EASY MONEY

After 9/11, the FED artificially lowered interest rates to stimulate the economy.  In addition to that, taxes were cut and spending by the government was greatly increased, especially in defense spending.

Now the consequences of those actions are coming to create several problems:

Mortgage Mess
As I have written earlier, they were handing out NINJA loans for a few years.  These are loans with NO INCOME, NO JOB. No problem.  When things got tight, people even browed against their equity with a home equity loan.  Then add some credit card debt and we’re in the middle of the mess were in now as interest rates climb. 

Boys Toys
If you look over the past few years, the extravagance of spending for “things” from new plasma/flat screens to upgrades to houses, or I should say mansions, to boats and cars, is outrageous.  I lived during these times in Bethesda, Maryland (USA) and I found it amazing that the land was so expensive, people could buy a house from the 1950, tear it down and build a “mac mansion” that took up 80% to 90% of the properties space.  I had not idea who was going to live in such a huge place.  Well, an entire generation could live there.  Things add up and they certainly did in this case.
Easy Credit
Fueling a lot of this was easy money and easy credit.  It is a proven fact that when you have to save $10,000 and then spend it, you’ll think twice or even more before spending it.  However, when the money comes on a plastic card and it was just given by a bank, the spending it is rather easy. Rather quick.  And the reality of what happened is only realized *after* the bill comes much later.  This is the type of environment that we easily loose site of what our motivations to purchase are, and our self-restraint to pay for things that we need most vs. buy things that we don’t need.
Paper Profits
Another factor in all this is when people pushing various types of paper – financial instruments –are earning a lot more than the “common man” who toils in the fields or works at a factory.  In the business world, now there are companies, especially in some VERY HOT SECTORS that are earning tons of money merely buying and selling OPTIONS on certain products and services.  These operations are “pushing paper” and making money overnight.

Recently I discussed such trades with a shipping broker, who had made millions for his company just by purchasing options on available shipping capacity.  Sure the underlying business model is hot, but on top of that millions are made in other ways.

The problem with all this is where is all the money coming from?
Fiscal Irresponsibility
Just like we’ve over spent, so has the government.  They have spent like there’s no end to the money chain.  Even worse, they have promised a lot more than they can deliver.  How’s all this going to be done?  By borrowing more and more.  Those people who started borrowing funds as students in the 1980’s are now the same people in charge of spending the hard earned money of taxpayers.  They have no problem spending it.  In fact, they’ll dip into the monies that are yet to be earned by your grandkids and promise it to the retiring baby boomers.

Where is all the money coming from?  Several Asian countries, and some creating printing of cash needs.  Wonder why the dollar is headed lower and lower, as it never had before.  Well, now you know.  Printing of money is the realm of third world dictators after they ruin the economy.

And foreign adventures
This is a classic case of spending on things by the government that creates even more of a mess and results in even more spending.

If the total cost of the Iraq war is taken into account, the American taxpayer is looking at the multi-trillion dollar tab.  Then add the interest that money will cost, since it may take another 10 years to pay for all of it and you can bet another trillion can be added to the final bill.

Where is all this money going to come from?  Will it be “saved” by buying oil at lower prices for the next 50 to 100 years?  Probably not.

My final word on all the government spending is that if the military budget was cut in half and more money put into the space program for example, a lot more solutions to the common problems will be found.  It is common knowledge that a dollar put into the Viking Missions of the early 70’s resulted in 10 times the return.  When does the government spend money where they get return like that, AND goodwill from the world?

After all of this, will a perfect storm brew?  Not if they get their act together quickly.  I don’t see that happening until a new administration purges the current war hawks.  If the policies and free markets are allowed to take their course, business, growth and governing will return to a more ‘healthy’ atmosphere. 

Something that will help this greatly is new leadership.  Taking a very tough stance on the way government is run. And spending only the money that the government revenues allow.
When things go back to basics, we’ll all enjoy a very healthy investment environment.
Rich Sage