I just read one of Jeff Benson’s economics posts, with the title: Housing Bubble vs. Tech Bubble Loss of Wealth in Dollar Denominated Terms. It’s worth a read if you’re economically inclined, as it compares the crash in values between now (housing bubble) and 7 years ago (tech bubble). Jeff’s figures tell an interesting story:
- Housing Bubble: Loss of value = $4.5 trillion (US GDP = $13.8tr, hence 32% of GDP)
- Tech Bubble: Loss of value = $7.1 trillion (US GDP = $10.1 tr, hence 70% of GDP)
In theory then, the tech bubble was more severe, leading to more than twice the loss of wealth in GDP terms. You can adjust this for chained dollar values but the figures wont come out much different. We might then argue that the US economy will breeze through this hiccup with minimal pain, and if these were the only figures that mattered it would be true. But they are not.
Benson considers the question of who lost out in each bust, although it’s difficult to be conclusive about the current bust because much of it has yet to play out. The question here is how many house buyers are going to mail the keys to the mortgage holder and walk, and how quickly will the related bonds be written down. The tech bust didn’t particularly impact consumers unless they held stock or options and the housing bust will only impact consumers that see housing equity vanish. In neither case is the impact directly related to income, so neither bust would, of itself, inevitably generate recession. Jobs were lost in high tech (a single though important sector), and jobs will be lost in construction (again a single though important sector).
As far as I can see, neither bust is devastating and the figures indicate that the tech bust was much worse (in respect of wealth destruction). The real problem comes from elsewhere and it looks a little ugly.
Debt and the Oil Quake.
Much of the buoyant US economy of recent years has been financed by debt. Some of that derives from consumers taking second mortgages and some of it has been credit card based. In the years since 2000 there has been a gradually ballooning of this debt as consumer incomes have remained pretty much stagnant. The upshot is that the total outstanding debts in the US amount to more than $40 trillion. (The source of the figures here is The Daily Reckoning.)
If you assume debt service at an average interest rate of 5%, that’s $2 trillion per annum – and almost all of it has to be paid from income, because the debt figures are reaching a ceiling. According to the The Daily Reckoning, the American consumer is (on average) bankrupt if house prices fall a further 20 – 30%. That puts an entirely different perspective on the housing bust, because it is continuing to push house prices down and houses are the main store of US consumer wealth, in so far as it exists.
Now factor into this situation the increasing price of oil and you’re looking at a very powerful set of recessionary forces. As the oil price rises it reduces the disposable income of the consumer, not just by virtue of the gasoline and heating bills, but also the cost of commodities including food stuff that rise with oil. The decline in the value of the dollar, which has been dramatic in the last few years further impoverishes the consumer, because it raises the price of every import. Take these things together and you can see why the Fed has been cutting interest rates in response to any-bad-economic-news-whatsoever.
And that’s why there is now talk of stagflation (a phenomenon of the 1970s). This scenario is not propitious for growth of any kind. As Benson points out, US consumers are responsible for 2/3 to 3/4 of the US GDP (that is approximately $9 to $12 trillion dollars of goods and services and that, in turn, is about 20% of world GDP.)
If you read the runes, they should tell you that this is not just an American problem.
