The Coming Credit
The incredible array of economic sins and imbalances in the U.S. economy are without precedent. For one thing, no country has ever experienced a sharp economic downturn against the backdrop of exploding credit demand. Never have consumers borrowed so madly to fend off a reduced lifestyle, nor have businesses borrowed so aggressively to keep their doors open.
In the 1930s corporations
had $2.00 in cash for every dollar of debt. Today they have a dime. By
borrowing extensively to buy back their stock or running down their
precious cash reserves to boost their stock prices, many companies have
painted themselves into a financial corner.
An unprecedented systemic problem with the U.S. economy means a severe crisis ahead. Weíre not making a bunch of facts up here. Weíre not standing diametrically opposite the mainstream economic forecasts and Wall Street propaganda because of wishful thinking. The facts are horrible to contemplate. The severe strains in the system wonít go away if and when the business cycle turns up. In fact, these intractable problems insist that the business cycle will turn down further and stay depressed for a long time. How depressed is the crucial question.
Profits are the main engine of a growing economy. Profits fuel spending on products and services. Profits translate into capital spending on plants and equipment. Without profits this important spending canít take place. An economy without profits is like a human body without enough calories. Robust activity diminishes. The profits decline in the second quarter was the greatest in 21 years. Despite a record nine interest rate cuts by the Fed, this profits malaise shows no sign of improvement. Something far worse than an inventory glut, the suspected culprit, must be at work.
What is it that turned down
profits and plunged all important business investment into a funk?
Hereís the list. You tell me how many of these profit depressants are
going to go away quickly.
Despite what youíve heard from Wall Street, information technology and the new economy failed to bring home the bacon for the U.S. These new technologies were overrated. Our so-called economic miracle pales in comparison to the auto industry of the 1920s with its intensive capital spending that created jobs, profits and wealth. Basically todayís new economy was propelled by Wall Street euphoria, runaway money and credit expansion and the worst examples of stock speculation and overvaluation in history. This was a bubble that has now burst with a vengeance. Wall Streeters recklessly continue to advocate more of the same but which of them has been right about anything for the past 18 months? What they have engineered and continue to promote amounts to the loss of five trillion dollars. The wealth of America is evaporating before our eyes. Attempts to reinflate the bubble with additional money and credit are now offset by corporations and the public who wish to hold on to their money and restore cash balances.
We all see that bankruptcies and defaults are on the rise. Itís my view that sooner or later cascading defaults will snowball into a credit collapse as one business failure brings down another. When a critical mass of consumers who are out of work or facing income reductions are forced to postpone their credit card payments or omit their mortgage obligations, the credit implosion will spiral out of control. Then we have the worst of all economic worlds. Our outrageously exorbitant money and credit expansion has fed into the willingness of too many people to overload on debt. When all the excesses and imbalances in the economy are taken together, I donít think any country has ever been in a worse pickle.
Todayís continued optimism
in the face of the facts I have related makes a person wonder if we are on
a different planet from the money managers and economic experts. But I
would argue that every economist who ever existed on this earth up to and
including John Maynard Keynes would agree with me when I express these
grave concerns. I hope you take my argument with more than a grain of salt
and donít let the assets you have accumulated wither away. Look at
whatís happened so far. Use that as a roadmap to the future. There are
good times and bad times, booms and busts, lush periods and droughts,
peaks and valleys, pleasure and pain, joy and sadness. We have lived
through a golden age and now we are likely to see its opposite. If all the
excesses of the bubble period are liquidated, it will be a financial
holocaust. If youíre not apprehensive, you should be.