Subprime to Prime, the Whole Credit Structure has been Hit

Last week, Bernanke “failed to relieve gloomy sentiment,” says the International Herald Tribune. Testifying before Congress, the Fed chairman must have made things worse, because investors promptly decided to stop buying stocks; instead they began to sell them. The Dow ended down 175 points.

Oil rose $2.19 to over $95… and gold held steady.

One thing that bothers us about our dim outlook for the U.S. economy is that so many others seem to see things the same way.

Tim Bond, strategist at Barclays Capital says the “world faces a future of inflation, higher interest rates, lower house and share prices and economic volatility.”

Yep, that’s what we think too.

He goes on to forecast, “rising real resource prices and a degenerating ecosystem, in turn catalyzing changes to the fundamental structure of the economy.”

We’re not sure about that last part, but we were with him up to there.

The reason for this assessment is also the same as ours. The world is over-leveraged. People have too much debt. And there are only two ways of reducing debt – either it is actually paid down, which would mean higher savings… less spending… and less “growth” for a consumer economy. Or it could be inflated away… which would bring problems of its own – a collapse of the dollar , most likely… collapse of the bond market… and a collapse of the dollar-based world financial system. The paths are much different, but they both lead to the same place: lower living standards in America… and Britain.

Mervyn King, head man at the Bank of England, said on Wednesday that it’s time to face up to a “genuine reduction in our standard of living.” He went on to predict that England would most likely see a combination of lower growth… and higher inflation.

Yes, dear reader, it’s our old friend stagflation… back after 25 years. And yet, he looks just the same. More than 2/3 of fund managers surveyed by Merrill Lynch say they see stagflation coming for a visit. Which worries us, because we see it too. And these are the same fund managers who were buying subprime debt and borrowing money so they could speculate on Chinese shares at 40 times earnings. Now, the managers are moving to cash. “Risk aversion hits 7-year high,” says the newspaper.

Stagflation is a devilish mixture. One part slump… one part inflation… and one part who-knows-what. Of course, the feds are eager to put more inflation into the brew. If they had their druthers, the concoction would have more of a kick – with more exciting price increases and less depressing slump. And to that end, they’ve come up with a number of rotgut proposals. For example, there is the “stimulus package’ signed into law Wednesday. You’ve heard about it on the news, so we won’t give the details. President Bush, signing the new law, applauded the U.S. economy with such gusto – it was as if he didn’t realie he had just signed a rescue measure.

“The genius of our system is that it can absorb such shocks and emerge even stronger,” said the president. But if the system were so robust, why was the doctor injecting $170 billion of adrenaline? He didn’t explain.

Meanwhile, the next article in the same issue of the Financial Times (yesterday’s) tells us that the feds also tossed a ‘lifeline… to floundering borrowers.’ You wouldn’t think such a resilient economy would need to give borrowers a lifeline too. With all that adrenaline in their blood, you’d think they could swim up Niagara Falls without a paddle, as they say. “Project Lifeline” is meant to replace the last project called “Hope Now Alliance,” for which all hope seems to have given out. How does “Project Lifeline” work? As near as we can tell, the people who took Alan Greenspan’s advice to mortgage their houses aggressively, and who now find themselves ‘upside down,’ with more mortgage than house, can call a toll free number and buy themselves some time.

Meanwhile the news continues to encourage us. Not because it is good, but because it is bad.

Auto loan delinquencies are at a 10-year high. “Repo lots overflow with reclaimed cars,” says the USA Today.

The Wall Street Journal reports that more families are falling behind on their heating bills.

And the Guardian , in the U.K., tells us that American students are the “next victims” of the credit crunch. Poor things, they’re unable to get financing to continue wasting their time in school; now they’re going to have to get a job.

From subprime, to prime, to home equity, to credit cards, to car loans, to buyout financing… the whole credit structure has been hit, some parts worse than others.

Today’s news, for example, also tells us that Switzerland’s biggest bank has fessed up to $11 billion in subprime related losses… sending the stock to a four-year low.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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