Friday, September 28, 2007

The Slow Strangulation Death of a False God: Debt-Based "Prosperity"

Nothing in the "news" persuades me that borrowing more money and easing credit standards will save the worshippers of a false god: cheap, easy credit.
Americans have slavishly worshipped at the feet of this golden idol for seven long years, and if you'll forgive the Biblical reference, these seven "fat" years of gorging on debt are about to be followed by seven "lean" years (or maybe 14 years, the crystal ball is hazy on that point) in which debt is repudiated and people begin saving out of fear for their future.

Astute reader Lindy A. shared these thoughts recently:

Your September 20th comments are timely and deadly accurate. Indeed, my family and I have thought for some time:

"Bread and circuses" are the order of the day

Those seeking elected office are not doing so for the common good

The "statistics" on inflation are obviously misstated --- one wonders why they bother continually repeating them

and now --- reducing rates and guaranteeing the devaluation of our currency to appease those who caused the crisis, accomplishing nothing

Our economy has been placed in the hands of others, we have fomented a war, we have gradually been encroached by ever increasing taxation, charges, fees and the like. (again, your analogy so apt, the frog in the water).

A sorry situation. We can, however, at least voice our thoughts, (so far), and take what individual steps are possible to give reality to our own lives.

Not having any TV service was our first step in the right direction. Moving was another. Honing various skills, downsizing all things; giving the "finger" to the exhortations to "buy" "buy" "buy".

Oops, there's the catch, isn't it? Now THAT'S what "THEY" are afraid of. A nation of individuals who say, "We don't need this "stuff".... both figuratively and literally.

Wow, then we'd have to have a rebirth of a culture more dedicated to intellect, internal satisfaction, ethical standards, and industry focused on actual needs. Ho ho hooooo. Sounds like something the framers of our Constitution would have approved.

Thanks for your sense and sensibility."

In contrast to this common sense (thank you, Lindy), here is the typical standard-issue status quo economist (as quoted in Barrons): Fear Seems to Be Fleeting by Michael T. Darda, chief economist, MKM Partners:

FORWARD-LOOKING FINANCIAL-MARKET INDICATORS are all pointing up: The Treasury curve has steepened considerably, risk spreads have come down significantly from peak levels, commodity prices are melting up again, and equity markets are moving higher.

We think this means that any patch of bad data that may develop during the months ahead will be transitory and temporary. Indeed, the equity market seems to be looking ahead to sustained earnings growth and stronger pricing power next year despite mixed economic data."

In other words: blah blah blah. Everything's great! The future's so bright we gotta wear shades! No recession, equity markets will go up strongly a sixth year in a row with endlessly growing profits and stock prices!

Meanwhile, back in reality, this is what I see with my own eyes:

Food prices skyrocketing, with projections for 10+ years of higher prices (Wall Street Journal 9/27/07) Soaring Demand For Grain Roils World Markets

House sales drop 50% in Los Angeles. Gee, do ya reckon supply now exceeds demand?

A year ago, I would stop my bicycle by the railroad tracks and watch dozens of railcars loaded with lumber heading south to L.A. Recently, the trains haul no lumber whatsoever; instead the train hauls tanker cars full of ethanol (see item one above about grain demand)

Our friends who once had a family income of $150,000 a year are now facing bankruptcy due to severe medical costs (yes, they have typical "corporate employer" insurance, but their share of the costs already exceeds $100,000).

Another high wage earner ($120,000/year) just put $10,000 of dental work on a credit card. Yes, she has corporate insurance, but the dental coverage is a joke. (It costs $500/year and pays out a maximum of $500/year. This is typical of "phony insurance" which pays little more than it costs--standard practice in the U.S. No wonder Buffet owns insurance companies.)

A friend in the video production/TV commercials business reports that auto sales have fallen off a cliff in September at his new car dealership clients.

Friends with $75,000 a year household income and two kids live paycheck to paycheck, and they rent their apartment. They do not own new cars and have no mortgage or car loans. This is standard nowadays: people take vacations with credit cards. They have no savings.

Note that these are not people with subprime mortgages which are re-setting--these are high wage earners with standard expenses in a "secretly inflationary" "tax the living heck out of the high-wage earner" economy.

Please spare me the gobblydigook about rate spreads and all the statistics and indicators. Let's stick to simple fundamental facts:

1. 70% of the U.S. economy is consumer spending.

2. U.S. consumers are either strapped, heading for bankruptcy or about to get strapped.

But complacency reigns supreme, as evidenced by this chart of the VIX
(a.k.a "fear index")

Is this a chart of complacency reigning supreme forever, or complacency about to be shattered by reality in October? Let's wait for auto sales, inflation numbers, gasoline prices, profit warnings, retail sales and all the other bogus/manipulated numbers for September. Maybe even the spinmeisters will be unable to mask the rot as the false god of ever-rising debt and "easy terms" borrowing by individuals, corporations and government alike topples under its own weight.

Thank you, Steve A., ($50) for your second generous donation to this humble site. I am greatly honored by your contribution and readership. All contributors are listed below in acknowledgement of my gratitude.

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