THE CLAIRE FOSS JOURNAL
ONE IN FIVE AMERICANS MAY LOSE THEIR HOMES
From The Daily Reckoning
April Fool's Day, 2004.
This is the day people admit what they've been all year
Perhaps Alan "Bubbles" Greenspan... Zembei "Mr. Dollar"
Mizoguchi... and all the world's most prominent central
bankers will wake up this morning, look themselves in the
mirror and say to themselves: ah, what fools we have been!
The U.S. economy appears to thrive by consuming what it
cannot afford. The Asian economies appear to thrive by
selling to Americans what they cannot pay for. And almost
everyone everywhere appears to like the foolishness so
much, they ask only that it continue.
And why not? Americans are happy to spend money they
haven't got; their economy depends on it. And Asians are
happy exporting products to them; their economies depend on
it, too. Who wants to change? Who wants to enter the long,
dark passage to a new economic order? No one. So it goes on
- based on lies, fraud and foolishness.
But the present situation is ruinous for everyone, as near
as we can tell. Each year sends Americans deeper into the
hole... and makes them less competitive on world markets.
Meanwhile, Asian economies add to their productive capacity
based on demand that really isn't there. If Americans spent
only what they could afford, buying would suddenly go
down... and cobwebs would form on Asian assembly lines.
China, with its hundreds of millions of barely-employed
people, would probably erupt into war, revolution... or some
other form of upheaval.
The whole thing will blow up in our faces. But when? How?
"There is a lot of ruin in a nation," Keynes pointed out.
But how much?
"The problem is debt," said Robert Catto at our Roundtable
discussion on Tuesday. "Somehow, debt levels have to go
But couldn't debt levels go down gradually, asked another
fund manager? We know the present situation is
unsustainable... but couldn't there be a 'soft landing'?
Couldn't the transition to a more balanced and healthy
world economy be accomplished without anyone slashing his
We considered the question. Certainly, we'd like to believe
it. But imagine a man with $100 to spend every week. He
believes things will always get better, so he mortgages his
house and uses credit cards in order to enjoy some of
tomorrow's good things today. He spends $110 a week... and
the economy booms. Multiplied by millions of fellows just
like him, the spending power of the entire nation seems to
have been magnified by 10%.
After a year, however, he owes 5 times his weekly
disposable income. No one will lend him more. Instead, his
creditors are demanding repayment. Can he gradually reduce
his debt without pain?
Alas, no. In order to reduce his debt, he must spend less
than $100 a week. His living standard must go down 10%... at
least. And even if he cut back by a single dollar - his
living standard must go down. Plus, the economy has come to
rely on him spending $110 every week. If he spends less
than that, sales go down... which sends a shock wave through
the entire system. Business profits fall. People are laid
off. The effect is amplified... because then incomes fall,
too. Pretty soon, the man no longer earns $100, but $95 or
$85. He has to cut back his spending even more, just to
keep his head above water.
Sir John Templeton was quoted last week saying that in the
coming downturn, 20% of people with mortgages are likely to
lose their homes. At the margin, the two-income, no-savings
household cannot afford even a slight cut in income or
credit. They will lose their house. And who will buy it?
And what price?
*** Editors note.
The upcoming mortgage foreclosure rate in Canada will be similar to
that of their American neighbors to the south.