Asbytec

Economy and Equities Still Vulnerable: It's a Matter of Credit

I have to agree with the author, deflation will keep hyperinflation suppressed for the foreseeable future.

On credit, I am all for investment credit. As the author points out, this is good for business and employment. However, (excessive) consumer credit is a horrible thing. It is used for consumption and rarely provides any return. The end result of excessive consumer credit is to indenture consumers to banks. We feel wealthy because we can borrow that wealth from those who really own it. When you (we) cannot get a loan, now, how wealthy are you? Answer: as wealthy as you (we) really are. Joe six pack is flat broke, he just didn't know it...until now.

But, that's the banking system for you...it doesn't pay to save nor to borrow (for consumption.) Savings interest rates do not keep pace with inflation, even mild inflation, and borrowing your wealth simply robs you of money over the long haul. We need a new banking system, rather our old one would be fine...without a Federal Reserve...it is neither.

Okay, off my high horse. The economy should wind down a bit more. First, the hard lessons learned of easy credit will preclude those who have wealth from lending it to Joe Six Pack on the same scale. My guess is, the days of getting a plethora of credit card applications in the mail are over.

Second, the financial markets will be highly regulated. Derivative money will not be as plentiful as decades past. Third, the consumer has learned a hard lesson, too, about excessive debt...once bitten, you know. Coupled with the deflation that has already occurred, there is not nor will be anytime soon enough liquidity to drive the global economy we knew and loved during the 90's.

Anyone who thinks the recession is over and the market will soon reach it's highs needs to step back and look at the bigger picture. What is the face of the American economy? It's Joe Six Pack who flips burgers in the service sector and spends large portions of his income to pay off consumer loans. That money creates wealth for the few trough feeders.

We have a failing auto industry, but we build a few aircraft. Basically, we make little the world wants to buy, like hydrogen cell technology. The lawyers see to that, it's cheaper to buy it from France than to hire a fleet of scientists and engineers. We consume...we are gluttons...and we run huge deficits. That system has about reached it's limit. I see a possible major change in American consumer habits, whether by choice or otherwise, if the banking system will allow it.

I assert, the US consumer will place less global demand for goods and services. Who will pick up the slack? China's immature middle class? Europe's aging population? Mexico? (Why is Mexico even mentioned in the North American Union?) I don't see anyone feeding the global economic machine with the veracity of the employed American worker and his credit limit. And there are a lot less of them (us) around...who've also lost their homes. Well, maybe the middle east can spend some oil revenue. Maybe, but it's not likely to sustain growth of the past two decades.

It does have to do with credit, and "they" ain't handing out much "wealth" to broke and indentured Americans, Canadians, et al. I believe the recent rally was driven by green shoots (amidst the thorns), investors following government stimulus money, and many just being tired and too eager to get back on the business as usual band wagon.

We're still in big trouble, folks, and the author correctly asserts it's all about credit, as well as the liquidity damn burst and weaker global consumer demand in the coming decades. Some extreme views will say the entire crisis was engineered for whatever ends. (Who knows...) I wish the system could just fail and be replaced with our constitutional system, if it weren't for the millions of indentured Joe Six Packs who rely on our current system for basic survival.

Anyway, it ain't over.