bosgouet

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    • Fri Jan 4th 21:37 PM | Rating: 0 0
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      Recession? Maybe; Crisis? I Don't Think So
      I think the avoiding of a crisis assumes that there are still ever more creative ways of supporting /growing the US economy. The successful erosion of the US manufacturing base has made it even more imperative that the US continue down the "financial economy" route.
      IMHO the last bullets were spent trying to "avoid deflation" after the tech bubble . 2 major components of the "financial economy" housing and the retail spending were both stimulated by the artificially low rates on offer.
      Employment surged primarily on the back of real estate construction/sales/res... These jobs are now reverting back to the mean and will most probably over shoot.
      Retail spending rebounded also based on MEW activity and now more recently due to negative equity, the spending is being continued by utilizing the much more expensive credit card debt. I think that this CC binge will catch up to many very soon and a contraction in retail spending will ensue, especially with the oil price at current levels.

      Another ignored facet of the way the property boom will catch people other than the traditional sub prime borrowers, is the prime borrowers who over borrowed to help finance their finance.
      Many people took huge bets on the "unstoppable"... property market and being otherwise intelligent people kept some of their borrowings back to help fund a "serviceability buffer" That way they could overstate their real income borrow more than they needed to fund their new property purchase, and then use those extra funds to service the debt in the short term. They figured that even if the "hot" market cooled for a few years, it would bounce back and their buffer would take care of repayments rather than their actual income in the mean time. Trouble is , as the property correction last ever longer and corrects ever deeper, these people will be running their buffers ever lower and eventually will question can they/should they have so much of their income being increasingly diverted into an underperforming asset. Eventually we will see a wave of such people selling their trophy properties as their buffers run out and their repayments start to mean material downgrades to their lifestyle.
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