Something does not add up! (page 3 of 3)

During the last three years (1998 through 2000), total net non-Federal Reserve (including financial) credit market borrowings increased $6.1 trillion, or $2.05 trillion annually.

This compares to $8.6 trillion, or an average of less than $1.1 trillion annually during the previous eight years (1990-1997). Please note that the US economy is expanding by about $500 billion annually in nominal terms, which shows that credit has to grow far more rapidly than nominal GDP to make the economic engine run.

Thus, it would appear that in order to hold its altitude, the US economy requires an ever faster and larger increase in private sector borrowings and money supply, which will, in my opinion, lead at some stage to more inflation or debt defaults, which may reach a colossal scale. To me, this continued credit market expansion and the exploding money supply coupled with the total OTC derivative positions, which according to the BIS now exceed $ 95 trillion, spells at some future date big and unavoidable trouble.

The US economy is on a collision course; we only don't know when exactly and against what the collision will occur. Therefore, the absence of extremely low valuations aside (except selectively in Asia and Russia), I am troubled by the fact that the global economy and especially the US have financed their growth through an excessive credit and monetary expansion, which in the long run simply does not add up.

Something will give. Possibly the economy will not respond to the Greenspan interest rates cuts. In this case a Japanese type of recession will take place, which will be accompanied by soaring default rates. Alternatively, growth resumes, but inflation accelerates far more than expected.

Admittedly, higher inflation rates may bail out the system temporarily, but only just, and later even more pain will be inevitable. However, in either case, the economic and financial environment will not be conducive to the huge capital gains, which only arise when assets can be bought for a song, as I have explained above at length!