The Slow Strangulation Death of a False God: Debt-Based "Prosperity"
(September 28, 2007)
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:
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:
"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
Wow, then we'd have to have a rebirth of a culture more dedicated to
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.
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.
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!
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.
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.
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