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The US Has No Chance of Option 1… So That Leaves Options 2 or 3
The big
financial myth-buster of the week is that the alleged deleveraging of the US
consumer has in fact been a giant myth. According to the Wall Street Journal, if you account for defaults, US consumers have
only pared down their debts by an annual rate of 0.8% since mid-2008.
The Journal writes (emphasis added):
Over the two years ending June 2010, the
total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion… Our
own analysis of data from the Fed and the Federal Deposit Insurance Corp.
suggests that over the two years ending June 2010, banks and other lenders
charged off a total of about $588
billion in mortgage and consumer loans.
That
means consumers managed to shave off only $22 billion in debt... In
other words, in the absence of defaults, they would have achieved an annualized
decline of only 0.08%.
This is a
major deal-changer for the US financial system. For months we’re been hearing
tales of consumers are doing the right thing by paying off debts and living
more frugally. While this is true for some consumers, the Journal’s article
makes it clear that the vast majority of folks are simply spending until
they’re officially bust and have their credit lines pulled.
Whether this
is because Americans are stuck on a “buy ‘til you’re bust” mania, or if it’s
simply because the cost of living in the US today is so high relative to
incomes and other expenses that most folks can’t
get by without using credit is up for debate.
Personally I
think it’s a bit of both, with some folks obsessively buying the new iPad while
skipping on mortgage payments while others are simply using credit cards to try
and get by after being unemployed or underemployed.
Indeed,
another story run in the Wall Street
Journal supporting the second argument points out that incomes have
actually fallen 4.9% since 2000. Add
to this the $1.5 trillion drop in household wealth in 2Q10 and it’s clear US
consumers are making less and losing even more from their investments.
This leaves
credit as the one means of maintaining living standards.
Regardless,
the primary point is that the US credit bubble has not deleveraged in any
meaningful way. The system remains debt saturated to the gills on a personal,
corporate, state, and Federal level.
In plain
terms, the entire US system is one giant debt bubble. And there are only three
ways to deal with a debt problem:
1) Pay
it back
2) Default/
restructure
3) Hyper-inflate
it away
The US has
no chance of #1, which leaves either #2 or #3. Both involve the Dollar taking a
sizable hit, which might explain why Gold has begun breaking out while
Treasuries are dipping.
Keep your
eyes on these two, if they don’t reverse soon then something big is coming down
the pike for the Dollar.
Good investing!
Graham Summers
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I think you are correct. One does not need to look back further than what happened in 2008 to see the impact of massive default on dollar's relative value against other currencies. One caveat though is that Obama and Bernanke are trying very hard to weaken the status of the US dollar. BTW, they think they are doing God's work. What a pity.
Of course he's correct. As Soros pointed out: "The chart of the dollar index is like a fever chart of the world financial system."
Everybody in the world is talking about the excessive amount of dollars being printed, meaning that NOBODY (well, nobody but Bernanke and a few smart Chinese and Swiss) is watching out for a replay of the sudden dollar shortage of 2008.
In fact, almost nobody knows or believes that there was a severe dollar shortage in 2008.
What can ya do? Ya can't tell people things they don't want to hear.
But the dollar index is very hard to play. If you're nimble and sensible, put your money into the gold bubble and get out as soon as you get that feeling that maybe you should never get out.
"I think we are in the early stages of a Major dollar rally."
give me a wake up call when it starts...the whole world is trying to tank their currencies, including the US, and you think we are in for a dollar rally? Are you selling financial advice? You sound like the broker I fired in 05...he told me Wall St banks were too big to fail.
So you mean for instance that the Eurozone setting up this massive 1 trillion Euro this spring was all done to tank the Euro?
And they were TBTF!
If you could strengthen the dollar through debt default, banks would never require loan repayment.
Ssshhh!
There is no such thing as fiat money.
It does not exist.
Buy gold and move along.
Nothing to see here.
Gold to $1700.
Gold to $15000 by 2020, minimum.