China''s foreign exchange reserve diversification may aim at oil too

Section:

By Bill Bonner
The Daily Reckoning
Monday, January 9, 2006

http://www.dailyreckoning.com/Issues/2006/DRUS010906.html

"Do you really think the end is nigh?"

We were on the phone with an Irish radio station this morning. We
explained our thoughts:

"You can never know when important trends will turn around, but
there is reason to worry that both the U.S. Empire and the U.S.
economy are peaking out. When the numbers are finally tallied, we
think they'll show a decline in real incomes for Americans in 2005 --
coincident with a negative savings rate. We haven't seen anything
like this since the Great Depression. In the depression, it was
obvious why people were drawing down their savings: they needed the
money to eat. A quarter of the workforce was out of a job.

"But why would the savings rate go negative in 2005, when the U.S.
economy is said to be expanding and everyone is supposed to be
getting rich? I'll tell you why." (Remember we were on the radio; a
certain amount of glib bluster is de rigueur.) "It's because the
whole thing is a fraud. Only the rich are getting richer." (We
thought this populist demagoguery might have a certain appeal during
drive-time.)

"At the middle and lower ends of the economic food chain, people are
having a hard time making ends meet. The only way they can keep up
with the Joneses is by borrowing. In 2005, about $200 billion
was 'taken out' of house-price equity. But it looks as though these
marginal borrowers are going to be squeezed from several directions
in 2006. Interest rates are rising. Lenders are being forced to
increase minimum payments and stiffen credit policies. Energy costs
are twice what they were a year ago. And the hottest housing markets
seem to be cooling off."

Also on the line was the station's pet economist from a university in
Dublin. He offered listeners a rebuttal: "Yes, Americans have
borrowed too much. But the United States has a huge, rich, dynamic
economy with many assets overseas, etc. Besides, some nations
operate with a negative balance of trade for many years. And people
have been predicting an imperial over-stretch for a long time. Not a
very original idea. We haven't read Mr. Bonner's book, but. ..."

We tried to follow his point or his logic, but we couldn't keep up
with it. As near as we could tell, he hadn't read our book, but he
was sure he wouldn't like it.

"What do you have to say to that, Mr. Bonner?" asked the show's host.

What could we say, dear reader? For a long moment we couldn't think
of a single sentence that didn't have a four-letter word in it. But
we doubted that that was the sort of honest response the station
wanted. So we gave more figures ... more talk of trade deficits and
other economic mumbo-jumbo.

We were just about to explain the difference between productive debt
and debt used for consumption, but our time was up. It was on to
something more important -- the sports coverage!

The banking industry has done a great thing, says another smug
economist from the American Banking Association. By encouraging
people to borrow against their houses it has helped people "free up
illiquid assets." In 2005 they helped people "free up" $200 billion
worth of illiquid assets.

Surely they should get a Nobel Peace Prize for that! Imagine all
those poor people who have been liberated from their own houses.
Last year they owned a roof over their heads, or "illiquid asset."
Now they own last year's hit CDs and have fond memories of last
year's vacations in Las Vegas.

Of course, they now have a deeper, more meaningful relationship
with a lending institution too.

As recently as the first Reagan administration, America's personal
savings rate was nearly 10 percent. By the first Bush administration
it had fallen closer to 5 percent.In the second Bush administration,
the rate has gone negative ... to minus 0.20 percent in November.
Over the last five years debt levels in America grew twice as fast
as incomes. Now "savings have practically disappeared," says Paul
Volcker. We have "an economy on thin ice," the former Fed chairman
says.

"On thin ice" is a metaphor suitable to the season and the
situation. It does not tell us if the nights will grow colder or
warmer. It does not tell us when the ice will crack. The end may or
may not be nigh, but readers are reminded to be careful.

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