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alstry (35.36)

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March 12, 2009 – Comments (37)

We have is a debt problem. 

For the past 68 years, an ever expanding debt base helped grow our nation and our economy.  For much of that time our productive capacity grew as we sold products around the world.  In the past 30 years the debt really started to take off.  In the past eight years, we went nuts as everything became dependent on simply borrowing more and more money and less and less on making and selling things.

We really don't have a credit crisis.  That is only what the media calls it. 

We have a debt crisis because people can't pay their debt and now a credit crisis because banks have very few people qualified to borrow.  When people can't pay their debt.....debt defaults.  When debt defaults banks lose money.   If banks lose money they don't have capital to lend in addition to the fact that very few are capable of borrowing.  Combine the two and you really have a credit crisis.

As long as banks kept extending credit to anyone and their mother, defaults were limited because people could just borrow more to service existing debt. 

This was especially true in housing. At the peak of insane lending practices...banks even extended credit to homeless people to buy homes.  As people borrowed with ease to buy homes, home prices went up.  As prices went up, people borrowed more and price didn't matter as long as they could borrow.  Then after buying the homes, people borrowed even more and really started doing stupid things like taking perfectly good countertops and replacing them with stone.  Taking very nice appliances and replacing them with stainless steel that showed fingerprints everytime someone opened the door.

We borrowed and borrowed and borrowed.  And then started borrowing to service the borrowed money.  With that borrowed money, we spent it everywhere.  Homes, stores, vacations, cars, dinners out....if we could borrow, we could spend.... and if we could spend, business went nuts...here and many other places in the world....especially Asia. 

Shipping companies were building boats as fast as they could to bring stuff over for those borrowing and spending Americans.  As we purchased more, the countries selling us stuff started booming and their people started borrowing and building..... sometimes buying our stuff.  Our business went nuts even more by selling not only to Americans who were borrowing, but to foreigners who were now buying and also borrowing.....just no where near the extent of Americans.

If business went nuts then everyone was happy.  Jobs were plentiful.  Profits skyrocked so tax revenues exploded.  Do you think exploding tax revenues were enough for our politicians....heck no!!! they started borrowing against the higher revenue stream and started spending too!!!!  Schools, parks, roads, hospitals, new buildings....you name it...if cities could borrow they would and spend it everywhere too....guess what???....business loved it too...profits really went through the roof and jobs were plentiful because everyone was borrowing and spending...and as everyone was spending, business was borrowing to satisfy the higher demand.

And since everyone was working, health insurance companes could extort employers and workers for ever increasing insurance premiums to pay for higher and higher health care costs.  As premiums rose, health care costs increased, as health care costs increased, premiums rose....as long as everyone was working....it didn't matter that their wages were stagnant and health care was taking a bigger and bigger chunk of their paycheck.......they could borrow to make ends meet.

As the debt grew bigger and bigger, the bankers became worried because debt coverage ratios became dangerously tight.....NO PROBLEM...securitize the debt and sell it to some idiot (your pension fund manager and overseas banks) who didn't appreciate the extent of how much of the actual economy was really a ponzi scheme built primarily on people borrowing.  If banks kept securitzing and selling off the toxic debt, the could report amazing profits as long as no one caught on.... take huge bonuses, and no one would know the difference until the bankers were long gone or had taken so much in bonuses it really didn't matter. 

Remind anyone of a utility dumping toxic waste in the ground water to save money and pad profits......????????

As long as people kept borrowing, banks kept the charade going.  In the early stages, if a person got in trouble, no problem...they could sell their house to some idiot who could borrow 5X their income and then pay off the debt and start all over.  This worked fine, until too many people started getting into trouble because too many borrowed too much.  By this time everything was dependent on debt....and I mean EVERYTHING!!!!  As long as the banks kept extending credit so borrowers could borrow more to pay off the money they borrowed, everything was fine.  The balloon grew bigger and bigger until it covered every aspect of our economy.

Who cares if we didn't make anything.....we could borrow and borrow and everything would boom!!!!

Housing, Car Sales, Air Travel, Hotels, Retail, Business Profits, Finance, Tax Revenues...we are already way over half the economy and we could keep going.......was dependent on borrowing.  Not only that, industries borrowed money to expand to satisfy the increased demand from the frenzied borrowing until just about everything in America was leveraged like NEVER BEFORE IN HISTORY.

The reason banks have a credit crisis is because people can't pay their debts.  People can't pay their debts because banks won't loan them more money to service their debt like they used to......if people can't service their debt....not only do they default on their debt hurting those that hold the debt....they can't spend any place because they are insolvent hurting businesses and employees across the country.  Not only are businesses hurt, but incomes implode evaporating tax revenues deepening the slowdown cycle even further as cities and states are starved for cash.

At the end of the day, you can take whatever side you want.....was it the people's fault for borrowing too much, or the banks fault for loaning too much to those they should have known couldn't pay them back.  The bankers didn't care because they were making bonuses in amounts NEVER before seen in the History of the World.....and by the time the party ended....they were so rich it didn't matter.  So you pick..... was it the borrowing users fault or the toxic credit extending dealers??????? 

Alstry says BOTH!!!!!

The joke now is that we are bailing out the dealers and punishing the users by foreclosing on the borrowers homes, kicking them out of their jobs, and putting them and their families out on the street......do you see Jamie Dimon panhandling???????

Now the slow down is spilling over to those that did nothing wrong due to an economy slowing down for EVERYONE.

Quite frankly, at this point it really doesn't matter......revenues are dropping so low that almost everything is going to be insolvent.  PERSONAL INCOME TAX RECEIPTS WERE DOWN OVER 64% IN FEBRUARY!!!!!!!   How many families, businesses, or municipalities in America can survive on that kind of revenue decline????  We see what it is doing to the auto companies....it is happening to the airlines, hotel industry, retailers, restauranteurs, mortgage brokers, builders, architects, and on and on................it will now affect health care as fewer and fewer will be able to afford health insurance and banks won't let people or businesses borrow to pay premiums like a few years ago.

THIS PROBLEM OF DEBT DEPENDENCY HAS NEVER HAPPEND BEFORE IN AMERICAN HISTORY.  Prior to The Great Depression, we as a people had very little debt.  Municipal debt was almost non existent and corporate debt was somewhat abused, but in a very concentrated manner.  People purchased homes on eight year mortgages with 30% down.  Much of the population paid cash for everything and our economy was just starting to grow much like China today.

Now debt is defaulting and the media is calling it a credit crisis????  No.... it is a debt defaulting crisis......and if we loan more money it will make the problem of having too much debt even worse....so what is the solution????.......EASY.....get rid of the debt by allowing it to default... or restructure it to a level where it can be serviced witihout requiring more debt.  But by extending credit, or loaning MORE money, to someone who has alreay borrowed too much makes a bad problem even worse.

So Alstry.... when will this mess be over????....very easy....when the debt has been restructured so that it can be serviced at a sustainable level based on an economy that isn't dependent on debt to function.

As I see it...we are only at the beginning of letting the air out of this HUGE baloon....we have a long long way to go..........no matter what the Techno Fairies tell you, what the TMF bloggers blog about, or Alstry says.......if we can't borrow to service the debt, the debt will default....as long as the debt keeps defaulting, the banks will not be able to lend and banks will need more and more capital just to stay solvent....if the banks don't lend, business will slow further causing additional layoffs and bankruptcies, and more and more people will be unable to service their debt......causing more and more debt to default.........and round and round we go purging the debt until businesses, people, governments, and families have economically shriveled to the size of a raisin and we can start all over again. 

The longer we allow this process to take....the longer the pain will last.

So ask yourself.....do you solve a debt crisis by creating more debt???????  That one is easy....we solve it by getting rid of the debt......inflating the currency doesn't solve a thing because the debt remains and prices increase faster than wages forcing people to borrow even more as they get further and further behind.

The quicker we get rid of the debt....the quicker we can restart our economy.  The sooner our politicians realize this.....the better for all of us.

Now these are the kind of blogs TMF bloggers should be blogging about.....not whether Alstry goes a bit over the top because he is upset that our American banks our outsourcing American jobs with American TARP funds.

Evil triumphs when the good do nothing.  Alstry doesn't have the reach of Motley Fool.  Now you know the problem.....let's solve it together....let's get the word out!!!!!!!!!!!!!!!! 

Have a great evening.

37 Comments – Post Your Own

#1) On March 12, 2009 at 11:51 PM, arockguy (< 20) wrote:

When your on, you are on.

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#2) On March 13, 2009 at 12:01 AM, coralbro (92.92) wrote:

I'll second arockguy

The real question is why can't our politicians use a little common sense combined with a little bit of rational thought, and come to the same conclusion?  Maybe they're too greedy, too stupid, or too worried about pissing off the lobbyists.  I don't know, but what I do know is that half of the members of CAPS (maybe all) would be better politicians than most of those in office. 

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#3) On March 13, 2009 at 12:21 AM, milpo (78.83) wrote:

Your most cogent and scientific post to date. Alah maak ya habibi.

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#4) On March 13, 2009 at 12:24 AM, StatsGeek (29.26) wrote:

I'm with you completely.  Most people are still in complete denial about how vast this problem is and how it is feeding on itself in an accelerating downward spiral.

Nice to see you focused on a cogent argument rather than self-aggrandizement!  :~)

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#5) On March 13, 2009 at 12:34 AM, DaretothREdux (43.75) wrote:

I must be a masochist. I promise myself I wouldn't comment on your posts anymore....(slaps forhead), but when you right, your right.

If you would write more posts like this and be less concerned (go ahead argue that you don't care lol) about people who get more attention or recs than you and insulting them, then I would rec and return to your blogs.

I can even deal with the third person and the punctuation, and you can even make fun of English majors...Lord knows I sure do, but then I mock everything (without being too insulting, trust me I can be cruel, it just doesn't help reach ppl...).

Respectfully,

The One and Only Dare

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#6) On March 13, 2009 at 12:43 AM, mrindependent (88.13) wrote:

awesome blog.  I couldn't agree more completely.

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#7) On March 13, 2009 at 1:06 AM, AnomaLee (28.58) wrote:

ditto...

Nice to see you focused on a cogent argument rather than self-aggrandizement!  :~)

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#8) On March 13, 2009 at 1:25 AM, PrestonCheek (31.70) wrote:

Maybe the best blog I've read. I hope your bloody marys are going down good tonight.

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#9) On March 13, 2009 at 2:13 AM, nihilkillsmemore (< 20) wrote:

Nice post...Hey I apologieze if I said you ran a hedge fund for dairy queen!!!..I was just joking! thanks for this eye opening post!

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#10) On March 13, 2009 at 2:47 AM, BaitBoyinOK (< 20) wrote:

Imminently self evident to even the most casual observer. As the frog luxuriated in his slowly warming hot tub, as he watched the economy move from a gold based standard to a debt based standard, as he fueled his hot tub with, not gold, but with debt - dang is it getting hotter in here? Even more imminently self evident to the even the most casual observer watching the luxuriating frog as his skin turned from green to red, the federal government, realizing that they had voluntarily and proactively moved the economy to a credit based standard, fed more money to said frog to keep the heat up on his own hot tub, keeping the interest rate low enough for said frog to luxuriate even more in the growing warmth. Until the frog is replaced by Congress and Senate members, the most casual observer will just cluck his tongue and watch the frog boil - AND THEN VOTE HIS CONSCIENCE! When you are trying to dig your way out of a hole, the best way to reverse course is to QUIT DIGGING! I'll say it again - IMMINENTLY SELF EVIDENT TO EVEN THE MOST CASUAL OBSERVER.

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#11) On March 13, 2009 at 2:54 AM, JibJabs (91.67) wrote:

Best post of yours I've read. I'm a novice and appreciate you taking the time to clearly explain your reading of our predicament. 

One analogy pops to mind: when a heroin addict (much as our economy is a debt addict) tries to kick the junk, there are several methods that can be used to rehabilitate the disease. One method is cold turkey, which you appear to be prescribing. The benefit is that the pain subsides relatively quickly. The drawback is that the pain is more excruciating than almost anything else known on earth. Over time, sensory neurons blunted by the opiates injected daily compensate by becoming more sensitive to pain (which is not felt at the time because the body adapts to a regular influx of heroin). Three to four days later, the physical withdrawal is over. But not after a horrific ordeal. 

The other option is to cushion the transition with less powerful opiates (generally methadone). It is a commonly accepted practice that relieves much of the pain from the transition, but it also prolongs the withdrawal a bit. 

It seems to me that Obama is prescribing methadone to the American economy. These problems weren't created overnight but, just maybe, by cushioning the blow the American economy could return to being a productive system more quickly than it could by awaking from a living hell on earth, just as the methadone-treated junky can be retrieved and turned back into a productive member of society. 

What do you think? 

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#12) On March 13, 2009 at 5:11 AM, kaskoosek (70.89) wrote:

Coherent, not the drivel you used to post.

+1 rec

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#13) On March 13, 2009 at 6:02 AM, Xciteddon (68.92) wrote:

Best blog in months!

I am glad you wrote it. Now what about the stimulus package? Any idea on how to jump start the economy? I think we are headed in the wrong direction....Should we be going in a diffrent direction? Give us more!

D

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#14) On March 13, 2009 at 8:00 AM, tomjones42 (< 20) wrote:

Great blog. So many people I know don't believe it is as serious as it is.

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#15) On March 13, 2009 at 8:05 AM, icuryy4me (< 20) wrote:

Excellent - Thanks!

Even our big creditors are getting nervous.

China holds about T$1.5 in dollar assets. Thier PM, Wen Jiabao, said this yesterday:

"We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries"

 Enough said. Run for the exits.

 

 

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#16) On March 13, 2009 at 9:01 AM, 4everlost (29.38) wrote:

1 more rec for this awesome post...

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#17) On March 13, 2009 at 10:18 AM, GNUBEE (27.03) wrote:

Well said, Alstry Very well laid out statement.

Remember this post? I just don't know if the US will take its medicine, or create a new scam to give the illusion of prosperity

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=58439&t=01002130057764754273

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#18) On March 13, 2009 at 10:25 AM, TMFJake (76.35) wrote:

CAPS off Professor.  Well done. 

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#19) On March 13, 2009 at 10:57 AM, REITDUDE (91.63) wrote:

Triple Threat Steel Cage Match:

Alstry vs. Goodvibe vs. DWI 

 

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#20) On March 13, 2009 at 10:58 AM, RookieQB (28.93) wrote:

Big REC

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#21) On March 13, 2009 at 11:02 AM, charlesblazer (99.04) wrote:

JibJabs,

Your heroin analogy is interesting.  But it seems like our current leadership is not prescribing methadone to blunt the withdrawal... it seems like they're cranking out more heroin, because... man... that stuff was good!  And they have not yet admitted the reality of our addiction.  To take the analogy a bit far... They're foisting the blame for any ills onto last week's dealers, and touting themselves as newer, better dealers.  As if the pain of addiction could be solved by finding a more "trustworthy" dealer.

Or... you could take the much more cynical view that our leadership fully understands the ills of our addiction, and is simply using our newfound angst to sieze the coveted role of the dealer upon whom we have become utterly dependent.

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#22) On March 13, 2009 at 11:09 AM, jddubya (43.65) wrote:

GREAT POST, BUT HOLY MOLY YOU'VE OPENED MY EYES!!!

...it sounds like you've just described a ponzi scheme:

I receive money and promise to pay it back with interest.

I borrow more money to pay back the first lender.

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#23) On March 13, 2009 at 11:17 AM, anibas (67.03) wrote:

Great blog! I am sending copies to everyone I know.

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#24) On March 13, 2009 at 11:27 AM, whereaminow (20.57) wrote:

alstry,

this is why you are the headline for my keynote speakers. great post.

David in Qatar

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#25) On March 13, 2009 at 11:33 AM, HSPV (< 20) wrote:

See how many recs you get when you post about something relevant? :) A good post; it is well thought out, coherent and clearly written.

So lets say that we (the United States, et al) are able to restructure our debt in the way you have explained - which is what I hope more and more Americans are doing or at the least realizing that is what they should be doing. What are the areas where the US economy can excell? Where will the real money come from?

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#26) On March 13, 2009 at 12:09 PM, HSPV (< 20) wrote:

Sorry to hi-jack your post alstry, but for some reason I can't blog on my account...

Have you seen this? I think everyone should see this (there might be a opening for alstry on CNBC yet).

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#27) On March 13, 2009 at 1:23 PM, bostoncelitcs (42.29) wrote:

Former Treasury Secretary and Harvard University President Larry Summers never saw this economic crisis coming?...........Please.  How much of their endowment was invested in US Treasuries and not "hedge funds".   It's time to remove the "tax-exempt" status of institutions such as Harvard, Yale......etc. the Mormon church (if they are going to fund anti-prop8 campaigns like in California), and Church of Scientology.

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#28) On March 13, 2009 at 1:30 PM, jamasony2 (< 20) wrote:

Great post, rec +1.  I encourage others to rec and comment as well, to encourage thoughtful and well written posts.

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#29) On March 13, 2009 at 2:29 PM, Bupp (28.49) wrote:

Alstry,

 There are two ways out of this situation, not just the one you propose.

 We can default on the debt or we can inflate our way out of it.

 

Also,

You should look into the end of Bretton Woods because the US pretty much partially defaulted only 40 years ago yet I have yet to see very many people mention this/even are aware of this.

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#30) On March 13, 2009 at 4:02 PM, jester112358 (28.77) wrote:

Great post.  Another rec from me!  Those of us who read Naked Capitalism and Mish's blogs have been seeing these kinds of cogent arguments for quite some time and I highly recommend these blogs to other Fools.

Now A little humor:

 "A rolling loan carries no loss"  -famous bankster saying.

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#31) On March 13, 2009 at 4:40 PM, jesusfreakinco (28.88) wrote:

Dedicating this song to my CAPS breteren...

JFC

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#32) On March 13, 2009 at 4:42 PM, TheGarcipian (65.72) wrote:

Excellent post, Alstry. You & I & lots of the CAPS players here know this addition of ours to debt. More people should know about it, and remember it for decades to come, so we can prevent another meltdown like this one.  Thanks for blogging about this.

--Gar

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#33) On March 13, 2009 at 4:43 PM, jesusfreakinco (28.88) wrote:

Dedicating this song to my CAPS bretheren...

JFC

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#34) On March 13, 2009 at 5:06 PM, anchak (99.84) wrote:

Outstanding post...reminds me of one of my old members on my favorite list called - Alstry, about a year back - someone who would actually come forth and make a definitive agrument without crucifying anyone.

 

 

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#35) On March 13, 2009 at 6:29 PM, RussWild (< 20) wrote:

Great post, i've have this same exact viewpoint for a long time now.

Long term setiment way down.

Just consider short-term setiment, the market does not follow a strait line so I...um (techno farie) can make moderiate gains on up and large gains on the down down movements. Having my money work for you more often is just a preferenc for me, but hold short for long time is sure money as well. To each his own my man!

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#36) On March 13, 2009 at 10:26 PM, vriguy (74.35) wrote:

Encore

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#37) On March 14, 2009 at 6:09 PM, Seano67 (82.64) wrote:

Awesome write-up, Alstry. That was a fantastic chronology of the unfortunate events which have led us to here- and not only that, but it was clear, well-written, easy to read and comprehend, and engaging. It had my full interest from start to finish, and I could not agree more with your thesis.

Great job.

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