Monday, August 29, 2005


Interestingly, Greenspan has finally voiced concern about a potentially damaging national property bubble (vs local patterns) and this comes days after the WSJ article about mortage backed securities. So not only are foreign investors "financing" the deficit, they are also (partially) fuelling the consumer binge.

The USA is probably the inventor of the theory of spending your way out of a recession. To most people, that just sounds weird but think about it, when you're topdog, there are banks lining up to lend you money and are delighted that you're spending. Sounds familiar? It 's like a certain New York real estate magnate's early years story (not named 'cos he's known to be rather litigious) . The moral of the story? It's when the chips are down and the bankers finally worry about their money that the big squeeze begins. For the magnate he was rescued by a market turnaround, for most middle class property owners, they may not be so lucky, after all, most don't own a large % of Manhattan.

It'll be interesting to see what the Bush administration comes up with as a solution - will they bail the property owners, will they bail the investors, will they maintain the bubble? Scenario 1: They might introduce puny measures to cool the market that merely slows the inevitable and leaves the small % of coolheaded investors and owners just enough time to get out of the market. Living on borrowed time and credit , not smart but may be preferable to other options.

Scenario 2: Whether it's a random event or just a matter of certain investors getting nervous and spreading that case of nerves to other investors, with the mortage securities market kaputt, the banks may have to reconsider risk management on a more traditional basis. Inevitably the banks start the credit squeeze and the price correction begins. Whether that price correction spirals is the question that most economists will like answered but that depends on the optimism (or otherwise) of consumers.

The moral of this story? No bubble lasts forever, whatever the optimism of the consumers. Look at the Japanese property market, despite recent years' improvement , prices are hardly anywhere near the highs of the bubble more than a decade ago. No doubt differences in mentality regarding spending contribute to the economic differences. [Delaying consumption or otherwise known as savings is a big factor in Asia's potential for economic growth , though recent years (think Asian financial crisis) has shown the "credit " mentality eroding traditional values. ] Efforts to spend their way out of the recession has proven less successful in Japan, maybe the worry about the subsequent bills proves stronger than the urge to spend.

Even though it's considered an economic principle that a consumer driven economy is the way to go, there are certain caveats. Expectations that credit expended will be debt paid by future income generated, a rate of growth that'll more than pay off the debt, creditworthiness are just a few of the more obvious. However, the USA seems to be the only country who doesn't have to pay attention to any caveats or cautionary notes 'cos being topdog means you're never bankrupt, so country wise it's safe but what that means for the american individual is different- individual debt as versus national debt never goes away , just ask the banks.

As for investors, those who forget the lessons of the '80s and '90s regarding corporate debt and junk bonds deserve to be reminded. Needless to say, this author does not share the optimism of the Bank of China fund manager quoted in the WSJ article , oh well, he's probably more qualified.

At the end of the day, maybe people should remember that consumption used to be a word for illness.