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Thinking About Checkbooks

by Fred Cederholm

The FED's cutting interest rates by another half to three-quarters of a point on March 18th will not fix anything, but will cause an immediate drop in the relative value of the US dollar causing import costs (particularly for energy) to surge further.
I’ve been thinking about checkbooks. Actually I’ve been thinking about fire sales, the housing bubble, credit card balances, employment/unemployment, the equity markets, the FED, interest rates, the dollar, and oil prices. Last week saw plenty of economic/financial news about US/us being covered not only abroad, but also by our domestic media. All of it was negative. In fact, the most ardent of news junkies were hard pressed to find one story in the plus column - that is, unless you referred to an ongoing string of announcements heralding record profits for oil companies.

You see America is up for sale right now. When the going gets tough (and I mean really tough), the tough don’t go shopping; they put their superfluous stuff on the market and try to unload. They don’t just sell what they no longer need, they also try to unload what they can no longer afford! It is a buyers’ market for just about anything you can imagine – houses, vehicles, furniture, equity investments... The problem is there aren’t a whole lot of buyers out there with checkbooks backed by the necessary deposits to cover the purchases.

Those with the cash are sitting tight for now. The “attractive bargains” of this week should prove bigger, even more “attractive,” by waiting. As a consequence, prices continue to drop and the “fire sales” heat up. This is not necessarily a good thing because it is not our own citizenry who are in the best positions to buy, and the foreign $ugar daddies just aren’t interested in what “main street” America has to offer and needs to unload. This applies to those US investment equities held as well.

The housing bubble (passing its gas) has put a record number of properties on the sale block, in pre-foreclosure, and in foreclosure. Real estate values are being deflated big time – not so much in the Mid-West as in the West, the East, and the South where a run up in “paper appreciation” was far greater. This is a natural, but painful swing of the pendulum. For about a decade now, the family home was used as a household ATM providing a seemingly endless source of funds for re-stocking checkbooks and funding what amounted to a profligate shopping spree run amok on steroids.

Outstanding credit card balances grew in sync with the proliferation of home equity loans. Now... maxing out the “plastic money reserves” is the sole avenue to keep many households afloat.

With no cash and a bone dry checkbook, families charge necessities! Many have chosen to stop paying the monthly mortgage to meet credit card minimums.
The January figures just out show outstanding consumer credit (plastic money borrowings) hit a record $2.52 TRILLION after rising $6.9 BILLION in January, rising $3.7 BILLION in December, and rising $4.5 BILLION in November. With no cash and a bone dry checkbook, families charge necessities! Many have chosen to stop paying the monthly mortgage to meet credit card minimums.

The most recent employment figures were equally depressing. Payrolls fell by 63,000 in February following a decline of 22,000 in January. The percentage of unemployed workers also went down, but this is only a superficial anomaly. The number of unemployed didn’t truly decline; what we are seeing is those long term without jobs are being excluded from the stats because their benefits have expired. This is no surprise as roughly 60% of jobs’ growth had been due to the housing boom.

Friday, the markets retreated back to the levels of Oct. 2006 - eliminating any gains from the prior 17 months. The employment figures, housing negatives, and burdens of debt clearly took their toll on Wall Street. Pressure is now on the FED to cut interest rates by a half to three-quarters of a point at their March 18th meeting – IF they wait that long! This will not fix anything, but will cause an immediate drop in the relative value of the US dollar. Import costs (particularly for energy) will surge. I expect at least a 15% spike in the barrel price of crude and the pump price of fuels right out of the chute. OUCH!!!

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

Copyright 2008 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at

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This story was published on March 10, 2008.