A house of cards
"Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." Sir John Templeton, 1994
It would now appear that we have reached the state of euphoria and nothing, just nothing, can go wrong. America's love affair with racy concepts, phony values and paper pseudo-wealth continues unabated. Credit is now elevated to the status of a fundamental human right and its expansion, regardless of the ability to repay, is now the key to our future.
Home ownership in many advanced economies is now at record levels. In America, President Bush signed the American Dream Down Payment Act of 2003. This legislation authorized $200 million per year in down payment assistance to low-income families. His goal was to increase the number of minority homeowners by at least 5.5 million before the end of the decade. Under Federal Law, if you are a first time home buyer and your income is 20 percent less than the local median income, your neighbor-the US taxpayer-will give you the greater of $10,000, or 6 percent of the cost of the home to buy it.
Currently, 70 to 80 percent of sub-prime mortgages are debt-consolidation loans that add credit card and other debt onto the house. At least 16 percent of sub-prime mortgages are delinquent or in foreclosure, and 4.6 percent are actually in foreclosure. The Federal Housing Administration (FHA), which insures these loans, says national FHA mortgage defaults are at 11 percent, while in places like Baltimore, Maryland and Queens, New York, the default rates for FHA loans are 21 percent and 25 percent.
The economy is in full "recovery," say the experts. But mortgage foreclosures, personal bankruptcies, and late payments are at record levels. White-collar workers are having a hard time finding new jobs and blue-collar workers' real earnings per hour have been falling for the last 30 years.
Less is more
As Dr. Kurt Richebächer points out: "From the start of 2004 through July, real consumer spending rose by $122.2 billion. That is $209.5 billion, or 2.8 percent at annual rate, and compares with an overall increase of $232.2 billion (3.3 percent) in 2003 and of $213 billion (3.1 percent) in 2002. For perspective, during the boom years 1999-2000, it had growth rates of 5.1 percent and 4.7 percent.
"Though this deterioration is not dramatic, it also does not suggest an ongoing recovery. Yet the aggregates hide one rather dramatic change in the current year, namely, sharply lower growth in spending on consumer durables. At annual rate, it was down to $23.5 billion in the first seven months of 2004, after $71 billion in 2003 and $58 billion in 2002.
"Still, there has been a dramatic change for the worse in the consumer's earning power. Since January 2004, the three-month annualized growth rate for real disposable personal income has literally collapsed: 5.7 percent, 4.6 percent, 4.5 percent, 3.7 percent, 2.5 percent and 0.8 percent for July. Over the seven months to July 2004, real disposable income was up a mere $77.4 billion, or $132.7 billion at annual rate. It grew by $174.3 billion in 2003 and by $226.2 billion in 2002.
"Presenting these numbers, we have to mention that they have been jolted by tremendous revisions. Earlier data showed a pronounced rise in personal saving. Now there is a steep plunge. The crucial fact to see is that the consumer stepped up his borrowing to compensate for slowing income growth. The rise since 2000 is 74 percent. Yet the net effect has been gradual retrenchment in spending."
Don't forget Japan
Since consumer spending accounts for roughly two-thirds of overall economic activity in America, if their ability to take on endless amounts of new debt has peaked, the future of the world will be far more traumatic than the Japanese experience over the last 15 years.
In generations past, thrift was a virtue. People who worked saved their money and items were purchased after those individuals worked for and had earned their money.
Banking on debt
Today things are done in reverse. The average consumer in America and in many of the advanced capitalist economies spends money at a far greater rate than past generations and he or she spends money that is not yet earned. They do so not only because credit is so easily obtainable but also because they have an underlying optimism that the economy will never let them down.
This behavior is both taught and encouraged by the system. The banking industry forces greater levels of marginally serviceable debt onto the public to keep The Game intact-and it has now graduated to prodding consumption elsewhere in similar ways because the fractional reserve system would collapse if new debt weren't continually being taken on.
Ever growing amounts of debt need to be created in order that consumers, businesses and government can service existing debt and buy more stuff. Therefore, the system can only exist on credit creation and rising debt loads. This also applies to nation states. Dr. Kurt Richebächer again: "In 2003, such dollar purchases by foreign central banks amounted to a stunning $616.6 billion, after $351.9 billion the year before. The total reserves of emerging Asia rose by over $350 billion between the beginning of 2003 and March 2004. Over the same time, Japan's central bank purchased $316 billion worth of U.S. assets. The biggest buyer in emerging Asia was the central bank of China.
"These huge and soaring dollar purchases by foreign central banks were crucial in allowing the U.S. Federal Reserve to pursue its ultra-loose monetary policy with ultra-low interest rates. As we have often stressed, this, in combination with equally loose fiscal policy, has prevented a deeper recession. But the question is whether or not these policies have laid the foundation for sustained economic growth in the longer run.
"In our view, it is bad policy on both sides. The Asian central banks accommodate the credit excesses in the United States, and in doing so, fuel rampant credit excesses in their own countries. Japan's horrible aftermath over more than a decade after its credit excesses in the late 1980s does not seem to deter anybody."
But this is a New Century and a New Dawn and the laws of the market appear to apply no longer. But the balance of power is slowly shifting. Debts will have to be repaid. Cycles repeat. n
It would now appear that we have reached the state of euphoria and nothing, just nothing, can go wrong. America's love affair with racy concepts, phony values and paper pseudo-wealth continues unabated. Credit is now elevated to the status of a fundamental human right and its expansion, regardless of the ability to repay, is now the key to our future.
Home ownership in many advanced economies is now at record levels. In America, President Bush signed the American Dream Down Payment Act of 2003. This legislation authorized $200 million per year in down payment assistance to low-income families. His goal was to increase the number of minority homeowners by at least 5.5 million before the end of the decade. Under Federal Law, if you are a first time home buyer and your income is 20 percent less than the local median income, your neighbor-the US taxpayer-will give you the greater of $10,000, or 6 percent of the cost of the home to buy it.
Currently, 70 to 80 percent of sub-prime mortgages are debt-consolidation loans that add credit card and other debt onto the house. At least 16 percent of sub-prime mortgages are delinquent or in foreclosure, and 4.6 percent are actually in foreclosure. The Federal Housing Administration (FHA), which insures these loans, says national FHA mortgage defaults are at 11 percent, while in places like Baltimore, Maryland and Queens, New York, the default rates for FHA loans are 21 percent and 25 percent.
The economy is in full "recovery," say the experts. But mortgage foreclosures, personal bankruptcies, and late payments are at record levels. White-collar workers are having a hard time finding new jobs and blue-collar workers' real earnings per hour have been falling for the last 30 years.
Less is more
As Dr. Kurt Richebächer points out: "From the start of 2004 through July, real consumer spending rose by $122.2 billion. That is $209.5 billion, or 2.8 percent at annual rate, and compares with an overall increase of $232.2 billion (3.3 percent) in 2003 and of $213 billion (3.1 percent) in 2002. For perspective, during the boom years 1999-2000, it had growth rates of 5.1 percent and 4.7 percent.
"Though this deterioration is not dramatic, it also does not suggest an ongoing recovery. Yet the aggregates hide one rather dramatic change in the current year, namely, sharply lower growth in spending on consumer durables. At annual rate, it was down to $23.5 billion in the first seven months of 2004, after $71 billion in 2003 and $58 billion in 2002.
"Still, there has been a dramatic change for the worse in the consumer's earning power. Since January 2004, the three-month annualized growth rate for real disposable personal income has literally collapsed: 5.7 percent, 4.6 percent, 4.5 percent, 3.7 percent, 2.5 percent and 0.8 percent for July. Over the seven months to July 2004, real disposable income was up a mere $77.4 billion, or $132.7 billion at annual rate. It grew by $174.3 billion in 2003 and by $226.2 billion in 2002.
"Presenting these numbers, we have to mention that they have been jolted by tremendous revisions. Earlier data showed a pronounced rise in personal saving. Now there is a steep plunge. The crucial fact to see is that the consumer stepped up his borrowing to compensate for slowing income growth. The rise since 2000 is 74 percent. Yet the net effect has been gradual retrenchment in spending."
Don't forget Japan
Since consumer spending accounts for roughly two-thirds of overall economic activity in America, if their ability to take on endless amounts of new debt has peaked, the future of the world will be far more traumatic than the Japanese experience over the last 15 years.
In generations past, thrift was a virtue. People who worked saved their money and items were purchased after those individuals worked for and had earned their money.
Banking on debt
Today things are done in reverse. The average consumer in America and in many of the advanced capitalist economies spends money at a far greater rate than past generations and he or she spends money that is not yet earned. They do so not only because credit is so easily obtainable but also because they have an underlying optimism that the economy will never let them down.
This behavior is both taught and encouraged by the system. The banking industry forces greater levels of marginally serviceable debt onto the public to keep The Game intact-and it has now graduated to prodding consumption elsewhere in similar ways because the fractional reserve system would collapse if new debt weren't continually being taken on.
Ever growing amounts of debt need to be created in order that consumers, businesses and government can service existing debt and buy more stuff. Therefore, the system can only exist on credit creation and rising debt loads. This also applies to nation states. Dr. Kurt Richebächer again: "In 2003, such dollar purchases by foreign central banks amounted to a stunning $616.6 billion, after $351.9 billion the year before. The total reserves of emerging Asia rose by over $350 billion between the beginning of 2003 and March 2004. Over the same time, Japan's central bank purchased $316 billion worth of U.S. assets. The biggest buyer in emerging Asia was the central bank of China.
"These huge and soaring dollar purchases by foreign central banks were crucial in allowing the U.S. Federal Reserve to pursue its ultra-loose monetary policy with ultra-low interest rates. As we have often stressed, this, in combination with equally loose fiscal policy, has prevented a deeper recession. But the question is whether or not these policies have laid the foundation for sustained economic growth in the longer run.
"In our view, it is bad policy on both sides. The Asian central banks accommodate the credit excesses in the United States, and in doing so, fuel rampant credit excesses in their own countries. Japan's horrible aftermath over more than a decade after its credit excesses in the late 1980s does not seem to deter anybody."
But this is a New Century and a New Dawn and the laws of the market appear to apply no longer. But the balance of power is slowly shifting. Debts will have to be repaid. Cycles repeat. n
