Ergo... end of consumer credit expansion. Get over it.

Great article from the daily reckoning;

Let’s look at the basics. We had a nice thing going. From 1945-2007, consumer spending and credit increased. As long as lenders were willing to lend... and consumers were willing to go further into debt... the economy expanded.

Towards the end, it got a little crazy. And then it blew up.

As predicted, the feds rushed in to save the situation. But they only have one trick – adding more cash and credit. That works every time... until it stops working. And it stopped working in 2008.

Banks don’t want to lend against falling house prices. And consumers don’t want to borrow when their incomes are going down.

Ergo... end of consumer credit expansion. Get over it.

But the feds keep at it. And with their help, the markets have bounced up. Of course, a bounce is one of the most reliable features of a market economy. A 50% bounce in the Dow – roughly equal to the bounce after ’29 – would take the index to 10,300. We’re not there yet.

So, there’s nothing unusual or unexpected about this situation. The markets have done what they were supposed to do. The feds have done what they’re supposed to do.

So what next?

Ah... dear reader... if we knew the answer to that question...

Here we are in uncharted territory.... terra incognito...

Never before has there been an international monetary system based purely on paper. And never before has it been run by people who believe they can force the market to do their bidding. They are convinced that they can avoid the Japan situation – where the economy dragged along for twenty years – by adding more cash and credit. Bernanke said he would drop it from helicopters if necessary.

Just one problem.... Bernanke can inflate... but only until the Chinese tell him to stop. When China pulls the plug on the bond market, the party comes to an end. That’s why the helicopters are still on the ground. And it’s why they will only take off when the situation becomes desperate.

An Ordinary End to a Post-Crash Bounce

It scares me that people are willing to borrow money that just serves to give them products/goods/services that depreciate. I can understand the need to borrow money to buy a house (generally appreciates) or to build a business (goal is profit) but to borrow money to buy white goods (TVs not kidnapped Westerners) seems idiotic to me... and is one of the major causes of the recession.

YOU - NEED - IT - BECAUSE - YOU'RE - WEAK.

Borrowing money for crap encourages business people to want to lend. Don't encourage them. Be strong, don't borrow money for crap. Yes, the recession is YOUR fault. I'm sure people will say I'm wrong. Argue all you want. Until you change your thinking, you will always end up with the same results.

shadowninja said:

It scares me that people are willing to borrow money that just serves to give them products/goods/services that depreciate. I can understand the need to borrow money to buy a house (generally appreciates) or to build a business (goal is profit) but to borrow money to buy white goods (TVs not kidnapped Westerners) seems idiotic to me... and is one of the major causes of the recession.

YOU - NEED - IT - BECAUSE - YOU'RE - WEAK.

Borrowing money for crap encourages business people to want to lend. Don't encourage them. Be strong, don't borrow money for crap. Yes, the recession is YOUR fault. I'm sure people will say I'm wrong. Argue all you want. Until you change your thinking, you will always end up with the same results.

Click to expand...

Not sure of the exact figures but if we all stopped buying crap and didn't waste in such a profiligate manner then the world economy would scream to a halt; for example 40% of food is wasted before it hits the supermarkets, 40% more is chucked out by said supermarkets and we as consumers then waste 10%...

If the lorries stopped collecting all the 5hite, then delivering all the 5hite to warehouses that then delivered/flogged it to supermarkets, then fuel consumption would collapse...

We've had a 4.5% contraction in UK gdp, cut out waste and it'd be close on 25%, world end as we know it. Behind the scenes politicians must be (should be) 5hitting themselves re. this inevitable end of days...

One of the issues (post credit crunch) that surprised me is just how much credit medium and large Co's need/needed to survive in order to peddle all the crap you allude to, the apparent success was built on the back of free and easy credit not nec. increased and profitable sales..IMHO the true recession hasn't even started...

Still, at least you can get a 42" lcd 1080 Pana for 400 quid atm...

In my view credit boomed in the UK when it was deregulated in 1981 and that is what started the ball rolling. One of the key reasons why businesses need credit is to do with cashflow. If they are not able to pay suppliers because their customers have yet to pay them then they need a line of credit to do so. I remember in the 1980s onwards that large companies such as the now extinct GEC had a deliberate policy of not paying their suppliers for a minimum of 90 days and often 180 days and at the same time as demanding that they were paid within 30 days. This included small trade type businesses who would often end up having to take legal action just to get paid. Without a line of credit thousands of these small businesses would have gone to the wall because of the corporate greed policies of large companies. I can remember accountants proudly presenting hugely positive cash balances because of these policies and on the same day seeing small business owners walking off site halfway through a refurbishment because they had not been paid for months.

Credit is needed in my view or things will often stop.


Paul

Black Swan said:

Never before has there been an international monetary system based purely on paper. And never before has it been run by people who believe they can force the market to do their bidding. They are convinced that they can avoid the Japan situation – where the economy dragged along for twenty years – by adding more cash and credit. Bernanke said he would drop it from helicopters if necessary.

Click to expand...

OK - so if you don't want a Fiat currency, what's the alternative ? Gold ? What happens when we realize that the amount of wealth created on the planet exceeds the amount of Gold ? Wealth can be created by digging stuff out of the ground and turning it into products thereby adding value. Wealth can be created by ideas and discoveries that similarly add value. With the Gold standard applied, wouldn't we effectively be capping wealth to the amount of a certain type of metal that has been dug out of the ground & refined.

How on earth does this make more sense than printed money in reality ?

Let's say the doom & gloom of the daily reckoning is right. Let's say the whole system collapses. What would the value of gold be then ? You can't eat gold & you can't defend yourself with gold. If the **** really hit the fan, you'd be much better with food, guns & ammunition.

I agree that the fiat currency is not perfect but harping on about a returnto gold isn't the answer as there is more value/wealth on the planet than can be represented in gold. For instance, is there enough gold on the planet to buy every property on the planet at todays values ?

Probably the only commodity on the planet that would be able to be a true replacement of the current fiat currencies is cocaine.

Black Swan said:

Just one problem.... Bernanke can inflate... but only until the Chinese tell him to stop. When China pulls the plug on the bond market, the party comes to an end. That’s why the helicopters are still on the ground. And it’s why they will only take off when the situation becomes desperate.

Click to expand...

So China pulls the plug. The value of the dollar goes down. US imports become very expensive, US exports become very cheap. How would this benefit China ? It would sure benefit the US.

My opinion (and my long term portfolio reflects this) is that US companies that have a large percentage of their revenues from exports and that import very little (Microsoft?) actually present an in-built currency hedge whilst still giving the chance for increase in the underlying value.

Black Swan said:

Not sure of the exact figures but if we all stopped buying crap and didn't waste in such a profiligate manner then the world economy would scream to a halt; for example 40% of food is wasted before it hits the supermarkets, 40% more is chucked out by said supermarkets and we as consumers then waste 10%...

If the lorries stopped collecting all the 5hite, then delivering all the 5hite to warehouses that then delivered/flogged it to supermarkets, then fuel consumption would collapse...

Click to expand...

I suspect the world would look a lot more like it used to, say in the 1930s, or 1950s.

Still a "modern" "industrialised" world, but a lot simpler and without the luxuries we take for granted. Better in some respects, worse in others. We'd eventually get used to it.

Not sure the economy would grind to a halt. I expect it will grow a lot more slowly than politicians and business leaders would like.

pedro01 said:

Probably the only commodity on the planet that would be able to be a true replacement of the current fiat currencies is cocaine.

Click to expand...

Time to move to South America?

Commodities like gold are favoured because they're not perishable. Or illegal for that matter.

yeh thats what you want as a currency, an addictive narcotic lol.."i was going to pay the bills but i snorted it all instead!" spose thats the reality for some folk

pedro01 said:

OK - so if you don't want a Fiat currency, what's the alternative ? Gold ? What happens when we realize that the amount of wealth created on the planet exceeds the amount of Gold ? Wealth can be created by digging stuff out of the ground and turning it into products thereby adding value. Wealth can be created by ideas and discoveries that similarly add value. With the Gold standard applied, wouldn't we effectively be capping wealth to the amount of a certain type of metal that has been dug out of the ground & refined.

How on earth does this make more sense than printed money in reality ?

Let's say the doom & gloom of the daily reckoning is right. Let's say the whole system collapses. What would the value of gold be then ? You can't eat gold & you can't defend yourself with gold. If the **** really hit the fan, you'd be much better with food, guns & ammunition.

I agree that the fiat currency is not perfect but harping on about a returnto gold isn't the answer as there is more value/wealth on the planet than can be represented in gold. For instance, is there enough gold on the planet to buy every property on the planet at todays values ?

Probably the only commodity on the planet that would be able to be a true replacement of the current fiat currencies is cocaine.



So China pulls the plug. The value of the dollar goes down. US imports become very expensive, US exports become very cheap. How would this benefit China ? It would sure benefit the US.

My opinion (and my long term portfolio reflects this) is that US companies that have a large percentage of their revenues from exports and that import very little (Microsoft?) actually present an in-built currency hedge whilst still giving the chance for increase in the underlying value.

Click to expand...

how would cheap exports and expensive imports help America? they run a HUGE trade deficit..

also there isnt enough fiat currency to buy every property on the planet either..you seem to have a very loose understanding of fundamentals..

montmorencyt2w said:

I suspect the world would look a lot more like it used to, say in the 1930s, or 1950s.

Still a "modern" "industrialised" world, but a lot simpler and without the luxuries we take for granted. Better in some respects, worse in others. We'd eventually get used to it.

Click to expand...

this is what a think to, the world needs to return to a "simpler" time.. like for instance communication? i think its gone to far..the world is to small now. i would rather we lived back in the days of a house phone and no mobiles and if someone is unavailable they are ****ing unavailable!