Bankruptcy filings should surge in 2012 because the foreclosure pace is picking up speed, and because the world and U.S. economies are not headed for improvement in the near future.
I. Foreclosures In 2012
I haven’t written about foreclosure in a while, but an article in the Thursday Los Angeles Times has given me the impetus to do so.
In the January 12, 2012 Business Section, E. Scott Reckard reported:
California and other states are likely to see an enormous wave of long-delayed foreclosure action in the coming year as banks deal more aggressively with 3.5 million seriously delinquent mortgages. And experts said that dealing with the foreclosure process, from issuing notices of default to selling repossessed homes, is likely to push housing prices lower this year before the real estate market has a chance to recover.
Wow! Three and a half million seriously delinquent mortgages. That’s a lot of toxic real estate. If you’re one of those 3.5 million people with a seriously delinquent mortgage, isn’t it time you considered bankruptcy?
II. The World Economy
Is that the only bad financial news? You know better than that. Here’s what Sue Chang of the Wall Street Journal’s Market Watch reported on Friday, January 13, 2012:
Standard & Poor’s late Friday stripped France and Austria of their triple-A ratings and also downgraded Spain, Italy, and Portugal. France and Austria are now both rated AA+ while Spain is at A and Italy is rated BBB+. Meanwhile, Portugal’s rating was slashed to a junk grade of BB. The move had been anticipated after the ratings agency placed 15 euro-zone countries on CreditWatch negative in early December.
On January 15, 2012 Virginia Harrison and V. Phani Kumar, also of MarketWatch, updated the report by adding a few more countries:
Ratings agency Standard & Poor’s cut France and Austria’s triple-A credit ratings by one notch late Friday, and also lowered the ratings of Italy, Spain, Malta, Slovenia, Slovakia, Portugal and Cyprus.
You also know about Greece’s recent financial woes. But they’ve started to fix the problem, haven’t they? Not according to Rachel Donadio and Niki Kitsantonis of the New York Times. On January 15, 2012 they wrote:
As Greece and its lenders prepare for another week of tense negotiations, European officials now say that the task is less to help the country through its troubles than to avoid the sort of uncontrolled default that many experts fear could threaten the global financial system. . . . [F]inancial experts fear the possibility of an “involuntary” default if the negotiators are unable to reach an agreement. That could unleash violent market reactions that could conceivably produce another market cataclysm like the 2008 bankruptcy of Lehman Brothers and throw the world into another recession. Fanning those fears is a growing conviction among the Greek political establishment and the country’s lenders that the old dynamic — with Greece pretending to make structural changes and its lenders pretending to save it from default — has become untenable . . .
And France’s credit downgrade isn’t its only problem. On December 16, 2011 (Beethoven’s birthday, for those of you keeping track) Clare Hutchison of MarketWatch wrote:
France’s economy will likely slip into recession in 2012, as falling confidence and political uncertainty plague the euro-zone nation, according to its statistics institute. The National Institute of Statistics and Economics said Thursday that the [sic] France’s gross domestic product will contract by 0.2% in the fourth quarter of 2011 and by 0.1% in the first quarter of 2012, before edging up 0.1% in the following quarter. . . . It also forecasts a recession across the entire euro zone as the financial turmoil takes its toll on European economies. The region-wide slump will put pressure on French exports in the fourth quarter, when demand for the country’s products will fall from 0.9% to 0.0%, it said.
And it’s not just France. In fact, on December 13, 2011 Chris Giles of the Financial Times wrote:
So acute are the risks that few economists are now willing to bet heavily against another global recession in 2012. By common consent, the world economic outlook is much darker today than it appeared in the early autumn. . . . And that grim assessment is shared by economists in the private sector. As Goldman Sachs marked down its latest forecasts, Jan Hatzius, its chief U.S. economist, said that growth was being held back in many developed economies by higher taxes and efforts to pay back household and corporate debt. “That combination is likely to see another two years of sub-par growth in the major advanced economies, extending into 2013,” he argued.
As you are reading all of this, you may be thinking that things are pretty grim. You’re being too optimistic.
III. The U.S. Economy
A. The Next Debt Ceiling Increase
Here’s some news on the home front that tells me that the nabobs running our country simply refuse to learn from Europe’s mistakes, and therefore refuse to address our underlying economic problems. It was reported by Greg Robb in the January 12, 2012 Market Watch:
President Barack Obama formally asked Congress to increase in [sic] the U.S. debt limit on Thursday, triggering a process to raise it by $1.2 trillion. Congress now has 15 days to vote to block the increase. But analysts doubt that opponents will succeed. While House Republicans may vote to block the increase, the Senate is not expected to follow suit. Obama could also veto any objection.
Let’s put this into perspective by considering the deficits for each year of the current administration, and comparing them to the national debt.
B. The Obama Deficits And The National Debt
1. The 2009 Deficit
According to Brian Faler and Julianna Goldman in the October 8, 2009 issue of Bloomberg:
The U.S. government ended its 2009 fiscal year with a deficit of $1.4 trillion, the biggest since 1945, the Congressional Budget Office reported. The deficit amounted to 9.9 percent of the nation’s economy, triple the size of the shortfall for 2008.
2. The 2010 Deficit
Donna Smith reported in the October 16, 2010 issue of Reuters:
The budget deficit for fiscal 2010 narrowed to $1.294 trillion from last year’s record $1.416 trillion as tax collections started to recover and bailout spending fell sharply.
3. The 2011 Deficit
The October 7, 2011 issue of USA Today reported on the Congressional Budget Office’s latest report:
A government report released on Friday predicts that the federal budget hit a near-record $1.3 trillion in the just-completed fiscal year.
4. The 2012 Deficit
If the President gets his request approved by Congress – and as the aforementioned Market Watch statement indicates, he probably will – then he will tack on another $1.2 trillion to the national debt during 2012.
5. The National Debt
In the November 17, 2011 Los Angeles Times Michael A. Memoli reported:
The Treasury Department confirmed this week that the national debt has surpassed $15 trillion – that’s 15, followed by 12 zeros . . .
Therefore, if the President is granted his debt wish, at the end of 2012 the national debt will have grown to $16.2 trillion. The portion of that gargantuan figure that will have been accumulated during his four years in office will be $5.19 trillion (= $1.4 trillion + $1.29 trillion + $1.3 trillion + $1.2 trillion).
If we divide $5.19 trillion by $16.2 trillion, and multiply by 100 to convert to a percentage, we get a bit more than 32%!. This means that about one-third of the entire debt accumulated by the nation since the Revolutionary War will have been accumulated during the four years of the Obama administration.
By the way, on July 3, 2008 the President said that his predecessor had been “unpatriotic” and “irresponsible” by adding $4 trillion dollars to the national debt over his eight years in office. Hmmm. Can you say hypocrite?
Now, I’m sure you’re thinking I’m being unfair, and just ranting against the President. Au contraire, my friend. Congress holds the purse strings and the authority to borrow pursuant to article 1, section 8 of the U.S. Constitution:
The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States; To borrow money on the credit of the United States . . .
Thus, the legislative branch has considerable culpability in this mess. However, I focused on the current administration because it has vigorously pushed Congress to spend like drunken sailors. Oops, that’s not fair to drunken sailors, since they spend their own money.
So where are we heading? If the current crop of leaders remains in office after the 2012 election cycle, expect the same philosophy to guide policy as we’ve had over the last four years. If we get a change in personnel we might get a change in governing philosophy, but I’m not counting on it.
Greece may be heading toward a national bankruptcy as it teeters on massive default. Portugal’s debt now has junk bond status. Spain is in the tank, and France is faltering. And the U.S. leadership is chasing those countries crying, “Wait for U.S. We want to play in the insurmountable debt sandbox too.”
As the Europeans are learning, socialism’s grand promises of economic security and equality eventually crash on the rocks of reality. In a famous statement attributed to Margaret Thatcher:
The problem with socialism is that eventually you run out of other people’s money to spend.
What should you do? I recommend that you clear out your own debt burden, so you aren’t left destitute when things really crumble around you. How? Avail yourself of the constitutional provision:
The Congress shall have power to . . . establish . . . uniform laws on the subject of bankruptcies throughout the United States; . . .
Get rid of your debts through bankruptcy. Good luck.