Has the Economic WMD been Dropped?
The problem in a nut shell:
Right now a lot of American individuals and business do not have the income(without supplemental credit) to meet their current monthly obligations. For the first time since the Great Depression we have a negative savings rate. We bridged the gap with rising asset/home values and homeequity loans.
Now, that homes are falling in value, HELOCs are not an option and many people simply do not have enough income to meet their current necessary expenditures as inflation persists. Inflation has been rampant on non housing related issues digging the consumer into a deeper hole.
For the last five years, the system was more than happy to provide a shovel. Trillions were loaned out and the economy boomed. We probably have more granite countertops than any country in the world while losing millions of manufacturing jobs. Now that there is limited credit availability, relatively few can service debt obligations creating an ever increasing cycle of defaults.
The problem is that home values must fall 60-70% just to maintain 2000 affordibility levels. With the economy slowing and layoffs rising, the problem is just getting worse. The spillover effect is now hitting our corporations with slowing and now declining sales. Corporate debt spreads are wide and getting wider. Revenues are falling to municipalities causing their debt obligations to come under scrutiny.
The situation is simply a cluster flop, many individuals, corporations, and municipalities simply cannot support their current debt levels. There are trillions and trillions of obligations potentially impaired. There is even more trillions of SWAPs on top of that.
It seems that pressure is getting a little too strong to keep it under lid. Friday's failed muni auctions. Yesterday AIG and Bush's concern for the economy. And today, did Paulson sound the alarm with "the worst is just beginning?"
I am not sure how you restructure Trillions in debt. It is a problem never confronted before in magnitude or scope. The question is how do you get money to the people and business to service their debt? If you let the debt default, then what happens to our financial institutions and savings? If debt defaults, must assets be sold to cover deficiencies creating an ever increasing cycle of asset sales? What if many want to sell at the same time? Sounds like some over inventoried housing markets right now.
Interesting dilema isn't it?
Is the system hosed? Trillions and Trillions of defaulting debt and SWAPs. Trillions and Trillions involving millions and millions. Never before has so much affected so many!!!!!!!!!!!!!