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Thread: A little something to put things in perspective

  1. #1
    God/dess Deogol's Avatar
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    Default A little something to put things in perspective

    Well - if we got good credit I guess that is why we have so much credit!

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    Banned Melonie's Avatar
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    Default Re: A little something to put things in perspective

    ^^^ the 'tin foil hat' crowd would tell you that this is a perfect setup to send every country with a positive current accound balance a little 'payoff' ... in the form of a devalued US dollar, which costs the US gov't essentially nothing, and which causes 15-25-35% of the 'value' of their 'positive;US dollar denominated current account balances to simply disappear.

    Of course, for those few Americans who actually save and invest more than they borrow and spend, 15-25-35% of the 'value' of our savings and investments would also disappear. But compared to the vast majority of Americans who owe much and save nothing, 15-25-35% of the 'value' of their debt obligations would disappear. This fact of course provides a pretty sure indication of which group the American gov't will be most concerned about,

    On the flip side, the hedge funds and foreign central banks have created an inversion in US treasuries ... which normally signals that they are expecting a recession and deflation. Global economic warfare waiting in the wings, with Joe Sixpack being totally oblivious ?
    !
    Last edited by Melonie; 08-26-2006 at 09:20 PM.

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    Banned Melonie's Avatar
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    Default Re: A little something to put things in perspective

    and the good Dr. Rickenbacher has this to say about the US current account deficit from an 'outsider's' viewpoint ...

    (snip)"The American consensus view holds that the trade deficit, however large, does not matter because foreigners easily finance it. This view reveals the total absence of any serious analysis of related domestic income and debt effects. The obvious first major harmful economic effect is that domestic producers lose an equal amount of domestic spending and income creation to foreign producers, and that today in a staggering annual amount of more than $800 billion, equal to about 7% of nominal GDP.

    Such persistently large and growing income losses from the trade deficit would have pulled the U.S. economy into recession long ago. It has not happened because the Greenspan Fed, by way of loose and cheap money, provided for a compensating increase in domestic demand through additional credit creation. It succeeded, true, but the thing to see is the additional credit and debt creation. This was justified with low inflation rates. Ironically, the import boom in the trade deficit has been very helpful in suppressing U.S. inflation.

    Yet there is still a second major harmful effect to the trade deficit that American economists completely ignore. Implicitly, the alternative demand created by the looser U.S. monetary policy is different from the demand that emigrates to foreign producers. The big loser is the export industries in manufacturing. The gains, via the surrogate demand, have been in consumer services and goods.

    In essence, the trade deficit alters the economy’s structure in a negative way. The losing manufacturing area is the sector with the highest rate of capital formation, and therefore also the highest rate of productivity growth. For good reasons, it also pays the highest wages. Consider that U.S. manufacturing lost 3 million jobs in the past few years. To be sure, the trade deficit is not its only reason, but unquestionably a major one.

    Pondering the U.S. economy’s unusually high addiction to credit and debt growth in relation to GDP growth, we are sure of another evil factor - Ponzi finance. Principally, every increase in spending brings about an equivalent increase in incomes. But this is not true in three cases of spending: first, spending on existing assets; second, spending on imports; and third, Ponzi finance.

    Ponzi finance means that lenders simply capitalize unpaid interest rates. Ponzi finance creates credit, but it is bare of any demand and spending effects in the economy. In the conventional American view, balance sheets of private households are in their very best shape because increases in asset values have vastly outpaced the sharp increases in debts. So Americans see no problem.

    With such great optimism about the U.S. economy still prevailing, it is a safe assumption that lenders have been more than happy to capitalize unpaid interest rates as new loans, at least until recently. As widely reported, lending standards have been extremely lax for years. Nevertheless, there is bound to come a point where Ponzi lending stops."(snip)

    from

    obviously, one large factor which would convince foreign lenders to change their Ponzi lending practices is the certainty that the US dollars they will be paid back with in the future will be worth 15-25-35% less than the US dollars the foreigners originally lent to Americans in terms of their own home currencies. Another large factor that would convince foreign lenders to change their Ponzi lending practices is the certainty that the US dollar denominated value of their 'collateral' is stagnant or actually declining (i.e. housing). IMHO it's virtually guaranteed that one of the two must happen, and maybe a combination of both.

    Of course, once the Ponzi lending stops, with stagnant paychecks, rising taxes, rising credit card and mortgage payments, rising energy costs, rising costs of basic necessities, not to mention a potential 15-25-35% increase in the US$ denominated price of imported products as the US dollar exchange rate is applied to foreign goods, Americans will have no choice but to greatly cut back on their consumer spending. This will trim the trade deficit / current account balances in a big hurry, with the possible exception of imported oil and gas.

    Of course, this will also probably trim some 15-25-35% of the remaining 'good' US jobs ... primarily those related to real estate construction and furnishings, real estate finance, retail sales of imported products, providers non-essential services (which unfortunately includes exotic dancers), production and sales of non-essential 'mid-market' goods (as always, 'rich' customers will keep Porsche, Louis Vuitton, and Hammacher-Schlemmer in the green ... but for Ford, Gap and Sears it will be a different story). IMHO enough pieces are in place for a truly ugly recession to materialize, and all we need is a 'catalyst' to light the fuse ... bad news from the middle east, another Gulf hurricane, some huge hedge fund going under, etc.

    So the real question that nobody seems to be able to answer is 'what happens then ...' - i.e. does the US economy go through a massive cycle of price deflation and bankruptcies like the 1930's, where troubled owners must sell or go bankrupt, but few have money/credit to buy what they're selling even at reduced 'distressed sale' prices - but with the US dollar holding it's 'value' versus world currencies - or ...

    does the Fed start printing money like there's no tomorrow to avoid the bankruptcies a la the late 1970's, because it's 25% easier to make credit card / mortgage payments if the dollars you're paying with are worth 25% less in terms of purchasing power and your paycheck has increased by 25% in terms of dollars but zero in terms of purchasing power - but as a byproduct create even more massive US dollar denominated price inflation of worldwide / imported commodities like food, energy, durable goods etc.

    Personally, I'm betting on a short burst of price deflation and bankruptcies, followed by a long wave of money printing / US dollar devaluation / price inflation. From the standpoint of US elected officials, once a short burst of Joe Sixpack bankruptcies hits the courts in early 2007 and causes tons of bad media publicity, they'll have no choice but to start running the US dollar printing presses at 'warp speed' so that Joe Sixpack can get an 'apparent' pay raise with which to continue making his mortgage and credit card payment (as well as a stealth increase in income taxes to help the gov't pay for social welfare programs for those who are already bankrupt)
    !
    Last edited by Melonie; 08-27-2006 at 06:06 AM.

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    Default Re: A little something to put things in perspective

    and some actual 'fallout' from Ponzi lending practices re Washington Mutual, lending even more creedence to the US dollar printing presses being shifted into 'warp speed' early next year ...

    (snip)"Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.

    Now the house is the bank's collateral for the questionable loan. But what happens if the value of the house starts to drop?"

    A good example of how this is unfolding at lending institutions comes from Washington Mutual: You may recall Washington Mutual laid off 2500 employees in their mortgage broker department earlier this year. As LTV went above 100%, and then as property values decayed from recent peaks, the collateralized aspect of these mortgages suddenly is at risk.

    Here's how this has played out over the past few years via WaMu's ARM loans (data via Washington Mutual's annual report):

    - 2003 year end, 1% of WaMu's option ARMS were in negative amortization (payments were not covering interest charges, so the shortfall was added to principal).

    - 2004, the percentage jumped to 21%.

    - 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.

    So each month, the borrowers' debt increases; Note there is no strict disclosure requirement for negative amortization -- Banks do not have an affirmative obligation to disclose this to mortgagees.

    Thus, a large part of our housing system have become credit cards. And according to Witter, "WaMu's situation is the norm, not the exception."

    Even worse, Witter notes that negative amortization is booked by the banks as earnings. "In Q1 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million."

    This situation is unsustainable. Witter's housing and market forecast is rather bearish:

    "Negative amortization and other short-term loans on long-term assets don't work because eventually too many borrowers are unable to pay the loans down -- or unwilling to keep paying for an asset that has declined in value relative to their outstanding balance. Even a relatively brief period of rising mortgage payments, rising debt and falling home values will collapse the system. And when the housing-finance system goes, the rest of the economy will go with it.

    By the release of the August housing numbers, it should become clear that the housing market is beginning a significant decline. When this realization hits home, investors will finally have to confront the fact that they are gambling on people who took out no-money-down, interest-only, adjustable-rate mortgages at the top of the market and the financial institutions that made those loans. The stock market should then begin a 25%-30% decline. If the market ignores the warning signs until fall, the decline could occur in a single week."

    As Witter puts it and Ritholtz concurs, the scariest thing is that the gambling-for-redemption behavior and problems of WaMu are not the exception in the mortgage industry; they are instead the norm. There are good reasons to believe that this is indeed the norm as lending practices have become increasingly reckless in the go-go years of the housing bubble and credit boom."(snip)

    from

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