A succinct summary of the brewing economic storm, from Paul Kasriel’s “15 November 2005”:http://www.northerntrust.com/library/econ_research/weekly/us/pc111505.pdf economic commentary:
* McMansions and SUVs ^1^ will not make us more productive in the future.
* Foreign creditors^2^ could start to question how we will be able to pay future interest and dividend payments without resorting to “printing” dollars.
* If foreign creditors should question our ability and willingness to repay them without resorting to the currency printing press, there could be a run on the dollar.
* A run on the dollar would lead to sharply higher U.S. interest rates.
* Sharply higher interest rates would do great harm to household finances and the housing market.
* A sharp decline in the housing market would result in a spike in mortgage defaults.
* A rise in mortgage defaults would cripple the banking system.^3^
* A crippled banking system would render Fed interest rate cuts less potent in reviving the economy.
My clarifications, drawn from statistics he presented:
# Household spending has been the basis of our economic growth in the past decade, with American consumers assuming record amounts of debt to keep up a spending spree: household deficits reached $531.5B in Q3 2005, vs a $108.7B surplus in Q3 1987; household liabilities relative to assets are up 29.8% in the same time.
# Foreign creditors, on a percentage basis, own three times more of U.S. capital stock now than in 1987, and five times more than in 1982.
# Mortgage assets comprise 62% of banks’ earning assets, more than twice the level of 1985.