Two years ago, I realized that a huge percentage of our economy was being supported by an unprecedented amount if new credit creation. Crazy Mortgages, Home Equity Loans, Private Equity Debt, Municipal Debt, ect.... All this borrowing generated an amazing amount of spending which in turn brought the perception of properity to many.
Borrowing levels became so high that it was clear that the path was unsustainable. I became concerned what would happen if people stopped borrowing(never even considering inflation)....and that is where the problem set in. Without borrowing, people, business and government couldn't spend and if they couldn't spend the economy would contract.
A contracting economy is bad enough....but when an economy contracts upon a bubble of debt, you get rapid and accellerating declines as debt obligations can't be serviced. The bigger the bubble the bigger the crash. And this is the biggest bubble ever!!!!
As debts default, lenders pull back further amplifying the downward spiral. At this point, revenues are shrinking everywhere. Consumers are defaulting. Business is shutting down and municipalities are cutting back. THE BIG ISSUE IS THAT TRILLIONS IN DEBT REMAINS ON A LOWER BASE OF REVENUES.
Yes, there are still cars in the parking lots. But the ability of those consumers to spend is declining daily and if you own your own business you are feeling it. Not only is spending constrained, but costs are skyrocketing. Costs for just about everything we spend money on and a factor I never considered when I started thinking about this mess.
I am not sure many realize just how much money was borrowed in the past seven years. It was more money than was borrowed in the preceeding seventy years. Borrowing money and spending it can be fun....the problem kicks in when you can't borrow anymore and must pay back your debt.
Now to throw fuel on the fire, intererst rates have started increasing rapidly. Rising interest rates directly result in lower asset values. Bond values crash. Commercial RE values decline. Homes become more expensive to finance decreasing affordability.
Think about the following for a second:
Asset values are crashing while incomes are contracting.
Add in a unprecedented debt load, rising interest rates and rising prices............how can one have a positive outlook on the economy for the foreseeable future?