ALSTRY'S FINAL BLOG!!!!
Just like the unemployment rate is under 10% when practically every company, city, county, and state is laying off and few are hiring.
“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.” - Barney Frank,
Let's see where that policy got us......
In 1980 our GDP was about $3 Trillion and Total Debt was about $5 Trillion.
In 2000 our GDP was about $10 Trillion and Total Debt was about $25 Trillion.
In 2008 our GDP was about $14 Trillion and Total Debt was OVER $50 Trillion.
In 1980 America's Total Debt was about 1.7X our GDP....by 2000 it was 2.5X and in 2008 it was over 3.7X a very large GDP...a very very large GDP built primarily on a ponzi scheme of growing debt.
Between 2000 and 2008....America and Americans borrowed more money in eight years than it did in its entire prior history since the founding of our nation. That borrowing was the fuel which drove most of our economy and tax receipts to government. That borrowing is what caused asset prices to skyrocket, salaries in incomes to grow, and tax receipts to explode.
The $50 Trillion was money lent to mortgages, home equity loans, credit cards, auto loans, municipal loans, corporate loans, private equity loans, commercial real estate loans etc....that $50 Trillion is the PRIMARY asset of America and it performing is the income to fund our banks, pension funds, retirees, and mutual funds.
The problem is after about 2003, the primary reason the debt was peforming was because the banks were lending more and more money so the borrower could keep making payments. Some call this extend and pretend. People were borrowing on their "low interest" credit cards to pay off auto loans.....then borrowing on their homes to pay off their credit cards......and same with corporations and municipalities.....and even the Federal Government.
Debt was the driver of America and it was the policy of our government to keep it flowing.....until the policy changed and somebody forgot to tell the people or many of our politicians. Interest rates were raised 17X and credit was cut off or tightened to much of the population. Since people and businesses couldn't roll over loans, debt started defaulting and asset prices crashed.
Revenues also evaporated as much of the revenues in our country was simply derived from massive lending and spending. As revenues evaporated...jobs were cut.....as jobs were cut, tax receipts contracted causing even more cuts.
Between 2000 and 2008...it was the borrowers of America that drove much of our economy and much of the world's as well..ESPECIALLY IF YOU FACTOR THE MULITIPLIER EFFECT.....you could say that the American borrower saved the world from economic disaster....only to make whatever future crash that much larger once credit was cut.
Since raising rates and cutting credit, the only thing the Fed has done is bail out the banks for infecting our country with $50 Trillion dollars of debt. Normally, when the parties that banks lend money to suffer.....the bankers suffer too!!!! It incentivizes the banks to make reasonable loans. BUT NOT THIS TIME.....bankers are actually profiting from their bad loans through credit default swaps and othe derivitives. As a matter of fact, there really is no money in banking anymore since most lending is not profitable due to high default rates and few projects worthy of financing. Who needs to lend to the private sector when you can make billions betting on it crashing and get money for free from the Federal Reserve and loan it back to the government at much higher rates???
In the mean time, NOTHING has been done to deal with this massive EXISTING debt load that simply can't be paid back if credit is not being extended to service it.
$50 Trillion dollars of debt requires about $3 Trillion dollars per year to service it assuming an average 6% interest. Right now government consumes about $6.5 Trillion to pay social security, medicare, welfare, defense, food stamps, unemployment, etc......
In other words, based on the current debt level and government requirments....America must generate almost $10 trillion dollars simply to maintain current structure....IIMPOSSIBLE WITHOUT MASSIVE CREDIT BEING EXTENDED....and that number is growing as more and more depend on government assistance, war is heating up, and stimulous after stimulous is being extended.
NOW debt is defaulting at record rates and our private sector GDP is evaporting due to spending cutting back. If we continue with current policies, it is likely to contract somewhere close to 1980 levels....or less than $3 Trillion dollars per year as more and more continue to default.
NO WHERE CLOSE ENOUGH TO FUND GOVERNMENT AND CURRENT DEBT OBLIGATIONS....without massive counterfeiting from government.
The funny part..... recently we allowed many public companies to roll over hundreds of billions of dollars of junk debt with additional loans from pension funds.....in other words, we are using our own pension system to infect ourselves with even more toxic debt....while Wall Street gets rich in the process.....AND THIS IS THE POLICY OF GOVENRMENT!!!!!!! at least some in government anyway who understand what is going on.
So here we are, as a result of this policy, we have $50 Trillion of debt against a shrinking private sector GDP. Consequently, private sector revenues are evaporating, jobs slashed, wages cut, tax receipts imploding....simply because it is impossible to buy goods and services and cover the massive debt obligation at current rates and declining revenues.
If we allow the debt to default....our pensions, insurance companies and banking system will be insolvent....if we try to print our way out of it.....nobody will accept our currency and our money will be worthless...the effect could be social chaos where we will all be broke holding a pile of worthless paper as we are so rudely finding out as more and more nations are moving away from the dollar.
Hmmm. What is Obama to do?....he inherited the biggest Ponzi scheme in history and it was the policy of the govenment he was part of and the bankers that facilitated and profited from the plan. Now the bankers have cut us off and the private sector economy is crashing as the debt is suffocating the cashflow as more and more are beginning to Feel. Time is running out before society will simply not accept the current policy as conditions continue to deteriorate.....you simply can't bail out the bankers and let the private sector collapse without the population getting upset...really upset.
Obama can be honest with his citizens and tell them the nation is broke and we must restructure and start over to build a durable foundation for the future.....or he can simply print money and cause the world to abandon the dollar...driving interest rates to unsustainable levels crashing the economy likely resulting in chaos....or he can distract his population and start a war and hope to pay off the debt by taking the assets of other nations....
the problem with the third option is the world is already well aware of this option....and sides have already been chosen.....my guess is most would not look too kindly to it even though we carry a pretty good punch.
Interesting times indeed.....with $50 trillion in debt and revenues evaporating....America is broke. And when America is broke, Americans are broke too as we are passengers on this ship.
The following graph does a nice job visualizing the percentage of debt to GDP and just how quickly it has grown since 1980....and how it has exploded since 2000. Remember, in 1980 our GDP was less than $3 Trillion....in 2008 it was over $14 Trillion with a much higher multiple of debt......
How do you restructure $50 Trillion dollars of debt without bankrupting every city, county and state in the nation????? How do you tell your citizens that their pension/retirement plan is broke....or there is not enough money to fund most of government and the obligations it owes you????? Very tough questions...but we are resillient people.
All interesting problems....and the world is well aware of them as the world is meeting to figure out how to run from the dollar as fast as they can.....
Expect massive troop build ups to be announced very very soon. Let's hope the right decisions are made....it may be the last ones for many of us.