Mopar Fanatic
05-08-2009, 03:58 AM
Over the last several years, as everyone knows, we have been borrowing a lot of money. Consumer debt, government debt, mortgage debt, investment leverage, car loans, student loans... you name it, we borrowed money to blow it on. As a result, anything typically purchased with debt (like houses, autos, stocks, tuition...) is in a state of great overcapacity. The higher demand created by borrowed funds created a response of supply expansion in, for example, Hummers and big houses in far-off subdivisions. Those things that could not be as readily expanded, like stocks and student capacity at universities, saw prices bid up to astronomical levels. Some things saw so much artificially generated demand that prices were bid up even though supply was greatly expanded (like houses).
Well, debt does not usually come out of thin air. One person's debt is another person's savings. For years we have had a negative savings rate in the U.S. (as have many other western debtor nations), so we have had to look abroad for money to borrow. Creditor nations, like China, Japan, and oil countries happened to be piling up trillions of dollars in foreign currencies due to their massive trade surpluses. Since the dollars they were holding were depreciating in value, these nations were looking for places to put their money where it would earn interest to retain some of its value. Treasury interest rates were being held artificially low by the Fed and, anyway, there was only so much Treasury debt to go around, so Wall Street came up with securitization as a roundabout way for these creditor nations to lend their money into the American market. The American market was the only market large enough to absorb the trillions being piled up in these other nations: If China attempted to loan a trillion dollars to Estonia, it would essentially buy the entire country several times over. They were willing to buy assets like credit card securities, mortgage securities, etc. because ratings agencies were calling them AAA. This has since been proven to be a sick joke.
The problem, as I have said before, is that "recovery" is going to be a return to a norm that no one under 40 has witnessed in their lifetime. We are going back to the time before we were able to borrow all this money to support our way of life. Even if the worst risks of meltdown are over (I don't think they are, but say they are), neither consumers nor market participants have yet realized that things are not going back to how they were 10 years ago, or even 20 years ago. The reason for this is that there is no one left to buy our debt. China has become a net seller of US debt. Japan will be forced to begin selling as well to prevent further deflation of its currency, which is destroying its export economy. World trade has decreased at rates much faster than it ever did during the Great Depression, sending trade surpluses through the floor, meaning there are fewer dollars looking for a home, even if countries were interested in buying our mortgage backed securities and credit card debt anymore. The judgment of the market is that the American consumer has reached his credit limit and is to be cut off while he pays some of his debt down. All of our policies have been geared toward seeking a way around this.
Because we cannot find savers around the world to lend us money, our own government has become the "lender of first and only resort". The Federal Reserve has become the primary, and in some cases the only buyer, of student loans, mortgages, credit card debt, consumer debt, corporate paper, you name it. Fannie and Freddie are being used to buy up even more mortgage debt. Banks, just for survival, have become dependent on negative real interest rates and hundreds of billions in cash infusions. I don't mean temporarily, but permanently dependent. Just like Greenspan raising interest rates popped the tech bubble, then lowering them blew up the housing bubble, then raising them again popped that bubble, raising rates off of our current record lows will again send our economy into a tailspin. In other words, no one will lend the US consumer money because it has been collectively decided that he is maxed out, so the government is borrowing it for us. The rest of the world is still afraid to completely stop lending the US money for fear of what will happen if our currency crashes, so our government is using this leverage to borrow money and lend it into our markets. The problem is that we have really no way out of this situation. We will continue to expand our balance sheet and take on government debt until there is not enough money left to lend even to our government. This day is fast approaching. The Federal Reserve has already begun buying Treasuries because they could not be sold at other than punitive interest rates. Smaller nations have already found themselves unable to borrow money, and mainland European nations have had to go hat in hand to the IMF. Iceland went bankrupt. Ireland will be bankrupt very soon, as will Greece and Austria. Eastern Europe's decline could drag all of Europe into a real depression, and even destroy its banking system. The UK has already found itself unable to sell all of the debt it offers. The only step up from the UK, as far as financial, social and governmental stability is the US, and we will soon find ourselves unable to fund our debts as well. We have set ourselves on a course that is basically impossible to reverse, and we have fundamentally changed almost nothing: We are still just as dependent on rising debt levels for stability, except that it is our government borrowing the money for us, rather than individuals and businesses borrowing it themselves. The world markets demanded that we make changes, and we have refused. It is as if our credit cards reached their limits, and instead of cutting back and paying them off, we borrowed the money against our family name instead of our own. The party goes on a little longer, but now the whole family is going to be destroyed by our actions.
The only way out of this mess is if several huge new industries are discovered and built, to the tune of doubling our productive capacity and GDP. This will make our debt less oppressive by comparison. I am not holding out hope - or just pure blind faith - that this will happen. The most realistic situation is that the currencies of Western debtor nations will lose a tremendous amount of value. Consumption and standard of living in debtor nations will have to fall. The currencies of creditor nations will have to rise, and consumption and standard of living in those nations will have to rise as well. Depreciation of our currency is the only way we diminish the nominal value of our debt. We cannot get back to the place where our private sector can acquire the debt it needs on its own. We are dependent on trillion dollar government deficits and an ever rising Federal Reserve balance sheet. Don't even think about Obama's promise to cut the deficit in half by the end of his term: The credit that the private sector cannot secure for itself, the government is going to have to borrow on its behalf, and we are talking about trillions and trillions of dollars. With our coming demographic bomb, and the Medicare and Social Security disasters looming, we were always going to crash and burn in the next few decades, but this worldwide margin call has moved that timeline forward dramatically. It will not be but a few years before the Federal Reserve is buying Treasuries or expanding its balance sheet by trillions per year.
Well, debt does not usually come out of thin air. One person's debt is another person's savings. For years we have had a negative savings rate in the U.S. (as have many other western debtor nations), so we have had to look abroad for money to borrow. Creditor nations, like China, Japan, and oil countries happened to be piling up trillions of dollars in foreign currencies due to their massive trade surpluses. Since the dollars they were holding were depreciating in value, these nations were looking for places to put their money where it would earn interest to retain some of its value. Treasury interest rates were being held artificially low by the Fed and, anyway, there was only so much Treasury debt to go around, so Wall Street came up with securitization as a roundabout way for these creditor nations to lend their money into the American market. The American market was the only market large enough to absorb the trillions being piled up in these other nations: If China attempted to loan a trillion dollars to Estonia, it would essentially buy the entire country several times over. They were willing to buy assets like credit card securities, mortgage securities, etc. because ratings agencies were calling them AAA. This has since been proven to be a sick joke.
The problem, as I have said before, is that "recovery" is going to be a return to a norm that no one under 40 has witnessed in their lifetime. We are going back to the time before we were able to borrow all this money to support our way of life. Even if the worst risks of meltdown are over (I don't think they are, but say they are), neither consumers nor market participants have yet realized that things are not going back to how they were 10 years ago, or even 20 years ago. The reason for this is that there is no one left to buy our debt. China has become a net seller of US debt. Japan will be forced to begin selling as well to prevent further deflation of its currency, which is destroying its export economy. World trade has decreased at rates much faster than it ever did during the Great Depression, sending trade surpluses through the floor, meaning there are fewer dollars looking for a home, even if countries were interested in buying our mortgage backed securities and credit card debt anymore. The judgment of the market is that the American consumer has reached his credit limit and is to be cut off while he pays some of his debt down. All of our policies have been geared toward seeking a way around this.
Because we cannot find savers around the world to lend us money, our own government has become the "lender of first and only resort". The Federal Reserve has become the primary, and in some cases the only buyer, of student loans, mortgages, credit card debt, consumer debt, corporate paper, you name it. Fannie and Freddie are being used to buy up even more mortgage debt. Banks, just for survival, have become dependent on negative real interest rates and hundreds of billions in cash infusions. I don't mean temporarily, but permanently dependent. Just like Greenspan raising interest rates popped the tech bubble, then lowering them blew up the housing bubble, then raising them again popped that bubble, raising rates off of our current record lows will again send our economy into a tailspin. In other words, no one will lend the US consumer money because it has been collectively decided that he is maxed out, so the government is borrowing it for us. The rest of the world is still afraid to completely stop lending the US money for fear of what will happen if our currency crashes, so our government is using this leverage to borrow money and lend it into our markets. The problem is that we have really no way out of this situation. We will continue to expand our balance sheet and take on government debt until there is not enough money left to lend even to our government. This day is fast approaching. The Federal Reserve has already begun buying Treasuries because they could not be sold at other than punitive interest rates. Smaller nations have already found themselves unable to borrow money, and mainland European nations have had to go hat in hand to the IMF. Iceland went bankrupt. Ireland will be bankrupt very soon, as will Greece and Austria. Eastern Europe's decline could drag all of Europe into a real depression, and even destroy its banking system. The UK has already found itself unable to sell all of the debt it offers. The only step up from the UK, as far as financial, social and governmental stability is the US, and we will soon find ourselves unable to fund our debts as well. We have set ourselves on a course that is basically impossible to reverse, and we have fundamentally changed almost nothing: We are still just as dependent on rising debt levels for stability, except that it is our government borrowing the money for us, rather than individuals and businesses borrowing it themselves. The world markets demanded that we make changes, and we have refused. It is as if our credit cards reached their limits, and instead of cutting back and paying them off, we borrowed the money against our family name instead of our own. The party goes on a little longer, but now the whole family is going to be destroyed by our actions.
The only way out of this mess is if several huge new industries are discovered and built, to the tune of doubling our productive capacity and GDP. This will make our debt less oppressive by comparison. I am not holding out hope - or just pure blind faith - that this will happen. The most realistic situation is that the currencies of Western debtor nations will lose a tremendous amount of value. Consumption and standard of living in debtor nations will have to fall. The currencies of creditor nations will have to rise, and consumption and standard of living in those nations will have to rise as well. Depreciation of our currency is the only way we diminish the nominal value of our debt. We cannot get back to the place where our private sector can acquire the debt it needs on its own. We are dependent on trillion dollar government deficits and an ever rising Federal Reserve balance sheet. Don't even think about Obama's promise to cut the deficit in half by the end of his term: The credit that the private sector cannot secure for itself, the government is going to have to borrow on its behalf, and we are talking about trillions and trillions of dollars. With our coming demographic bomb, and the Medicare and Social Security disasters looming, we were always going to crash and burn in the next few decades, but this worldwide margin call has moved that timeline forward dramatically. It will not be but a few years before the Federal Reserve is buying Treasuries or expanding its balance sheet by trillions per year.