The credit expansion is over - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 12 July 2010
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Paris, France,

Today, we weep!

Yes... pity the poor rich. Or those who thought they were rich. They're losing their houses.

The New York Times reports that the rich are defaulting on their mortgage loans faster than the poor:

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"The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.

"Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

"More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

"By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

"Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

"The rich are different: they are more ruthless," said Sam Khater, CoreLogic's senior economist."


Ruthless? They are just coming to the obvious conclusion faster than their poorer brethren. And it makes sense that they should. They have more money at stake.

The obvious conclusion: this is no normal 'recovery.' If prices aren't coming back, why pay off a mortgage loan when you don't have to?

We continue to live in a gray zone.

It is not as black as the Great Depression.

But it's certainly not as bright as the go-go Bubble Era, either.

What it is, exactly?

Is it a correction?

What is it correcting?

We don't know. Not exactly.

When will it be over?

We don't know that either.

What will happen next?

Wish we could tell you.

Let's keep it simple: will prices go up or down?

Hey, stop asking so many questions!

Look, we're way ahead of most people. Most people - including most economists - think we are in a period of 'fragile recovery.' They think we had a recession. Now the economy is recovery. If the recovery doesn't seem much like other recoveries in the Post-War era, it doesn't trouble them particularly.

Besides, they know what to do - keep money flowing!

Here at the Daily Reckoning we are coming to a growing awareness of what bumblers and self-absorbed preeners our fellow economists are. But we'll come back to that.

Let's push ahead with what we think we know about what it going on.

So far, the economy gives no sign of normal 'recovery.' We'd be deeply concerned if it did. Because what it had before the crisis of '07-'09 is not something we have again. It had the bubble heebie-jeebies, if you know what we mean.

Now, the economy gives every sign of
being in a Great Correction...

...unemployment is not recovering. In fact, it seems to be getting worse. It would not be at all surprising to see the official unemployment rate go up to 12% in the next leg down...

...housing is not recovering. It has stabilized...but only tentatively. There is still a huge overhang of inventory and underwater mortgages to be resolved. And the latest figures show they're not moving. Under these circumstances, you'd have to be one heckuva optimist to think prices would 'recover' anytime soon...

...credit is not recovering. Instead, it is shrinking... Last week's figures show more contraction.

These things do not point to the end of the world. They point to the end of the credit expansion that ballooned up the economy from the first Reagan administration through the last administration of George W. Bush.

That expansion is over. Kaput. Finished. What's coming next? We'll see...

*** This weekend we went to a wedding in rural France.

The affair was held in an ancient church, in an ancient town, in an ancient part of an ancient continent. On the ceiling of the stone church were frescoes painted in the 11th century. On the columns, were designs that dated from the same epoch, but had the curious wavy-gravy look of '60s die-dyed ties.

As foreigners, we never know what we're looking at. Is this the real France? Or is this a precious little bit of France that has somehow managed to resist the trends of modern politics and culture?

People were well-dressed. And well-mannered. Most were good looking and much better turned out than you would see at the typical American wedding. Almost elegant. But this was no typical French wedding either. In France, the gap between the classes seems much clearer and more rigid than in America. People from different social milieus don't mix. A large American wedding might be expected to have a cross-section of American society. Some rich, some poor. Some cultivated and educated. Some not. American families get jumbled up and mixed. But these people all seemed to be a part of the same group.

"We live in a small apartment in Paris," explained a couple we met. "It is so small we can barely seat 6 people for dinner. We do our socializing out here. We try to come most weekends. And, of course, we come for the summer vacation.

"Paris is just a place to work. It's hard to have a social life in Paris."

Their parents have a magnificent chateau, emblematic of the couple's social status. But in Paris, they are just another couple trying to make ends meet.

The wedding mass included chants and songs in Latin. The couple then swore a special oath in front of the local Virgin - one in the bride's family chapel - as the two-hundred guests enjoyed foie gras and champagne on the lawn outside.

"You Americans must like this sort of thing," said a guest who had had a little too much to drink. He was a short fellow, clean cut with closely cropped hair. He looked as though he might have worked for the Nixon administration if the Nixon team had included any Frenchmen. "You get to study us as though we were savages on some remote island somewhere. It's a sort of ethnography, I suppose.

"Well, you have to remember, that this is not France as it is. This is France as it was. We are royalists. Petainists. Ultra-catholic. Ultra-conservative. We are the people who don't exist anymore.

"You go to Paris now. You take the subway. You will find yourself surrounded by muslims, blacks and communists. We are perfectly happy with the muslims and blacks. But the communists have ruined the country. Now, more and more people don't work. And those who do work have to carry the non-workers on their backs. Plus, the government makes it harder and harder for them to work.

"In my business, we get someone on a three-week contract. If that works out okay, we put them on another three-week contract. And if that works out, we let them stay for 6 months. We have to be very cautious. Because once you get someone on board permanently, they're almost impossible to get rid of. Practically every business operates with employees who are worthless. It's amazing they operate at all.

"Well, these kinds of things make the country less and less competitive...and put us deeper and deeper in debt. And with the politics we have, there is no way out. Because the people - the voters - are imbeciles.

"The whole idea of democracy is stupid. Countries ...nations...societies...are not meant to be led by the common people. The common people are by definition blockheads. The live like pigs. And think like mules. Or sheep.

"That's why there is always an elite. The elite should lead. That's their proper function...to help put the rest of the people on a better path. It wasn't the common people who built Versailles, after all. It wasn't the ordinary voter who designed the Eiffel Tower, or found a cure for pneumonia. And the idea that the common people should determine - by their superior numbers - what happens to a whole society is absolutely preposterous. And I can tell you...the experiment with popular democracy is going to end badly, as they always do.

"The people are going to continue to demand more benefits, more holidays, more health care and more protections...until we finally go broke."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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5 Responses to "The credit expansion is over"

ssk

Jul 16, 2010

Not sure if Bill accepts the concept presented by Frenchmen about the Elite class but this seems to be pretty close to the caste system developed in India.

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praveen bhargava

Jul 13, 2010

Further the bubble is developing slowly but steadly in the whole of the world from the beginning of 2010 covering China, Europe, United States and also India. the stimulus package works short term recovery of the depression because the large funds put in to the ecomony through out the world will last for short term and when after a reasonable time the ecomomic package say the easy loans with less interest and no payment/recovery of loans for a reasonable time expires then the bubble of depression become large and large.
Now the time has come to take back the stimulus package.The recovery of soft loans with interest plus credit squise all around the world will play its role and will certainly put the world in yet another deeper depression.The huge demand artificially created during the last 2 years with the soft loans package for home,automobiles,personal loans ,short term business loans,without adequate securities are showing signs of less recovery,failaure in paying back loans .All these negatives are adding slowly a situation which will be out of control in the near future and will be the cause of the bigger depression in the near future say at the end of 2010 or so in whole of the world.

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sunilguglani

Jul 13, 2010

THERE IS A VAST DIFFERENCE BETWEEN INDIAN SITUTAIONS AND WESTERN COUNTRIES

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Dalip Singh

Jul 12, 2010

Well said,I am with the Frenchman about the elite who are the ones who should be leading and is it not something so similar to what is seen in out country too,where uncouth like politicians and the 'Babus' who are least productive but go on strike now and then the cop who is interested in only making his 'hafta' and the municipality worker the less said the better,and who leads the herds,the scroundrals called 'Netas' who are so concerned about the 'Gareeb' and the 'Aam Admai'who pay no tax and are a burden on the system.

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SANJAY

Jul 12, 2010

we have felt it in the past that whole of India was working at discipline at the time of emergency in 1975.In the name of democracy,we are deteriorating day by day.Sometime dictator is good,but what will happen if he is a bad man/women..... So we are living with less evil

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