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« Lumber Prices Crater | Main | A Great Nobel Prize »

October 06, 2006


gary lammert

Who really wins or loses with excessively easy lending terms
or excessively low interest rates?

In the late 1920's buying on credit became widespread. Automobiles,
radios, washing machines - all became available to the American wage
earner - on credit. And they consumed.... and consumed in bolus mass.
On the stock exchange ten percent margin was available for
speculators. Borrowing became rampant. Stock valuation become
overvalued and assets relatively over consumed. The population of
consumers in need of a radio, washing machine, automobile, et. al.,
was rapidly depleted. Ongoing consumption at the median
credit-dependent bolus rate was impossible. Inventories accumulated
and workers were laid off, with the resulting inability to pay for
their own assets acquired on credit. The assets were then repossessed
increasing the already over supply. The deflationary macroeconomic
negative feedback system proceeded in a necessary and mechanistic

Lenders were left with repossessed assets whose worth was less than
purchase value - with a falling population of potential consumers.
With less product demand factory owners with capital debt for
machinery and buildings were unable to maintain payments. Stock on ten
percent margin became more than just worthless, it became a liability,
as obligations to pay the entire purchase amount remained even as the
stock valuation decreased by 25, then 50, then 75 percent. As the
macroeconomic system unwound into a deflationary collapse in 1932; the
debtor of last resort, a debtor whose balance sheet was quite good,
became also the employer of last resort. And so as the US GDP
collapsed by 40-45 percent, the US government began its work projects
program creating some of the public infrastructure that still serves
its citizen to this day.

Fast forward three generations. The marvels of the late 1920's were
replaced by the computer, its software, and the new information age of
the nineties. Over borrowing and over investment in this arena left
warehouses full of enough fiberopic cable for a generation and an 80
percent collapse of the NASDAQ over the exact same time frame as the
DJIA top to bottom period from 29 to 32. 'Replaying 1929' - US's, not
the United States', but Urban Survival's insightful recognition of
what was transpiring, i.e., 1858's second subfractal's Groundhog's Day
to 1929 was an instant attractor to the website for all who
qualitatively, and for fractalists, quantitatively, appreciated the
nature of cyclical events.

1932 was not 2002. The internet collapse, while wiping out more than 6
trillion dollars of paper value, had little effect on the GDP. Times
were different. A strange set of world circumstances existed in 2000.
Emerged was both a single superpower with an unparalleled military and
nuclear arsenal and a rapidly evolving, highly capable and rising
manufacturing giant with a massive population willing to work 60-80
hours a week at 1/10-1/20th the cost of the superpower's worker. Even
with oceanic transportation of goods, the American consumer reaped the
benefits of these low cost items. American industry could not compete
and jumped in, closing their own manuafacturing plants, and began
marketing and enhancing the distribution system of foreign made

At the same time the Federal Reserve and Financial Big Business
synergistically created the last 'great' American industry. This
powerful industry increased the money supply faster than at any other
time in US history. That industry could be labelled 'US Lending
Unlimited.' In the 21st century, that industry has shoehorned the
average American citizen into the role of debtor of last resort. The
citizen-wage earner has been enticed into a speculative housing asset
bubble greater in proportion and magnitude than any prior historical

The new lending parameters have made initial house ownership less
expensive on a monthly basis than rental. They have divorced the
value of homes from traditional savings and wages. The new rules have
artificially inflated the purchase price of homes. Wages have not
proportionally increased, leaving the interest and principle debt to
wage ratio and long term debt burden significantly higher. Equity from
that 'artificially' inflated price has been extracted in record
amounts by home owners who have gone on a consumption spending spree,
bolus consuming items in a two-three years that might otherwise have
been consumed over a decade. Home values soared eventually pricing out
the entry population. Building continued and oversupply resulted.

Now to this mix comes higher property taxes, higher insurance rates
especially in eastern and southern coastal states, and a large
population of readjusting ARM's with higher monthly payments. The
inflationary true debt burden and costs become too many straws for
the camel's back. The oversupply of washing machines and automobiles
in 1929 and fiberoptic cable in 2000 now resonates with the incipient
cateclysm in the over supplied housing market in 2006. The money made
by the builders which was no longer being invested in the housing
markets found its way into the equity market, the last game in town -
for one last blow-off. The composite Wilshire nominally is still 1100
billion or so below its March 2000 value and using housing prices as
dollar-denominated purchasing power is valued at perhaps 60 percent of
its March 2000 worth.

Meanwhile there is very little the US can exchange with its Eastern
'trading' partners except its paper currency and a promise to pay
interest on that paper. This strange symbiotic relationship has
provided 'the glut of world dollar savings' that has serviced the US
federal debt and maintained low interest rates. The US dollar, because
of America's superpower stature, continues and will continue to have
value in its purchasing ability of dollar-denominated oil. As
commodity assets, equity assets, and real estate assets deflate, the
value of the dollar will increase in its purchasing power. Friday's
breakout of the dollar is occurring as an expected coupled event with
the collapsing US housing market and incipient uS equity collapse.

So who wins when credit is so unregulated and made so easy that not to
borrow is to lose money? Who wins when real ongoing inflation creates
a disincentive to saving? As the economy collapses; and folks are
unable to repay their loans; and lenders acquire assets that cannot be
sold; and the world becomes a much more dangerous place - the answer
becomes apparent: no one.

Gary Lammert

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