alstry (35.45)

Why so Negative

July 24, 2008 – Comments (7)

Because credit is evaporating everywhere.  Now all over the world.

What people seem to fail to realize is how significant credit was as a driver of economies.  Especially ours.

Credit drove people to buy homes, cars, and businesses.  That buying drove growth, jobs, and tax revenues.  It also propelled an incredible amount of construction over the past 10 years and price appreciation in real estate.  That price appreciation increased tax revenues to our governments.

Credit creation was responsible for a huge percentage of the profits of our banking system.

In the end, a very large pecentage of job growth over the past 10 years was directly due to credit creation.  Mortgage jobs, construction, real estate, retail, manufacturing, service ect.....

In the end, credit creation made us boom at all levels.........individuals, businesses and government.  We borrowed and spent and we all benefitted.

As a result of all this credit creation, we now have to deal with trillions of dollars of accumulated debt.  This debt must be serviced.

The problem is the banks have run out of money and credit is contracting leading to slowing revenues.  It is becoming more and more difficult to service debt.  Simply servicing debt is consuming a larger and larger percentage of revenues leaving little for anything else.

For the past year we have been seeing a growing number unable to service their debt.  Higher bankruptcies, foreclosures, and defaults.  In addition, we have seen a steady decline in revenues at all levels.

The problem is without access to credit, further declines in revenues are inevitable leading to even more defaults and failures.  And right now, the system does not have much capital to extend credit nor are there many projects that can provide an adaquate return on capital.

We have NEVER faced this problem before.  Even in the Great Depression we were a young nation with a growing industrial base without too much accumulated debt.  The Great Depression was caused by a liquidity crisis....our current issue is a solvency crisis at practically every level.

The current housing proposal simply patches defaulting debt.....it does little to create a stimulous to stop FUTURE defaults.  As revenues continue to slow FUTURE defaults will only increase and increase and credit will tighten even further.  Just follow the notices of default for housing, it foreshadows future foreclosures.....they are rising every month and we are already at record levels.

Whether we like it or not, credit was the currency which drove America for the past thirty years.  Now it is gone and we have tens of trillions of dollars of accumulated debt to deal with.  Our banks have little to lend out and are cutting back practically daily.

As the existing debt on their books continues to default, banks' revenues will likely contract even further.  With declining outlets to lend, and existing debt defaulting.....the outlook for many of our banks is very negative....especially regional banks.

The contraction will continue until debt and revenues come into balance.   Right now we are a long way off.  June was a terrible month for state tax receipts.  It will likely get a lot worse going forward unless we figure out a way to stimulate the economy.  The banks' balance sheets are in terrible shape and getting worse.

In the past we grew industries and then created bubbles upon bubbles.  The bubbles caused us to accumulate debt to the point where our banks don't have much to lend.  NEVER have we depended on credit like we did over the past seven years......now that credit is evaporating, revenues are slowing. Now the question is how are we going to come out of this mess without bankrupting our nation first?

The above falling revenue analysis does not even factor rising commodity costs.