Friday, September 30, 2005
Auto-erotic asphyxiation. That's the US economy right now.
It would cost $3000 annually per non-government worker to pay JUST the interest on our national debt. So we keep borrowing to pay the interest. The US is bankrupt. It is not POSSIBLE for us to pay off the national debt. We have/had the best credit in the world and so we've been able to keep rolling our credit cards over. We may be about to reach the point where the creditors don't want to give us another card.
The hurricanes may be the straw that broke the camel's back. I certainly wasn't expecting that. I figured it'd be an agonizingly slow grind toward the edge and then a stampede over. Ah well structure is structure, fundamentals are fundamentals, value is value.
Freaking Alan Greenspan says we've lost control of the deficit. Gee, ya think? Then he goes on to say:
Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.If you have any fluency in fedspeak you're peeing your pants right about now. Our options will be Weimar/Argentina type hyperinflation, or widespread asset deflation ala the great depression. Or maybe the worst of both, spiraling prices for goods and services with plummeting asset prices. Whee.
The lowered risk premiums--the apparent consequence of a long period of economic stability--coupled with greater productivity growth have propelled asset prices higher.5 The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.
Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.
One third of the people in this country are supported by the government. What finances the government? Taxes and debt. Where do those taxes come from? You begin to see the problem.
Soon the leading edge of baby boomers will be reaching retirement. When that happens many 401ks require people to start taking the money out. What happens to any market when everyone starts selling? You begin to see the problem.
For all those boomers with defined benefit pensions the picture may be even worse. Companies are going bankrupt because of benefit promises. The gov program to bail out those pensions has become so overburdened that it's teetering too. The pension benefit program only pays out about a third of the promised amount anyway, but with major airlines and automakers about to fold... You begin to see the problem.
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Best quote ever.
"Whenever you propose a new law, imagine what the results would be if that law was enforced by your worst enemy or the stupidest person you know."
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