This was a post that I wrote several years ago; it still holds true today. In many ways it is far worse, yes it is still lingering! Now for the post............. Its not just delinquent subprime loans that are creating havoc with America’s economy, the crux of the problem facing us today lies in the real value of assets these loans represent. The factor that many people fail to consider is the dreadful carrying charges that Real Estate generates as it sits in a sour state, often vacant it tends to receive little or no maintenance and it spoils like a basket of fruit growing worse by the day. Legal costs, taxes, insurance and an illiquid market for dilapidated real estate needing expensive repairs mean this problem will linger and effect the market for several years. Many more large write-offs are forthcoming.
America’s depression in the 1930's was greatly the result of a liquidity crisis, history shows the economy seized up like an engine deprived of oil. Lessons long learned have put the Fed and World Central Banks out front in preventing this problem today. A better analogy as to the quagmire before us is Japan’s economy from the1980's forward. Even zero percent interest rates have failed to push their economy back onto the track of solid growth.
The type of economic trauma we are currently experiencing is often deflationary, in this case stagflation may be created by flooding the market with money to mask and minimize the pain caused by values of assets dropping while loans on those asset remain constant. Disinflation, stagflation, and inflation all result in a “transference of wealth” to those invested to benefit from these unique trends which can be manipulated by the banking system.
World and economic trends are formed by many factors . The “velocity” of money as it moves faster across markets aided by electronic transfers has added to the money growth, the gross national product, and the creation of what I see as the first Global Bubble. Those who see China as unbreakable may need to look deeper past their own reflection and they will see a country with huge problems, an economy based on corruption, weak banks, and an over valued stock market. A huge population does not make a country rich, we have drank the Kool-Aid and bought this myth! I would not be surprised to see China become unhinged in much the same way the Soviet Union did at the end of the cold war.
It appears that many investors are viewing this pull back as a buying opportunity. Trying to catch a falling knife and picking a bottom in this market are both very dangerous. My views are based on several years of research and are the basis for opinions I presented in my recent book.. I have reviewed this research and stand by my view that Americans have a hard road before them as they adjust to the realities of our fast changing world.
Footnote; To those of you who disagree with the statement "many people fail to consider is the dreadful carrying charges that Real
Estate generates as it sits in a sour state, often vacant it tends to
receive little or no maintenance and it spoils like a basket of fruit" for a fun read may I suggest the post below,