The Effects of America's Myriad Debtloads

I write today about the larger problem masked by the subprime mortgage crisis: America is awash in debt and has shifted from a country of producers to one of consumers. I want to lay out the effects of over-consumption and debt as I understand it:

We have shifted to a service-economy from a producing economy, importing many of our goods, and buying them on credit, with a savings rate that has turned negative. This means Americans spend more than they earn. 'The System' would collapse if people stopped consuming, so the system funnels more and more credit to the consumers. This comes in the form of mortgages, creditcards, auto loans, and student loans primarily.

Alan Greenspan lowered Federal interests to near-zero to add liquidity to the markets, meaning to create more easy credit. As home values went up, because more and more amounts of mortgage credit became available to an increasing number of unqualified buyers, consumers used home equity to pay for their mounting debt bills.

Many of us are familiar now with the 'subprime mortgage crisis', but I am also sure each of us knows at least one person who has a good credit score who is struggling to make their house payments, creditcard payments, and student loans! These are prime mortgage holders, many of whom have more than one car, a large house, and multiple credit cards. The picture I am laying out is that the problem here isn't simply the unqualified subprime borrowers.

What did bankers do: they packaged subprime mortgages into financial products that paid x yield based on the interest rates being paid by the mortgage holders. Those new products were sold to huge institutional investors like other banks, insurance companies, and pension funds, to name a few, who liked the fixed interest they received. It is well-documented that those assets now have deteriorating values because people are defaulting on those underlying mortgages, causing enormous 'write-downs', which are the differences between what the institutions thought the bundled mortgages were worth v.s. what they could actually sell them for. Banks and other institutions have thus far written off $500 billion of such assets.

But what about the prime loans that are headed for default which were packaged into those new financial products? Even worse, bankers have ALSO packaged creditcard and autoloan assets into similar financial products. Now that home equity has dried up, there are predictions that creditcards will be the first item people default on, followed by the car loan, and lastly the home mortgage.

My point is there are still massive waves of debt-based losses coming. But what does this mean on a macro-level?

I have previously written about the flow of capital, wealth, and power to the Far East. I stated that the American worker would one day be working for foreign owners: case in point, Budweiser is now owned by Inbev, a foreign entity, and no longer a bastion of American-worker-based pride.

Another element of this shift has to do with China: the Chinese goverment keeps the value of its currency pegged to the US dollar, making its goods cheap for Americans to buy, when it is widely understood that if it was allowed to float, the yuan might rise by 40% against the dollar. Because it is held artificially low, the yuan that Chinese citizens earn with their hard work and savings has 40% less buying power. The Chinese buy US treasury bills to lend us money and then sell us cheap goods, and that has been the status quo.

But take this into account: the Federal Reserve has stopped publically publishing the M3 number, which is the total number of dollars in circulation because it doesn't want anyone to know the extent they have been running the printing press! Eventually, China is going to stop buying Treasuries with the savings of its citizens, let the yuan float freely against the dollar, which will cause the saved yuan of all those workers to skyrocket in value and gain major purchasing power for themselves to buy things like dishwashers, cars, and other consumer goods mirroring the expected living standard of most Americans. In turn, the dollar will continue to fall in value and buy less goods, because precisely there are too many dollars in circulation.

THIS is precisely the major mechanism of shift of empire.

Read the headlines, its all right there: Americans aren't saving, we are a service based economy, our manufacturing industries have deteriorated, our recent GDP growth was from exports (goods made here but bought by foreign consumers), homes are deflating in value, credit is getting harder to get, and the yuan is gaining value (even if slowly) against the dollar. Inflation, even if under-reported by the government, is skyrocketing at the fast pace in 17 years in the US eroding the purchasing power of the average US citizen. You don't have to believe me.

The investment advice I give and am adhering to is the following: I sold my home, am renting a nice apartment, am buying gold, am buying stock of companies in the east, and will now again be selling the dollar. As noted in a recent post over the past months, for the short term, I was betting the price of oil would drop and that the dollar would strenghten, which happened. I am beginning to shift those positions for the long-term which is dollar-negative, gold/silver positive, real estate negative, financial companies negative (more losses to come, $1 trillion more estimated by PIMCO's Bill Gross), industrial/infrastructure positive.

It is not about doom-and-gloom, it is about understanding the Ponzi scheme that America's economy has been functioning on. Think about it: if, let's say, no one could get a mortgage for whatever reason, how much would x house be worth? Much less than the pricetag it has today. Same goes for tuition at most universities if most of the students couldn't get student loans.

I recommend watching: "In Debt We Trust" and "I.O.U.S.A", and reading Schiff's "Crashproof".

Goodluck.