The Debt Bomb: Only housing is keeping the fuse on America's borrowing habit from burning down

Barron's On Line ^ | 20 January 2003 | JONATHAN R. LAING

[shrinkermd]

BUBBLES HAVE LONG BEEN part of the financial firmament. The tulipmania in 17th-century Holland and the notorious South Sea Company stock bubble a century later in England are lowlights of economic lore.

History is replete with numerous other examples of financial manias followed almost ineluctably by huge price busts, down to our own era. Japan is still paying the price of deflation and economic narcolepsy a decade after bubbles in its stock and real-estate markets popped. Debt collapses in Asia and South America punctuated much of the 'Nineties. The bursting of the U.S. tech-stock bubble in early 2000 led to the vanishing of more than $5 trillion in wealth, at least on paper.Now, many worry that a U.S. housing bubble, lofted by four-decade lows in mortgage rates, could explode, eviscerating consumer spending and economic growth.

[junta]

Especially since the financial press for a decade at least was the marketing arm for the Street. I have the foolproof plan for reflation though, everyone takes his money and converts it to single dollar bills then goes home and cuts them in half, each half being worth one dollar per the government hence we become wealthier and go out and spend. Call it informational era coin clipping and no doubt as effective as the Roman's version.

[dennisw]

btttttttttttt

[FITZ]

Actually there is no dirt-cheap land for sale in Mexico which is why many of them come here because they can live in housing projects or in illegal subdivisions cheaper. Many of our immigrants have no money, no English language skills, no education past 3rd grade in Mexico. They have no money to buy houses and many can't get jobs that pay minimum wage.

This is an example of some of the neighborhoods they come from in Mexico where they use about $150 worth of discarded wooden pallets to build houses and we're seeing similar houses going up all over the place here.

[dtel]

Exactly.
Less say you pay 1% RE tax on your 100K crib.
1000 a year.
Now your home is worth 200K.
2000 a year.
City gov running short of money?
Hey good news Joe, your crib is now "worth" 300K.
Send us your 3000.
Payable in cash by the end of the month.
Gotta love it, see we never even raised your taxes.

[Servant of the Nine]

It sounds gloomy, but the actual number $31 trillion is not important. It is the ratio of debt to Gross Domestic Product, and of Debt to The Total Asset Value of the Nation.

The People at Barron's know those numbers are more convincing and I believe the only reason they didn't include them was that they don't support their pessimism.

So9

[FITZ]

increases in population and increases in productivity

Population growth alone doesn't help an economy ---definitely not when the growth is in the welfare class. Here we have have increases in population at the same time jobs are leaving the country. Even in the good jobs what good is there when an American is laid off so an H1-B visa immigrant is hired to take the job? Good jobs are the answer to a bad economy.

[RayChuang88]

Many of our immigrants have no money, no English language skills, no education past 3rd grade in Mexico.

This is a part of the illegal Mexican immigration problem that the pro-immigration crowd doesn't want to talk about. Many of them are illiterate to the point they can't even read a Spanish-language newspaper! If they were at least the equivalent of high-school literate in Spanish they could probably eventually assimulate in to the USA because they could then learn English fairly easily.

[Dec31,1999]

and we're seeing similar houses going up all over the place here.

Sometimes zoning laws are advantageous. You just can't build structures like that here. We certainly have no lack of poor immigrants in NY. And tons of Mexicans, too! Everybody needs a place to live, so the poor pool their meager resources and live in "expensive" apartments and houses.(Because there is no inexpensive housing here.)

I agree with your welfare stance, though. I'd rather have the poor just move out or not be encouraged to come here in the first place, as mean-spirited as that sounds.

[FITZ]

Except for the low income housing projects --you must have those. It's not mean-spirited, it's just that we shouldn't import poverty and problems. They should be solved by that country they originate in instead of sending it all here. We just don't have enough low-skilled jobs to support this kind and level of immigration.

Poverty grips U.S. border

http://www.borderlandnews.com/stories/borderland/20020605-120875.shtml

[FITZ]

There never seems to be any solution but to raise taxes and government spending to bring these people into a higher living standard, there is no way they can afford to pay their own way however. I can feel sorry for them ---but pity is a bad emotion because it accomplishes nothing and usually makes the situation worse.

[Grut]

Gotta love it, see we never even raised your taxes.

My solution: make any real estate assessment a bona fide offer by the assessing agency to buy the property at 90% of the assessed value. Instant return to real market values!

[cgbg]

translating this into simple layman's language for a simple mind?

The American corporation and consumer is borrowing and spending money like a drunken sailor. The drunken sailor is about to fall off the pier. When he does it will be called The Great Depression of 200*.

Warning: I have been preaching gloom and doom for three years. While my "bad attitude" has saved me a ton of money by keeping me out of the stock market the "big one" still has not hit.

The good folks at Barrons are very smart. Pay attention, folks.

[Captiva]

I am sure there are not too many illegal aliens buying 200K homes.

Of course not. But for how long? My grandparents [not illegal but vile Mediterranean immigrants nonetheless] settled in the older run down sections of town. Now me upwards of 25 of my cousins live in $200k to $700k homes. We count one millionaire amongst us, too.

[BlackJack]

Thanks for posting the article. If you come across other good
articles please post them also!

[RedWhiteBlue]

The aliens aren't necessarily illegal.

Take my subdivision and the surrounding area (a master planned community) as an example. Per capita income within the master planned community is 3X the national average. In my subdivision, the average home size is 4000 square feet. Each house also has garages that hold 2 to 4 cars. Most houses have pools. My next door neighbors on one side are from the Middle East (Christian). My neighbors on the other side are from the Philippines. The people directly in back of my house are from Taiwan. Sprinkled throughout my subdivision are people from other places -- China, India, you name it. None of these people were born in the US, although I would suspect by now that many are naturalized citizens. And none of these residences in my own subdivision, as far as I know, holds more than one family. I estimate that 20% of the homeowners in my subdivision were born in some other country. And it is the same throughout the other subdivisions of the master planned community.

A lot of the people that come here from elsewhere work hard and they work smart. They work their way up, and they take hold of the American dream. The US is the recipient of a lot of the brain drain from other countries, and the trickle-down effects on our economy of their consumption, as well as the taxes they pay, is positive.

[Red Jones]

economic fundamentals are completely and totally out of whack. Our trade deficit is 4.5% of our GDP. This is 3 times higher than any other nation at any other time. Our corporations are just about selling seed-corn for revenue and they're still fixing to not be able to service their debts collectively. Our consumers are borrowing feverishly on the price of their frequently over-priced houses in order to make their expenses. Our government is fixing to borrow massively as well. We have what classical analyses of the stock market and the real estate market to be a large bubble that people are dependent upon to finance borrowing. A bubble, meaning that the stated value of the stocks and of the real estate is larger than what appears to be the value by other measures, so borrowing on this higher value can be problematic should the stated price correct. So, all fundamentals are ripe for catastrophic economic events that would result in depression difficult to reverse. However, the federal reserve is very powerful and works world-wide with a clique of banks and governments. They will shelter us from these problems by making the bubbles bigger, by deception, by thievery, by currency manipulations and by whatever means. Optimistically, we'll just have continued slow erosion of the real standard of living for the majority of our people, but no sudden disruption, because our leaders will shelter us from the worst possible consequences of their folly.

But we've had some bad fundamental economic policies for a long time that are doing a lot of damage. The chinese yuan should float relative to the dollar if we're going to trade with them on this scale, and yet it is fixed artificially low. Not only that the US dollar is over-priced inherently because of its unique role as international trading currency. The chinese refuse to buy american food. So, the end result of all this is market forces shut down production inside of the US, but we are still enabled to borrow.

The clique in charge wants the US dollar to be the super-currency. This is good for the top 15-20% of americans in that they can buy anything they want with valuable US dollars. But in time this harms the rest of americans who work in job market that involves competition with those who produce in foreign countries. Economic catastrophe usually doesn't matter to anyone until it happens, then it matters to everyone.

America should not only require chinese yuan to float freely. It should also develop a new currency. The US should use a domestic US dollar for internal use and let the existing US dollar be used by anyone who wants to use it. If this domestic currency floats, then it will decline in value relative to the current US dollar. This would be good for american producers. In the long run we can't finance social security, medicaire and much else unless we have good production in the domestic economy. with our currency being artificially high, with the yuan being held low, we are going to gut production inside of the US.

I think it would be better to have the disruptions and clear out the ruling clique and start over. But, sadly, the ruling clique is very good at crisis control.

[Tauzero]

"So, in a sense, about a third of today's aggregate debt total is being double-counted."

B.S. Debt is debt. This is just a bull rationalization.

The very fact that so many companies today are acting as debt intermediaries tells you just how much our culture and economy are simply soaked in debt.

And why stop at the particular financial transactions the bulls have in mind? When a bank makes a loan, that money is deposited in other banks, which then lend the money out again. Why not count that as one loan? Carried to the logical extreme, the "double counting" argument reduces total debt to about $55 billion, the core money supply.

No, this debt counts -- ALL of it.

[Red Jones]

bump

[First Amendment]

Thanks to all for explanations - I know everything is FUBAR but I am an ignoramus when it comes to stuff like this. I appreciate the tutorials!

[RLK]

believes there's a 30% to 40% probability of a U.S. depression over the next two-to-five years.

--------------------

I would say the probability is higher than that for the reasons I've stated elsewhere.