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Michael Marquette’s “View from The Bridge”: Is America Heading Toward Bankruptcy?

by Marquette Turner

in Money & Business, News & Views, Special Reports, View From The Bridge

I have been encouraged  over the last week at the willingness of vendors and buyers to listen to us and consider our advice. It would be a foolish person who would declare that the market has changed but deals are happening as all parties have been willing to give and take.

There are indicators that further pain is yet to come and Australia looks likely to have its second consecutive quarter of negative growth, making the recession official – the first in more than 17 years. Japan’s exports fell by more than 49% last month and world production has decreased at three times the rate (in just six months) than it took in the 1929-1931 Great Depression.

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Economically the news worldwide is worrying and finally we are starting to hear that this crisis is more than just a confidence issue – it is fundamental. The world immersed itself in debt, more debt than ever before as people bought houses, shares, personal goods and lived extravagant lifestyles that they could not sustain.

I have previously said that Consumer Debt in Australia increased from just over AUD $700 billion to AUD $3.6 trillion in just under 10 years – this was fueled by stupidity and greed. Wages have not increased by anywhere near a factor of five times which makes the increase in consumer debt even more concerning. Credit cards have been dished out with haste not seen before and we haven’t even started to deal with the major fallout from credit card debt as Governments try to stabilize the financial sector’s current mess.

Banks lent money to those who simply should not have borrowed at all and low doc and no doc loans were handed out too freely by all sorts of lenders –there were even ones set up to lend only to these sort of borrowers – in other words high risk customers.

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I know of a person who borrowed nearly $1.5 million and bought apartments at the height of the market for ridiculous prices with the assistance of no doc loans and borrowing against unrealized equity. The person paid the mortgage each month using rental income from tenants in the apartments and by charging the remainder on an AMEX charge card which was processed monthly through a family business.

This was a recipe for disaster and it has been – the property prices have plummeted and the vicious credit cycle has caught up. Why was this person ever lent the money in the first place? Stories like this are abundant and exemplifies why the world is facing the current crisis.

So the sooner we stop hearing nonsense that this is a crisis of confidence and when confidence is restored everything will be okay again the better. We cannot let the situation become what it was previously because the perfect storm of debt will repeat itself again. There will be many more foreclosures, many more businesses fail, more will join the unemployment ranks and many more people will face bankruptcy.

Fundamentally we must stop our obsession with growth. Growth is a wonderful thing if the basics behind the growth are sound. There has been no distinction made (and there never is) of how consumers spend. There is no point growing the economy and people spending out of control if it is on credit cards.

We must make a distinction between spending and growth based on cash rather than a debt fueled growth obsession which has implications that we are yet to understand. The United States has spent more money on bailing out companies and stimulating their economy than I ever thought possible.

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It will take generations to repay the debt (if it is ever repaid), with Republican Senator Judd Gregg (NH), the ranking member of the US Senate declaring that at current budget levels the US foreign debt will be three times what it is now in just 10 years and the country will be bankrupt. This is a huge call from such a respected man – someone offered a position in the cabinet by President Obama.

No longer are these calls of common sense outrageous predictions of Armageddon – there are real risks which could damage the entire world and even when this current crisis settles down there will be another set of issues to resolve – many that have been put on the back burner as the current mess is dealt with. As long as we are sensible and use foresight now we can limit our exposure to negative outcomes.

Michael Marquette

Marquette Turner Luxury Homes

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