Altes Elliott-Wellen-Forum - The Trouble with Debt / MUST READ

The Trouble with Debt / MUST READ

verfasst von JÃœKÃœ, 02.07.2002, 15:31

http://www.mises.org/fullstory.asp?control=994

The Trouble with Debt

by Sean Corrigan

[Posted July 2, 2002]

 

This latter mattered because the GDP, or gross domestic
product, numbers are in fact not really"gross" at all, but a mishmash
of net expenditures with a partial gross addition in the critical, but largely
arbitrary, category of investment. Reclassifying an activity as"investment"
rather than mere business-to-business spending thus swells the
aggregate--especially if"real" values are reckoned to be far
outstripping actual dollars spent, thanks to those wondrous hedonics.

So it seems ironic that, just as the Bureau of Economic
Analysis shifted software from expense to capital expenditure to boost the
bottom line--to the disapprobation of such august bodies as the Bundesbank, who
famously recalculated the European data on the basis of the BEA methodology and
found Germany came out way ahead of the States!--WorldCom was practicing the
same game.

But if WorldCom--and, no doubt a host of imitators yet to be
identified--was artificially reporting capex, should we go back and revise all
those GDP numbers lower, too?

The answer is clearly in the affirmative.

Thus, another tenet of the Greenspan Model proves to be
invalid. Not only were profits often fraudulently overstated--as well as being
falsely, if legally, enhanced by stock-options accounting--but
"growth," too, was slower than reported in the boom years.

Do you know what was real, though? Incontrovertibly,
unimpeachably, and rigorously recorded? Debt--even if the ultimate title to much
of it has been obscured by Wall Street’s skills in financial engineering. Debt.
Liabilities. Owing money. Claims on yet-to-be-earned income. A lien on the
future. A mortgage on Tomorrow. Debt. The real, four-letter legacy of Alan
Greenspan and his former accomplice, Bob Rubin.

In a week when Adelphia--in the supposedly safe,"utility-like" cable
TV business--filed for the fifth largest bankruptcy in U.S. history, and when,
abroad, FIAT was cut to one notch above junk and left with the threat of being
tipped into that inglorious category by Moody’s, the status of much of that
debt is again a vexed question.

Moody’s itself was relatively sanguine in its latest
overview. Noting the speculative grade default rate was stable at 10.3 percent
in May, the agency merely remarked that there had been a"slower than
expected decline" in that proportion, though spokesman David Hamilton did
admit that"credit remains a concern."

FitchIBCA painted a somewhat bleaker picture, posting a
13.4-percent default rate on its high-yield universe, with any improvement in
overall ratings a mere statistical artefact resulting from the fact that even as
so many CCC and lower-grade bonds had defaulted--fully $34 billion out of $120
billion late last year--several"fallen angels" had been newly
included, as they in turn dropped out of the investment grade rankings.

S&P was perhaps the most sombre, noting that"the
second half of 2002 continues to be challenging." Standard & Poor's also
pointed out that, while 60 percent of U.S. ratings outlooks were currently
stable, negatives, at 35 percent, outpaced positives 7:1.

Moreover, the firm was at pains to point out that pressure was
not restricted to tech, telecom, and energy, but that the malaise was much more
widespread.

Autos were characterized thus:"financial performance
deteriorated precipitously." In capital goods:"the extent of the
weakness cannot be overstated." Banks?"The majority of the 25 percent
subject to change have a negative outlook." Energy:"Dismal."

Chemicals, forestry & mining, auto supply, consumer goods,
media & entertainment, airlines--all had more companies with negative
outlooks than with positive. Only health had parity between the ups and the
downs (thank you, socialized medicine!).

As for those banks, while earnings were a record $21.7 billion in the first
quarter--largely due to the Fed’s largesse and the corresponding aid to net
interest income--the FDIC warns of two major risks; that high loan-to-value
consumer loans are not performing as well as their grantors’ models predicted
(Capital Insight Rule I: The Model is NOT the Market) and that there are heavy
exposures to commercial property in some of the districts worst affected by the
bust.

For thrifts, there are other worries. For the first time in
four years, loan-loss provisions do not fully cover noncurrent loans, and there
has been a sharp jump in problem thrift assets to a $15 billion level not seen
since 1994.

At the personal level, the ABI showed record filings for
bankruptcy in the last four quarters, with more than 1.5 million, mostly
individual, filings being logged for the first time ever. Also, despite
secularly low interest rates, we know debt service as a proportion of disposable
income is already at a record, even without adding in the personal sector's
equivalent of a"special purpose vehicle"--a consumer lease agreement
whose contingent cash-flows underpin financial market debt somewhere else in the
system.

But, hey, why worry? Just buy a house, and all your problems
will be solved. Or, at least, that’s what the data continue to tell us is the
preferred solution for many.

Existing home sales this year so far are up 18 percent in
dollar terms from the first five months of 2001, with average prices rising 9
percent nationwide to top the $200,000 mark. A record average/median ratio also
suggests the distribution is being sharply skewed to high-end purchases, to
boot.

New home sales, too, topped the one million annual rate last
month for the first time ever, and overall housing turnover is now a record 18
percent of disposable income--significantly above the 13-percent average since
the last cycle peak in 1989, and twice the 9-percent low seen in the 1990
property bust. 

Moreover, consider that, if we knew that in a nation the
size of, say, France, there had been a median home price increase of 25.5
percent in a year and that this, far from deterring purchasers, had led to a
22.7-percent increase in sales, would you say this represented a Bubble--a good
old debt-fueled Bubble--and that this might pose risks to financial stability,
especially when so many people involved were dependent for work, whether
directly or indirectly, on the most battered industries?

In which case, what are we to make of the extraordinary
57-percent dollar year-on-year increase in spending on the California Real
Estate Rush?

Houses are nonproductive assets, financed with a great deal of
leverage. What is more, though they release their services in small increments
to the owners, they deliver a large dollop of uncompensated purchasing power up
front to their builders or to those cashing out of the market, as well as to the
Realtors, who netted around $1,200 for each loan originated in the record $2
trillion total last year.

Therefore, houses are, perhaps, the ultimate engines of
created credit on the upswing, and are among the more dangerous deflators on the
way down.

As this last, fully functioning monetary engine accelerates
its revolutions--with the wholehearted endorsement of Dr. Debt, Alan Greenspan
himself--bear in mind that real estate did not pop until nearly two years after
the Nikkei’s 1989 peak and that land values ran up nearly 20 percent in the
interim, even as stock prices were falling by half.

Consider also that it was the fall of 1931--again, almost two
years after the stock market crash--when real estate woes started to exact a
heavy toll on banks’ loan portfolios and on the mortgage bonds they had issued
previously.

As Benjamin Anderson put it, by 1931-32, many were wondering
whether they would not have done better in 1929 to have sold mortgages and
invested the money in stocks, even at the height of the mania. Many of the
latter were still paying substantial dividends, Anderson noted: many of the
former--even those issued by prime mortgage guaranty companies--had long ceased
to pay interest.

Dr. Debt may well find it will not just be equity investors
and overseas dollar holders who come to curse him. Overburdened homeowners and
even those who count these debts and their derivatives among their own savings
may well come to do likewise before the crisis passes.

<hr align="left" width="33%" SIZE="1">

Sean Corrigan is a principal of www.capital-insight.com,
a London-based economic consultancy. See his Mises.org Articles
Archive, or send him MAIL.

<center>

<HR>

</center>

Thread gesperrt

gesamter Thread:

The Trouble with Debt / MUST READ - JÃœKÃœ, 02.07.2002, 15:31