Debt Spiral

credit_cardsDebt is the new four letter word. Debt is affecting everyone from Mr. Consumer to private equity firms like Carlyle.  More precisely, massive debt is the real killer.  Mr. Consumer for years had been charging up a storm on his credit card, buying 4 dollar lattes, hitting the mall and buying every retarded gadget from the Sharper Image and then to top it off he went and bought a home with very little down.  The technical term for Mr. Consumer’s situation is called [email protected]#$.  The recipe to get out of this situation is almost like losing weight – eat less (earn more) and exercise more (spend less).  Easier said then done, most companies are cutting back on raises or just getting rid of people.  Any sort of government refund check will most likely go to paying down his debt and not new spending. That is the catch-22, most of the world economy revolves around the American consumer spending and not saving.  But, for the American consumer to get back on track they have to save and not spend. Policy makers around the world seem hell bent on lower interest rates and approving fiscal stimulus packages to boost the economy.

If I’m not mistaken, this whole credit crisis was about cheap money and loose lending practices.  Take India for example, the government has been reducing interest rates but no one seems to be buying houses.  The banks fault the property developers for overpriced inventory and the property developers blame the banks for high interest rates. Who is right? Both share some blame but it’s also the real estate companies that over built which is leading to excess capacity in most Tier 1 (Bombay, Delhi, etc…) and Tier 2 (Poona, Indore, etc…) cities. I don’t think stimulus packages will work and the only thing that will help is just the natural progression of the business cycle.  But, policy makers can’t sit around and wait, they have to show they are doing something which just seems to make things worse…think TARP.

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