To: Les H who wrote (161111 ) 4/20/2002 11:10:45 AM From: Les H Respond to Above and beyond the problems of recession, the US economy must deal with a massive build up in credit. Recent releases from the Federal Reserve show total credit market borrowings increased by $6.06 trillion, or 27%, in the three years from June 30, 1998 to June 30, 2001.20 Yet, gross domestic product increased only a total of 17.3% over that same time frame.21 This suggests massive credit inflation, at the same time financial assets, especially the Nasdaq, have deflated. According to the Wall Street Journal total consumer assets fell 4% during the past two years, while their debts increased 15%. On the business side, while corporate assets climbed 7% in the past two years, corporate debt rose 15% in the same time period.22 Going back to accounting 101, if net worth equals assets minus liabilities, the current situation makes for a lot of negative net worth that will require current cash flow, income growth, and/or write-offs to get back even. Since growth cannot be counted on for at least for the near term, rationalization of this excrescence of debt will at best absorb current cash flow; placing capital investment plans on extended hold, or at worst require write-off or default. With US corporate profits currently no higher than in the mid-1990’s,23 I believe trillions more in IOUs will have to be rationalized to unwind the bubble created just since 1998, beyond the defaults and write-offs that have already occurred in 2001. With the financial press recently telling of accountants and appraisers claiming that companies are lining up to announce huge write-offs in 2002,24 and industry experts expecting any number of retailers to be forced to close stores,25 I believe the default monster is likely to raise its ugly head once again in the New Year. ramadvisors.net
