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US Credit Bubble - Disaster inevitable

  1. From Doug Noland.
    Recommended weekly reading.
    Doug Noland


    "The bottom line is that the economy is today faltering in the midst of record low interest rates and unprecedented Credit availability throughout the consumer sector. This could not be more ominous for a consumer/consumption-based economy, yet most are determined to ignore the dire implications. Credit conditions could not be looser throughout the expansive mortgage-finance super-industry, yet housing markets are weakening in many key markets. Spending is barely sustaining the massive retail/consumption sector that has ballooned over the protracted boom. Auto finance could not be more freely available, yet auto sales are weakening and U.S. manufactures (and their behemoth finance subsidiaries) are already in fights for their lives. And except for the fringes of subprime, Credit card finance could today not be more readily available. Yet spending is stagnating. At the same time, the financial system remains generally flush with liquidity and the dollar is holding its own, as mortgage and auto Credits are being created in record volumes. Yet the U.S. and global financial systems are truly Coming Apart At The Seams. There is a real dilemma today that large quantities of increasingly weak U.S. Credits are barely sustaining an unruly consumption beast with a voracious and insatiable appetite. But feeding this uncontrollable animal was always a serious mistake. He’s grown big and mean. The situation is only today finally being recognized as unacceptably burdensome. Financial fragility has become too extreme.

    With the financial system under intense stress, it is time to prepare for what will be a deep and protracted recession. And, importantly, those (wishful) thinking that it made good sense to stimulate the mortgage finance borrowing binge until the capital spending boom returned, should now accept the reality that it’s not going to happen (and that such a “strategy” was a momentous mistake!). The Credit system is too impaired, chastened investors and speculators too risk-averse, and the Bubble economy too maladjusted. And, the old hero, “structured finance,” is indeed today’s villain. Paraphrasing the great Schumpeter, people have been determined to dig in their heels and hold their ground; but the ground is about to give way. "

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