Zeb Faces Reality or,

Put the Damn Sardine Can Down and Go to Work, Zeb (cont.)

...Zebediah cannot run for the hills and can't claim disability insurance. It slowly dawns on him that HE ALONE is responsible for getting out of the mess - Yorick, Xavier and all the rest of the alphabet friends just shrug and mumble "caveat emptor Zeb, it's the free enterprise system". So Zeb is going to have to noodle a way of solving the problem on his own...

Let's state the problem again:

1. Very high debt/GDP
2. Overpriced assets
3. An economy that mainly consumes imported non-durables financed by the combination of (1) and (2). Personal consumption now makes up almost 70% of GDP.

The importance of this merry-go-round to the "normal" functioning of the economy was made starkly evident just yesterday, when President Bush in his news conference said, and I quote:

"I encourage you all to go shopping more".

Now, I readily admit that I am an idealist; I prefer that Presidents say things like this, instead:

"The credit belongs to the man in the arena whose face is marred by dust and sweat and blood, who strives valiantly, who errs, and who comes up short again and again, who knows the great enthusiasms, the great devotions, and spends himself in worthy causes."

Teddy Roosevelt

I know the world has changed a great deal since T.R.'s time, but..."go shopping more"? Is that what this great nation has been reduced to? Trips to the mall encouraged by the President? Why? Are we in the depths of Depression and Mr. Bush needs to stir the people with a modern day version of "The only thing we have to fear is fear itself"? Not hardly. But "go shopping" was not an off-the cuff remark, either: it seems that holiday shopping is not going very well this year. Draw your own conclusions.

I strongly believe we have reached the outer limits of the phoney economy. The personal savings ratio has turned negative (see chart below) and as we consume more than we make we have to liquidate assets from savings - financial or other. Borrowing more does not help because interest payments must come out of income or accumulated savings. Selling assets is the only way out, for as long as consumption goes on unchecked.

In addition, debt service now takes up a record high percentage of income (see next chart), even though interest rates are still very low by historical standards.

Who owes the debt is just as important as how much there is (next chart). The largest piece, Financial Sector, is made up mostly of packaged mortgages and Government Sponsored Enterpise (FNMA, FHLMC, SLMA, etc) debt. Social Security debt (the so called Trust Fund) is not included. Households owe almost the same, again mostly as mortgage debt. The whole pie comes to $42 trillion, or 315% of GDP - if Social Security was included it would be 350% of GDP.

...Zeb suddenly realizes that he has got to stop wasting his time with that stupid can and start doing something to get himself out of debt. You see, in order to buy them sardines our foolish fish fan had borrowed the million bucks. He had thought he couldn't lose (best fish...EVER!) - what was a tiny bite, eh?

Deeply regretting his excess, Zebediah now rolls up his sleeves and goes to work. Doing what, you ask? By now you surely know the answer (smile)...

Stay Tuned...