This will be the year of bankruptcy

It has to happen. As painful as it is.

And there is no magic wand or legislative action or Federal Reserve printing press that can make it all right.

MY OPINION: THOMAS OLIVER
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The laws of economics are stronger than any policy. They are similar to the laws of nature. You can build levees strong enough to hold back the ocean for a while, but sooner or later, you’ll discover why it isn’t wise to live below sea level on the coast.

And so the deleveraging, or debt reduction, of the American economy continues.

You will sense it in the names of the noted business bankruptcies, but you will know it by the numbers.

Last year saw such names as Circuit City, Washington Mutual, Linens n’ Things, Pilgrim’s Pride and Skybus file bankruptcy. Already this year, Trump Entertainment Resorts has filed. Charter Communications, the nation’s fourth-largest cable company, has said it will seek Chapter 11 bankruptcy protection by April 1.

When the final fourth quarter numbers are in, about 45,000 businesses in 2008 will have filed bankruptcy, a 60 percent increase over 2007, according to New York University’s Robert Salomon.

We could see 55,000-businesses file bankruptcy before this year is over, or nearly twice as many as just two years ago, according to the professor’s blog. He notes that number could be even larger.

In Georgia, according to the U.S. Courts’ bankruptcy data, bankruptcies in 2008 will easily exceed the 1,456 in 2007, increasing between 70 to 100 percent. There is no sign of let up this year.

Phil Larkins, a senior money manager at Northern Trust in Atlanta, said we are reaping what we sowed.

As proof he cites household debt as a percentage of our gross domestic product. In 1990, it stood at 60 percent. It had climbed to nearly 70 percent 10 years later. In 2007, it passed 90 percent on its way well past 100.

“It now stands at 130 percent and that tells me that there is $1.5 to $2 trillion of debt that consumers need to get rid of,” Larkins said.

The irony is that consumer spending is vital to the economy. As consumers hunker down and pay off debt and save rather than spend and charge, companies will not make enough money to pay their own debt. Hence bankruptcy.

“Bankruptcies will increase unabated this year,” Larkins said.

Twenty years of excess leveraging can’t be worked out of the system in a normal recession, Larkins said. That’s why sometime this year, those who make such things official will note this is the worst recession on record, not counting the big D.

“We’re seeing people who can afford to spend looking like a deer in the headlights,” Larkins said. “There is a zone of fear that’s going to take a while to work off.”

It’s going to be painful. But it has to happen.