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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (104788)	9/3/2009 12:36:00 PM
From: Hawkmoon	2 Recommendations Read Replies (2) \| Respond to of 110194

I'm confident the future will provide you with a more healthy respect for the dangers associated with excessive debt relative to income. Excessive debt purchasing a depreciating asset (ie: credit cards.. etc).. yes... Moderate debt (such as a mortgage that's no more than 4x household income) is often a necessity, lest all that paid rent be permanently lost to some landlord rather than accumulated as equity. And let's face it, it's often difficult to buy a reliable car without taking on debt. Furthermore, if farmers didn't go into debt, it's quite unlikely they couldn't afford to plant crops every year. You can praise savings over debt, but it's certainly no guarantee against excessive debt. Look at Japan. Real Estate declined by 80% at one point there. The Japanese became one of the planet's great savers and interest rates went to near Zero. Yet, the country's national debt is one of the highest (% wise) of any developed economy. And due to the excessive savings, the carry trade developed where they Japanese loaned out money to nations who could pay them a higher interest rate. And profits they made by selling us stuff was plowed back into US debt. That's what fueled this bubble.. Excessive Chinese, Japanese, and European savings invested in US mortgage bonds and treasuries as a ploy to avoid disturbing favorable FOREX ratios. It was a supply of money that had to be invested and the US gov't had temporarily stopped selling 30 year T-Bills and when resume, the supply was limited. That money went into mortgage bonds instead, keeping rates artificially low, providing tremendous capital to be lent out and securitized. Look at China.. The people there are saving up to 40% of their annual income and it STILL created a bubble. Brand new malls and office buildings left unoccupied. Real Estate prices rising even more than here in the US (when compared to income), yet few people to rent them for a decent ROI. Excessive savings is just as bad because it results in excessive debt somewhere. Banks won't pay interest on savings if they can't loan out that money. And right now they can't loan all of those trillions to anyone but the Federal Government, hence the tremendous rise in government debt. So while we agree on the pitfalls of excessive debt, you miss the dangers of excessive savings creating distortions in the economy. Hawk