Tuesday, June 22, 2004

Consume Yourself Into Bankrupcy

A rant against the absurdity of modern politics calls our attention to the alarming rise in US private indeptedness and personal bankrupcies, and predicts recession.

The question is when.

This is how the American economy works at present:

1) consumers buy on credit,
2) banks hand out the money to consumers from a capital pool they themselves borrowed from the Fed or foreign investors,
3a) the Fed is feeded by foreign central banks (mainly the Japanese and Chinese) buying its treasuries to maintain an exchange rate allowing exports,
3b) foreign investors are attracted by high returns expected from general economic data or stock market reports of firms,
4a) the Japanese, Chinese etc. exports close the circle to the careless US consumers and blow up the US trade deficit,
4ba) the economic data are blown up with numerical tricks like the Hedonic Price Index (<-responsible for most of the perceived extra growth of the USA relative to Europe in the nineties),
4bb) the company balance sheets likewise thanks to poor accounting that was NOT improved after the Enron and ArthurAndersen etc. scandals, and the feedback created by accounting for stock price changes in them.

Of course, to maintain the system, the foreign purchasers of US stocks and treasuries have to purchase increasing amounts of these - always invest more than the returns from existing investment. In effect, this is an imperial tax.

And of course, this won't go on forever, and the greater the losses for Japan, China and US stocks Owner Johnny English Average the later they get out of it.

I wonder in what order and with how much a mitigating effect on each other Peak Oil, nonlinear global warming effects and the 'self-correction' of the above global economic imbalance will be upon us. And if the social-political side effects won't completely overshadow the causes in the eyes of most people.


At 5:41 PM, Anonymous Anonymous said...

I suspect after the election. The plunge-protection team may well be back.

And all with the full faith and credit of the US government.

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At 6:56 AM, Anonymous CreditGuru said...

American economy is considered to be an exemplar. Unfortunately, I'm not an expert, but what I don't like is credit popularity. More properly, our people don't know everything about credit. They aren't ready to manage their credit debt clearly. Thus, credit is an encumbrance for them instead of being the most useful deal on the way toward a comfortable life.

At 12:05 PM, Blogger Karen said...

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