Three key economic levels have been reached recently that have led us to the economic crisis we face today and may face in the near future.
1) Governments spending beyond their means producing unsustainable levels of debt.
2) Household or consumer spending rose beyond levels that can be reasonably sustained.
3) Levels of home ownership were propelled to levels that could not be sustained by consumers, banks and mortgage lenders.
In example one, government is guilty of being greedy and somewhat less than prudent. In the second example, consumers got carried away and borrowed beyond their means. In example three, the guilt should be shared by GOVERNMENT AND CONSUMERS as well as financial firms. All acted in their own SELF-INTEREST and all got caught playing too close to the fire and got burned.
It's time for ALL parties to take ownership of their part in development of the crisis, instead of just demonizing one party or group. (does that sound familiar?)
Recent economic figures show that consumers are taking reasonable and prudent measures to recover. Unfortunately, banks and financial firms are doing the same, which is furthering the pain. It's time for government to take the necessary steps to tighten their belts and spend more intelligently.
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When Government deficits exceed 40% of expenditures - historically the tipping point for hyperinflation has been breached.
http://www.frontlinethoughts.com/article.asp?id=mwo100909
Killing the Goose
October 9, 2009
By John Mauldin
"There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures.
"According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spending has to be borrowed. [Emphasis mine]
"One has to ask whether the US reached the critical tipping point. Beyond the quantitative measurements associated with government deficits and money creation, there exists a qualitative aspect to such a scenario that may be far more important.
The qualitative perceptions of fiscal and monetary policies are impossible to control once confidence is lost. In fact, recent price action in metals, the dollar and commodities suggests that the market is already anticipating the future."
Let me point out that the deficits for 2010 assume a rather robust recovery, and so they could turn out to be much worse, especially if unemployment continues to rise and Congress decides (rightly) to extend unemployment benefits.
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When aggregate household consumption grows to over 70% of GDP, it is a level that historically is unsustainable
http://www.journalofaccountancy.com/Issues/2009/Oct/20091781.htm
The U.S. Economic Crisis: Root Causes and the Road to Recovery
Return to prosperity requires reversal of excessive consumption, low savings trends.
BY GREGORY W. BROWN, PH.D. AND CHRISTIAN LUNDBLAD, PH.D.
OCTOBER 2009
At the broadest level, we have witnessed a consumption boom over the last two decades, where U.S. aggregate household consumption grew to represent more than 70% of gross domestic product (GDP), a historically and unsustainable high level
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http://www.vcstar.com/news/2009/sep/09/homeownership-rates-expected-to-drop-with-market/
Homeownership rates expected to drop with housing market
By Allison Bruce
Posted September 9, 2009 at 12:01 a.m.
“Maybe not everybody should own a home,” said Bill Watkins, executive director of the Center for Economic Research and Forecasting at California Lutheran University.
Though homeownership is often talked about as the crowning achievement of the American Dream, high homeownership rates have led to the economic troubles now facing the nation.
Not everyone in the country was meant to own a home. We stretched the system a little too far to give everyone who wanted to own a home the chance to own one BEFORE THEY WERE READY.
Even though it’s easy to say that there should be a balance of homeowners to renters, finding that ratio is difficult. There’s no theory for the right rate, so it comes down to looking at the data, Watkins said.
For the U.S., it seems the right rate is about 64 percent to 65 percent homeownership. Build it up higher and you run into people getting loans by lying, unscrupulous lending and eventual collapse of the financial system, Watkins said.
Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created - Ludwig von Mises
All of which leaves true capitalism – a product of the voluntary society and the sum total of all the exchanges and cooperative acts of people all over the world – with few actual intellectual defenders. They are growing, but the educational work we need to do is daunting, and we are facing the most powerful forces in the world. There is nothing new in this. In the history of the world, freedom is the exception, not the rule. It must be fought for anew in every generation. Its enemies are everywhere, but the leading enemy is ignorance. For this reason, the main weapon we have at our disposal is education. - Lew Rockwell
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