AnonymousDebt vs. Income: At the Point of No ReturnSat Feb 21 16:31:31 2004220.127.116.11(1) American Debt Bubble problem already past the Point of No Return(2) Is Alan Greenspan Behind China's Bubble Too?(3) SIGNS OF A HURRICANE, by Marc Faber(4) Calvi murder linked to missing $70m(5) Fourth-highest concentration of US debt at Caribbean banking centers(1) American Debt Bubble problem already past the Point of No ReturnDate: Mon, 16 Feb 2004 22:04:28 -0500 From: "David Chiang"Debt vs. Income: At the Point of No Return February 16, 2004Richard Benson February 12, 2004Richard Benson is president of Specialty Finance Group, LLC , offeringdiversified investment banking services.
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=30391 At the beginning of 2003, the level of debt that Americans owed as anabsolute amount, and as a ratio of income, was already approachinglevels never seen before. Debt can be handled in a number of ways:1) earn enough money to pay it off; 2) default; 3) borrow even more; or,4) pray for inflation so you can earn more dollars (but really pay backless).Where are we now?Last year, personal income increased about 2%. Individual debt increasedabout 10%. Personal debt for autos, credit cards, etc., topped $2Trillion - up about $120 Billion despite massive debt consolidation andmortgage refinancing. Mortgage debt rose about $800 Billion, and totalindividual debt rose over $925 Billion, while wages and salaries roseonly $190 Billion. Retirees and savers saw their interest income shrink,as interest paid on savings dropped by $30 Billion. Indeed, given theFed's low interest rate policies, it doesn't pay to save.In December, the savings rate dropped to a new low of 1.5% and in the3rd quarter of 2003, the only reason financial assets were acquired isbecause they were bought with borrowed money. The low savings rate iseven more astounding when you consider the increase in DisposablePersonal Income of around $200 Billion from the tax cut. The economyneeds $500 Billion in government stimulus from tax cuts and increasedspending just to keep employment from falling and to help consumers rollover their credit cards for another month.The savings rate is actually materially overstated. Personal Income,according to the Bureau of Economic Analysis, includes a few hundredbillion dollars in "imputed income" for owning your own home andreceiving value for other "non-cash services." Imputed income issignificantly greater than the 1.5% savings rate! Unfortunately, debtcan only be repaid with actual cash flow. In January, Personal Incomerose at about a 2% annual rate and very few jobs were created. Consumersare spending every last penny to live, and many are "tapped out."What is perfectly clear from simple arithmetic is that without a suddenincrease in the number of jobs and the wages they pay, individual debtcan not be serviced by personal income. Worse yet, not only are peoplenot saving, but their financial reserves are not in real cash. The onlything keeping the "national ponzi scheme" going is the illusion ofwealth created by the Federal Reserve's low interest rates and liquiditythat has allowed stock market valuations and housing prices toartificially inflate.The market value of homes in 2003 rose about $1 Trillion and stockmarket values rose about $1.5 Trillion. The rising asset prices looklike they balance rising debt on household balance sheets. Tragically,the increase in asset prices will vanish the day that interest ratesrise, but the debts will still remain. Indeed, not only will the debtremain, but the cost of servicing it will go up dramatically. Asinterest rates rise, wages and salaries must increase or massive debtdefaults will follow.Income and job growth are so low that we have certainly passed "ThePoint of No Return." There cannot be an easy resolution to the debtbubble and resolution will only come when a crisis forces change.Perhaps, for this election year, crisis can be postponed by continuingto facilitate an increase in borrowing so that debts can be rolled over,but increased. By 2005, the ultimate outcome to resolve the debt problemlooks like it will be a combination of inflation, rising interest ratesand debt default.The reason we do not believe that job and income growth will save theday for the American worker is we have never before seen in history suchincreases in government spending, tax cuts, federal budget deficits,consumer spending and borrowing, with so little job growth. The massivefiscal and monetary stimulus has mostly been spent. There will be somenice tax refunds this spring, and that's it! The peak of mortgagerefinancing is already past. Construction spending is at a peak and thepercentage of people who own their homes is at a record 69%. Mortgageunderwriting shows that 5% of homebuyers in 2003 really couldn't affordto buy a home, and another 5% could lose their home if one spousebecomes unemployed.While the industrial sector is recovering, employment in themanufacturing sector has not increased since the start of the recession- there has been job loss in manufacturing for the past 42 months in arow. The United States has been in an economic recovery for over a yearand a half and continues to lose manufacturing jobs every month! This isunprecedented!Capacity utilization in the US remains about 76%, while massive newinvestments in production capacity are being made in Asia. The drop inthe dollar has primarily affected trade with Europe, and Europe isn'tstealing our jobs. As long as Asia buys our dollar debt and continues tohold their currencies down against the dollar, job growth will happenthere, but not here. Even when China and the rest of Asia "finallyfloat" their currencies, few jobs will come back to America.In the United States, we only produce 45% of the manufactured goods weconsume and much of that production is in electricity, petroleumrefining, chemicals etc., that are capital intensive, with few workersrequired. Critically, many of the workers listed as employed inmanufacturing are not engaged in manufacturing at all but in design,marketing, and distribution. Even if the Chinese currency doubled invalue, the labor cost for a worker in China would still only be afraction of the cost for an American in America. The sad fact remainsthat Personal Income growth will not happen because of job growth.Personal Income remains under pressure as higher "valued added"manufacturing jobs are exchanged for lower paying part-time and servicejobs. America is losing manufacturing jobs paying $45,000 - $60,000 ayear so it needs three new service jobs paying $15,000 - $20,000 a yearjust to replace the one manufacturing job that was lost.So, where are Americans and their mountain of debt headed?If the days of borrowing more - courtesy of both the Federal Reserve andAsia's Central Banks - are winding down later this year when Asiarevalues its currency, it looks like there will only be two ways out:increased inflation and debt default. Both are likely. When thoseChinese goods at Wal-Mart go up 30% in price, Americans will seeinflation. The Fed will accommodate most of the inflation, but therewill be a rise in interest rates. Inflation, if allowed and encouraged,will save the wage earner so he can continue to service his consumerdebts. Rising interest rates will smash into housing prices like atornado in Kansas. Homeowners who have a 30-year fixed rate mortgagewill come out in the end, if they don't have to sell their home for atleast 10 years. Anyone who wants to sell their home will see some "assetdeflation," and financial institutions will experience substantial "debtdefault." The Federal Reserve will "print money like crazy" to fightasset deflation and encourage inflation. Sometime before or after thePresidential election, the financial markets will be interesting, butpainful to many.(2) Is Alan Greenspan Behind China's Bubble Too?Date: Tue, 17 Feb 2004 17:28:44 +1000 From: "makichris"Is Alan Greenspan Behind China's Bubble Too?William Pesek Jr. Feb. 11 (Bloomberg) --Globalization is globalizing the Federal Reserve.
http://quote.bloomberg.com/apps/news?pid=email&refer=columnist_pesek&sid=a5z8k14ECUoU It has 12 districts and acts based on U.S. events, but its influence hasnever been greater. It isn't far-fetched to think of Latin America asthe 13th district, Southeast Asia the 14th, Russia the 15th, China the16th, and so on.Perhaps it's not surprising, then, that some observers are blaming theFed for problems in one of its de facto, satellite districts. China,Asia's second-largest economy, is experiencing a dangerous asset bubble,one that's making investors antsy.It seems a reach to blame Fed Chairman Alan Greenspan and his colleagueshere in Washington. After all, Asia isn't a huge blip on the Fed's radarscreen these days. The Fed also has taken its share of flack for theU.S. bubble of the late 1990s. But the U.S. central bank's global reachis being felt in Asia.``The Fed commitment to keeping interest rates low for a considerableperiod of time fueled speculation in high-risk assets,'' says Andy Xie,Hong Kong-based chief economist at Morgan Stanley Asia Ltd.``The byproducts of this speculation,'' Xie explains, ``are the wealtheffect on consumption in the U.S. and the cheap capital-fueledinvestment boom in China -- the twin engines or bubbles, depending onyour perspective, for the global economy today.''The cycle, Xie says, will end with either the Fed reversing its policyor with a financial accident caused by the leverage building up inhigh-risk assets around the world. ``History would not be kind to theFed,'' Xie says. ``Its accommodation and even encouragement ofspeculative excesses would be viewed as the primary cause of the massivebubble in the global economy today, the consequences of which are yet toshow.''The Fed's culpability is debatable. What's not is that speculativecapital flows into Asia reached a record high last year, surpassing theprevious peak in 1996.The big recipients of capital in 1996 were Hong Kong, South Korea andSoutheast Asia. This time, it's China. Just like the capital flowdestinations of the 1990s, China is experiencing an investment bubble.In 2003, East Asia's foreign-exchange reserves rose $234 billion morethan the region's trade surpluses. That compares with an average of $26billion in the 1990s and $8.3 billion in the 1980s. China and Japan werethe main capital recipients in Asia last year.The increase began in 2001, when the Fed cut interest rates aggressivelyto boost U.S. growth. Like clockwork, China's foreign-exchange reservesrose by more than its trade surplus for the first time since 1996. Theinflows picked up speed and reached record levels last year.What can be done about all this? China needs to tighten capital controlsto slow the inflow, Xie argues.Such a step would be anathema to free-market aficionados and to theGroup of Seven nations, which last weekend renewed its call for flexibleexchange rates. But the longer Beijing allows such rapid inflows ofspeculative capital, the more difficult it will be to avoid a financialcrisis.Xie's views are contrarian, indeed, but it's hard to dismiss them. Thevast majority of world leaders, economists and investors think China'scurrency is undervalued and that Beijing should let it rise. That wascertainly the thrust of the G-7's latest communique.But ``the appreciation of China's currency, which many advocate as themain means to cool the bubble, would only encourage more speculation, aswe saw in Southeast Asia,'' Xie says. ``The resulting bigger bubblewould make a hard landing inevitable.''China may be presenting economists with a rare throw-away- the-textbookssituation. Established macroeconomic models hold that more exchange-rateflexibility will squeeze some air out of China's bubble and keep theeconomy from overheating. Freeing the yuan may do exactly the opposite.Beijing has taken steps to cool its economy. The central bank, forexample, increased reserve requirements on commercial banks to curbmoney-supply growth. Higher interest rates in the U.S. could help temperChina's boom. Global investors are looking for hints on the subject whenGreenspan testifies in Congress this week.``The massive swings in capital flows into Asia could only be explainedby the speculative drives that rise or ebb with some stimulus,'' Xiesays. ``The stimulus is usually Fed policy changes.''It's doubtful Greenspan is preoccupied with all this. But thosespeculating on China's rise should keep two things in mind. One, theFed's policy decisions here in Washington may have considerableinfluence on China's outlook. Two, what markets think they know aboutChina's currency policy could be 100 percent wrong.(3) SIGNS OF A HURRICANE, by Marc FaberDate: Wed, 18 Feb 2004 23:04:18 -0500 From: "David Chiang"SIGNS OF A HURRICANE by Marc FaberThe present "strong" recovery phase in the U.S. economy won't last forlong, as it is totally artificial. There are simply too many imbalancesin the system - as reflected by a record low national saving rate,record household debts, and record trade and current account deficits -for this recovery to lead to sustainable strong growth that wouldjustify the present stock valuations.According to economic theorist Joseph Schumpeter, economic recoveriesthat are purely a consequence of fiscal and monetary stimulus mustultimately fail. Schumpeter writes: "Our analysis leads us to believethat recovery is sound only if it does come from itself. For any revivalwhich is merely due to artificial stimulus leaves part of the work ofdepression undone and adds, to an undigested remnant of maladjustments,new maladjustments of its own."My colleague Peter Bernstein correctly points out the complexity of theissues involved: "Private sector saving, private sector investment,household consumption, government spending, government revenues, capitalflows, and trade balance all react upon one another - often insurprising fashion. We live in a complex system: each piece tends tofunction as both symptom and cause." And while I cannot discuss hereBernstein's entire analysis of economic data, which he himself admits is"confusing," I would like to point out that he also is "certain" that"current trends are not sustainable."Bernstein writes: "The imbalances are now enormous, far more glaringthan at any point in the past. Furthermore, the linkage of the parts areso tightly knit into the whole that reducing any one imbalance to zero,or even compressing them all to a more manageable level, appears to beimpossible without a major upheaval. A hitch here or a tuck there haslittle chance of success. When it hits, and whichever sector takes thefirst blows, the restoration of balance will be a compelling forceroaring through the entire economy - globally in all likelihood. Thebreeze will not be gentle. Hurricane may be the more appropriatemetaphor."Part of the problem the United States is facing is the long-term declinein the U.S. national saving rate (including household saving, corporatecash flows, and the government's budget surplus or deficit). As apercentage of GDP, there was an improvement in the national saving ratebetween 1993 and 2000 due to higher taxes and a swing in the federalbudget toward surplus...but thereafter, the national saving rateplunged. Over the same time period, real personal consumptionexpenditures as a percentage of GDP declined modestly between 1988 and1998, but soared between 2000 and 2003 to a record.Now, in past recessionary periods (1973-74, 1981-82, and 1990), thetendency has been for real personal consumption ex
Message Board by American Patriot
Friends Network [APFN]
APFN MESSAGEBOARD ARCHIVES