Originally Posted by ETWolverine
First of all, unlike Cheney, I do have training in economics, and I happen to agree that balancing the budget is the LEAST of our problems... in fact it's not really an issue at all.
As to the article itself:
I happen to agree that government pork and earmark spending is too high. The Republican Congress spent like drunken Democrats, and the Democratic Congress is doing no better and spending like drunken communists. We need to cut unnecessary government spending. (BTW, military spending is NOT unnecessary.)
However, the Bush tax cuts have resulted in the highest levels of government income in history. When your income is higher, you can afford to spend more.
Then there's the idea that "debt" is automatically a bad thing. Bobby, you are a credit analyst. As am I. You deal with the retail market, I deal with commercial lending, but the concepts we both learned in credit training apply to both sides of the fence. Is debt always a bad thing? Do you look only at the liabilities portion of a person's PFS, and ignore their assets, their equity, their liquidity, and their income and expenses? I know that most of what you do is FICO scoring which essentially scores debt service ability and liability levels, but your borrowers must give you some sort of asset/liability/equity/income summary. Do you ignore everything except debt levels when reviewing a credit? Because that is what this article is doing.
Debt levels are only one small part of an overall credit picture. What has that debt funded in terms of assets? How has that asset and liability affected capital. What has it done to cash flow? Has income increased relative to debt levels? Is cash flow sufficient to service debt requirements? This article touches on NONE of those topics. Having done the research, I can quite simply say that the US economy is not headed for "disaster" as the author of this article would have you believe. Tax revenues are up. Spending has increased, but at a slower rate than income. Cash flow is stronger than in 2000, as detemined by the low inflation rate compared to the growth of GDP. Debt is up, but has resulted in an increase in employment... an asset called "human resources"... as well as increased military spending... another important asset. Our leverage level is actually pretty low, with the total national debt being much lower than the national equity (a leverage ratio of less than 1:1. I usually lend up to a 3:1 leverage ratio, so 1:1 is pretty darn strong as far as I'm concerned. The capital markets guys lend up to a 9:1 leverage ratio, so they surely don't have a problem with a 1:1 ratio.) Simply put, the article is wrong about the state of the US economy. The so-called budget deficit is going to dissappear by 2010, even if nothing is done to "fix" it... and probably faster than that if the economy continues to grow.
The article is also wrong about what will happen to our debt, and how we will become a debtor nation to everyone else, and that all those other nations are going to essentially bankrupt us. Baloney. Do you remember the old saying that if you borrow half a million dollars, the bank owns you, but if you borrow half a billion dollars, you own the bank? If we "default" on any loans to our creditors, those foreign governments' economies will simply collapse. Our debt allows us to CONTROL THEM, not the other way around. That's what happens when a smaller economy lends lots of money to a bigger economy.
This article is based on doom-and-gloom predictions with no understanding of economics in the real world, and only looking at part of a very complex financial/economic picture of the US economy.
What is driving the market declines we have seen ove the past couple of weeks is concern of Countrywide Financial's cash flow difficulties. The fact that Countrywide is the largest lender to the subprime real estate market lend itself to fears that subprime lenders are having trouble collecting on their loans... the signs of a real-estate bubble burst.
However, there are a few things that people are forgetting.
1) Countrywide drew down $11.5 million on their line of credit yesterday. Many saw that as a bad sign, but I see it differently. What it means is that Countrywide has the cash on hand now to service operations. That is a GOOD thing.
2) Countrywide has not stated that they are having any sort of difficulty collecting on loans to their customers. There is no evidence that their "cash flow problems" have anything to do with troubles in the real estate market.
3) Even if Countrywide were to go belly-up right now, it still would not have the effect on the economy that so many people are fearing. No single industry in the US economy has the power to move the entire economy the way the market investors are fearing... much less a single company in a sub-sector of a single industry. The fears that Countrywide's failure or bankruptcy might cause the entire US economy to collapse is rediculous. Sorry, they may be the biggest sub-prime RE lender out there, but they ain't all that.
And all of that ignores the strong economic health of the rest of the economy. The strogest level of employment in decades, a steady increase in personal incomes, continued strong retail sales growth in all areas, increases in manufacturing including the auto industry (and who thought that would be true five years ago?), low inflation rates, strong GDP, increased tax revenue for the government, etc.
And let's not talk about the idea that Bush entered a war with "no exit strategy". We've been over all that in many other strings. We don't need to rehash that here.
In short, though, this article is short-sighted, blindered, and looks at only a portion of a very large picture and adds unrealistic doomsday projections to create a false sense of economic weakness. The writer of the article is just plain wrong.
Elliot