There are a lot of green shoots, but they don't make a meal for a small horse. It will never get out to people why this depression is happening because those in charge don't want a nation of people to catch on as those in bondage in Egypt did 3000 plus years ago. There will be all kinds of explanations like Black Swans and the last administration or subprime lending, but there will never be allowed to slip the deadly nature of credit and debt in general.
We are in a mess. The entire survival of modern civilization may rest on the solution to the current financial/debt system. It would be easy enough to get rid of the debt, but few understand the power that amassed debt considered money gives an economy when it is nearing peak. The massive amounts of performing debt represents capital, retirement, savings and money all at the same time. Problem is, it is also a cancer to the economic well being once it becomes excessive.
One of the paradoxes in this economy is that savings is debt. Debt is savings, debt is money and it is the basis of rasing more debt, more money and creating more savings. But, as more is generally better, more against something relatively fixed like the size of the economy eventually becomes overwhelming. To say that they can pile debt to the moon is only true to the extent that the expectations of it being serviced or repaid.
There is more to the debt than meets the eye. The dollar is debt. It is the debt that the Euro is largely based on. It is the backbone of the Chinese financial system. If another currency was to step forward and take the place of the dollar, it would imply that the country of origin had created enough debt to sustain that much debt outside the country. Most countries don't have private property rights or enough property to float enough currency to support the credit systems of the world. It would be nice to have something like the Swiss franc as a reserve, but it would only be a few weeks that Switzerland would be drained of money and a few years of borrowing it that it would be broke. The Euro would work, but the internal and external debt of Europe is massive. The yen might work, but the asset base of Japan has been eroded by deflation and to utilize the yen would drain what was left.
What is about to transpire is the no mathematical solution problem. This past week the former risk evaluator of FNMA from the 1980's came out with a loss projection for the FHA. With it were studies that raised the question of why defaults and foreclosures on mortgages were going up during the 1990's despite a good economy. It is pretty clear with some lookback that the general level of debt in the economy was making it more and more difficult to service existing debt. Once asset inflation stopped, the game was up.
Now governments around the world are trying to stimulate borrowing and lending to get the economies going and I don't believe it is going to work. Instead, we are going to find that all new debt is going bad in with the pile of the other bad debt. The maximum debt capacity of the economy has been reached and all new debt is merely adding to the losses.
Stock market bulls think the Fed has solved this and all we need is for banks to start lending money again. Of course, the nature of the stock market is all involved have stock for sale, meaning they are really only promoting what they have,like Kroger promotes groceries. The difference being that you have to come in and buy groceries from somewhere. You don't have to buy anything financial with your money if you don't want to.
The implications of what I write are dire for stocks, which are priced at levels where only more leverage can ever make the prices go up. Corporations may have a lot of cash, but they also have record levels of debt and any that get more debt are raising their odds of going broke. I am convinced that US corporations drew their credit lines last year as the crisis approached so they would be certain to have money. Though this action may have helped many avoid bankruptcy, it may have also ensured others they were going broke. GE could very well be one of them, with the government getting the bill for the insolvency.
The level of debt has to decrease and it cannot decrease without also decreasing the pool of savings and the money supply. The Fed is attempting to keep cash in accounts by buying debt, but I suspect they are going to run in place at best. Savings has increased, but I believe this is more a matter of consolidating ownership of cash balances in the hands of fewer people and the paying down of existing debt. We will see if I am correct soon.
Going forward I sense that bankers are going to realize as well that any new debt they issue is merely going bad with the rest. As the system deflates worldwide, which it will, prices of everything will collapse as those selling literally everything will need cash to attempt to service debt. That is how liquidations occur.
At this time, the banking system is choosing to speculate rather than make loans. This is in part providing liquidity for assets, but it has it dangers. Putting out cash for assets is just as deadly as lending cash. Once it becomes clear that the bigger fools are already in the game, banks and brokers who have been throwing stock between themselves to inflate prices are going to find they are the bigger fools. We are headed for a liquidation as we saw between spring 1930 and summer 1932. I am betting the SPX goes to under 400 for certain and the Dow under 4000, taking out the entire post 1995 bubble. Tens of millions are going bankrupt and the financial bubble in Asia is going to implode along with ours. The housing market decline is going to resume, as all in the making of mortgages are going broke and the government is going to have to adapt to survive itself.
No comments:
Post a Comment