alstry (35.73)

Rallying Dollar will Weaken Profits

August 08, 2008 – Comments (3)

Rising dollar will make US exports more expensive against their foreign counterparts resulting in lower profits.  Remember when exports were going to be the savior of America?

Over the past seven years we borrowed Trillions and Trillions of dollars against assets that were worth a fraction of the amount.  The debt became the assets of our banks, insurance companies, and pension funds.  Earnings exploded selling toxic debt(ever see the nice cars drug dealers drive selling toxic drugs?) and government became addicted to unprecedented tax revenues.

Now the assets backing the debt are imploding in value and the dealers want their money back.  The problem is that there is not enough revenues to service the debt and the assets are crashing in value as everyone is trying to liquidate at the same time.  Many of our banks and insurance companies are on the fast track to bankruptcy.

One has to laugh when the pundits say this is almost over.....it has just begun.  We have only hit the weakest borrowers with subprime and that has already been half a trillion.  Just wait for Prime and Commercial Real Estate Loans as they are now starting to default.

On a relative and absolute basis, the dollar amount is much greater than the thirties.  There is just no simple way to pay back Trillions of dollars when there is not enough revenues to service the debt and little in the form of collateral.  It doesn't matter of your are prime or subprime.....if there is not enough coverage...the debt defaults and if you have to liquidate.....well you better hope there is enough value.

This is the MOTHER OF ALL MARGIN CALLS.  Banks are cutting off credit everywhere as their asset base implodes and depositors are extracting cash.

And now, we will be facing headwinds with weakening exports making a horrible situation even uglier.

Some people mistake all this borrowing for the government printing money.  It created the illusion that money was printed because, in fact, that is what happens when money is borrowed.....but few remember that a liability is also created......and payback is a bitch.....especially when you can't borrow to keep the debt serviced.

Each quarter, things will get worse....and now at accellerating rates....until we reach a point where income can support debt.  This applies to individuals, business and government.

As I have stated before, California is an excellent example of an unprecedented mess.  There simply is no way for CA to recoup the revenues it became accustomed to from the Real Estate Boom.....it expanded its obligations and going forward.....with an aging population...those obligations are going to rise as revenues will contract further....don't forget, the more CA cuts the further the economy will contract.

You can slowly see the vail being lifted off the bride......unfortunately when the groom sees the face....it may not be what was expected.