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alstry (35.03)

How bad will this get???

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May 28, 2008 – Comments (12)

Consumers are supporting $7 Trillion more in debt than a few years ago.

Wages are flat and in many cases declining.

Food and Fuel prices are skyrocketing.

Banks are cutting off access to credit. 

The equation is simple:

For those that live paycheck to paycheck, have little in savings, just dropping a little bit below your minimum payment threshold causes defaults.  You don't have to lose your job, simply stagnant wages and rising expenses can cause defaults.  Job losses only accellerates the losses.

My friend and I were debating what percentage of Americans face this condition.  I estimated about 50% and he estimated closer to 2/3 to 3/4.  What is interesting, absent the top 5% of wage earners, incomes for Americans have actually declined in the past 7 years.  Never has Americans experienced a decline in wages for such a long period before.....then add in inflation and the relative decline is enormous.  In the seventies, wages went up with inflation.

So here is the problem, if 2/3 of the country is not earning enough to subsist and service debt, what kind of defaults can we expect.  Our country services over $50 trillion dollars of debt.  Further, the spillover is going to be enormous as business fail do to slowing sales and municipalities can't generate enough in taxes to provide services and pay debt obligations.

In The Great Depresssion, the debt burden on the average American relatively was much lower than it is today.  Yes, we can argue we consume too much, but that consumption is what drives business, wages and government taxes.

The downward spiral from tightening credit and slowing spending seems seems like it has a long long way to go.  The question now is how long?

 

12 Comments – Post Your Own

#1) On May 28, 2008 at 2:17 PM, LordZ wrote:

WOW if only i could comment without fear of reprisal... SAme old posts about the sky is falling... hopefully you won't need any umbrellas. The divide simply grows... between the have and the have nots.. all i can say is that i didnt contribute to any of this debt and when the check comes around please dont expect me to open up my wallet or use my credit card to pay the bill..

When times are hard and your afraid to pay the fee... than its time to look for somebody who will do the job for free...

 

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#2) On May 28, 2008 at 2:22 PM, alstry (35.03) wrote:

You miss the point.

We all live in one system.  If the system fails, we fail.

If you lived in Germany post WWl, for the most part, it didn't matter how rich you were, at a billion percent inflation, everyone is broke now matter how much money they had in the bank and how little debt they had.

Think about that for a second.  Not saying it will happen, just an example of when you live in a system, no matter if you think you do everything right, and the system fails, you fail.

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#3) On May 28, 2008 at 2:26 PM, goldminingXpert (29.76) wrote:

The sky is falling...the economy is heading into depression.

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#4) On May 28, 2008 at 2:50 PM, LordZ wrote:

Let it fail....

stop worrying...

it'll be all good....

 

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#5) On May 28, 2008 at 2:54 PM, LordZ wrote:

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#6) On May 28, 2008 at 3:19 PM, cubanstockpicker (20.20) wrote:

Alstry I can easily tell you that most have hashed this point quite a few times. Just be prepared to place your bets, you are not wrong. Its gonna get bad and in many cities the options are not good. Take my tricounty area. No good public transport system, traffic up  to the nose, complete urban sprawl, property values have plummeted yet again and average income is lower than average cities.

Also we have more SUVs than humans because everyone needed the Big SUV to carry two kids and 5 bags of groceries "in of the flatest areas of the country".

I have now started a business and just setup my biodiesel tanks to sell locally to truckers. Where people have found fear, I am getting greedy. 

I also just bought two relatively brand new diesel engine Dodge trucks 2500 HD for a steal. 

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#7) On May 28, 2008 at 3:21 PM, nuf2bdangrus (< 20) wrote:

The Fed is desparately trying to reinflate a deflating economy....because the entire paper system rests around it.  The punchbowl of the central bank is the only thing holding up the markets, which realy on faith and speculation.  But sooner or later, in one way or another, we have to reconcile with the fact that we have on a personal and governmental level taken on way more debt that we can every pay.  Somebody is going to get stiffed, creditors, our children, us when we are old, or all of the above.  The macro theme says ROWG now depends on US consumption, but they will divorce over time, and when they do, bye bye holding US treasuries.  Commodoties on a pullback are part  of a diversified portfolio.  Own the things people have to have.  Short the mid level luxuries.  THe rich btw, never suffer, they didn't in Weimar Germany because they hald swiss accounts and owned gold.  We will never get that far, but we have realy abused the reserve status of the US dollar, and for that, there will be hell to pay.  Be nimble.

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#8) On May 28, 2008 at 3:29 PM, LordZ wrote:

I swear ive heard this all before and I have replied similiarly...

put your money where your mouth is...

the  fed lol

sort of like trying to inflate a tire with a gaping 2 inch hole...

its simple reduce your spending

reduce your debt

until you take control of your own situation dont be expecting someone to come save you

because you will be like Al Bundy waiting on a pizza thats never been ordered...

 

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#9) On May 28, 2008 at 3:35 PM, alstry (35.03) wrote:

I understand your points.  The problem right now is that debt is defaulting faster than money is being printed.

There is over $50 trillion of debt and around $10 trillion of cash.  Cash can get sucked out in an instant.

Due to the rising default rates, banks will be forced to charge a higher interest.  With higher interest there will be less credit available and even more defaults.

The issue now is that the defaults are starting to effect our corporations and municipalities.  There really is not much anyone can do, save hyperinflate, other than let this play out.

If we hyperinflate, as many Americans are entering retirement, we may create a bigger problem than we resolve.

We crossed 4% on the 10 year today.  Expect to hear about rising bank defaults in coming days.  This seems like a train wreck about to happen.

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#10) On May 28, 2008 at 4:37 PM, alstry (35.03) wrote:

SAN FRANCISCO (MarketWatch) -- Ford Motor Co. is looking to cut up to 12% of its salaried workforce in an effort to put its derailed overhaul back on track toward profitability, according to Wednesday report from a local Detroit newspaper.

Ford is cutting 15% of production.  This will affect tens of thousands of workers....and that is just at the company.  It will also affect many more employees at suppliers and trucking companies and local business depending on those employees spending.The human impact will be very large.

Now interest rates are creeping over 4% and Key Corp says defaults are rising....no kidding!!!!

The issue now....... that corporations and municipalities are ramping up the layoffs.... how far will this continue??????

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#11) On May 28, 2008 at 7:28 PM, LORDZPAIN wrote:

WOW Alstray does this really bother you this much, does this really make you unable to sleep ????

AMerican AXLE who striked for 4 months is going to have half of its work force slashed....

This isnt anything new.... hurray for higher interest rates... money shouldnt be so cheap....

IT could be worse... Ford could institute slave labor and force its salaried workforce to work around the clock doing the job of 3 or 4 people....

Banks need to fail, especially when they blow and dont deserve to be solvent..... the sooner and the quicker I start hearing and reading the sooner it can get better....

you cannot start the breathing,,, if you cannot stop the bleeding first....

makes no sense trying to get the patient to keep breathing if you cannot stop that patients bleeding... you'll only end up pumpin and pumping more blood until your floor is covered deep in pools of blood...

JPM casts 5% inflation rate for summer of 2008...

 

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#12) On May 28, 2008 at 9:09 PM, alstry (35.03) wrote:

Everything you say is true.  I can't add anymore.

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