Economic Crisis or Opportunity

Many things have been written about the Economic Crisis that is facing America. The Bail Out of this last week is a perfect example of over compensation for a perceived threat. By stepping back to look at the global economy it's easy to see that the opportunities are endless for development.

We have a system of economy that is the envy, or scourge of the world. We can make money out of thin air. Many of our corporations do that every day, it is their business model. There seems to be a lot of blame. The Usury Laws of the 1980s, the Reagan budget deficits, or Clinton deregulating banks, every body has a theory.

Then there are the people who blame the consumers. If people had just lived within their means there wouldn't be a problem. That is very true. If corporations had just stayed small independent businesses with a focus, everything would be fine. What actually happened is that the entire world economy expanded, grew, at an accelerated rate.

This we can lay at the feet of George Bush, and Dick Cheney. There was a mandate to expand the economy from both the people and businesses. George Senior warned us about the New World Order and it came economically.

Consumer spending has been the corner stone of our economies for several decades. Housing is an important key to that spending. A new housing unit needs washers, dryers, refrigerators, decor, building materials, in other words, durable goods. Wages have been very stagnant so the money needed to come from somewhere. Credit took a center stage to our economic expansion.

Credit card debt was converted to, or rolled into refinances at lower interest rates. Second mortgages or debt consolidation loans paid for trips, cars, and boats. So much spending happened every industry was doing well. The industry that was doing very well were the Financial Markets. Stocks were up to the level of the tech bubble of the late 1990s. Home prices doubled in seven years. Everything was more expensive and people paid the prices asked. Chinese goods that were supposed to be cheap were selling at full retail. Every body was making money, even the discounters.

Here's the magic of thin air. Companies like Chase can create credit card debt roll that into a home refinance, and a second mortgage, while doing a debt consolidation for the same person. They then sell the mess for cash to the secondary market, while maintaining the derivatives. The idea was that the value would be there over time.

Now it gets interesting when people figure out they can't pay the credit card debt on the ten credit cards they have been using. They go to declare bankruptcy and we saw the bankruptcy laws change. People couldn't pay mortgages and foreclosures went up. People just stopped paying what they didn't have money for.

In a nut shell that's what's happening in the Financial Markets; the consumer is tapped out.

The good news is that it makes no difference if the consumer pays for past debt. They can, and most will. The Bail Out infuses cash into a financial market place that has tons of cash. Corporations have made staggering profits. What's interesting is that they can simply "write down" asset values to take a paper loss, and then sit on the cash. We focus on the United States, but the cash is everywhere.

The bubble was and is the difference between the price of an asset and it's actual value. The price of everything has gone up including stock prices and the price of housing. These assets when they go down in price and get closer to real value show as the "loss." In reality many of these assets are still performing. You can rent out a foreclosed property, or a company that has issued stock can still make money even if the stock price goes down.  

I would go into the currency markets which I think ultimately need correction and the dollar should prevail as the dominant currency. The United States played well and in my opinion has come out ahead. A recession only means a breather while we, the consumers, concentrate on paying our debts. The money machine churns on. 

The question is if your business model can survive on a cash basis. Can you service debt if you have to pay it in cash. For sure the price of things will need to go down, including stocks. The next question is if your business can fund your retirement. These will be challenges.

Holy Cow, I thought this article would end up on my personal page rather than out here, so let me clear some personal opinions.

The Credit markets are the buying, selling, and trading of these debt instruments. Derivatives are yet to be explained to me because it seems to be a catch all phrase for servicing debt. When debt gets passed around it goes to harder and tougher "bill collecting." There are contests in corporations for the person who can shame a dead beat into paying up.

The assets that secure debt have a core value. In Real estate that core value is tied to the Consumer Price Index which includes housing. How much a house can rent for determines it's value. Sorry, it's just business. When we started paying double the price or paying mortgages double what a property could ever possibly rent for it was a problem.

All I'm saying is that rather than give your money to a bank, or financial institution to invest for you, look around. Look at your neighbors, friends, or relatives to see if they need help. Invest in yourself first, buy share within your own community. The returns can be far greater than your 401K which today may be worth less than it was and more than it will be.

It's all risk, and I personally would rather have control over the risks I take. We are all in this together.