THE GREAT DEBT CRISIS AND LOSS OF EQUITY

The "Great US debt engine slips into reverse"or so says John Kemp, Reuters columnist in "Great US debt engine slips into reverse" Reuters, Dec 12, 2008. After six decades of excessive consumption and prosperity the credit system has come to a halt and the locomotive of the US economy is stalled and beginning to slip back downhill in the third quarter of 2008. Kemp unearths some interesting facts: For six decades now--since the 1950s, financial activity has grown much faster than GDP (gross domestic production). From 1952 to 2007 our GDP has grown by about 40 times, while credit market debt has increased by more than 100 times. Credit debt has outpaced production by better than two to one. For the entire report see: http://www.forexfactory.com/showthread.php?p=2416385

Kemp points out that in 1953 for each dollar of GDP the economy was burdened with about $1.28 in debt. By 1980, each dollar of GDP was paired with credit instruments of $1.61, and in 1990 that had grown to $2.28. But debt continued to grow and by the end of 2007, there was nearly three and one-half dollars of debt for each dollar of GDP. While during these years of incraseing debt burden the US plowed ahead..not on what it was producing but on credit advanced by China and oil producin nations of the Middle East. Their largess permitted the huge expansion of US debt, enormous growth of consumption, massive home building, enormous business investment, and of course, the unwise tax cuts and ill advised prosecution of wars of choice --all at the same time, and all on the "cuff".

Then, in the twinkle of an eye...between July and September 2008 the entire credit-debt structure came tumbling down.

But right now like a man with a hangover in a liquor store..America has sworn off debt..but perhaps just for now. For the first time since 1952 total debt owed by US households fell. For corporations debt growth slowed from 14% to 4% in the last year. Only the US government remains an active borrower, its rate increasing by 40% in the three months up to this last September.

The Bush Administration, Greenspan and and other Bush-defenders have all "Poo Pooed" the great mountain of debt...claiming that both household and corporate assets have grown even faster than the debt.

But that was then. Now household net worth has shrunk in each of the last four quarters. Household net worth, valued at $64 trillion at the end of 2007 has dropped by $7 trillion to just $57 trillion, losing about 11% of its value. That seven trillion dollars of vanished wealth is one half of the nation's annual GDP, and greater than the GDP of any other single country on the planet! This, in addition to the nearly one billion loss in mutual funds valuations and nearly two billion dollars in pension fund reserves and three trillion dollars in falling equity prices may be the greatest loss of equity ever! Finally, the net worth of corporations (excluding financial corporations) fell by 52 billion out of $16 trillion net worth or about 3% of their value.

Next: The impact of Wall Street Scandals such as the Bayou Hedge Funds case.