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So Who's the Doomsdayer?   (January 23, 2006)


You think I'm the only one worried about America's out-of-control borrowing and its complacent acceptance of very high risks for low returns? Read these selections and then guess who penned them:
"Our budget deficit will substantially worsen in the coming years unless major deficit-reduction actions are taken…The likelihood of growing deficits is of especially great concern because the deficits would drain a correspondingly growing volume of real resources from private capital formation and cast an ever-larger shadow over the growth of living standards."
Translation into English: The more money the Federal government borrows to fund its deficit and the more it pays in interest on that rising debt, the less there will be available for investing in private enterprise. And remember, it's businesses old and new which create the jobs and profits which support the living standards for both workers and investors--even government workers.
"This vast increase in market value of asset claims (stocks, bonds, houses) is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent… But what they perceive as newly abundant liquidity can readily disappear… history has not dealt kindly with the aftermath of protracted period of low risk premiums."
Translation into English: There's an asset bubble in stocks, bonds and housing, folks, because people are foolishly assuming there's no risk of a drop in asset prices. As a result of this 'what, me worry?' complacency, people are accepting low returns on their money--in other words, they aren't demanding any "risk premium" at all.

Even worse, investors are assuming these risk-free conditions will last for the foreseeable future, when history shows that all the easy-to-borrow-and-very-cheap-money can vanish in a New York minute, causing all asset bubbles to pop more or less at once. With nowhere to hide, and finding they can no longer borrow their way out of trouble, the financial house of cards people have been counting on as rock-solid will crumble.

So who's this wild, irresponsible doomsdayer? Alan Greenspan. Read his comments again, listen to the deafening silence and denial of our leaders and citizenry, and then fear for our nation.

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copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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