One for you, Dino:
=======
HOW DEBT MONEY GOES BROKE
by Steven Lachance
December 12, 2005
Most know debt is a byproduct of the finance-centered US economic model. Few, however, are familiar with how much debt the US credit system creates, let alone the implications. The upshot is financial decision making based on mainstream herding and hesitancy to take essential steps to preserve personal wealth.
How much debt?
According to the most recent Flow of Funds report from the Federal Reserve, total credit market debt (TCMD) expanded by $799 billion in the third quarter of 2005. At this rate, debt growth for a single year is $3 trillion, or 50% greater than total US industrial production. Since 1987, the year Alan Greenspan became chairman of the Federal Reserve Board, TCMD has more than tripled, from $13 trillion to $40 trillion, and now accounts for well over 300% of GDP. This debt growth is without precedent by any relative or absolute measure, evidence that the US has experienced a debt bubble.
Where does it come from?
Traditionally, savings finance debt. As the US savings rate has been anemic for years, many establishment economists, Ben Benanke among them, have claimed that US debt growth is supported by the inflow of surplus savings from abroad-the global savings glut thesis. Net purchases of US debt by foreign interests, though, are less than $1 trillion per year, far short of annual debt growth of $3 trillion. Some commentators are quick to point a finger at the Fed; it's printing money they say. This too misses the mark. As of 9 December, Fed credit was up just 3.8% YoY and the combined balance sheet of the 12 Federal Reserve Banks is barely $1 trillion.
The pump for the epic American debt bubble is neither foreign savings nor the Fed. For the $27 trillion of debt created during his tenure, Alan Greenspan can thank the private sector and the government-sponsored enterprises (GSEs). The Fed may be negligent for loosing control of the credit system, but it is not directly responsible for what has occurred since. The GSE's combined book of business, for instance, dwarfs the Fed balance sheet at nearly $3 trillion. Anchored by the money center banks, a vast constellation of financial entities, including mortgage lenders, consumer credit firms, and the financial arms of industrial enterprises, has blossomed to do with a vengeance what the Fed itself would not; create a seemingly unlimited quantity of debt out of thin air through loan origination.
Where does it go?
Debt is self-liquidating when used to generate future income, from which interest is serviced and principal repaid. Used for any other purpose, it is non-self-liquidating and results in payment obligations with no countervailing source of income. Of the $3 trillion in debt created this year, households used about 50% for mortgages and consumer loans, governments 25%, and companies 25%. Only companies incur self-liquidating debt, so at least 75%, or $2.25 trillion, of the debt has produced a future burden rather than an income stream. Companies, though, are no white knights. They have mostly used their $750 billion of the debt pie for purposes other than capital investment, namely to cover unfunded liabilities and buyback shares they liberally printed to reward management in the first place. The US is, thus, at or close to a situation whereby the percentage of debt financed by domestic savings is zero and the percentage of non-self-liquating debt is one hundred.
How does it end?
A debt-based monetary system has a lifespan-limiting Achilles heel: as debt is created through loan origination, an obligation above and beyond this sum is also created in the form of interest. As a result, there can never be enough money to repay principal and pay interest unless debt is continually expanded. Debt-based monetary systems do not work in reverse, nor can they stand still without a liquidity buffer in the form of savings or a current account surplus.
When debt grows faster than the economy, the burden of interest is bearable only so long as the rate of interest is falling. When the rate of interest reverses course, interest charges start rising faster than debt growth. This point was reached on 16 June 2003, the day the yield on the benchmark 10-year Treasury bottomed at 3.09%. Since then, debt grew from $32 trillion to $40 trillion, an increase of 25%. During the same period, annual interest charges rose by over 50%, from $1.28 trillion ($32 trillion at the prevailing average interest rate for debtors of 4%) to $2.0 trillion ($40 trillion at 5%). When interest charges exceed debt growth, debtors at the margin are unable to service their debt. They must begin liquidating.
Dipping into savings or running a current account surplus can offset liquidation for a time. The greater the pool of savings and the current account surplus, the longer an economy can endure liquidation at the margin without experiencing cascading cross-defaults. The US in the early 1930s and Japan in the early 1990s had such a liquidity buffer. In both cases, mobilizing domestic savings to increase government debt reversed the decline in total debt outstanding in two to three years and interest rates stayed low because savings financed the new debt. As a result, interest charges no longer exceeded debt growth and the need for marginal debtors to liquidate disappeared.
The US is now in a fundamentally different position than it was in 1930 or Japan was in 1990. Aside from a dearth of domestic savings, its vulnerability is compounded by a current account deficit. There is no buffer and no margin for error. Thus, when interest charges, now $2 trillion per year and accelerating, overtake annual debt growth, now $3 trillion and decelerating, liquidation will immediately trigger cascading cross-defaults. Without domestic savings to mobilize, the Fed cannot facilitate the expansion of government debt to fill the breach and simultaneously hold down interest rates. It cannot win the battle to keep debt growth greater than interest charges, the precondition for the viability of a debt-based monetary system. Once started, cascading cross-defaults consume all debt within an economy. The Fed has only two options: institute a new monetary system with a new currency or return monetary authority to the market and shut down.
© 2005 Steven Lachance
CONTACT INFORMATION
Steven Lachance
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Email
Calling Dinos
Calling Dinos
by Johnson&Johnson » Tue Dec 04, 2007 2:50 pm
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by Johnson&Johnson » Tue Dec 04, 2007 4:47 pm
yes ive seen it
very good, simple way to explain the debt money system
check out 'The Money Masters' too
top stuff...
very good, simple way to explain the debt money system
check out 'The Money Masters' too
top stuff...
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- Contributor
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- Joined: Wed Nov 29, 2006 12:03 pm
by dinos » Wed Dec 05, 2007 5:36 pm
Fiat currencies are fine, but you have to watch your fundies - something the US government is catastrophically poor at. Especially with dolts running the country who think that debt is just numbers on paper and doesn't matter.
Touching on inflows from European sources covering other shortfalls... this theory just doesn't hold up when you have an environment where your currency is being driven down in value, your secretary of the treasury is trying to fix the situation by making people abroad as irresponsible as people at home and head of your central bank routinely flip-flops about what its role is vis-a-vis the economy. I'd have to say at this point, with dollars dropping, overseas capital would be foolish to invest in American equities because it's guaranteed to lose money.
Any case, I surmise that the US is now in a recession. But stock markets are generally an accurate gauge on the state of the economy, and with the Dow at 13,360, near historical highs, that's great, right? In the words of Larry Kudlow, the famous shill for the Bush administration: "If things are so bad, then why are they so good?!?"
I Like Big Buybacks And I Cannot Lie
In the past several years, a hell of a lot of companies have bought back tremendous amounts of their own shares. Never mind companies like Fastenal who bought back a million shares, or Callaway Golf who bought back $100M worth. We're talking IBM, Conoco, Affiliated Computer Services, Dell - who have bought back billions of dollars worth of their shares. Just to put it out there, Dell has authorized $10B worth of buybacks and IBM has issued debt to buy $12.5B worth. This is just off the top of my head - there's far more going on. With the supply of shares available dropping, stock markets have rallied. But it's hardly a situation where growth has led to stronger equity markets - the dow has gone up almost purely for mechanical reasons.
Taking it a step further, the Dow companies have a good deal of international exposure so they are able to capitalize on the cheap dollar and generate favorable earnings surprises when restating back to greenbacks. Again, they're not growing - they're getting lucky.
"But the cheap dollar is GREAT for exports!" Yeah, for exports. Only 11% of the US economy deals with exports. For the remaining 89%, the cheap dollar means cold hard inflation. And hence my thesis that the DJIA is not an accurate gauge at this point for the soundness of the US economy. We have to look at the value of the dollar for a clearer picture of the economy.
Public Liars
If You Don't Count The Prices The Increased, Then Prices Stayed The Same!
The Federal Reserve is the only central bank that reports "core" inflation. That is, they remove food, energy prices (J&J, I'm sure you know this - others may not) and take out M3 for good measure, and then report that everything is fine. The inflation number is not even an inflation calc any more. http://www.shadowstats.com/cgi-bin/sgs/article/id=343 Back in the 1990s, Greenspan, et al, theorized that if people were eating steak and the price of steak increased, then they would start eating hamburger. So any calculation of inflation should consider this shift. So the calculation identifies increasing costs against a declining standard of living. The cost of inflation has been replaced by the cost of survival.
Further, Uncle Ben has been waffling repeatedly in his interest rate bias. He says he won't drop rates, then caves into market sentiment and does so. We basically now have a Federal Reserve trying to game the stock market. All economies in the world have normal cycles of expansion and contraction. For whatever reason, "recession" has become a 9-letter four letter word here. The government doesn't want to allow normal market forces to take care of things so that you can re-start clean from a new floor. The markets are working against them - any liquidity that Bernanke added to the economy in the September time frame has all gone to Asia.
Even worse, Mr. Hankie (Paulson - it really is sad when you can accurately compare any government official to a South Park character) is working on a "solution" for the sub-prime mess whereby rates on ARMs are frozen so that folks can continue to meet their payments. So the banks will not be able to write down their bad loans, ensuring poor performance in the financial sector as well as continued tightening of lending practices. This will lead to continued problems with real estate.
October Housing Sales Revised Upward!
The National Association of Realtors recently spun that October sales were revised upward, when in fact, sales for September were revised downward. The fact of the matter is that prices in October fell at the fastest rate since 1970 - and this still hasn't kick-started sales. It's worth noting that the NAR's "economists" have never foreseen a drop in sales. It's a wonder that they can look themselves in the mirror when they're so obviously spinning to lend legitimacy to this gaggle of buffoons.
In summary, if you let people down when they need to trust you, you'll pay the price for it. This is what's happening to the US right now. From dishonesty with inflation calcs, to massaged GDP numbers, to fraudulent cheerleading by "economists" and pundits to central bankers that come across as incompetent. The US has been putting itself in a position where it's not trustworthy. Who would want to lend money to the US given that the money supply has to be increased to pay it back? God bless the Chinese, I suppose.
If the lent funds dry up, that will have an even more serious impact than that above.
Touching on inflows from European sources covering other shortfalls... this theory just doesn't hold up when you have an environment where your currency is being driven down in value, your secretary of the treasury is trying to fix the situation by making people abroad as irresponsible as people at home and head of your central bank routinely flip-flops about what its role is vis-a-vis the economy. I'd have to say at this point, with dollars dropping, overseas capital would be foolish to invest in American equities because it's guaranteed to lose money.
Any case, I surmise that the US is now in a recession. But stock markets are generally an accurate gauge on the state of the economy, and with the Dow at 13,360, near historical highs, that's great, right? In the words of Larry Kudlow, the famous shill for the Bush administration: "If things are so bad, then why are they so good?!?"
I Like Big Buybacks And I Cannot Lie
In the past several years, a hell of a lot of companies have bought back tremendous amounts of their own shares. Never mind companies like Fastenal who bought back a million shares, or Callaway Golf who bought back $100M worth. We're talking IBM, Conoco, Affiliated Computer Services, Dell - who have bought back billions of dollars worth of their shares. Just to put it out there, Dell has authorized $10B worth of buybacks and IBM has issued debt to buy $12.5B worth. This is just off the top of my head - there's far more going on. With the supply of shares available dropping, stock markets have rallied. But it's hardly a situation where growth has led to stronger equity markets - the dow has gone up almost purely for mechanical reasons.
Taking it a step further, the Dow companies have a good deal of international exposure so they are able to capitalize on the cheap dollar and generate favorable earnings surprises when restating back to greenbacks. Again, they're not growing - they're getting lucky.
"But the cheap dollar is GREAT for exports!" Yeah, for exports. Only 11% of the US economy deals with exports. For the remaining 89%, the cheap dollar means cold hard inflation. And hence my thesis that the DJIA is not an accurate gauge at this point for the soundness of the US economy. We have to look at the value of the dollar for a clearer picture of the economy.
Public Liars
If You Don't Count The Prices The Increased, Then Prices Stayed The Same!
The Federal Reserve is the only central bank that reports "core" inflation. That is, they remove food, energy prices (J&J, I'm sure you know this - others may not) and take out M3 for good measure, and then report that everything is fine. The inflation number is not even an inflation calc any more. http://www.shadowstats.com/cgi-bin/sgs/article/id=343 Back in the 1990s, Greenspan, et al, theorized that if people were eating steak and the price of steak increased, then they would start eating hamburger. So any calculation of inflation should consider this shift. So the calculation identifies increasing costs against a declining standard of living. The cost of inflation has been replaced by the cost of survival.
Further, Uncle Ben has been waffling repeatedly in his interest rate bias. He says he won't drop rates, then caves into market sentiment and does so. We basically now have a Federal Reserve trying to game the stock market. All economies in the world have normal cycles of expansion and contraction. For whatever reason, "recession" has become a 9-letter four letter word here. The government doesn't want to allow normal market forces to take care of things so that you can re-start clean from a new floor. The markets are working against them - any liquidity that Bernanke added to the economy in the September time frame has all gone to Asia.
Even worse, Mr. Hankie (Paulson - it really is sad when you can accurately compare any government official to a South Park character) is working on a "solution" for the sub-prime mess whereby rates on ARMs are frozen so that folks can continue to meet their payments. So the banks will not be able to write down their bad loans, ensuring poor performance in the financial sector as well as continued tightening of lending practices. This will lead to continued problems with real estate.
October Housing Sales Revised Upward!
The National Association of Realtors recently spun that October sales were revised upward, when in fact, sales for September were revised downward. The fact of the matter is that prices in October fell at the fastest rate since 1970 - and this still hasn't kick-started sales. It's worth noting that the NAR's "economists" have never foreseen a drop in sales. It's a wonder that they can look themselves in the mirror when they're so obviously spinning to lend legitimacy to this gaggle of buffoons.
In summary, if you let people down when they need to trust you, you'll pay the price for it. This is what's happening to the US right now. From dishonesty with inflation calcs, to massaged GDP numbers, to fraudulent cheerleading by "economists" and pundits to central bankers that come across as incompetent. The US has been putting itself in a position where it's not trustworthy. Who would want to lend money to the US given that the money supply has to be increased to pay it back? God bless the Chinese, I suppose.
If the lent funds dry up, that will have an even more serious impact than that above.-
dinos - Contributor
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by Johnson&Johnson » Thu Dec 06, 2007 2:36 pm
Ella re Dino
Some good points I could be here all day responding
Didn't Bernanke stop publishing M3 money supply figures back in 2005 ? That suggests that YES, they printed more money and that is what is driving the dollar down. As a consequence, China has no choice but to diversify away from the greenback. After they got stiffed on the Unocal bid they realized that they could not even spend their reserves on major US assets, so why bother holding a depreciating asset that you cannot even recycle back into the US economy ?
The fall of the dollar is a very good indicator that America has had it's day. They have become nothing more than an anaemic, hollowed out economy of overconsumers. The dollar may rise a bit here and there but the general trend will be down. Sterling will also drop further (especially if the BOE cuts the base rate to try and save the housing market) as they have a lot of the same structural problems as the yanks.
So what will come 'after the fall', as Emmanuel Todd put it. My money is on a multipolar world, with the lion's share of power going to the EU and Russia. The EU are really driven by the Germans. They have a budget surplus. They have heavy industry. They are still the biggest exporter in the world, still far bigger than China. And yes, they have the courage to face market cycles realistically and endure recessions as a necessary (albeit painful) part of free market capitalism.
The Russians have just about every natural commodity in abandunce and a strong leader at the helm. If they can solve their population crisis (it's shrinking very rapidly) and social problems then they might make a good comeback. But don't expect a liberal and egalitarian society. Russia has never been one and probably never will be.
China I feel is overrated, their banking system looks vulnerable and the state spends billions propping up unprofitable businesses. Those foreign reserves may have to go into saving the sector from collapse once their US consumer-driven manufacturing bubble bursts
P.s I think gold will rocket to 2000 usd an ounce as the Chinese and Arabs divert more $ into commodities
How is the housing market out there in the US ? Pretty screwed I hear. England is next bubble to burst, then Cyprus.
Heeeeavy stuff for a Thursday... !
Some good points I could be here all day responding
Didn't Bernanke stop publishing M3 money supply figures back in 2005 ? That suggests that YES, they printed more money and that is what is driving the dollar down. As a consequence, China has no choice but to diversify away from the greenback. After they got stiffed on the Unocal bid they realized that they could not even spend their reserves on major US assets, so why bother holding a depreciating asset that you cannot even recycle back into the US economy ?
The fall of the dollar is a very good indicator that America has had it's day. They have become nothing more than an anaemic, hollowed out economy of overconsumers. The dollar may rise a bit here and there but the general trend will be down. Sterling will also drop further (especially if the BOE cuts the base rate to try and save the housing market) as they have a lot of the same structural problems as the yanks.
So what will come 'after the fall', as Emmanuel Todd put it. My money is on a multipolar world, with the lion's share of power going to the EU and Russia. The EU are really driven by the Germans. They have a budget surplus. They have heavy industry. They are still the biggest exporter in the world, still far bigger than China. And yes, they have the courage to face market cycles realistically and endure recessions as a necessary (albeit painful) part of free market capitalism.
The Russians have just about every natural commodity in abandunce and a strong leader at the helm. If they can solve their population crisis (it's shrinking very rapidly) and social problems then they might make a good comeback. But don't expect a liberal and egalitarian society. Russia has never been one and probably never will be.
China I feel is overrated, their banking system looks vulnerable and the state spends billions propping up unprofitable businesses. Those foreign reserves may have to go into saving the sector from collapse once their US consumer-driven manufacturing bubble bursts
P.s I think gold will rocket to 2000 usd an ounce as the Chinese and Arabs divert more $ into commodities
How is the housing market out there in the US ? Pretty screwed I hear. England is next bubble to burst, then Cyprus.
Heeeeavy stuff for a Thursday... !
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by dinos » Thu Dec 06, 2007 10:23 pm
Greenspan stopped reporting M3 in March 2006. It had risen 17% that same month.
As for China, the Unocal transaction didn't go so well but they fared much better with Blackrock. So, now the sport of delisting public companies, seizing the employees' retirement savings and firing them, then saddling the "new" company with so much debt as to often strip it of viability, is no longer just an American pastime. We're not talking numbers big enough to compete with FX reserves though. At the moment, they seem reluctant to diversify away from USD because it'll hurt their export business. But eventually, this will come to a head and they'll have no choice.
What's interesting though is some sentiment I've been hearing that OPEC is considering to price oil against a basket of currencies instead of just dollars. Dollars go down, they have to raise the price and then they're stuck holding the bag looking like bad guys.
There are tons of questions that need to be sorted before this becomes realistic. Light Sweet Crude and WTI trade on NYMEX; Brent trades on ICE. Will they follow the new convention? OPEC has no control over what these individual markets price their commodities in. Only 3% of commodity trades ever settle with physical delivery, so cooperation from the derivatives markets is crucial for success. If some don't follow suit, the value of oil will be obfuscated and there will be heavy volatility in the price. If all the markets go along with it, that'll be a lot of unneeded USD.
Either way, you're right - the US is no longer the place to be if you need growth. That's in EMEA at this point. I also agree with you that China will be playing catch-up with Europe and Russia. But I also see a lot of opportunity for investment as the Chinese (as well as the ME and Africa) build their infrastructures.
Real estate is, indeed, up against it here and it's getting worse. This is one of the worst housing slumps since the great depression. But it does get more interesting - without home equity for people to raid in order to pay off their credit cards and continue to live beyond their means, they are going to be SCREWED in a big way when they can no longer pay the monthly minimums. (It's really hard to declare Ch11 bankruptcy here - you have to get on a Ch13 debt repayment program and the ruined credit will mean that people will have to search for hard money, which has dried up, for housing, etc). I think the consumer debt bubble will also burst in the next couple of years.
So yeah, the US economy isn't looking as good as it used to. BTW, how long 'till Chrysler goes bust, now that Bob "I Destroyed Home Depot And All I Got Is $200M" Nardelli is at the helm?
Hope you're well...
As for China, the Unocal transaction didn't go so well but they fared much better with Blackrock. So, now the sport of delisting public companies, seizing the employees' retirement savings and firing them, then saddling the "new" company with so much debt as to often strip it of viability, is no longer just an American pastime. We're not talking numbers big enough to compete with FX reserves though. At the moment, they seem reluctant to diversify away from USD because it'll hurt their export business. But eventually, this will come to a head and they'll have no choice.
What's interesting though is some sentiment I've been hearing that OPEC is considering to price oil against a basket of currencies instead of just dollars. Dollars go down, they have to raise the price and then they're stuck holding the bag looking like bad guys.
There are tons of questions that need to be sorted before this becomes realistic. Light Sweet Crude and WTI trade on NYMEX; Brent trades on ICE. Will they follow the new convention? OPEC has no control over what these individual markets price their commodities in. Only 3% of commodity trades ever settle with physical delivery, so cooperation from the derivatives markets is crucial for success. If some don't follow suit, the value of oil will be obfuscated and there will be heavy volatility in the price. If all the markets go along with it, that'll be a lot of unneeded USD.
Either way, you're right - the US is no longer the place to be if you need growth. That's in EMEA at this point. I also agree with you that China will be playing catch-up with Europe and Russia. But I also see a lot of opportunity for investment as the Chinese (as well as the ME and Africa) build their infrastructures.
Real estate is, indeed, up against it here and it's getting worse. This is one of the worst housing slumps since the great depression. But it does get more interesting - without home equity for people to raid in order to pay off their credit cards and continue to live beyond their means, they are going to be SCREWED in a big way when they can no longer pay the monthly minimums. (It's really hard to declare Ch11 bankruptcy here - you have to get on a Ch13 debt repayment program and the ruined credit will mean that people will have to search for hard money, which has dried up, for housing, etc). I think the consumer debt bubble will also burst in the next couple of years.
So yeah, the US economy isn't looking as good as it used to. BTW, how long 'till Chrysler goes bust, now that Bob "I Destroyed Home Depot And All I Got Is $200M" Nardelli is at the helm?
Hope you're well...
-
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by Johnson&Johnson » Wed Dec 12, 2007 10:45 am
Ella re Dino
I am good. Looking forward to Christmas and a few days off from the office. I am planning to go to New Orleans and Houston in January and it will be interesting to watch American TV from my hotel room and see how far they are sanitizing the problems in the US economy.
My own analogy goes something like this:
I always think of the USA as a shopper with a large, fat chequebook. The shopper visits every shop in the mall and buys stuff. A LOT of stuff. More stuff than they need, or could ever possibly use. The shopper pays for this stuff by writing cheques from their chequebook. The shopkeepers accept the cheques but never cash them with the bank, instead they keep them in a vault locked away, to trade at some future time with other shops or to buy something back from the shopper.
Ultimately the shopper never sees the cost of his purchase deducted from his bank balance, and this gives him a false sense of security and confidence to spend more and more.
Why do the shops accept the cheques from the shopper ? Simple. He is the biggest shopper in the mall, and he looks incredibly wealthy, so they assume that he can afford to buy all their goods and he has the money in the bank to cash in any redeemed cheques.
Over time the shopkeepers notice that the value of these cheques is diminishing due to inflation. They get nervous, and start to cash them in at the bank. The shoppers account is soon run dry, and the bank extends him a line of credit. But the shopper is a rabid consumer who does not know how to live within his means. He can't stop buying stuff, most of it luxury goods or frivolous junk. Eventually he is so far into debt that reality sinks in, and he stops consuming.
But by then it is too late - he is already broke and the bank is threatening to seize his assets.
The only solution is to do a deal with the shopkeepers and hand over his remaining assets in order to wipe out the debt he owes them. The bank goes along with this, and the shopkeepers take possession of most of what he owns. The shopper is broke and must find a way to reinvent himself and get back some of what he has lost. He is wiser now, but the transition to living within his means is painful and he cannot help thinking about his wonderful life before he went broke.
So he gets a job stacking shelves for the shopkeepers
I mean, it's a start, right ?
This is a nice synopsis too:
The Greenback Death Spiral
When Bush took office in January 2001, the national debt stock at less than $6 trillion. Today after tax cuts, war spending and a credit boom, the debt stands at $9 trillion. One of the biggest causalities is the US dollar, which has finally begun its overdue correction as the credit crisis unfolds. However, we believe the dollar's decline is just a prelude to a much more substantial fall given the need to shrink the $750 billion current account gap, which runs almost 6 percent of GDP. The US manufacturing sector has dwindled to less than 20 percent of GDP, worsening America 's trade gap to grow. In 1988, the US trade gap stood at $247 billion (when the euro averaged $0.88). Today, the greenback has fallen 40 percent against the euro, but the trade gap has worsened (the euro is close to $1.50). America 's trade deficit must be financed by $2 billion of capital a day from the rest of the world. Since foreign investors are no longer buying significant amounts of US stocks or even their paper in the wake of mortgage crisis, the trade deficit must somehow be financed. Former Fed Chairmen Greenspan said the dollar decline may reflect foreigner's reluctance to buy US securities and that, "there is a limit to the extent the obligations to foreigners can reach". We have reached that limit.
At a time when the US requires more than $2 billion a day to finance its bloated current account deficit, the depreciating dollar acts as a disincentive to foreign investors for additional investments in US securities, particularly when they reduce rates. To no surprise, foreign investors dumped their holdings of US securities by a record amount, according to the latest US Treasury figures. To be sure, the dollar has lost its safe haven status as the credit crisis unfolds. In August, total oversea holdings of US bonds, notes and equities fell a net $69.3 billion after a revised increase of $19.2 billion in July. The August outflow surpassed the previous record of $21.2 billion in March 1990.
The United States continues to spend more than it produces. The chronic twin deficits are bloated by war spending and America 's insatiable appetite for oil which has caused the trade deficit to explode to almost 6 percent of GDP. Over the last ten years, the consumer accounted for 70 percent of American spending, driven largely by the housing boom and the doubling in property prices. That has ended and now price inflation not asset inflation will plague consumers in light of rising energy, food and higher financing costs.
Ironically the credit crunch started a new bubble. Newly created money is fuelling the boom in global commodities. Currencies are losing value against commodities and gold due to open-market operations that sees everyone absorbing excess dollars with newly created currencies. The printing presses are on full steam. Global monetary policies are excessively stimulate as a result of the demise of the greenback, ensuring our intermediate target of $1,000 an ounce. Reflationary forces to end the credit crunch has caused a dollar crunch and investors are looking to hard assets to keep their value. To be sure, the dollar has lost its status as the world's reserve currency.
(John R. Ing, Maison Placements Canada)
And I love this article:
THE DAYS OF HEROIC GREED are ending...
In an article this week that examined the troubles brewing in Citigroup’s mortgage business, the Wall Street Journal focused on Natalie Brandon, a 51 year old married woman from Granada Hills, CA, who is currently unable to make the payments on her $625,000 adjustable rate home loan from Citigroup, despite the fact that the rate will not even reset higher until June of next year. Amazingly, the Journal reported that Mrs. Brandon bought the house in 1985 for just $105,000, but had chosen to refinance five times over the past seven years, borrowing more than $500,000 and spending every single penny. While this may be an extreme example of American profligacy, it is by no means unique. Unfortunately this type of behavior typifies everything that is wrong with the modern American economy.
Had this homeowner behaved responsibly, as was typical for Americans of prior generations, her current monthly mortgage payments would likely be less than $600 and the remaining balance on her loan would be about $40,000. In eight more years she would have owned her home free and clear, and would likely be on track for early retirement. Instead, after 22 years of making mortgage payments, she is now $625,000 in debt. The article stated that she had recently tried to refinance into a 6%, forty year, fixed-rate mortgage, but it fell through. Even if she had qualified, she would have been obligated to make monthly mortgage payments of close to $4,000 until she was in her nineties.
For years, Wall Street and the media have been singing the praises of the heroic American consumer. To that end Mrs. Brandon could be portrayed as Wonder Woman. She did her part to power our consumer driven economy by borrowing and spending to her heart’s content. Her last refinance even allowed her to buy a brand new Lexus. As long as she could find a greater fool willing to loan her more money, there was no limit to what she could buy. As it turned out, Citigroup was the greatest fool, left holding the bag on a $625,000 mortgage on a house now likely worth only half that amount.
See: http://money.cnn.com/2007/11/23/magazin ... topstories
AND:
John and Grayce Coffman could lose the Fullerton home they bought in 1977 because they can’t keep up with their mortgage’s rising costs. The Coffmans, who are unemployed and in their 60s, borrowed $552,300 from Countrywide Financial, the largest U.S. home lender, in the summer of 2005. Despite making about $50,000 in payments since then, they now owe more than $590,000 to Countrywide.”
“They took out a loan that allowed them to make a low monthly payment, but tacked the unpaid interest onto the loan balance. Now the Coffmans say they can’t afford the minimum payment of more than $2,000 a month, which has gone up from $1,776 when they first got the loan.”
“And they certainly can’t make the fully amortized payment of more than $4,500, which would be roughly 80 percent of their income. The Coffmans earn about $5,400 a month from Social Security and government assistance for five of their six adopted grandchildren, according to the Coffmans and their recent bank statements.”
"They bought their two-story home for $97,000 in 1977 and have since extracted all the equity gain in it. They’ve cashed out $600,000 in home equity with the help of several lenders.”
They got through 600k in equity.
WHERE DID THE MONEY GO?!!!
========
Take care Dino, let's do coffee one day in NY.
I am good. Looking forward to Christmas and a few days off from the office. I am planning to go to New Orleans and Houston in January and it will be interesting to watch American TV from my hotel room and see how far they are sanitizing the problems in the US economy.
My own analogy goes something like this:
I always think of the USA as a shopper with a large, fat chequebook. The shopper visits every shop in the mall and buys stuff. A LOT of stuff. More stuff than they need, or could ever possibly use. The shopper pays for this stuff by writing cheques from their chequebook. The shopkeepers accept the cheques but never cash them with the bank, instead they keep them in a vault locked away, to trade at some future time with other shops or to buy something back from the shopper.
Ultimately the shopper never sees the cost of his purchase deducted from his bank balance, and this gives him a false sense of security and confidence to spend more and more.
Why do the shops accept the cheques from the shopper ? Simple. He is the biggest shopper in the mall, and he looks incredibly wealthy, so they assume that he can afford to buy all their goods and he has the money in the bank to cash in any redeemed cheques.
Over time the shopkeepers notice that the value of these cheques is diminishing due to inflation. They get nervous, and start to cash them in at the bank. The shoppers account is soon run dry, and the bank extends him a line of credit. But the shopper is a rabid consumer who does not know how to live within his means. He can't stop buying stuff, most of it luxury goods or frivolous junk. Eventually he is so far into debt that reality sinks in, and he stops consuming.
But by then it is too late - he is already broke and the bank is threatening to seize his assets.
The only solution is to do a deal with the shopkeepers and hand over his remaining assets in order to wipe out the debt he owes them. The bank goes along with this, and the shopkeepers take possession of most of what he owns. The shopper is broke and must find a way to reinvent himself and get back some of what he has lost. He is wiser now, but the transition to living within his means is painful and he cannot help thinking about his wonderful life before he went broke.
So he gets a job stacking shelves for the shopkeepers
I mean, it's a start, right ?
This is a nice synopsis too:
The Greenback Death Spiral
When Bush took office in January 2001, the national debt stock at less than $6 trillion. Today after tax cuts, war spending and a credit boom, the debt stands at $9 trillion. One of the biggest causalities is the US dollar, which has finally begun its overdue correction as the credit crisis unfolds. However, we believe the dollar's decline is just a prelude to a much more substantial fall given the need to shrink the $750 billion current account gap, which runs almost 6 percent of GDP. The US manufacturing sector has dwindled to less than 20 percent of GDP, worsening America 's trade gap to grow. In 1988, the US trade gap stood at $247 billion (when the euro averaged $0.88). Today, the greenback has fallen 40 percent against the euro, but the trade gap has worsened (the euro is close to $1.50). America 's trade deficit must be financed by $2 billion of capital a day from the rest of the world. Since foreign investors are no longer buying significant amounts of US stocks or even their paper in the wake of mortgage crisis, the trade deficit must somehow be financed. Former Fed Chairmen Greenspan said the dollar decline may reflect foreigner's reluctance to buy US securities and that, "there is a limit to the extent the obligations to foreigners can reach". We have reached that limit.
At a time when the US requires more than $2 billion a day to finance its bloated current account deficit, the depreciating dollar acts as a disincentive to foreign investors for additional investments in US securities, particularly when they reduce rates. To no surprise, foreign investors dumped their holdings of US securities by a record amount, according to the latest US Treasury figures. To be sure, the dollar has lost its safe haven status as the credit crisis unfolds. In August, total oversea holdings of US bonds, notes and equities fell a net $69.3 billion after a revised increase of $19.2 billion in July. The August outflow surpassed the previous record of $21.2 billion in March 1990.
The United States continues to spend more than it produces. The chronic twin deficits are bloated by war spending and America 's insatiable appetite for oil which has caused the trade deficit to explode to almost 6 percent of GDP. Over the last ten years, the consumer accounted for 70 percent of American spending, driven largely by the housing boom and the doubling in property prices. That has ended and now price inflation not asset inflation will plague consumers in light of rising energy, food and higher financing costs.
Ironically the credit crunch started a new bubble. Newly created money is fuelling the boom in global commodities. Currencies are losing value against commodities and gold due to open-market operations that sees everyone absorbing excess dollars with newly created currencies. The printing presses are on full steam. Global monetary policies are excessively stimulate as a result of the demise of the greenback, ensuring our intermediate target of $1,000 an ounce. Reflationary forces to end the credit crunch has caused a dollar crunch and investors are looking to hard assets to keep their value. To be sure, the dollar has lost its status as the world's reserve currency.
(John R. Ing, Maison Placements Canada)
And I love this article:
THE DAYS OF HEROIC GREED are ending...
In an article this week that examined the troubles brewing in Citigroup’s mortgage business, the Wall Street Journal focused on Natalie Brandon, a 51 year old married woman from Granada Hills, CA, who is currently unable to make the payments on her $625,000 adjustable rate home loan from Citigroup, despite the fact that the rate will not even reset higher until June of next year. Amazingly, the Journal reported that Mrs. Brandon bought the house in 1985 for just $105,000, but had chosen to refinance five times over the past seven years, borrowing more than $500,000 and spending every single penny. While this may be an extreme example of American profligacy, it is by no means unique. Unfortunately this type of behavior typifies everything that is wrong with the modern American economy.
Had this homeowner behaved responsibly, as was typical for Americans of prior generations, her current monthly mortgage payments would likely be less than $600 and the remaining balance on her loan would be about $40,000. In eight more years she would have owned her home free and clear, and would likely be on track for early retirement. Instead, after 22 years of making mortgage payments, she is now $625,000 in debt. The article stated that she had recently tried to refinance into a 6%, forty year, fixed-rate mortgage, but it fell through. Even if she had qualified, she would have been obligated to make monthly mortgage payments of close to $4,000 until she was in her nineties.
For years, Wall Street and the media have been singing the praises of the heroic American consumer. To that end Mrs. Brandon could be portrayed as Wonder Woman. She did her part to power our consumer driven economy by borrowing and spending to her heart’s content. Her last refinance even allowed her to buy a brand new Lexus. As long as she could find a greater fool willing to loan her more money, there was no limit to what she could buy. As it turned out, Citigroup was the greatest fool, left holding the bag on a $625,000 mortgage on a house now likely worth only half that amount.
See: http://money.cnn.com/2007/11/23/magazin ... topstories
AND:
John and Grayce Coffman could lose the Fullerton home they bought in 1977 because they can’t keep up with their mortgage’s rising costs. The Coffmans, who are unemployed and in their 60s, borrowed $552,300 from Countrywide Financial, the largest U.S. home lender, in the summer of 2005. Despite making about $50,000 in payments since then, they now owe more than $590,000 to Countrywide.”
“They took out a loan that allowed them to make a low monthly payment, but tacked the unpaid interest onto the loan balance. Now the Coffmans say they can’t afford the minimum payment of more than $2,000 a month, which has gone up from $1,776 when they first got the loan.”
“And they certainly can’t make the fully amortized payment of more than $4,500, which would be roughly 80 percent of their income. The Coffmans earn about $5,400 a month from Social Security and government assistance for five of their six adopted grandchildren, according to the Coffmans and their recent bank statements.”
"They bought their two-story home for $97,000 in 1977 and have since extracted all the equity gain in it. They’ve cashed out $600,000 in home equity with the help of several lenders.”
They got through 600k in equity.
WHERE DID THE MONEY GO?!!!
========
Take care Dino, let's do coffee one day in NY.
- Johnson&Johnson
- Contributor
- Posts: 216
- Joined: Wed Nov 29, 2006 12:03 pm
by dinos » Fri Dec 14, 2007 7:59 pm
Cheers, JNJ.
Seeing your example of the abuse of home equity, I'm reminded of a girl buying a car as I was buying my business car...
Basically, she was trying to turn in two cars to buy a pick-up truck (I never understood the fascination with pick-up trucks). One of the cars was in an accident and she was upside down on the other. Her credit was among the lowest scores you can have while still being able to support basic life functions. I overheard the salesman telling her that he'd have to add something like $7000 to the price of the pick-up to make up for her two piece-of-crap cars and, because her credit was so bad, he couldn't swing her a loan that was better than 20 or so per cent. Her response: "I don't care - I want a truck!" He just sat there looking at her with a distant, gaping stare...
Some people know they're doing the wrong thing, but proceed anyway because they don't want reality to get between them and whatever they want at any given moment.
It never ceases to amaze me that, faced with a choice of independence (i.e. paying off their mortgage) or servitude (getting that dream car, getting that dream kitchen, putting their house on the line to finance credit card debt, etc) that so many people will choose to put themselves into the dirt because the urge to keep up with the Joneses is so strong.
Any time you're in NY, send me a PM - a coffee is always a good thing!
-dinos
Seeing your example of the abuse of home equity, I'm reminded of a girl buying a car as I was buying my business car...
Basically, she was trying to turn in two cars to buy a pick-up truck (I never understood the fascination with pick-up trucks). One of the cars was in an accident and she was upside down on the other. Her credit was among the lowest scores you can have while still being able to support basic life functions. I overheard the salesman telling her that he'd have to add something like $7000 to the price of the pick-up to make up for her two piece-of-crap cars and, because her credit was so bad, he couldn't swing her a loan that was better than 20 or so per cent. Her response: "I don't care - I want a truck!" He just sat there looking at her with a distant, gaping stare...
Some people know they're doing the wrong thing, but proceed anyway because they don't want reality to get between them and whatever they want at any given moment.
It never ceases to amaze me that, faced with a choice of independence (i.e. paying off their mortgage) or servitude (getting that dream car, getting that dream kitchen, putting their house on the line to finance credit card debt, etc) that so many people will choose to put themselves into the dirt because the urge to keep up with the Joneses is so strong.
Any time you're in NY, send me a PM - a coffee is always a good thing!
-dinos
-
dinos - Contributor
- Posts: 853
- Joined: Tue Aug 08, 2006 8:28 pm
- Location: New York
by dinos » Wed Dec 19, 2007 6:15 pm
Here's more on the state of real estate here...
http://online.wsj.com/article/SB119803038237438417.html
Basically, the actual prices of home sales are being mis-reported and this is understating the actual price drop of sales. There are examples in the article above such as a $196,000 house in Colorado whose actual price was $168,000 because KB Home paid a third party, who made a cash payment to the buyer. Or a $479,000 home in Florida whose actual price was $450-459K because Lennar gave the buyers vouchers to buy a new Ford Mustang or Harley Davidson.
This is outright fraudulent reporting. You see this on Long Island too - houses being offered with a free Mercedes. I just hadn't realized that the cost of the cars was not being counted in the sales price. This drives home two points:
1. You can't count on any part of the real estate industry to be honest right now, and
2. You can't count on the industry's regulators to do their jobs.
But hey - in an environment where the problems were caused, in part, by a lack of regulation (the federal reserve did not correctly oversee the banking system as the current crisis developed, ratings agencies put fraudulent investment grade ratings on CMO paper to keep business coming in from banks, etc), this boldly underscores the need for regulators to step in and make some order from the chaos. I doubt they will heed the call, and the current real estate problems here can only deteriorate.
http://online.wsj.com/article/SB119803038237438417.html
Basically, the actual prices of home sales are being mis-reported and this is understating the actual price drop of sales. There are examples in the article above such as a $196,000 house in Colorado whose actual price was $168,000 because KB Home paid a third party, who made a cash payment to the buyer. Or a $479,000 home in Florida whose actual price was $450-459K because Lennar gave the buyers vouchers to buy a new Ford Mustang or Harley Davidson.
This is outright fraudulent reporting. You see this on Long Island too - houses being offered with a free Mercedes. I just hadn't realized that the cost of the cars was not being counted in the sales price. This drives home two points:
1. You can't count on any part of the real estate industry to be honest right now, and
2. You can't count on the industry's regulators to do their jobs.
But hey - in an environment where the problems were caused, in part, by a lack of regulation (the federal reserve did not correctly oversee the banking system as the current crisis developed, ratings agencies put fraudulent investment grade ratings on CMO paper to keep business coming in from banks, etc), this boldly underscores the need for regulators to step in and make some order from the chaos. I doubt they will heed the call, and the current real estate problems here can only deteriorate.
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