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Home business strategy

It Will Be The Economy, Stupid

by Dana Blankenhorn
June 20, 2007
in business strategy, Current Affairs, economics, economy, futurism, investment, politics
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Here’s a prediction for 2008.

The economy, not Iraq, will be the key issue.

The fact is we’re rapidly moving toward an elite consensus on Iraq. Republicans like Fred Thompson are becoming more defensive, Democrats like John Edwards are becoming more accepting. Both sides are probably willing to accept a force of 50,000 or so, left indefinitely, so long as they’re kept in forts and casualties are kept to a minimum. Activists drive the parties apart on the politics, but elites are coming together on the policy.

The economy is something else. While it’s impossible to hide coffins with happy talk, thus most voters understand the reality of Iraq, the real estate recession has been hidden until now, because all the analysts on CNBC and everywhere else are part of the business — they’re all selling the idea of continued prosperity. None of them will tell you the truth if that truth is as nasty as this truth is.

Even the statements of Bill Gross, above, are a rosy scenario. He’s talking about the government cutting interest rates so that the fall in housing prices is limited. But how do you cut interest rates when the dollar has already fallen through what you thought was the floor?

The housing market has become a falling knife. Higher mortgage rates, rising loan requirements, and increasing inventory means capitulation is ahead. Instead of a gentle fall in prices, you get an enormous kerplunk as desperate sellers take whatever offer they can. The whole equity base must then re-adjust to the new market reality, which means the problems you have in dicey loans are extended to anyone who bought high.

I have predicted 9 of the last 3 recessions, so perhaps you’re going to want to discount what I say. I predicted the recession would start a year ago when the new bankruptcy laws kicked in. It didn’t. That’s because the recession process is tied to real estate, which moves very slowly, even glacially, and the bankruptcy law only caused real estate to start moving. It has taken this long for the movement to become obvious.

House_prices_falling
Over the next year we’re going to see an enormous hit to general economic activity,
and to local governments. Schools and police depend on property tax
revenue. Other state and local services rely on sales tax revenue,
which will fall as property values decline. Which means stocks tied to
housing start falling. Which means lay-offs.

Unemployment rates don’t tell the story of this economy because so many
of us have become "contingent" workers with "contingent" income. As a
freelance writer I’m a "contingent" worker — I count as employed but
my income can fluctuate wildly. So do real estate agents. There are
more of them than there are freelance writers, and their income
collapses will have a real impact on millions of family budgets.

Recessions have causes but so do recoveries. The last recession was caused by the dot-bomb, but the housing recovery soon made it disappear. The problem with this
recession is that the cause of recovery is not so readily apparent.
Government can’t do it because it’s tapped out.

Technology and
manufacturing will have to do it, which will take time. Alternative
energy and research will have to do it. Innovation will have to do it. What now looks like our biggest crisis, global warming, will become the heart of our economic recovery plan. But that growth will have to start
from a much lower economic base than we’re at now. Foreigners will buy a lot of our assets, and reap a lot of the profits. That’s going to cause resentment.

All of which means that by this time next year the economy is going to
look extremely nasty. Real estate collapses happen in ultra-slow
motion, and this one has just begun.

Tags: 2008 electioneconomic outlookeconomyhousingreal estate
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Dana Blankenhorn

Dana Blankenhorn

Dana Blankenhorn began his career as a financial journalist in 1978, began covering technology in 1982, and the Internet in 1985. He started one of the first Internet daily newsletters, the Interactive Age Daily, in 1994. He recently retired from InvestorPlace and lives in Atlanta, GA, preparing for his next great adventure. He's a graduate of Rice University (1977) and Northwestern's Medill School of Journalism (MSJ 1978). He's a native of Massapequa, NY.

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