Monday 29 September 2008

What Leveraging Really Means to the Average Person

Excessive leveraging is what the Reserve Requirements of a Central Bank are supposed to limit. Obviously, there has been a big failure to communicate and inflation of house prices and stocks over the Bush period has been rampant. Without adequate Reserve Requirements throughout banking systems the US and UK will continue to create too much credit, and their currencies will weaken unless there is real economic growth, which is not likely in this holding period of adjustment.

Obviously, banks need to exact adequate reserve requirements (deposits, lower multiples of loans over income, percentage of income paying for interest and loans, etc.) from customers or they will fold like the economic system is folding right now. If your present loans are more than three times your salary, you should cut back spending or liquidate shares (i.e. loans to companies) to pay your loans down, no matter what the favourable interest rate, dividend percent or capital gain expected. That is prudence and not recklessness as has been common over the Bush administration period.

The problem is that more credit has been created over the last decade than what combined incomes can cover with interest payments. To get back to order, people need to sell assets, such as stocks and shares, houses, and liquidate deposits paying off their debts or as much interest as will keep the creditors happy (pretty high now!).

When this does not happen the debts become bad debts and the banks have to declare that they have bad debts. If everyone has bad debts at the same time, the assets that the bank is using to recover bad debts such as repossessed objects and homes fall in value because everyone is selling stuff at the same time.

When the Fed helps the banks it does not mean that the bad debts disappear, but that the fall in asset values is more orderly over time as sales of assets progress. Prices of stocks and shares, houses, and other assets will continue downwards until the full correction point has been reached.

For the average person, this means that the sale of a property that cannot be financed can to be delayed on a downward moving market. The problem is that people will race to sell while the market is on the upper end of its downward slide. Furthermore, people will delay acquisition of assets on a market moving downward because they prefer the higher valuation. There is consequently no easy solution, just the mathematics of human and market behaviour.

We do not know what the full correction point is, but one can be suspicious that the leveraging went forward some seven years beyond reason. So perhaps values of the past seven years adjusted for some small growth in value would appear to be about right. Not very nice, but more stable than continuing to live with the fear of a rush to sell rather than more certain modest growth in value! The appropriate correction period is the next nine months not years from now as the bad bailout dynamics might induce. Laws and money cannot really buy US banks out of stupidity, just time so that they can become smarter investors in people and assets.

Sensitivities

Each morning, I have been in the habit of taking my bike for a ride to Lake Huron and along the coast. The past week has been amazing. Temperatures were around 70 degrees fahrenheit, and there was just a slight breeze.

The sun broke through the leaves of the tall oaks splitting a hundred times within the woods to create a dazzling array of little lights and many shades of green. Acorns fell spontanously and seemingly dangerously from lofty branches a hundred feet overhead, smashing with a hard cachunk on the pathway and anyone or anything below.

I love to watch chipmunks, and these were really having a wonderful time, very excited by the warmth of the day and full of fun.

The Numbness That CNN Coverage of the Credit Crisis Brings to One

I have yet to decide whether it is the way that CNN covers the news or the news itself. Either way the CNN news and coverage of the attempts by Congress, the Fed, the President and the others to 'save the American main/high street and Wall Street' leave me quite numb.

The bottom line to me seems to be that leveraging of debt by all entities in the US and UK economies reached record levels growing alarmingly throughout the Bush administration period. What is clear is that nominal incomes of individuals and companies are insufficient to meet the requirements for interest payments and that the leveraging is collapsing everywhere like a deck of cards. One is quite foolish to think that such a collapse can be paid for by further leveraging by the US congress.

The fact is that the US and UK economies are now so highly geared up that a big crash in confidence will follow in October 2008. During the remainder of 2008, the result of this excess has got to be pressure on interest rates otherwise the result will be inflation during 2009, further job losses and unions pressing wage demands.

What could happen is all out war within society for what remains of income streams after the best creditors have had their share.

Can we really believe that the lenders in Asia will want to lend to dollar holders?

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Sketches from scratches is a provocative blogspot that has grown out of the Wuh Lax experience. It is eclectic, which means that it might consider just about anything from the simple to the extremely difficult. A scratch can be something that is troubling me or a short line on paper. From a scratch comes a verbal sketch or image sketch of the issue or subject. Other sites have other stuff that should really be of interest to the broad reader. I try to develop themes, but variety often comes before depth. ... more!