Wednesday, October 14, 2009

The Effects of the Crisis - Part 1


Wise men argue whether the present economical crisis is a recession or a depression, and it has earlier been discussed whether the crisis will be V-shaped (with a quick recovery), U-shaped (with a slower recovery) or L-shaped (with no recovery). Some calculate the average losses over the entire population, and find that the effects have not been so hard, and that we in hindsight will remember this crisis as nothing more than a dip in a rising curve. But no matter how you you look at it - massive job cuts and the lack of new jobs can ruin many people's lives. Even so, I can not (from a Swedish perspective) recall reading many articles from this point of view: about (many) single individuals, whose lives have taken a turn for the worse in the wake of the crisis.

Also American reports often remain silent about the millions of newly poor that follow in the wake of the crisis. As we all know, being poor is much worse in the USA than in Europe in general or in Sweden in particular due to the less fine-meshed social security net. Personally I notice this lack of understanding when I speak to intelligent people without crisis awareness, who think everything is pretty OK now "when its so cheap to hire a craftsman".

To raise awareness about the bottomless abyss that has opened below the feet of many Americans, I hereby begin writing a set of texts about the losers of the crisis - a growing underclass - that is all too often dismissed and made invisible. We have the concepts and cultural frameworks to easily accept and understand stories about skillfull "upstarts", who climb the social ladder, working their way from the factory floor to the corporate boardroom, or becoming the first person in their family to achieve a university degree and "become someone". But we don't have the same clear framework to understand downward mobility, and the stories about individuals who due to stupidity, less fortunate choices or pure bad luck find themselves out in the cold, economically and socially.

There are two connections between this subject and peak oil. The first connection is that many say there is a link between the current crisis, the increasing oil price between 2002 and 2007 (from $20 to $100/barrel), and the astronomical peak in the oil price last summer ($147/barrel). According to some, the economical crisis is nothing less than a consequence of this long prelude and its finale when the energy prices hit the roof last year. The second connection is that when we find ourselves in the downward slope beyond the oil peak (which might happen now or any time within ten years), large numbers of the population will suffer materially, and then suffer again. The effects of the current crisis might thus either be the first stage in an enduring and deep(ening) economical crisis, or a full dress rehearsal for a future possible crisis. In the words of the peak oil writer Richard Heinberg from the documentary film "Oil, Smoke & Mirrors":

''...yet people won't be talking about the oil peak. They'll be talking about the unemployment figures. They'll be talking about the high price of food. They'll be talking about the fact that you can't get on an airliner and travel any more because the airline industry has collapsed, there are only a few carriers still in business and tickets are astronomically expensive. They'll be talking about the latest war or terrorist incidents. They will have completely lost sight of the one event that caused all of those effects.''

The US is a predecessor - a country that precedes us - and the situation and the consequences of the economical crisis are at this point many times worse there than here in Sweden. These texts will therefore be strongly America-centric. The ambition is to open up the eyes of those who do not know what is currently happening in "the richest country in the world", and hopefully urge for humble reflection about what this might mean. Could the same thing happen in Sweden? The US is also interesting as there is a great and heartshrieking discrepancy between the current reality and many Americans' view of their own country. Regarding this self-perception Göran Rosenberg writes in the last issue of the Swedish magazine Axess (September 2009):

"The American idea is broadly an idea of a society called America, inhabited by the happiest among people - the Americans, who are convinced that only in America can Man fully realize his innate right to life, freedom and search of happiness. The American idea is the idea of an exceptional society, created on an exceptional place under exceptional circumstances (if not by divine intervention) and with an exceptional role to play in the world."

But various texts and articles from this proud country now indicate that it is slowly crumbling from within. If the foundation is stable enough, and the carrying walls manage to carry the weight, maybe this is not such a big problem? Maybe more people will live in poverty, but this might not necessarily herald any major consequences for the majority population? Even if this is the case I would now like to direct the attention to those who have fallen and might find it difficult to rise even in the most optimistic scenarios of economic recovery. The storytelling technique I use in this set of articles is similar to Dante's descent into the circles of hell, thus I will begin with describing milder effects of the crisis (worsening economy, new patterns of consumption, increased prudence), and step by step move ahead to those worst affected that now are moving toward, or already live in, complete misery.

If we begin with new patterns of behavior that hardly provoke anyone, prudence and a new kind of prudent thinking is currently gaining ground after a 15, or maybe 40 years long shopping spree. It is no secret that uninhibited Americans during a long time have been shopping away, and bought ever bigger homes to make room for new clothes and stuff. Savings have been low, and consumption has been fueled by borrowed money, often with the increasing value of the own house as "security". Household debts have increased from 60% of the household income to 130% in 25 years (between 1982 and 2007). At the same time it is the households' consumption that has maintained the American economy, representing almost 70% of the US GNP:

”This shift back to thrift may seem to be a healthy change for a consumer class known for spending more than it earns, but there is a downside: American businesses have become so dependent on consumer spending that any pullback sends ripples through the economy.”

We all know what has happened since the housing bubble inflated. Today many Americans have been forced to leave their homes when they couldn't pay the mortgages for their loans. Among those who still live in their own homes, 25% live in houses with "underwater mortgages" - houses that are currently worth less than the loans on these houses - after ten straight quarters of sinking house prices. In addition house prices are expected to sink further - approximately half of all American homes may be over-indebted two years from now.

What this means is that many people are "prisoners" in their homes, and can not sell them without losing money or become indebted. The alternative is to walk away from the house, as most American loans, in contrast to Swedish, are tied to the house, not to the person. One must however calculate that the credit score will plummet, and that several "normal" economical transactions thereafter become complicated (renting an apartment, renting or borrowing money to buy a car, getting a mobile phone etc...). The bottom line is: American houses have changed from being piggy banks to albatrosses around the neck of the American house owners, and continued grand scale consumption based on the house as security is out of the question from now on

What to do? Well, the radical (?) act is to not live above one's expenses and to save money instead of spending them. Many Americans who have not been personally been affected by the economical downturn and still have plenty of money, have now started to change their patterns of consumption into less spending.

”With the economy in shambles and so many people losing their jobs and homes, it is no longer considered cool to brag about possessions and purchases. For many during a deepening recession, conspicuous consumption is out and frugality is the new black.”

Others get feelings of guilt from consuming stuff that they don't need: “The shift appears to be driven, at least in part, by a sense that the economic crisis is a long overdue catharsis; it's the jolt we needed to reverse a multitude of bad financial habits and destructive attitudes developed over many years.”

These changed habits are visible in many ways. When the mother of two and secretary Kelly needed new boots, her choice was between buying a new pair for 200 dollars or taking an old pair to the shoemaker. Her first visit ever at the shoemaker's was initially hard to swallow, but was eventually an eye-opener.

”For a fashion-conscious woman, the thought of recycling clothing hurt her pride a bit. "I walked in with my tail between my legs," she says. "It was something, initially, I was not proud of." Then she saw the price: $16. And the work: the boots looked as good as new.”

All of a sudden many Americans "discover" that it is possible to repair the things you already own instead of buying new things. Professionals who repair goods (car and bicycle mechanics, watchmakers, tailors, TV- and white goods repairs) have noticed a hike in demand for their services. Among those who both sell new and repair old goods (for example tailors who sew clothes and repair old ones) the trend is also clear; new sales diminish while repairs increase. To clip (the ubiquitous) coupons in newspapers has also increased in popularity in the last couple of years after having lost popularity during 15 years, and skillfull coupon-clippers can lower food costs with up to 50%.

It is also interesting to notice that one of the biggest obstacles to overcome are psychological barriers regarding "what kind of person you are". Once Kelly visits the shoemaker for the first time and is pleased with the results, it might well happen that the habit takes root and remains, even if the country's economical situation later improves. A shoemaker comments and says that two years of recession can create new habits and that it is a vitamin injection that can sustain him for another 10-15 years. Enough people have already seen or felt the effects of the economic downturn themselves, so that habits and fundamental values might be changed profoundly for a long time after a possible economical recovery.

(Comment: I habitually write "a potential economical recovery" where the original article instead simply refers to "the economical recovery" or "once the economy gets rolling again". I think it is fascinating how quickly many instinctively presume that a recovery is automatically waiting around the corner. The thinking seems to be that "the stock market has "always" risen over time before, and it will therefore do it again". The idea is that stocks gaining value over time as some kind of irresistible natural force, or even a natural law similar to the law of gravity. As the sun rises in the east, so will stocks increase their value over time.)

An area where great cuts in spending could be made is clothes. Both "thrift stores" that sell used ("pre-owned" :-) clothes, and more fashionable second hand stores that might sell a month-old blouse at the third of the prize are increasingly popular in the US. Regarding clothes, there are obviously a lot of excesses to cut from. Have you ever seen how big an American "walk-in-closet" can be? You can easily fit your home office in there. Or your visiting relatives. According to a UK survey, half of all clothes, shoes and accessories that British women bought the previous year had never been used. Every British woman used on average almost £500 on buying clothes that had never been used, and every tenth piece of clothing went straight into the dustbin. Fascinating but also slightly scary is the fact that 90 millions mobile phones are laying unused in British drawers. (That is 1,5 mobile phones for each man, woman and child in the UK.)

This text has been about habits among those that are not really pressed to save money, but who today do so anyway. In part two of this set of articles I will write about those who have bigger problems and are simply forced to change their habits and cut expenses.

While starting to write about the effects of the crisis I have realized that this will be my tour de force so far in my blogging career. Earlier sets have consisted of two or three interlinked texts, this set will be at least six articles long. This is the first example of what will for sure happen many times again, since I have now kept my eyes open and gathered clues and links about specific peak oil-related topics during weeks or even months.

This text was originally published in Swedish on September 27, 2009.

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