When Do the Wheels Come Off?

Or have they already?

It all depends on what you mean.

With last year's carnage in various financial markets, we've already bought and paid for a grim recession, which we're experiencing this year. No more carnage is necessary in the debt and equity markets to discount a great deal more future discomfort. As a matter of fact, the implied rates of default at which credit swaps are currently trading would suffice to discount a depression, not a recession.

So, higher unemployment, lower real estate prices (residential and commercial), and outright contraction in global levels of economic activity are already priced into the market. But their full impact hasn't yet been felt in the general economy.

That's all well and good at the macro level. At the more personal, individual level, though, the questions are more in the nature of, will my spouse keep his/her job? How far underwater are we on our house? Why is there only half as much in my 401K as this time last year?

Those are the questions of the merely worried. For the roughly 15% of the workforce captured by the U-6 unemployment number, the questions are a bit rougher, on the whole. (Incidentally, if you want to compare current employment to the headline 25% number tossed around for the Great Depression, use U-6, not the lower, headline U-3 figure).

That 15% is the group of people who are in the process of learning just how frayed the social safety net has been left about a quarter of a century of Reagan revolution, new Democrat reform and the Bush family ascendancy. I don't know what a laid off third year law firm associate does, with a six-figure educational debt, and utterly no prospect of replacing his or her $150,000 salary. But it's no wonder rents in Manhattan are plunging.

I think that most of the 282,000 people laid off so far from financial services sector jobs had the resources to keep going for a few months, maybe a year. By and large, they aren't the segment of the population living literally paycheck to paycheck. But, by and large, they are a population segment with very high living expenses, and backing down from the life style, particularly for families, is going to be a very tricky proposition indeed. More than a few DINK marriages will shatter, and when there are kids involved, I dunno. . .

This is going to be the first post war recession in which the impact falls as heavily on the service sector as that of past recessions has fallen on the manufacturing sector. And given wage rates prevailing in the services sector, that means that the impact will be felt higher up the ladder, well into the middle class.

And that is likely to have political ramifications. You can't eat family values or right to life rhetoric. Don't hedge fund managers and Wall Street traders make hate crime targets every bit as attractive as gays?