Third Eye on the Third World

Date October 13, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “The Death of Debt-Based Wealth”

The price of oil plummeted from a 2008 high of $147 to below $80 a barrel and is trading at the September 2007 price. Commodity prices have collapsed. The leading indicator, the Reuters/Commodity Research Bureau index, is not only down 30 percent from its June 2008 high; it is down over 10 percent from October 2007 levels. Global stock markets are in free fall. European markets are off 45 percent in the last 12 months. Asia’s markets dropped nearly 50 percent in a year, as has the Philippines. The US has fallen 40 percent since October 2007. Even the Saudi stock market is down 47 percent from the 2007 close.

I have called the recent events financial AIDS, Asset/Investment Deflation Syndrome, and the roots causes are not unlike the basis for medical AIDS. No matter what the propaganda about medical AIDS, by far the highest risk groups for contracting AIDS are those engaged in promiscuous behavior and intravenous illegal drug use. Promiscuous sexual behavior comes from a desire for instant gratification and pleasure regardless of the consequences and intravenous hard drug use is a trap and addiction that is impossibly difficult to break.

For some thirty years, the developed so-called First World unashamedly did everything possible to make indulging in material satisfaction a primary life goal. The quest for more and more pleasure-giving ‘things’ has pushed aside faith, honor, family, dignity, wisdom, integrity, and responsibility.

Corporate executives falsify company books in order to fund their luxurious lifestyles. A woman in the US carrying triplets, aborts two of the children because having three kids would seriously affect her financial ability to entertain and travel. In the pursuit for ‘more’, average middle class people make wild investments. The result of being able to have more possessions is the justification for doing anything it takes to achieve that goal.

And if you cannot afford to buy the pleasure you want, borrow the money. Just like the drug user, one time will not hurt. That wasn’t so bad was it? So do it again and again and again until you are hooked and financially destroyed. The total debt obligation of the United States including the federal, state, and local governments, business, and private personal debt is 53 trillion dollars. That is $175,154 per man, woman and child or $700,616 per family. Total U.S. individual consumer debt, which includes installment debt, but not mortgage debt, is $10,000 for every person. That means an average family owes $40,000 in personal debt not including their home loan. 80 percent of today's debt was created since 1990. In the 1990s alone, debt increased more than two times faster than the growth of the total economy. The percentage of disposable income spent on personal debt payments was 8.6 percent in 1983 and over 80 percent in 2007. In 1981, US families saved an average of 11 percent and owed 4 percent of their income on credit cards. By 2000, the average savings rate had already fallen below zero, and credit-card debt had gone up to 12 percent of income.

What is the human cost? In 1987, the number of shopping malls surpassed the number of US high schools. For US parents: average time spent shopping per week: 6 hours; time spent with children per week: 40 minutes. The percentage of college freshmen who reported thinking it is essential to be well off financially was 44 percent in 1967 and 83 percent in 2007.

Is there any wonder why the Holy Father, Pope Benedict, would say last week that the current global banking crisis indicates that the modern world economic order is "built on sand", and only the "word of God" can offer a solid foundation for life.

This is not simply religious talk. A building erected on a foundation of sand and not bedrock only has an illusion of strength. Wealth created by debt and borrowing is only an illusion of wealth.

All of these recent efforts by western governments do nothing to create a financial bedrock and only serve to reinforce the foundation of sand. The idea that the world can somehow continue to build wealth through borrowing and debt is a fantasy. When you hear the experts debate about when the financial markets will recover, know that the answer is Never.

Japan had its borrowing bubble collapse in 1990 and the Japanese stock market index then was at 40,000. The highest it has ever been in the last 18 years is 22,000 and today it stands below 10,000.

Many nations have fed their economies off the illusion of western wealth including Japan, South Korea, India, Russia, and most prominently, China, through inflated Foreign Direct Investment (FDI) and exports to the US and Europe. China will survive by public spending of a large amount of its $1.5 trillion foreign reserves. Russia has its oil and Korea and Japan have stable domestic economies. Opinions are mixed on India, as its domestic banking sector appears to be sound but its currency is at a six year low.

The Philippines? Assume a 10 percent drop in all contributors (remittances, FDI, exports) to the Gross Domestic Product and economic growth is still 4 percent. The stock market? Wait a few weeks and you will see the best buying opportunity (probably near 1,950) since 2003 when the index was at 1,000.

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