Earn What You Spend

In truth, I’m not a dispassionate observer of this crisis.  It effects me in the same way it is effecting virtually every American.  It’s frightening, and I’m forced to reevaluate many assumptions I had previously taken for granted.  Watching the stock market over the past two days is simply hard to stomach.  

Paul Krugman writes: 

We’re in the midst of the worst stock market crash since the Great Depression: the Standard & Poor’s 500-stock index has now fallen more than 50 percent from its peak. Other indicators are arguably even more disturbing: unemployment claims are surging, manufacturing production is plunging, interest rates on corporate bonds — which reflect investor fears of default — are soaring, which will almost surely lead to a sharp fall in business spending. The prospects for the economy look much grimmer now than they did as little as a week or two ago.

It was only a few months ago when Lehman Brothers fell, but that already feels like a lifetime ago.  What most investors would give to have that level of stock market back now.  Over the last three months alone, the stock market has dropped over 40%.  

Three months ago we were worried about housing prices, CDOs, subprime mortgages.  That hasn’t changed.  Only now, we have three more things to add to the mix: consumer spending, deflation and Detroit.  I’ve touched on consumer spending quite a bit, and Krugman continues on why deflation and Detroit are such monumental concerns: 

About deflation: Japan’s “lost decade” in the 1990s taught economists that it’s very hard to get the economy moving once expectations of inflation get too low (it doesn’t matter whether people literally expect prices to fall). Yet there’s clear deflationary pressure on the U.S. economy right now, and every month that passes without signs of recovery increases the odds that we’ll find ourselves stuck in a Japan-type trap for years.

About Detroit: There’s now a real risk that, in the absence of quick federal aid, the Big Three automakers and their network of suppliers will be forced into liquidation — that is, forced to shut down, lay off all their workers and sell off their assets. And if that happens, it will be very hard to bring them back.

Felix over at Portfolio sees the situation differently: 

Which says to me that for all that financial stocks are being crushed, this is no reprise of the financial crisis we saw in the wake of Lehman’s collapse. Rather, it’s an old-fashioned economic crisis, which severely erodes the equity of leveraged banks, but where money still flows and even the occasional IPO can get away if it’s priced at a discount. Or, to put it another way: it’s a bear market, not a financial meltdown. Which might be little solace to anybody whose stocks have been crushed of later, but which might help reassure policymakers at least a little.

Either way, one thing is clear: times are tough, and are only going to be tougher before we can climb out of this.