Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
4Activity
0 of .
Results for:
No results containing your search query
P. 1
Severe Debt Scarcity Coming to US

Severe Debt Scarcity Coming to US

Ratings: (0)|Views: 6|Likes:
Published by Ron Robins
Debt saturation is occurring, and with it a declining return on each borrowed dollar—even for the US government. Most significantly, the banks and the financial system will probably soon experience a new round of massive real estate related losses and subsequent financial institutions’ bankruptcies. Thus, a new major financial crisis will likely soon engulf America, greatly impairing its lending facilities and creating a severe scarcity of debt... In the next few years credit conditions are likely to go back seventy years when private debt was difficult to obtain.
Debt saturation is occurring, and with it a declining return on each borrowed dollar—even for the US government. Most significantly, the banks and the financial system will probably soon experience a new round of massive real estate related losses and subsequent financial institutions’ bankruptcies. Thus, a new major financial crisis will likely soon engulf America, greatly impairing its lending facilities and creating a severe scarcity of debt... In the next few years credit conditions are likely to go back seventy years when private debt was difficult to obtain.

More info:

Published by: Ron Robins on Dec 31, 2010
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as DOC, PDF, TXT or read online from Scribd
See more
See less

11/06/2012

pdf

text

original

 
Severe Debt Scarcity Coming to US
By Ron Robins, Founder & Analyst,Investing for the SoulBlogEnlightened Economics;twitter First published December 26, 2010, in his weekly economics and finance column atalrroya.comIf US consumers believe it difficult to borrow now, just wait! In the next few yearscredit conditions are likely to go back seventy years when private debt was difficultto obtain. Most Americans intuitively believe there is too much debt at every level of society. But the economic and political vested interests do not want them worriedabout that. They want to give them credit to infinity to keep this economic messfrom imploding. The US Federal Reserve’s new round of quantitative easing (QE2) isclear evidence of that. However, Americans are right about their inordinate debtload, and future economic conditions are likely to create a severe debt scarcity.The principal reasons for the coming debt scarcity are that ‘debt saturation’—wheretotal income cannot support total debt—has arrived, say some analysts; also, thegrowing understanding that adding new debt may not increase GDP—it coulddecrease it; and that the banks and financial system are a train wreck in waiting,eventually being forced to mark their assets to market, thus creating for themmassive asset write-downs and strangling their lending ability.The realization that debt saturation has arrived will not surprise many people. Butunderstanding that new debt can decrease economic activity might surprise them.And the numbers illustrate this possibility. In Nathan’s Economic Edge, Nathanstates, “in the third quarter of 2009 each dollar of debt added produced NEGATIVE15 cents of productivity, and at the end of 2009, each dollar of new debt nowSUBTRACTS 45 cents from GDP!” In fact Nathan also shows that for decades, each new dollar of debt produces lessand less in return, from a return of close to $0.90 in the mid 1960s to about $0.20by 2007. One explanation for this is that as societal debt increased it focuseddisproportionately on consumption rather than productive enterprise, whose returnappears greater.On the subject of consumption, the renowned economist David Rosenberg in TheGlobe & Mail on August 16 stated that “U.S. household debt-income ratio peaked inthe first quarter of 2008 at 136 per cent. The ratio currently sits at 126 per cent, butthe pre-2001 norm was 70 per cent. To get down to this normalized ratio again, debtwould have to be reduced by about $6-trillion. So far, nearly $600-billion of badhousehold debt has been destroyed.” This data reaffirms Americans growing aversionto debt, that debt has become too onerous, and is suggestive of debt saturation.Replacing declining consumer debt is the exponential growth of US government debt.For 2009 and 2010, the combined US government’s fiscal deficits required or requireborrowing an extra $2.7 trillion or so. Yet with all that spending—combined withabout $2 trillion of ‘money printing’ from the US Federal Reserve (the Fed)—itcreated only around $1 trillion in increased economic growth!One may argue that the phenomenal US government borrowings will provide returns
 
far into the future and that the present low economic returns are due to not fundingareas with potentially better returns. Some economists say that spending oninfrastructure and education provides the best returns. However, with economistssuch as Nobel Laureate Paul Krugman and numerous others predicting hugecontinuing deficits for years ahead, and with a Japan-like slump in economic activity,the odds are likely that any new borrowed dollar will continue to provide only poorreturns for years to come.A further, major reason for the coming debt scarcity will be the tremendouslyimpaired financial condition of the banks. The values assigned to many bank assetsare fictional according to numerous experts. QE2 is about many things but one of them is aimed at delaying the potential for implosion of the banking system. In2009, the Financial Accounting Standards Board (FASB) caved in to government andbanking industry lobbyists to allow many bank assets to be ‘marked to fantasy’ andnot ‘marked to market.’ This viewpoint is best expressed by highly respected Associate Professor WilliamBlack (and formerly a senior regulator who nailed the banks during the savings andloan debacle) and Professor L. Randall Wray, who wrote an article on October 22 inThe Huffington Post, entitled, “Foreclose on the Foreclosure Fraudsters, Part 1: PutBank of America in Receivership.” They wrote that, “FASB's new rules allowed thebanks (and the Fed, which has taken over a trillion dollars in toxic mortgages aswholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional ‘income’ and ‘capital’ atthe banks.” However, the Federal Reserve may be realizing that it might not have been such agood idea to buy some of these ‘toxic’ securities. Bloomberg reported on October 19that, “citing alleged failures by Countrywide to service loans properly… PacificInvestment Management Co., BlackRock Inc. and the Federal Reserve Bank of NewYork are seeking to force Bank of America Corp. to repurchase soured mortgagespackaged into $47 billion of bonds by its Countrywide Financial Corp. unit, peoplefamiliar with the matter said.” Also, on November 2, CNBC reported that Citigroup could be liable for huge amountsof toxic security buy-backs as well. “If all four mortgage acquisition channels turnout to be equally as defective… Citi's liability for repurchases could soar to about$100 billion dollars at a 60 per cent defect rate - and to around $133 billion dollarsat an 80 per cent defect rate.” Clearly, such numbers are staggering. These, as well as many other banks andfinancial entities, could collapse. Politically, in the present circumstances, it would bedifficult for the US government to provide massive new funds to support the financialsystem. Therefore, it will be up to the Fed to decide what to do.If the Fed prints ever increasing amounts of new money to try to moderate thefinancial collapse, hyperinflation could be the result. If it does not print massiveamounts of new money, a deflationary depression could be born.In high inflationary or hyperinflationary conditions, few will want to lend as they getpaid back in dollars that are declining very rapidly in value. In a deflationary episode,lending is reduced due to huge loan losses. Therefore, during either, and/or aftersuch events, debt scarcity will be in full force.

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->