Wolf Richter: The Economy Is Cracking Under Too Much Debt
Wolf Richter: The Economy Is Cracking Under Too Much Debt
Wolf Richter joins the podcast this week to discuss the deterioration of the global macro situation, and how he is seeing growing signs of recession breaking out across the economy:
I think that was one of the biggest mistakes the central banks made during the financial crisis: They stopped the debt from blowing up. So we never had a cleansing.
In a recession, normally companies de-leverage. They go through bankruptcy, they shed their debts, and you have this big wave of debt restructuring. This is painful for bondholders and banks, but it clears out the crap that is clogging up the pipeline. And so these companies reemerge or get bought out and the debt just disappears. The same with consumers: they unload their debts through various methods, and so when the recovery starts, you are not suffocating under this huge load of debt.
That has not happened in the United States, particularly, but in other countries, too. That debt never got fully blown out. And then the recovery started with 0% interest rates and monetary stimulus, which only encouraged companies and individuals and governments to take on even more debt. So now we're burdened with such an enormous amount of debt that I think it is very hard to even breathe for the economy. A lot of people out there are worried about this, which is why you hear now voices saying we need a serious reflation. They need to come up with a lot of inflation to wipe out that debt. And of course, that will be a fiasco for our economy because if you have any uptick inflation without an equivalent uptick in wages — which we have not been getting — then you will destroy the consumer. And so this is not a great solution either.
But we are still solving the too-much-debt-problem with too much debt. I mean, the Fed is still saying We will make money for free and you just need to borrow more money, and that's its solution to having too much debt. It's insane when you look at it.
Restaurants, a classic leading indicator of economic spending, are having one of their worst periods since the 2008 crisis:
Restaurants are a key indicator in an economy for discretionary spending. You do not have to go to a restaurant, you want to go. So we keep our eyes on restaurants for that reason, plus it's a big part of the economy — it is about 4% of GDP, about 10% of the jobs.
Now we have indications that the industry is running into hard times. We have restaurant bankruptcies this year of chain restaurants. They are just piling up and of course these are all the older chains that have taken on lots of debt with encouragement of the central bank and now the leases are going up and expenses are going up and sales are going down, and the only way out is for them to declare bankruptcy. There are, I think, 14 chains that have declared bankruptcy in the last 10 months. That's a lot. That's as bad or worse than during the financial crisis.
We have the restaurant index that has dipped into the negative now. We have the restaurant owners and operators getting bearish on the overall economy. They are usually a pretty optimistic lot and so now, in the next six months, they are seeing that it is going to get worse rather than better. So, the restaurant business is getting hit. The casual dining, fast dining sectors — these are the ones that are particularly under the gun right now. If you're running a restaurant like a TGI Fridays or Black Eyed Peas or one of those you're losing your customers. People do not have enough money and they are cutting back on restaurant spending.
And housing in previously "bulletproof" bubble markets like San Francisco are finally straining under the weight of their unaffordability:
So the numbers, they seem really crazy to people to the people who live in other parts of the country.
Here in the Bay Area, San Francisco isn't even the most expensive place. Palo Alto and Silicon Valley are a lot more expensive. But San Francisco is big so we see the numbers. I think the median teacher makes around $65,000 a year here. I mean, forget about buying a house. There are not that many houses in San Francisco; they are very expensive, like a $1.3 million median price, somewhere out in the Avenues, far away from everything. So let's talk about apartments, let's talk about condos. For renting an apartment, if you have a salary of $65,000 a year and you are looking at a one bedroom apartment, nothing fancy, just a median one-bedroom apartment that rents for $3,400 a month, a little over $40,000 in rent a year. So you pay taxes on your $65,000 in salary and social security and so-forth, and then you have practically nothing left to be on rent. So forget buying groceries, forget buying clothes, this is it. So you have to pack a two-teacher couple into a median one-bedroom apartment and that will barely work financially. And raising a family in a one bedroom — and one-bedrooms in San Francisco are small, I mean these are tiny places — people do that, it's not uncommon. This is what we call a housing crisis: when the median income cannot afford a median home anymore. You need to be quite wealthy to afford a median home.Now if stocks double or triple in price, it doesn't really have an impact on the real economy. People do not have to live in these stocks. They do not have to buy them. They do not have to eat them, but when you start talking about housing doubling, the cost of housing doubling in a span of a few years, now you are talking about real life getting so expensive that it is no longer affordable for the lower 80% or so. And I hate to say lower 80%, but that is really what it is, so this is where a housing bubble is very destructive in the real economy. When you walk around San Francisco, you see a lot of little shops and restaurants that are closing. There's not a lot of retail given the income levels in San Francisco because we do not have much money left after rent. So this housing crisis is starting to eat up a bigger and bigger part of the economy. Housing bubbles are treacherous, and when they blow up, which they always do, they become even more treacherous. They impact the financial system in fundamental ways and they wreak a lot of havoc. So creating a housing bubble, or as the Fed calls it: "healing the housing market", is both terrible on the way up, and terrible on the way down.
Click the play button below to listen to Chris' interview with Wolf Richter (47m:27s).
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