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alstry (36.08)

Why so Negative

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9

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.

 

 

 

7 Comments – Post Your Own

#1) On July 24, 2008 at 9:47 AM, alstry (36.08) wrote:

An example of things to come as a result of declining revenues:

From Mish's Blog citing the LA Times:

Gov. Arnold Schwarzenegger is planning to cut the pay of about 200,000 state workers to the federal minimum wage of $6.55 an hour until a budget is signed, according to a draft of the governor's order obtained by The Times.

Administration officials said Schwarzenegger is expected to sign the order early next week as part of an effort to avert a cash crisis. The controversial move, likely to be challenged in court by public-employee unions, would save the state about $1 billion a month, the officials said.

Workers would be repaid their lost earnings once a budget was in place.

The order also calls for the state to immediately lay off 19,000 part-time workers, stop overtime payments for almost all employees and cease all hiring until a budget is enacted. The deadline for passing a budget was July 1, and without one California may be unable to borrow billions of dollars needed to keep the state solvent.

 

The problem is that California's declining revenue problem is likely only going to get worse!!!!!

How many states, businesses and individuals will have to declare bankruptcy before debt comes into balance with revenues?????

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#2) On July 24, 2008 at 11:48 AM, bobbyj0708 (< 20) wrote:

Alstry, you are of course, correct.

Don't feel like you need to explain yourslef to idiots like LordZ.

Keep the doom and gloom coming, people need to know what's coming. Forewarned is forearmed, unless you're too stupid to prepare.

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#3) On July 24, 2008 at 12:04 PM, cwlawrence (< 20) wrote:

Speaking as an idiot and one who is possibly too stupid to prepare - What exactly does one do to protect agaist this 'armageddeon'?

 

I get what alstry is saying, but have no idea how to go about not losing the pittence that I have managed to save up over the last few years.

 

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#4) On July 24, 2008 at 2:38 PM, bobbyj0708 (< 20) wrote:

Pay down any adjustable debt (or default). Move 401k into a treasury fund if possible. Don't buy anything you don't really need. Cut expenses. Buy LEAP puts on LEH (my personal favorite!)

I know it's not a great list of options because it's pretty late in the game but cash is gonna be king pretty soon.

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#5) On July 24, 2008 at 7:01 PM, DemonDoug (35.21) wrote:

Buy precious metals, (silver especially), buy some firearms and ammo, stock up on water and canned goods, learn how to fish, and also I recommend buying PM, or whatever your favorite international sales blue chip stock is, that have been around since before the great depression.

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#6) On July 25, 2008 at 12:41 AM, jesusfreakinco (28.98) wrote:

Bobby,

Bonds will sell off as well and may lose a significant amount of value.  I wouldn't recommend bonds either... 

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#7) On July 25, 2008 at 12:57 PM, bobbyj0708 (< 20) wrote:

Which would you rather have your 401k in - stocks or a T-bill fund if those are your options?

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