The storm is here, the trees are falling

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Written by Daniel Steinmann

Friday, 03 July 2009 09:34

I grudgingly have to admit the economic melt-down is very much with us and that we are now suffering from the secondary round fall-out: Production falling, inventories rising, exports shrinking, company profits gone, dividends diminished or postponed, property values crumbling and job losses all round.
Revenue to the fiscus will be dismal this year. Credit demand has all but collapsed measured against the regular 20% plus year-on-year monthly figures we got used to in 2006 and 2007. And despite the rapid and rather aggressive reduction in interest rates, many households are in serious trouble. And for us, the worst six months are still ahead. Between now and the end of this year, the business environment will not improve, instead I expect it to deteriorate gradually but persistently and I only expect a meaningful but conservative revival from around March next year. For the developed world, I still expect the big market crunch somewhere in the last week of August to early September.
When another chain letter crossed my desk this week, I took note of this phenomenon for the first time in my life. Usually I regard them as a mild irritation entertained by stupid and lazy people. The same type you find in a gambling house feeding the one-arm bandit the pennies that should have bought that day’s milk and bread. I also know that for as long as I can remember, chain letters were illegal and as far as I know, this has not changed.
But what made my eyes pop out was the fact that the unsuspecting people who have entered their names in the chain mail hierarchy, are actually people I know. These are not people who would participate in this form of pyramid under normal circumstances. For them to suffer the humiliation of having to put their names at the top of an illegal letter hoping to receive free money through the mail must be mentally and emotionally disturbing.
My feelings towards any form of gambling can be described with only one word - DISGUST. So it must be clear I am biased in the extreme against the trade and against those people who base their lives on what they perceive as luck. Luck it may be, or lack of it, but all too often an escalating series of life failures are blamed on gambling as if it is a condition, which the sufferer cannot avoid. And to me a chain letter is just another form of gambling albeit more sophisticated, structured and devious. A chain letter is a gamble in the sense that you need to fool enough eager fools to draw them into it, and it follows a classic pyramid pattern. The few at the top enjoy the rewards coming from those clambering for the top as the base grows. If the base does not continue to grow, the rewards at the top quickly disappear. Perhaps, technically by definition, not precisely gambling, but in my view, exactly the same thing.
When ordinary folks revert to pyramid schemes they are in dire straits. This was shown to me by this week’s chain letter. The people whose names are at the top will never participate in such a scheme unless they are desperate. Therefore, I must assume they are.
Destruction of income has wide consequences for the individual and for the family. Suddenly the person finds himself without access to credit. If his property value does not allow him to make an equity withdrawal, he quickly descends down the debt trap. If on top of that, the family is large, the cars and everything else have been financed, and the house is mortgaged to the hilt, his month-end is not an enjoyable occasion.
A string of debit orders is knocking persistently on his bank account door and there is nothing he can do to make them go away. Usually, in conditions like these the debtor tries to swing a few higher-value assets fast only to find out he is in the middle of a market where many other people are in exactly the same boat. Hence there is no demand and consequently no bargaining power. The asset values are typically less than half of what the man is asking. Eventually he sells for whatever he can get thereby further eroding his credit worthiness.
This is dangerous spiral and often it becomes an avalanche once it has started. The end result is desperation and despair.
I do not wish this for anybody. That is perhaps one of the big reasons I am hoping for finding a bottom in this economic downturn, and then for stability with growth, no matter how slow or incremental. At least that puts one in a position where financial planning becomes viable again. It will also allow those households that are already in serious trouble to work out a strategy with their creditors (and their bankers) to get through the turmoil.
But for that to work, you cannot go and gamble away the milk and bread money.