The Chinese banks are going to learn a lessen in how one can reduce debt. There are two principal means. One, pay it off. Two, default on it. We here in the U.S. have been learning all about number two for some time (and will continue to do so as delinquencies in residential and commercial loans continue to escalate). Not so much on number one.
For a while - precious short while at that - consumers in the U.S. were focusing on paying down debt and increasing savings. The savings rate was actually up to around 6.2%, but in the most recent stats it is now back down to 4.2%. It seems the government is having some success in luring people back to their spending ways. Between cash for clunker (yes I took advantage of that one) and first time homebuyer specials, Uncle Sam is doing a good job of prying open those tight wallets to get us to buy things that we would be foolish not to buy at these prices. So what happens when the cash for clunkers program and the first time homebuyers program are over? Well the first is already over and the last runs out later this year, so we will see. I suspect we stole future sales to serve our immediate needs and we will simply see even more depressed sales levels in months to come.
When will the government wake up a realize that we can no longer fuel the economic activity we saw in the last half a decade. It was built on debt and the government cannot simply replace private debt with public debt and cure it. At some point the government can no longer afford more debt and must stop. What then replaces the government debt? Nothing!! You just have a bunch of money-strapped taxpayers and their children and grandchildren spending decades now trying to pay down the public debt in addition to their private debt.
Sure, the government needed to spend a few hundred billion or so here and there to prevent Financial Armageddon (a good book to read, by the way), but the key here is to avoid sudden death and then let the economy start its very long slow recovery. It is a correction and it will correct whether we spend a lot of money trying to stop it or not. The more we spend trying to stop a correction, the longer and more painful it will be. Let people save money and pay down debt. Let some institutions, retail outlets, builders, etc. fail. The painful reality is that some must do so for us to reach reality. Our society was at unsustainable levels for many years and reality, i.e. paying down debts and living within our means, now has to take hold. We will spend a decade or so learning from our mistakes, yet the government seems hell-bent on repeating them. Folks, time to say no.
In any event, I am glad I got that off my chest.
I am also glad to see some of the main street media finally not simply toting the government line like all is fine and go out and spend your precious money. The WSJ, for one, had good articles this week on China's problems and the view that the stock market has gone too far too fast. Even Bloomberg is getting in on the act, slowly. Their current on line headlines tell the story:
•Stocks in U.S. Extend Worldwide Drop on Speculation Rally Has Gone Too Far
•Disney to Acquire Marvel for $4 Billion, Gaining Spider-Man, X-Men Series
•AIG's Benmosche Says Cuomo's Retention-Bonus Actions `Unbelievably Wrong'
•Brokerages' Signing Bonuses May Fuel Improper Behavior, SEC Chairman Warns
•China Stocks in `Deep Bubble,' May Fall Further 25%, Economist Xie Says
In fairness, I did not include all the headlines, just those that tell part of the overall picture. We will see.
Also, in fairness, not all the media is being a frank about the situation and some, including me, still have serious doubts about Bloomberg. Fiancial Times and NY Times are both reporting how government, i.e. the U.S. taxpayers, are now making money off the bailouts. Yeah, right! I could summarize this piece from Naked Capitalism but it is short and well worth the full read:
http://www.nakedcapitalism.com/2009/08/more-bogus-bailout-reporting-as-big-banks-repay-bailout-money-us-sees-a-profit.html
I noted above the overall savings rate in the U.S. Let me add in that, according to this post, there is a good argument to be made that for 99% of Americans there is no savings, or at least there have not been of late. No way to know for sure, but however you cut that pie the saving rate has been low and, after a few months of growth, now seems to be in the wrong direction.
http://www.nakedcapitalism.com/2009/08/guest-post-the-savings-rate-has-recoveredif-you-ignore-the-bottom-99.html
And Just When it Seemed Safe to Dive Back in the Housing Pool ...
It would seem that banks may be keeping some foreclosure/delinquent properties off the market. So what happens when they decide to catch up? I read as well today, in the WSJ, how some lenders for commercial real estate have rolled over loans to keep their default (fantasy) rates lower than they should be. This is shocking, just shocking, I had no idea that gambling iss taking place in this establishment. That is a paraphrase from Casa Blanca but close enough. Here is a link to the actual clip:
http://video.google.com/videosearch?q=casablanca+shocked&hl=en&emb=0&aq=0sx&oq=casa+blanca+shocked#
Disclosures: Other than I am heavy on put options and have no equity positions - None.
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