Join Early Retirement Today
Thread Tools Search this Thread Display Modes
"America's Grand Deleveraging"
Old 12-06-2007, 09:33 AM   #1
Full time employment: Posting here.
Retire Soon's Avatar
Join Date: Nov 2005
Posts: 655
"America's Grand Deleveraging"

David Wessel wrote an insightful article in today's Wall Street Journal about the credit market, which he refers to, "the lifeblood of modern economy." It was only more than a month ago when the Federal Reserve declared, "The upside risks to inflation roughly balance the downside risks to growth." The argument now is whether growth slows in early 2008 with unemployment increasing a little or if there is a recession in which unemployment increases substantially.

The U.S. has experienced recession only 16 months in the past 25 years and in the previous 25 year period there were 64 months of recession.

Banks and investors have been loaning money freely for many years, while taking big risk with little reward, which is known as, "low risk premiums." Lately they are hoarding cash and are even refraining from lending to each other more more than a few days. In August 2005, Greenspan warned, "History has not dealt kindly with the aftermath of prolonged periods of "low risk premiums."

The credit problems the U.S. is having today go further than just subprime mortgages, but alsoinclude increasing delinquencies on credit cards, auto loans and home equity loans as well. To further exacerbate the problem, banks are now having to dip into their cash reserves in order to cover growing losses.

Eventually banks will have to pull back on loans to consumers and businesses. Wessel goes on to define "leverage" as the factor by which a lever multiplies a force and in finance it allows, "The bold to make bets that pay off handsomely when times are good." The problem we now have is that is that this same force magnifies losses when things go bad.

Wessel further explains that economists refer to recent decades as the, "Great Moderation," in which inflation was low and recessions were scarce. He now believes that this era may be giving way to a new one, the "Grand Deleveraging." He makes his point even clearer when he quotes Commentator John Mauldin, "However...we see a few fire trucks starting to gather and those sirens are telling us that more are on the way. There is smoke coming from the building. Attention must be paid."

Free Preview -
Retire Soon is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-06-2007, 06:07 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 36,219
So, any ideas how to invest for a "massive deleveraging"? Move it all to government treasuries?

audreyh1 is online now   Reply With Quote
Old 12-06-2007, 06:12 PM   #3
Thinks s/he gets paid by the post
twaddle's Avatar
Join Date: Jun 2006
Posts: 1,703
Bill Gross says buy euros and yen. Personally, I think Europe and Asia will be confessing their sins soon as well.

PIMCO Bonds - IO December
twaddle is offline   Reply With Quote

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
"Gut feel" versus "evidence-based" medicine Buckeye Health and Early Retirement 10 11-08-2007 10:21 AM
My "Core Plus" Strategy - Feedback on the "Plus" part? milmoose Young Dreamers 24 11-01-2006 09:41 AM
"Retirement expense" over "SS income" Sam FIRE and Money 41 10-30-2006 04:59 PM
Anyone notice "Osama" sounds like "Obama" ? Mr._johngalt Other topics 50 10-29-2006 05:41 AM
Book reports: "Blink" & "Tipping Point" Nords Other topics 2 12-04-2005 04:15 PM

» Quick Links

All times are GMT -6. The time now is 05:05 PM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2023, vBulletin Solutions, Inc.