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Friday, February 8, 2013

The Revival of Subprime: Will This End Badly?

Of course liquidity/credit for everyone, even those that can't afford it, will end badly.  Liquidity provides the grease for the wheels of asset inflation.  Asset inflation, or "the wealth effect", in turn, drives spending; spending which account for more than 70% of GDP in the US has become 'the economy'.  This trend can be found in many of developed economies around he world.

As long as asset inflation drives the economic growth, it looks like a win-win setup for everyone, right? Asset inflation not only makes everyone but those dependent on their labor for income rich but also drives economic activity.  Unfortunately, the vast majority of the world's citizens are dependent on their labor for income.  Labor which cannot be divided and allocated across gold, silver, copper, corn, oil, real estate, etc. Moreover, the growth of this income rarely exceeds the cost push inflation of the necessary basics such as housing, food, energy, healthcare, etc.  So goes the old saying the rich get richer, and poor get poorer, and increasingly pissed unless centralized policies support at least a subsistence standard of living.

This explains why socialism despite it's lethal reliance on ever-increasing amounts of debt thrives - at least for now.  As an increasing number of citizens can't find a chair when the next cyclical recession stops the music yet again, even an offer of subsistence standard of living won't be enough.

Headline:  The Revival of Subprime: Will This End Badly?

The sub-prime market - risky mortgage backed securities - is hot again and its revival is exceeding many people's expectations, the chief market strategist at Rosenblatt Securities says. He believes this will end badly.

The subprime mortgage crisis which led to the financial crash of 2008 involved institutions making loans to those that had difficulty maintaining their repayment schedule.


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