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alstry (36.24)

We All Live In The Bubble

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February 13, 2010 – Comments (5)

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.

5 Comments – Post Your Own

#1) On February 13, 2010 at 1:57 PM, alstry (36.24) wrote:

It is amazing how so many believe the world as we knew it will all come back......IT"S OVER!!!

Let's make a few points clear.....

The internet is FINALLY NOW revolutionizing the way we work, shop and interact.  The way we pay, purchase, process will be very different in the not too distant future.  It already is for many of us.

Our leveraged consumer economy of years past is behind us and the need for commerical real estate will be a small fraction of the current footprint.  The same can be said for office space as we move towards telecommunting and digital delivery.

The BIG IMMEDIATE problem going forward is much of our current capital is leveraged into obsolete RE buildings and developments and many of our current contracts are based on legacy revenue and income streams.

Whoever said a house is an investment and not simply a place you consume while living there?  Wouldn't capital be better allocated in R&D and production?

Who said "full employment" is 160 million Americans working....what if we need only 20-30 million to accomplish what the current labor force does today?

What do we do with the rest of the people?

All interesting question that our leaders should be dealing with today as tax receipts to government evaporate and millions lose their jobs, businesses, and homes each and every month.

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#2) On February 13, 2010 at 2:36 PM, AdirondackFund (< 20) wrote:

Soon, we'll all be living in a yellow submarine. 

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#3) On February 13, 2010 at 5:29 PM, alstry (36.24) wrote:

Los Angeles Unified School District May Cut up to 6 Days From School Year

Pretty soon our kids will go to school online.....saving 4 million teachers a drive to and from work everyday and massive amounts of gasoline and traffic on the road.

Individual Insurance Rates Soar 15% or more in at least 3 States

Insurance as we know it will change dramatically as more and more health care will be delivered online and a cash based system develops.

It will be highly likely that the revenues to health care will decrease dramatically going forward.

St. Vincent's Hospital Manhattan - Begins Layoffs of Nearly 300

25-50% paycuts will be commonplace.....remember when people thought my forecasts were crazy????

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#4) On February 13, 2010 at 6:28 PM, cmorr504 (< 20) wrote:

Rates for skilled trades are dropping like a stone where I am. Lowe's is expanding their install/outside sales aggressively. Seems like they are dying in that big box. Sales at the local lumber yard are down 30% at least. Whole setup is geared toward new construction. Whole neighborhoods worth of lumber, piled high...

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#5) On February 14, 2010 at 10:17 AM, alstry (36.24) wrote:

SHUTTING DOWN HALF THE SCHOOLS IN KC

KANSAS CITY, Mo. -- Kansas City Superintendent John Covington called for the closing of nearly half of the district's schools as he unveiled his massive right-sizing proposal to the Board of Education at a meeting Saturday.

The meeting was held before a packed house at the offices of Husch Blackwell Sanders. The plan would close 30 of the district's 61 schools. Grade levels would also be redistributed and the downtown central office would be sold. The closings would result in the loss of 285 teaching jobs, officials said.

http://www.kctv5.com/education/22556982/detail.html

If you really think about it, our economy, and the world's economy was essentially lending and spending driving growth.....the problem comes in when the debt has to be paid back.

St. Vincent's Hospital Manhattan has been a West Village institution for 160 years, but is now in desperate financial straights.

The hospital is $700 million in debt. Recently it has needed state loans to meet payroll.

The people losing their jobs include housekeepers, orderlies, dietitians, managers and medical residents.

It also asked its remaining staff Friday to take pay cuts of up to 25 percent.

ONE HOSPITAL....$700 MILLION OF DEBT?  HOW MUCH OF OUR HEALTH CARE SYSTEM FUNCTIONED SIMPLY BY BORROWING MONEY?  WHAT PERCENTAGE OF GDP WAS DRIVEN BY DEBT?

The same is now true for government, where borrowing trillions of dollars per year permits government to pay employees and spend massively on health care, welfare, and defense.

Where the moral dilema comes in is deciding who gets credit and who doesn't in a world that is simply driven by credit?

What happens when we can't borrow anymore?

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