We All Live In The Bubble
Between 1980 and 2010.....total public and private debt in America increased from about $5 Trillion to about $50 Trillion....coincidently, the stock market increased by about the same percentage from about 1000 to 10,000.
As we exported less and less, we depended credit on more and more to drive our economy. Just during the Bush administration, debt doubled from about $25 Trillion to $50 Trillion. It was that lending and spending that advanced demand and stimulated our economy and economies around the world. It is what drove job creation, health care and housing during the period. It also drove massive tax receipts to government which permitted government spending to double over the same period injecting additional stimulous into the economy.
The BIG problem today is massive accumulated DEBT infects practically every school, hospital, city, county and state in the union in addition to families and businesses costing the nation about $3 Trillion per year to service. The ONLY way to service such a large amount of debt is to continue to increase credit at similar or greater rates provided during the Bush administration.....but we are running out of savings as credit is being cut off.
The irony is most of this debt is owed to ourselves in our Pension, Retirement, and Investment Accounts. A smaller percentage is owed to foreigners. The paradox arises by trying to service this unsustainable debt obligation, we are diverting dollars from goods and services and shutting down the economy, and by shutting down the economy we are making it harder and harder to service debt destroying our retirement and investment accounts.
As savings runs out, deterioration will accelerate as evidenced by CRE:
The delinquency rate on CMBS conduit and fusion loans increased by more than 50 basis points in January, bringing the total rate to 5.42%. The total delinquent balance is now more than $36 billion, a $3 billion increase over the month before. By dollar and basis points, this is the largest increase in the delinquency rate thus far in the downturn, as measured by the Moody’s Delinquency Tracker (DQT).
In addition to deterioration from contracting credit, we are also experiencing massive job losses and real estate vacancies due to the recent adoption and implementation of efficient technologies as our economy moves online.
Consequently, because of permanent technological dislocations, many of the job losses and real estate vacancies will not be replaced soon creating massive convulsions in our economic system. We live in a bubble that requires massive numbers working supporting a massive real estate infastructure driving taxes to government and funding health care.
Collectively, it is this system that drives our economy and due to credit contracting and technological dislocations, our current system is deteriorating rapidly. We can't hide from this process as we all live in the system....just like a passenger on the Titanic couldn't hide in first class when the boat had a systematic leak.
There is a big tension developing between government's need for revenues and citizens ability to pay as tax receipts to government evaporate. Based on my extensive reading, it appears few really understand what is going on as many simply think this is a cyclical downturn and not a paradigm changing event. Further, most terms in existing contracts and payment structures were entered into during a much different economy....adjusting will be very disruptive for all parties involoved and derivitively affected.
Unless we start to deal the the problem as it exists, simply lending out the few remaining dollars from our pension funds and retirement accounts to soon to be legacy businesses.....it will only protract the inevitable as it has done for the past few years and make any recovery even more painful.
There really is no where to hide from the effects of delveraging and digitization as it is now palpable around the world as evidenced by Japan, Dubai, PIGS, Ireland, Iceland, Eastern Europe, and now seeping into South America....not to mention most municipalities accross America.
This process will be uncomfortable and convulsive for many. It is a bubble we all live in and a bubble we must all deal with.....let's hope cooler head prevail as the stress rises moving forward.