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To: Mark Adams who wrote (107708)	6/8/2001 4:29:08 PM
From: pater tenebrarum	Read Replies (1) \| Respond to of 436258

debt to disposable income hasn't increased 'slightly'. it has exploded to an all time high of close to 110% for households. similar to the other debt measures, it's a quite exponential looking curve. regarding net worth, we have discussed this extensively on the thread in the past. i do agree with you that debt and net worth have to be looked at together. well, something has happened that i predicted would happen when the stock market mania was still in full swing: based on their increasing, ephemeral 'net worth' , consumers went on an all out spending binge, amassing a sizeable debt. the average 401 K plan was collateral for credit amounting to 50% of its value in March of 2000 (source: contrary-investor...you'll find it in the archives). at the time i pointed out that a great trap was being laid, as the debt was incurred on the (completely wrong) assumption that the Wall Street mantra that 'stocks always go up in the long run' meant that the value of these 401Ks would keep increasing year after year, at the inordinate rates investors became accustomed to during the bubble years. however, the WS mantra isn't quite true when a supercycle bear market period commences. so in the meantime, individuals net worth has been slashed by some 800 billion dollars in the course of 2000, while the debt has not only stayed the same, but has actually increased. iow, the collateral isn't what it used to be. the effect of this reduction in 'wealth' (please note, the wealth has never really existed...it was all on paper, based on whatever the last trade on Wall Street was) will be an eventual steep drop in consumer spending, and i expect another round of 'wealth' destruction lies just ahead, in the form of plunging real estate prices (has already begun in some areas), further eroding confidence. of course , the expected increase in savings will lay the groundwork for the NEXT economic upswing, as you say. but first, savings have to be increased, and debts cum malinvestments liquidated. the faster this process is allowed to play out, the better. unfortunately the monetary authorities would like it not to play out at all...which is a big mistake imo, as their delaying action only assures that the period of re-adjustment will take longer than necessary and possibly be worse than it would have been otherwise, ultimately. i can however understand why the Fed is so wildly accommodative...the reason can be found in the extent to which the financial system's fragility has increased in recent years. there is so much leverage, and such staggering amounts of derivatives 'hedging' this leverage risk, compared to the puny capital of the financial institutions, that any abrupt loss of confidence could lead to a systemic crisis. in addition to that, the number of big players in this arena has decreased markedly in recent years. that means that the default of only ONE of them would be enough to bring the system to its knees. we could see shades of this when LTCM (a single hedge fund!) went into default in '98. so they're in a box, of their own making. unfortunately we all will have to pay the bill. so far the financial sector's ponzi methodology of creating more new credit than old credit is defaulted upon is working...but it's an ever closer scrape, as e.g. qu.1 2001 bond defaults alone already are close to the annual total of the last recession. sorry for being such a persistent gloom-and-doomer, but i have to call them as i sees them.