Tuesday, July 11, 2006


From what I gather, Americans on the lower 50 percent of the economic scale are having a tough time. Their wages haven't kept up with inflation, interest they pay on their credit card debits is rising, college tuition and medical expenses are surging, and their mortgage payments are steadily rising, particularly if they took Alan Greenspan's advice and chose a variable rate mortgage. During this year and next year about $2 trillion in variable-rate mortgages are due to be reset, and that should put a squeeze on the "bottom 50 percent's" spending. If that doesn't put pressure on them, the current price of gasoline and will make them think twice about taking that thousand mile vacation trip in the family SUV this summer.

The government puts out glowing figures on the growth of the US Gross Domestic Product. And of course, a large portion of this "growth" is simply the US public taking on more debt. Total US mortgage debt is now about $9 trillion, and in case you weren't aware of it, that's one gigantic load of Federal Reserve Notes that America's consumers owe to the banks and the savings & loans.

A lot of the spending frenzy has come from the appreciation in the price of homes and the withdrawal of cash from those levitating houses. Last year consumers withdrew $750 billion from the value of their homes, although that process is now slowing down. The big question is whether the so-called housing "slowdown" is going to be the well-advertised "soft landing," or whether it's going to be more of a painful thump. Unfortunately, nobody has the answer to this one. What we do know is that housing inventories are high with the inventory of existing homes at an all-time high -- up 41% over last year.

I've said before that the last two generations of American's are the only two generations in US history that have never seen hard times. Actually, we haven't experienced anything that even remotely resembles a consumer recession since the early '90s, and the '90s recession was over in a hurry. Today, the Fed literally promises that we'll never have another recession -- and even a "slowdown" is talked about in hushed tones.

There's something different about the situation today, something different than anything the US has ever had to face before. What I'm referring to is the giant mountain of debt, around $50 trillion, that has been built into the US economy. With that amount of debt, the US really can't take a recession, a thesis that I'm sure Bennie and the Feds are well aware of. With housing sales now slowing down, my guess is that the Fed is about through with raising rates. Raising rates in the face of a slowing economy is the recipe for disaster and Mr. Bernanke knows it.


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