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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: RON BL who wrote (277734)	7/19/2002 6:03:56 AM
From: JDN	Read Replies (1) \| Respond to of 769667

Dear Ron: Wow, that is SCARY, what makes it so scary to me is it appears to be well thought out and not the typical crap one reads in the media. JDN

To: RON BL who wrote (277734)	7/19/2002 9:29:45 AM
From: Doug R	Respond to of 769667

>>The point that needs to made here is that all sectors of the economy -- the government, business, and the consumer -- are addicted to credit to keep them functioning. However, there will come a time when the financial system is unable to provide the ever-increasing amounts of credit to keep the economy and the financial system afloat. Foreigners who now provide the US with $1.5 to $2 billion a day in credit to finance our widening trade deficit may run out of patience with our proliferate spending.<< As I stated here once before, the value of the dollar, as a fiat currency, is based on debt. Once the burden of debt reaches the breaking point, the dollar will crash. It may have already started. >>It is now this preponderance of debt and the reduction of returns on financial assets that present the U.S. with the possibility of a financial breakdown. The prosperity of the U.S. economy is every bit as dependent on foreign capital as it is the perpetual creation of domestic credit. The U.S. has been running continuous budget and trade deficits for more than two decades. These deficits, in particular the current account deficit, have been viewed in financial circles as a sign of affluence and influence in the world community. The growing government budget deficits have made the U.S. bond market the largest debt market in the world. Make no mistake: the U.S. economy runs on credit. Devoid of domestic savings, it is dependent on outside sources of capital to finance internal consumption. The result has led to a burgeoning mountain of debt. Foreign investors now hold a good majority of this debt. Any one of these foreign sources -- whether a foreign central bank, offshore hedge fund, or overseas institutional investment fund -- could trigger a debt and dollar crisis. Problems in Japan could lead to the repatriation of capital back home. A growing confidence crisis triggered by accounting and earnings scandals could cause foreign capital infusions to drop off or be withdrawn. If monetary inflation by the Fed continues, hedge funds may withdraw capital sensing a rekindling of inflation. In the thirties, Ludwig von Mises warned about the dangers of “Hot Money” when he wrote, “Many capitalist became anxious to protect their capital against their own government’s policies of confiscatory taxation, open expropriation, and devaluation. [All three currently exist in the United States.] They entrusted their funds as demand deposits to commercial banks and bankers of countries whose currency conditions at the moment seemed to be worthy of more confidence. As soon as doubts concerning the stability of this country’s currency appeared, they hurried to withdraw their balances and to transfer them to another country in which the risk of an impending depreciation seemed less likely.” 1 Credit Inflation = Debt Implosion = Deflation A more likely scenario is an implosion of the debt markets that begins with the gradual erosion of credit quality. On the day this Storm Watch Update was written, Moody’s Investor Services released a report showing that corporate credit quality continued to deteriorate sharply during the first quarter of this year. Downgrades exceeded upgrades by 4.7 to 1. The first quarter was the steepest decline in credit quality since the fourth quarter of 1990 when downgrades jumped to a 6.3 to 1 margin. Moody’s was hopeful that a rebound in corporate profits could narrow the gap. 2 Credit inflation expands the availability of credit in the financial system and into the economy. As credit is expanded, the quality of credit begins to decline. This leads to defaults and bankruptcies as the total volume of credit outstanding becomes less likely to be repaid. This is what S&P, Moody’s, and Fitch are now reporting. It is the unwinding of the 1990’s credit boom. The process begins gradually and picks up momentum with the expiry of the speculative fever in investing and lending. What needs to be understood is that history teaches us that all credit inflations end up in a deflationary credit collapse. Overburdened consumers eventually realize that their present debt circumstances can no longer be supported by their labors. Once this realization is made, they will have two choices. One will be to carry on until they are forced to default. The other choice is to reliquify their balance sheet, which would involve the sale of assets, downsizing, or reduced spending. Either choice is deflationary. Businesses, on the other hand, can reach the same conclusion with similar actions. Once a business that is heavily laden with debt realizes that profits and cash flow can no longer support debt service costs, they immediately begin to retrench or restructure. Assets are sold, payroll is cut, and all plans for expansion are curtailed. This is exactly what you are seeing now in corporations large and small. These actions have become part of the daily news landscape. financialsense.com