $4.2 trillion in lost real estate value is a new reality. This for the most part is a large reason for the massive amount of foreclosures. Negative equity brought on by years of dubious lending. At the moment, there is painful reconciliation of the balance sheet. Americans are doing their part yet Wall Street isn’t. In fact, they are on path to having another record breaking year with more rounds of epic bonus paydays as they exploit the imbalances in the system. This is courtesy of the U.S. taxpayer since many of the firms would be obsolete if it weren’t for the historical bailouts. No one has bailed out the average American although the pretext to the Wall Street bailouts was to help the average person.
If we combine equities, businesses, and other forms of wealth Americans have seen some $12.2 trillion in net worth disappear since the peak in 2007:
The Fed is trying to inflate the nation out of the trillions in debt that is weighing on it like an albatross tightly affixed to the neck. Will it work? It is doubtful that the average American will feel it like a stunning success. Wall Street can leverage the weak dollar to sell abroad and also, use carry trades to their advantage. Yet the vast majority of Americans don’t play the foreign exchange markets and thus will benefit little by this move in the long-term. In the end, we will need to reckon with the balance sheet in some shape or form. The only way this will happen is if we get our financial system restored to some form of integrity. Otherwise, you can expect to see other “firsts” like gold hitting $1,100 an ounce.
Employment Engineering: Firing those who Work with Their Hands. Finance, Insurance, and Real Estate Jobs Protected by Bailout Structure. Other Sectors Dealing with Depression Trends.
It is hard to imagine why Wall Street would cheer a 10.2 percent official unemployment rate since the stock market actually ended the day higher after this dismal news. Since the start of the recession, 8 million people have lost their jobs. A total of approximately 27 million people are unemployed, underemployed, or have given up looking for work. All the talk of improvement got people out looking for work again and that is why the unemployment rate saw a big jump from 9.8 percent to 10.2 percent even though employers “only” cut 190,000 in October. The data is deceptive for many reasons. For one, long-term unemployment is a sign that many jobs will be lost forever. The second more ominous point is that many sectors are experiencing mini-depressions.
All job cuts are not equal. If we had to sum it up, paper pushing jobs in the financial sector seem more immune than good producing jobs. Let us look at how the real employment situation is panning out:
government jobs
Since the start of the recession 22 months ago in December of 2007, the government has added 78,000 jobs employing some 22.44 million people. It is interesting to look at local and state taxes that are being pummeled yet this sector is still up. It would be one thing to create new jobs but looking at the chart above, jobs were never cut. What did the government actually do? States like California implemented furloughs and raised taxes in many cases. Of course, the major issue in many states is the bloated pension system that puts an unsupportable burden on those who are actually still working. I can understand that someone needs to live and support themselves in retirement. But in California for example, you have many people receiving $100,000+ pensions and many only worked until their early 50s. What is clear from the above is the government did not cut any jobs on a net basis. So we can scratch this sector when looking at where the jobs were lost.
The next sector is the FIRE economy:
fire employment
Given the 8 million jobs officially lost in this recession, a mere 600,000 came from the finance, insurance, and real estate industries. This is the sector that is largely responsible for the housing bubble and the entire finance mess yet it is not taking a major cut as it should. Why? The bailouts are targeted in protecting many of these Wall Street paper pushers. In fact, you can see that in the last month it actually added jobs. The 6.6 percent drop does not reflect the actual overall fall in employment. Again, this sector is being supported by the trillions in taxpayer money. So where are the job cuts really coming from?
Construction employment has taken it on the chin:
Construction employment is down by a stunning 20 percent since the start of the recession. It is interesting that from the start of the recession, construction and the FIRE sector had roughly the same number of employees benefiting from the housing bubble but where the FIRE sector lost 600,000 jobs, the construction sector has seen 1,557,000 jobs cut, nearly 3 times the rate of the FIRE sector. Apparently building a home is less valuable than writing a toxic mortgage. Again, the government bailouts are protecting an over employed FIRE sector while throwing other sectors of the economy to the wolves. Keep in mind both of these sectors used the same underlying asset (real estate) to expand. The housing bubble is now the U.S. Treasury and Federal Reserve bailout of the FIRE economy.
Durable goods manufacturing has also been slammed:
manufacturing jobs
Durable good manufacturing has fallen a stunning 18 percent since the recession started. If we look at construction and durable goods, both sectors are experiencing depressions while the FIRE sector is experiencing a tiny recession. And take this data point as a reference:
Durable goods and manufacturing:
December 2007 jobs: 8.728 million jobs
October 2009 jobs: 7.121 million jobs
FIRE sector:
December 2007 jobs: 8.242 million jobs
October 2009 jobs: 7.697 million jobs
This should tell you what is happening to many average Americans. Only two years ago, the durable goods and manufacturing sector had 486,000 more jobs than the FIRE sector. Now, the FIRE economy has done a role reversal and has 576,000 more jobs than the durable goods manufacturing sector! Who are we really bailing out here?
Conclusion
Simply taking the employment report at face value is meaningless. What is happening is the bailout structure is designed to prop up the primary industries that created the housing bubble. Many of the FIRE jobs are over compensated Wall Street cronies who are using taxpayer dollars to gamble. The real fact is many sectors of the American economy are in deep recession. Unless you work for the government or the FIRE sector, chances are your industry is in a deep recession. Then again, why else would the stock market be up by 60 percent since March? It is easy to make money when you eliminate the biggest line item (employees) for short-term bottom line gains for those in the FIRE economy since your job is subsidized by the taxpayer.
