cabaretewilliam previously said:

This article is posted for the serious people on this site, not for the trolls and losers who just through around insults and who could not form a logical thought if their life depended on it The article is about the USA but obviously all this will have a huge impact on the DR as the USA is where so much of our money comes from. Wm.

http://seekingalpha.com/article/141605-the-coming-economic-collapse-part-1?source=article_sb_popular

Graham Summers

Yesterday I outlined how the mainstream financial media is completely overlooking the similarities between this latest rally and the one leading into the summer of 2008.

Today, I am beginning a three part series explaining why I expect this fall (3Q09) to be as bad, if not worse, than last year’s in real terms, why Obama’s stimulus plan is too small to accomplish anything, why the US is entering a Depression, possibly a Great Depression, and what is the most likely outcome for the US in financial terms going forward.

Today, I’ll be focusing on the issues that brought us to this current mess.

The seeds of today’s crisis were first sown in 1971 when the US formally opened trade with China. In an effort to boost profits, large scale US manufacturers and other multinational firms began outsourcing their manufacturing jobs to the People’s Republic soon after.

When other industries realized the kind of money that can be saved by sending work overseas, they soon followed suit. Outsourcing moved up the corporate food chain until even R&D jobs and other high-level, high-skill set jobs were shifted to Asia. This, of course, diminished the number of these positions in the US. Thus began three major trends:

1) The US’s economic shift from manufacturing to services (mainly financial)

2) The massive drop in US incomes

3) The beginning of the debt bubble

Nothing illustrates the first point like the rise of the financials sector. From 1970 until 2003, financials’ market capitalizations as a percentage of the S&P 500 rose from less than 5% to 22%. Over the same period, financials’ earnings as a percentage of the S&P 500’s total earnings rose from less than 10% to 31%.

Put another way, by 2007 one in every three dollars of corporate profits came from the financial sector. Meanwhile, China was experiencing an unprecedented level of growth thanks to our renewed trade: Chinese per-capita income doubled from 1978 to 1987 and again from 1987 to 1996.

Now, fewer jobs in the US means lower US incomes. Going by the Federal government’s official (inaccurate) data, weekly US incomes peaked in October 1972 and have since fallen 15%. Of course, these numbers are based on official inflation data which is horribly under-stated. According to John Williams of www.shadowstats.com, if you were to go by actual inflationary data, US incomes have fallen more like 40% since 1972.

This fact stares us in the face everyday, though no one really notices it. In the early ‘70s, typically one parent worked and the other stayed home. Today, BOTH parents work and most Americans are barely getting by.

The reason why we didn’t notice the drop in quality of life before was because of one thing:

Credit.

Credit cards had been in use since the ‘50s, but they had yet to catch on, largely because banks couldn’t make obscene profits from them (the interest rates they could charge were limited on a state-by-state basis).

Then, in 1978, the Supreme Court passed a law stating that banks could charge their cardholders any rate allowed in the bank's home state. With this ruling, credit cards suddenly had the potential to become a major profit center for banks. Large banks immediately shifted their credit card operations to states where there wereno limits on interest rates (Delaware and South Dakota).

Credit creates the illusion of wealth (or in the US’s case for the last 30 years, the illusion of maintaining the same standard of living) because you’re able to spend more than you make or spend money without paying upfront. Americans, earning less and facing rising costs of living, gradually began their descent into indebtedness: between 1980 and 1990, credit card spending average household credit card balances quadrupled.

In this manner, the average American didn’t notice that his or her quality of life was deteriorating at a rate of about 2-3% a year. Similarly, he or she didn’t notice that more and more jobs (of greater and greater technical expertise) were shifting overseas.

And thus began the epic shift in American wealth to Wall Street (the rise in the financial industry) and China (the producer of cheap goods we had to buy due to the drop in incomes).

On Monday I’ll detail how the debt bubble encapsulated the US government and why Obama’s Stimulus won’t accomplish anything in terms of fixing the economy. Until then…

Good Investing!

Manhattanite previously said:

Not a bad article. I note the author traces the causes of the ongoing troubles to decisions made over the last quarter century, unlike the universe of partisan hacks out there trying to pin it on alleged socialism by Pres. Obama. I agree with the author that it was a huge mistake to become reliant on the financial sector and speculation, and to let credit get out of hand. I note recently the Congress attempted to rein in credit card companies, however I believe consumer credit is just the tip of the iceberg.

The instruments that allowed the volume of credit to expand so far and with such lax underwriting standards were

1) the vast world of mortgage backed securities (MBS) that let all the institutions that originated various forms of real estate debt ship it off to investors with no incentive to verify the underwriting quality AND

2) Credit default swaps (CDS) which created even less incentive to scrutinize the underwriting by allowing people to ship off the risk that their debt investments would default,by buying unpayable amounts of unregulated insurance.

Although the author accurately points to the larger general trends behind this mess, I would say the development of huge unregulated markets in these two specific instruments in the last ten years is what allowed the pool of available credit/capital to expand so wildly and with so little UNDERWRITING (aka proper consideration of possible outcomes).


That's my opinion as a responsible and still employed financial underwriter

cabaretewilliam previously said:



good analysis - I will post the 2nd and 3rd installments as they come up in the next 2 days....

dreadlocks previously said:

the article has nothing in it that any adolescent cannot, and does not , understand. what i do not understand is where Obama fits into this analysis. only the simple mind of the cabarete curmudgeon could make that linkage. did he say something about ¨serious minds´, by any chance?