One of the economists on CNBC cable recently said that there was a massive
transfer of wealth from the nations that consume oil to the nations that
produce oil.
Russia, and the Middle East
are the primary beneficiaries and the
US and
Europe
are major victims.
This transfer is affecting both individuals
and whole industries. Americans
own real estate, stock, and automobiles and these assets values are
declining. The Federal Reserve
Bank estimates that individual net worth declined in the last quarter of
2007 by 2.9% or 1.7 trillion dollars.
This was the second consecutive quarter that household net worth has
declined. Furthermore, entire industries, like airlines, financials,
automotive and retail are being damaged.
Let me tell you how the transfer of wealth
is happening. Look at residential
housing values. In 24 of the 26
major markets in the United States,
housing values are falling. In
some areas this deflation is precipitous.
The major asset and the greatest single source of equity that is held
by individual Americans is the equity in their homes.
As values decrease throughout the
US, wealth is
being lost. The second biggest
source of wealth in this country is the stock market.
The market reached a high in October 2007 and has begun a slow and
volatile decline. The majority
of stockholders now believe the market will decline even further.
Large
trucks and SUV’s have also declined in value. CarMax, a used car
retailer and wholesaler, based in Richmond, VA, and publically traded on a
major stock exchange commented on their most recent fiscal quarter.
CarMax stated they had seen a decline in prices for trucks and sport-utility
vehicles of nearly 25%. Trucks and SUV’s are already
depreciating assets but the sharp and sudden decline has meant that those
consumers who have financed
their SUV over 48 or more months with low down payments are now upside down
and cannot sell them without bring cash to the table.
Thus, they are stuck and are seeing their wealth decline.
Recreational vehicle dealer sales are down about 20% in the past few
months and are in the same situation as SUV’s.
Whole industries are being decimated by the
run up in oil. As the price of
airline tickets rise, less people fly.
It is the old law of price elasticity.
The higher the price of an item, the less it is purchased. (Except,
of course, scotch whiskey) As a
result, the airline industry is being force to reduce capacity and lay off
employees and unload plane leases. The auto industry is in the same bind and
GM announced the closing of four plants.
The real estate and mortgage industries are being decimated by the
declines in house values and are laying off employee.
There are already over 200 large mortgage companies out of business.
Title insurance companies have laid off substantial numbers of
employees.
The banks and financials have seen a huge
decline in their values and the Federal Reserve is predicting an increase in
the number of bank failures.
Unemployment is rising.
The unemployment rate has just risen to 5.5% and no one thinks this
in the end.
