MUST READ: DID THE NATION OVERDOSE ON DEBT?
We’ve spent a great deal of time here at TPC focusing on the real economy and the impact of the public and private debt on Main Street. While many investors prefer to get caught up in the short-term gyrations of the market it is important not to lose sight of the bigger picture and the deleveraging that has yet to take place. The problem of debt still exists and threatens to hamper the economy for years to come.
Attached is an excellent piece of research from John Silvia and Kim Whelan at Wells Fargo which we are reproducing with their permission. They detail our concerns succinctly and eloquently. This is a must read for any investor who is trying to wrap their head around the current long-term implications of our massive outstanding private and public debts. Reader comments are encouraged.
“While the budget gap will narrow in the near-term, the long-term trend does not show a return to fiscal discipline, rather the destruction of it.”
Sadly, none of these private sector economists will have a whit of impact on the public sector economists. We will watch a slow deterioration of the public sector at the long-term detriment of the private sector. The fact that we’ve “stabilized” the system doesn’t mean we’ve saved it. Ask a surgeon if a life-time of not taking care of yourself will ensure a triple-bypass patient will survive. In my view, the higher the markets go, the lower the country sinks.
Does the Banking Division of Wells Fargo know that their Economic Group is telling the fed to “turn off the liquidity pipes before the nation is awash in an even greater flood of debt.”? I think not. Due to the disastrous acquisition of Wachovia, Wells is on like support, and the liquidity pipe spew is the only thing currently keeping them alive.
Great data. It’s nice to see some analysts at a big bank worried about government spending.
Anon Reply:
November 13th, 2009 at 8:50 AM
Gold bouncing back.
SpiderTrader Reply:
November 13th, 2009 at 9:21 AM
Right back where we started. EUR approaching $1.50 again. This can’t last. Foreign countries will only allow the dollar to fall so much.
TPC Reply:
November 13th, 2009 at 9:34 AM
Dollar index hitting new lows as we speak. You gonna hang in there with that trade?
Anon Reply:
November 13th, 2009 at 10:03 AM
Playing the $ bounce IMHO is suicide unless its a pure short term trade. A trade which u may lose 5 times before winning 1. $ is a secular short due to the long list of issues. Which means real assets inflate regardless of fundies
SpiderTrader Reply:
November 13th, 2009 at 10:22 AM
Maybe you’re right. But the move in gold appears unsustainable to me given the low inflationary environment and technicals. TPC is right though. I will have to revisit the trade early next week since it appears as though we’re making new lows in the dollar.
Agree.I think this Baby Boom generation might be a problem in many countries.
Please don’t show this report to the market, it tends to go up on bad news.
Excellent analysis. I wonder what their solution is, however? If Wells truly believes we should take the liquidity out of the market it likely means the economy will suffer. It’s almost an Austrian outlook from a major Wall Street bank. Curious indeed.
At the moment the real problem is NOT government debt, but private debt. Collectively, Americans have borrowed $42T, which dwarfs the $1.4T deficit, or the $2T the Fed has printed. Indeed, debt deflation has wiped out 20%-30% of the assets backing that $42T, for a loss of $8T – $12T. In fact , government’s borrowing is intended to keep the money supply from falling into a deflationary spiral.
I do not agree that it should be targeted at banks and financial operations. Government spending should be going into the general economy, where it can pay down debt and save jobs. It all ends up in the banks no matter where you spend it; at least have it do some good before it gets there.
The whole argument over inflation or deflation is based on the sizes of total debt: $42T for the private sector, and $12T for the public sector. The bigger number is in the drivers seat right now. It will take something like 20 years to pay down the private debt to a sustainable level. At that point the public debt may be larger than private debt, and might be the thing to worry about. Japan did this. They “transfered” private debt to public debt, so far without spectacular results.
Of course the government has two unfunded liabilities, as the are euphemistically called. Social Security and Medicare. Medicare is simply unfunded, but social security had been running a surplus due to the baby boomers. The government simply spent all that, so it now constitutes an interest free loan of unknown size. These will be on the order of $50T and will be repaid over 30 years or so. As this really take hold government debt will certainly grow to be larger than private debt, Then you can worry about how government spending will harm the economy.
With all that I read from this article, I still cannot get my head around the investing process. I am still stung and concerned that if I bought more stocks, they would be mismanaged to the point they won’t earn money anyway yet despite this the CEOs are rewarded with big bonuses. I say that if a small investor does not get any return from the investment, no CEOs or any of their underlings should get bonuses for a job well done. What job is that if the investor is not getting any return?
Evelyn Guzman
http://www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)
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