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U.S. Economy: Back on Track? What Track?
The U.S. has borrowed and leveraged itself into a deep, deep hole.
I did not mean to watch the presidential debate Wednesday evening last week. It came on as I was about to watch the Monday Night Football game I had recorded. But there they were, two candidates for President telling us that the Wall Street bailout plan was a necessary step to get our country "back on track," and that they had the plan to "rebuild consumer confidence" and "get the banking system fluid again."
"Back on track," I thought. "What track would that be?"
What ails Wall Street is the poison flowing from the over-leveraged Main Street – and not the other way around, as many would suggest. Cheap money, like a phoenix wrought from the ashes of the dot.com bubble, is at the heart of this crisis. There would be no "toxic Wall Street assets" if Main Street were making their payments.
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True, Wall Street leveraged those mortgage-backed securities (or "insecurities," as EWI's CEO Bob Prechter recently called them) many times over. But the fact remains that an average American homebuyer, sold on the government's idea that home ownership is his inalienable right and the fulfillment of the American dream, simply bought more home than he could ever hope to afford.
Here is a documented, and likely typical, case: Take a wage earner at $65,000 annual income, sell him a $500,000, 100% financed, interest-only mortgage loan, collect the loan origination fee, split the real estate sales commission – and you have just created your own toxic asset. Now sell that loan to Wall Street, which is then repackaged into a mortgage-backed insecurity – and so on.
So where, exactly, are the rails of the "track" headed that we need to "get back on"? Nowhere, it would seem. The U.S. has borrowed and leveraged itself into a deep, deep hole. We do not need a plan to get us back on that track. What we need is straight talk about cutting back on expenditures, changing the way we finance ourselves, and how our economy works.
We already have enough cars and TVs to give the U.S. the highest tangible standard of living in the world. But we are hollow as the world’s largest debtor nation, with a less than zero savings rate and an appetite for consumption so large that we need to finance it with foreign investment.
The Fed's has been aggressively pursuing monetary solutions to this crisis. But that cannot solve fundamental flaws in our economic model. America needs to produce for itself with American jobs. Our tax base is being eroded even as we outsource our service-based economy.
We have $56 trillion in unfunded liabilities, more than $9 trillion in outstanding debt, a more than $400 billion annual account deficit, and a massive annual trade deficit. And lately, the Fed’s balance sheet has ballooned to more than $1.7 trillion with assets of questionable credit quality. Once this deflationary crisis has passed, the debt will remain – unless we change our "track."
This story originally appeared on the October 8 Daily Forecast page for the U.S. 30-year Treasury Bonds in Bill Fox's Interest Rates Specialty Service. (See full menu for EWI's Specialty Services here.) Bill Fox is EWI's Senior Bonds Analyst. He has been involved in the markets since graduating in 1988 from Vanderbilt University. He joined EWI in 1994; most of his subscribers are professional bond traders spread around the globe.