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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (202)	2/18/2004 4:25:19 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Richard Benson, who publishes Benson's Economic and Market Trends, wrote a very interesting essay entitled "Debt vs. Income: At the Point of No Return." One of the most important things, to me anyway, since it is so simple and I like simple things because I am a simple man and that's why everybody thinks I am a simpleton, wrote, "Last year, personal income increased about 2%. Individual debt increased about 10%." "What is perfectly clear from simple arithmetic is that without a sudden increase in the number of jobs and the wages they pay, individual debt can not be serviced by personal income. Worse yet, not only are people not saving, but their financial reserves are not in real cash. The only thing keeping the 'national Ponzi scheme' going is the illusion of wealth created by the Federal Reserve's low interest rates and liquidity that has allowed stock market valuations and housing prices to artificially inflate." Philip Spicer, handsome as ever, sent the following, with the header "Some things never change" and it shows the truth of that statement. "The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn't want to go bankrupt. People must again learn to work, instead of living on public assistance." The quote is attributed to Marcus Tullius Cicero, circa 55 B.C. dailyreckoning.com

To: yard_man who wrote (202)	2/18/2004 4:37:14 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

One more snip from the Mogambo Guru [Mish note: he is so preoccupied with his view of inflation that he misses the big picture even when he reports on it. Here it is] Mr. Freeman is one of those guys who are, like me, still under the impression that the output of the country should be concerned with people making and buying and selling things that they want. How old fashioned we are! Quaint, even. Mr. Freeman goes relentlessly on, even as we beg him to stop, and thus end our torture. In the '80's "For every dollar of increase in productive GDP - which we here call real GDP - there was a $4.25 increase in debt; throughout the 1990s, for every dollar of increase in real GDP, there was a $13.90 increase in debt. However, in the 2001-03 period, when real GDP, even in its statistically massaged form, stagnated while debt grew hyperbolically, each dollar of increment in real GDP required a $63.51 increase in debt." But not content with that, Mr. Freeman extrapolates beyond that, and notes that this whopping increase in GDP brought about by juggling the numbers and making assumptions about quality, "This signifies something else: The U.S. economy's current indebtedness can never be paid off out of the real productive portion of the economy." But the amount of money necessary to just pay the interest on all this debt at the end of the month is a big wad of cash. He notes that "This debt service of $8.09 trillion and rising, cannot be paid. Were it to be paid out of GDP, it would require siphoning off three-quarters of the national product. Moreover, it would require siphoning off the equivalent of 2.5 times the productive portion of GDP (real GDP). The debt service requirements are so large that they could not be met: There would not be enough GDP left over to sustain human existence, by providing the market-basket requirements of enough clothing, housing, food, etc., and a sufficient amount to pay the debt." So what does this mean to you and me? "A system is bankrupt when the debt-servicing requirements exceed its wealth generation, so that an individual or entity cannot pay back the debt service and meet the needs of human existence at the same time. The United States is bankrupt." Now if it was me, I would have inserted a long pause for emphasis, thusly: "The United States is (pause) bankrupt." But bankruptcy is not an automatic thing, since hotshot managers and desperate executives will find ways to keep the thing going as long as they can. To that extent, "Some of the debt will be 'rolled over' i.e., refinanced with new debt, which swells the debt bubble even further. However, the Wall Street financiers can, and do, take measures to collect a significant portion of the debt service through extraction: They loot the population through fierce austerity; they do not replace run-down plant and equipment, etc. This is destroying the underlying physical economy upon which life depends. As the world financial disintegration increases instabilities, a spike in U.S. interest rates, a wave of defaults on over-priced homes, will ignite the $36.85 trillion debt into conflagration. The debt bubble has built into it the causes of its own destruction. The debt bubble's upward flight is nearing an end." ========================================================== Sounds like a deflation trap to me Mish