Has Time Told
Over the past five years, consumers, business, and government borrowed trillions. We went nuts on mortgages, home equity loans, credit cards, junk debt, securitized debt, collateralized debt, tranched debt, municipal debt, commercial real estate debt, just to name a few. The problem is that many of these loans were made with little regard with the borrowers ability to repay. Now many borrowers can't repay and loans are defauting.
These loans were the basis of billions and billions of earnings of our financial instituions. These earnings were capitalized into stock equity valuations creating even more wealth. The loans allowed people to upgrade kitchens, buy SUVs, and take vacations. It allowed cities to build new schools, arenas, and provide wonderful social services. The loans were the fuel to develop huge condo projects, mixed retail emporiums, and office buildings that any executive would be proud to occupy.
Jobs were created and money was spent everywhere. Then as the money ran out, people borrowed even more. People borrowed on their homes to pay off their credit cards. When their home equity lines ran out, they borrowed on their credit cards to pay their home equity payments. Now that it is all runniing out, people are simply sending back their keys via jingle mail. Huge commerical projects are stopping midstream....just take a stroll along the strip in Vegas.
With credit drying up, spending is slowing. Slowing spending leads to slowing sales. Slowing sales leads to job reductions. Job reductions leads to slowing spending. Slowing spending leads to less tax revenues. Less tax revenues leads to government cutbacks. Government cutbacks leads to job reductions. Job reductions lead to foreclosures. Forclosures lead to declining home values. Declining home values lead to lower tax revenues. Lower tax revenues leads to even more cutbacks. If you have made it this far, you keep going round and round.
In essence, we loan trillions of dollars to people and entities that couldn't afford to pay it back. The cash coming in simply can't afford to service the debt. As layoffs begin people won't be able to pay their mortgages and foreclosures will continue to rise. Billions in condos are defaulting due to a lack of buyers. Commercial projects built to support defaulting residential areas are failing. Corporate debt is starting to default at increasing rates. Credit card defaults are rising. Heck, even Harley Davidson is having issues with its loan portfolio.
Now everyone wants to be paid back but the money simply ain't there to make the banks whole. People aren't going out to eat as much anymore. Retail sales are slowing. Auto dealers are singing the blues.
Why? Because it is getting harder and harder to access money. Why do we need MORE money?
Simple. Because over the past five years costs have skyrocketed and incomes have remained stagant. Think about it, the income of the average American family has stagnated around $60K for the past eight years. But most of the following have at least doubled for many families:
Debt Service, Health Insurence, Property Taxes, HomeOwners Insurance, Fuel, Milk, Bread, Medication and many other items.
You think a check for $600 is going to make up the difference? It was debt that made up the difference for many families over the past few years. That is why we had a negative savings rate over the past few years....something which hadn't happend since The Great Depression. Now the debt is being cut off, many families can't meet their monthly obligations.
So what is a country to do? Many of its citizens can't afford their monthly payments on their current incomes. Imagine what will happen if layoffs increase. Now its corporations and municipalities are starting get squeezed. They owe trillions too. Will they have to start downsizing. Does anyone see a recurrent theme developing?
Tonight is my first blog on a problem that I identified a few years ago. I kept telling my friends time will tell. From my perspective, we may be on the eve of determining whether time has told.
Regardless of what happens, we are a resillient people and a resillient nation. We will overcome whatever comes our way. The question now is what is coming our way? It appears we shall soon find out.