The DANGER period
I am not sure people really understand the nature of the current problem. To distill it to its essence, for the past seven years we built an economy based on borrowing. After we borrowed a bunch, we borrowed more to keep up with our payments. As long as we kept borrowing and the banks kept lending we kept growing......until debt became so high that the system couldn't lend anymore.
Without lending people couldn't spend. Business slowed and decreasing taxes followed. Now we are dealing with an economy that is no longer getting trillions of stimulous each year. We are about one year into it and savings has bridged the gap for many. But savings is now running dry for many individuals, businesses, and governments. As savings deplete, defaults rise.
What is amazing is that we are still at the beginning of this cycle. Now defaults have become so high that prices are beginning to crash.....especially in housing where tract homebuilders overbuilt.
THIS IS THE DANGER ZONE. CRASHING PRICES.
As distressed inventory keeps rising, the need to liquidate increases. As the outlook for more distressed inventory gets even worse....the urgency creates a vicious downward pricing cycle. We are now in that period. Notice the huge discounts banks and builders have offered on their homes in the past few months. How large do you think the discounts will grow when they accumulate more inventory over the summer and need to liquidate before the slow Fall/Winter selling season.
As prices fall, bank collateral becomes impaired further limiting banks ability to lend. For an economy that was addicted to borrowing, it is simply applying the brakes harder to slow moving train.
If people can't borrow they can't buy. If they can't buy sales slow. If sales slow jobs get reduced. If sales slow and jobs contract, taxes fall forcing cutbacks in services acclerating the downward spiral.
We are now into that sprial. There seems little in the way to stop this unless we repudiate trillions in debt and start all over. Each month that goes by, we should objectively see more and more distress. More and more foreclosures. More and more layoffs. More and more bankruptcies. More and more municipal defaults.
What I have yet to see is a credible plan to halt this downward spiral. It is a situation our country, and the world has never faced before.
How do we stimulate an economy that was addicted to credit and credit has practically been eliminated?... Add in the fact that we are not producing much anymore and simply more or less servicing each other.....pretty soon we run out of money to pay for the services.
It is crazy times folks and it seems like the world has its head buried in the sand hoping things will just get better as conditions continue to get worse.
Have a great weekend.