From Marc Faber
and Jim Puplava
(links found by Bernhard
) come the following graphs which explain in no uncertain terms why the current economic situation is worrying:
My analysis of these graphs, and other scary ones, below.
The first graph is telling a simple story: people are cashing in on the increased value of their houses - by piling on more debt
, which simply appears more sustainable when the asset backing these debts (your house) is more valuable. ("extraction" in the graph means debt extraction
, i.e. adding on to mortgages and spending the money).
The debt burden on US consumers has increased steadily for the past 20 years. In part, this reflects more sophisticated financial instruments and a general trend towards lower interests throughout the period (as the 70s inflation was fought off successfully). What is really worrying is that, contrary to what happened in the early 90s, the 2001 "recession" did nothing to reduce that debt burden: debt service to disposable income (i.e. the portion of your cash that you use to pay off debt - the red line above) has remained at record highs, and the net savings are at record lows - they have actually negative: Americans now spend more than they earn.
The second graph above the fold (which is formatted to make the two curves look similar, but is nevertheless very scary) shows that the increase in homebuilders's share prices (a proxy for the real estate market) is looking distinctly frothy.
What this means is that US consumers are spending real money based on the virtual increase in the value of their homes - after spending the real money based on the virtual increase in the value of their shares a few years back.
As this graph shows, consumption has grown in the US faster than real GDP in every year since 1997, fuelled by the two successive asset bubbles. This consumption growth has fuelled an import boom which has widened the trade deficits to new records.
What these graphs mean is that consumption is not fuelled by a healthy economy, but by increasing debt. The absence of savings means that there is little investment in the US economy (all investment is financed by foreigners and not by local savings), and therefore the money is spent elsewhere.
Contrary to what many of you on this site think (from the comments in my previous diaries), this is not a sign that the US economy is not competitive - it is simply a sign that you are choosing, as consumers, on an a macro level, to spend on "stuff" and not to invest, and that the local production capacities are therefore not extended to provide for this demand - not because they would be unable to compete, but because you (the Amercian population as a whole) would rather buy foreign stuff now than US stuff a little bit later.
This graph shows that US banks are significantly reducing their loans to the commercial and industrial sector. As Marc Faber writes:
So, all Mr. Greenspan has created is a huge financial and asset bubble everywhere in the world, but no real improvement in the US economy, which is like a drug addict and requires more and more credit to stay afloat. As someone once said, in order to avoid a hangover, you must keep on drinking...
The problem, however, is that the US requires an increasing amount of credit growth in order to keep real estate and stock prices up and to make them move higher, which in turn supports the US consumer's excessive consumption. But, at the same time, while asset prices in the US are soaring, output is not rising for the simple reason that the market has discounted this "evil" Fed induced con game.
Meanwhile, things are reaching their limits:
- the number of homes available for sale is at record highs. Should demand slow down (because debt gets more expensive with increased interest rates), supply will be too plentiful, thus leading potentially to a nasty fall in prices - and makind all that "virtual" equity worthless - but nonetheless already spent.
- the accumulation of US dollars by foreigners is reaching macro economic levels which are worrisome. In the case of Japan, the first holder of reserves, these reserves represent a growing portion of the country's GDP. That means they are working, giving the fruit of their labor to the Americans and are getting in exchange that growing pile of IOUs which is beginning to steadily lose its value (against some currencies). This is NOT a good deal for them anymore...
Turning into a nation of sharecroppers may end up being a nice outcome...
And remember - it IS Greenspan's fault.