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alstry (35.46)

Has the Economic WMD been Dropped?

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February 12, 2008 – Comments (3)

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!!!!!!!!!!!!!

3 Comments – Post Your Own

#1) On February 12, 2008 at 8:47 PM, alstry (35.46) wrote:

California is the 8th largest economy in the world.  Has the  bomb dropped?  There are millions in CA leveraged up to the gills on their homes, cars, and credit cards.  Now we have confirmation that sales are slowing. 

 

This is from the January California Controller's report.

January Retail Sales and Use Tax revenue was $991.4 M in Jan 08 vs $1,097.7M in Jan 07, down 9.7% year-over-year.

The California sales tax rate is 7.25%, so a drop of $106 M in revenue means that actual retail sales were $1.47 billion lower than the previous year.

I think that this is especially bearish for retailers because they are slashing margins just to get these declining sales volumes.

Personal Income Tax revenue in January was up an anemic 2.2% year-over-year.
http://www.creditbubblestocks.com/2008/02/california-sales-tax-receipts-down.html

The Party's Over In California

The school district ultimatum is a direct result of across the board spending cuts mandated Schwarzenegger after years of reckless spending finally caught up to the State of California. Schwarzenegger was forced to declare a "Fiscal Emergency".

Inquiring minds my wish to read Turn out the lights California, the party is over and Mish's California Budget Proposal for more on the sad state of the state of California.
http://globaleconomicanalysis.blogspot.com/2008/02/wage-freeze-for-teachers-and-wage-cuts.html

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#2) On February 12, 2008 at 9:00 PM, alstry (35.46) wrote:

At $50K per year in cost, it would take a 25,000 person job reduction to make up for the lost revenues over the course of a year.  What if sales slow even further?  Then what about those businesses that must lay off for the lower sales?  Then what about those business that depended on the purchasing power of all of the above?  What about those people that must put their homes up for sale in an already over supplied market?

Wage Freeze?  Is the cost of Health Insurance going up?  What about Food and Fuel?  What about credit card interest rates?

Remember this is just beginning of the worst according to Paulson.

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#3) On February 12, 2008 at 9:30 PM, alstry (35.46) wrote:

At $50K per year in cost, it would take a 25,000 person job reduction to make up for the lost revenues over the course of a year.  What if sales slow even further?  Then what about those businesses that must lay off for the lower sales?  Then what about those business that depended on the purchasing power of all of the above?  What about those people that must put their homes up for sale in an already over supplied market?

Wage Freeze?  Is the cost of Health Insurance going up?  What about Food and Fuel?  What about credit card interest rates?

Remember this is just beginning of the worst according to Paulson.

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