A basic economic assumption is that every boom is followed by a bust. The recent financial meltdown that’s been strewn with bank failures, real estate foreclosures, Wall Street bankruptcies, federal bailouts and company fire sales, reminds me of the barge industry’s boom-bust scenario in the late 1970s.
During the ’70s there was a surge in U.S. grain exports and barge traffic. Barge shortages and strong rates brought record orders for new bottoms. As part of a capital investment stimulation package, the accelerated depreciation of certain fixed assets, including barges, for tax purposes over a seven-year schedule instead of the previous 20 to 25 years was allowed. This brought in a flood of investors from outside the industry that built speculative “doctor/lawyer” barges, aiming to make a ton of cash with the strong barge market and accelerated tax deductions. It all came to a halt when the U.S. responded to the Soviet Union’s invasion of Afghanistan with an export grain embargo.
The export grain market rapidly declined, which resulted in a huge surplus of barges. The speculative barges that had previously been fully booked began running up daily fleeting fees. As a result of the soft demand, many of the outside investors eventually sold the barges at a huge loss.
With too many barges chasing too little cargo, barge lines entered a long-term stagnation period. Slow cargo growth in the 1980s prolonged the chronic oversupply of barges into the ’90s. The bust took nearly two decades to work out.
Fast forward to 2006 when the real estate boom first began to show signs of weakness. Houses are a lot like barges. Whenever there is a speculative increase in supply and a subsequent sharp drop in demand, the results are catastrophic. For nearly three years we have been hearing how the housing inventory surplus will work itself off and the markets will return to normal. That hasn’t happened. The barge industry bit the bullet and faced the consequences, and that’s what the financial and real estate sectors have to do as well. The barge bust of 1980 was comparatively tame compared to what lies ahead.