Dominos of Debt
Somewhere I read a story about where “the short end of the stick” came from and it was a story about debt. Some British King borrowed the gold of wealthy people and gave them a stick with a notch representing how much they were owed. The economy was good as the King spent the money on whatever. But, the King spent all the gold and had no way to pay it back leaving the wealthy merchants holding the short end of the stick.
True story or not, it does not matter, but what does matter is that unmanaged debt constantly plays a roll in the destruction of economies. Mexico had huge currency devaluation in the 80s due to debt. Zimbabwe has no economy left due to debt. I would argue the things that have happened in Zimbabwe that made it worse were a natural response due to the increasing discrepancy of wealth due to debt and lack of opportunity. When the divide becomes too great, anarchy takes over.
When I looked in the African economy and their debt, well, the financial geniuses of the UN pushed all poor countries with debt towards agriculture. It caused a glut in the market. I am working from memory here, but the Africa numbers showed that their productivity improved enormously, like maybe double or triple, but 20 years later they were getting only about 30c on the dollar compared to the price when the UN enslaved them to these activities. They worked harder, and they worked harder, and they worked harder, and they could not meet their debt obligations and their Nemesis UN saviour snapped their whip and directed them to grow and harvest more, further to their detriment in terms of working further down the supply and demand chain. My read of it shows that they feel there was some kind on conspiracy against them; however, I think it was failure to consider supply and demand economics in the plan and basically have no contingency to deal with that.
But, it was debt that left them to the mercy of ignorant plans.
The US is in bad shape debt wise and I don’t think people appreciate the degree to which this changes the financial landscape going forward compared to people’s experience of how these things worked in the past.
The US has enormous debt per person, to the point that Moody threatening to cut the US’s AAA rating is probably overdue, especially in the light of the fantasy that the US has about 10 years to turn this around. The US debt is critical. I doubt very much that economic forecasters are factoring in the premium that the US has enjoyed on its currency and how much for nothing that premium has given the US.
But, Moody's has certainly been proven to be incompetent in rating debt. Consider MBIA's AAA rating. A true AAA company demands the best rates for borrowing. MBIA is having to pay 14% to attract new capital. Having to pay14% is not a AAA company, but a completely junk level company. MBIA is but one of the financial issurers that people have used as a hedge against investments, investments that probably ought not have been considered.
I never followed the markets for the 1987 crash, but I have read about something called "portfolio insurance" which lead to the same kind of garbage investment strategies that these mortgage insurers have encouraged.
I have previously posted that I am 100% out of the market and it has to do with not trusting the $681 trillion dollars of these derivative things that I do not understand, but I don't need to understand them to appreciate that even 1/10th of 1% is a $681 billion dollar mistake and 1% is $6.8 trillion dollars. It is a fantasy to not expect mistakes that we will all pay for and my investment strategy is to do my best to position myself to take the least hit from the greed and arrogance of these idiots. Being in the market seems like a good strategy to be in the wake of the fallout, whatever that might be.
Well, all of these losses that are hitting the news appear to be from the $1.35 trillion dollar CDO market. I could be wrong. Well, eeek, the credit default swaps (CDS) market is $45 trillion...
The market is proving that these made up things are not all that secure and these things are used to hedge risk. If you are doing something that you feel you need to hedge risk, well, if that hedge disappears, and these CDS things are fragile enough to disappear, just what will you do next? I don't want to be around for that tsunami, nor do I want to be in the wake.
The more I look, also, the more I see that real estate bubbles are far more tramatic for the economy than other bubbles. The graph titled "Credit Crazy" in this post shows credit market debt versus the GDP. You can see what happened with the real estate bubble of the 1920s as well as the rapid rise of debt thanks to bubbleman Greenspan.
Combine the real estate bubble with the grossly increased dependence on foreign debt, well, we are back to the debt problem. I was looking at Thailand's 1997 crash which made it drop 75% during the year. Somewhere I read they also had a real estate bubble.
Anyway, things look very bad to me. And CR has a very good post about the quality of the consumer debt.