With or without a successful resolution to the credit crisis in the near term, we still face a global recession that can potentially compress the margins corporations worldwide. Some have speculated that this has already been priced in to stocks during the 25% correction we’ve seen in October. Others, including myself, have a more gloomy picture painted.
One doesn’t need to predict the future to understand the lessons of the past, the human psychology of markets and the massive borrowing that led us to the top of the biggest financial bubble in history. The tulip mania craze will be seen as a walk in the park compared to the massive leveraged world we live in now.
Simply put, every single person, company and government will finally have to start living within its means, rather than borrowing based on the promise of future earnings. This will break down consumerism. Consumer spending accounts for 75% of the US gross domestic product. What happens when the consumer isn’t spending? Deep protracted recessions with L-shaped recoveries.
Now our national debt is larger than our GDP. Of course the United States’ wonderful standard of living is supported by the tremendous generosity of foreign central banks and sovereign wealth funds, to the tune of $2 billion a day.
I have a funny feeling that when our treasury bills are backed by defaulted mortgages, junk credit cards and bad auto loans that our debt rating will be downgraded from AAA and foreign money will flee from the US as it never has before. Leaving the government without the funds to support social programs or even some vital infrastructure and state funding. The only option is massive tax hikes or huge program cuts (or perhaps both by mere necessity).