That giant sucking sound you hear is the sound of liquidity draining out of global financial markets. Gurgle.
Cheap money made everything go up. But what now? The Fed's attempt to reflate the U.S. market appears to have stalled. The Dow fell below 13,000. Gold, oil, and base metals were off too, as investors begin to rethink just what's ahead for the global economy.
Jim Melcher from Balestra Capital Partners says he's worried about a recession. "Not a normal one, but a very bad one. The worst since the 1930s. I expect we'll see clear signs of it in six months with a dramatic slowdown in the gross domestic product."
He was talking about American GDP, of course. And last we heard, that recession in the 1930s was not a recession but a depression. Could it get that bad?
Well, it could. A normal business cycle would cause some pain as the misallocated capital from the previous boom is written off. It's looking like there may be as much as US$400 billion in dodgy subprime loans in the U.S. And estimates of the size of the losses have been consistently low and consistently wrong.
Still, half a trillion dollars isn't so much when compared to American GDP. There are other problems of course, in the job market and with foreclosures. But it all comes back to debt. America has been living beyond its means for thirty years, ever since the greenback was cut loose from gold.
The current world economic order is a product of America's debt-based lifestyle. As that lifestyle-based on cheap energy and available credit-becomes untenable, how will the world change? That's what we try to figure out every day here at the Old Hat Factory. And how to profit, of course.
Lately, though, we are worried Australia is repeating many of the mistakes made in America. "In a sign of increasingly hard times, over half of Australians have admitted to using their credit cards to get them between pays and cover cash shortfalls, a survey reveals," reports Nicki Bourlioufas at News.com.au. This is good for credit card companies. Did you know Visa is going public next week in the United States?
There are two ways you can look at this use of credit to make ends meet. On the one hand, in a world of flat wage growth and a global labour market, but with rising consumer and house prices, you almost have to go into debt (if you want to own a home.) This debt-based prosperity is a fraud. It's a modern day kind of serfdom which many people enter into voluntarily, and never escape.
On the other hand, nobody puts a gun to your head and forces you to use a credit card. We are probably entering an era when people will have to revise down their expectations about material prosperity. They will have to delay consumption and live within their means, making sure expenses do not exceed income. It's revolutionary.
Dan Denning
The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- None Found
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Shawn Jewell on 13 November 2007:
Hi DR Team
It seems both sides of politics are trying to make it possible for more young people to get into the home "ownership" market. The Housing Industry associations applauded the move as I heard on the ABC News radio last night (as they would), but luckily Steve Keen was interviewed too and he said that both strategies would only add more petrol to the debt fuelled crisis (aka Housing Boom) and besides with our addiction to debt for 40yrs now, house prices can't really go much higher as people are running out of cash to pay for the huge mortgages now required. I think Steve sounds very sensible about debt (as do you guys) and his graphs (via website) suggest we heading to the same crisis as the US is in.
Thanks for your DR stories I really have enjoyed them and the books by Bill since I came across them this year.
Regards
Shawn
Comment by Karl on 14 November 2007:
As a young boy my father had loads of advice for me. He was not what you would call an extremely intelligent man, but one thing he did teach me was to make sure that my income was greater than my expenditure. As you say, its a revolutionary idea.
30 years on, and I still make sure my income is greater than my expenditure, even when servicing debt. It's not hard. It's a wonder why so many people can't seem to.
Comment by barry broome on 18 November 2007:
I live in U.S. and this economy is a mess. Sure unemployment is low and companies are doing good. BUT, the national debt has at least doubled during the BUSH reign and credit card debt hit 915 billion currently. The only way to pay off all of this (Federal and Personal) is for people to live BELOW their means for at least 5 years - so a recession and or depression is INEVITABLE - just imagine if we would have lived WITHIN our means. I'm trying to pay off ALL of my debts as fast as possible but i'm afraid it won't be fast enough - Truly concerned in Mississippi - thanks for article.....