The US has great natural wealth, yes. It is not self-sufficient in, for instance, oil, but it has great wealth.

However it does not have wealth in line with what people today spend. Take a look at [link|http://www.prudentbear.com/archive_comm_article.asp?category=Credit+Bubble+Bulletin&content_idx=8782|this article] and then tell me how an economy whose manufaturing shrinks year after year, which manages to run up an annual trade deficit of over 400 billion dollars, and whose businesses are having trouble posting profits is managing to give banner years to imported cars (domestics are in the tank) and handily beat all records in real estate sales.

Personally I am shocked that the recession didn't turn nuclear. It should have. OTOH when I read through [link|http://www.prudentbear.com/archive_home_com.asp?category=18|this archive] of articles, it makes sense. I have seen those processes at work. That is the business that I deal with.

Since his examples are long, I will give the short version. When banks first came around, they would lend money to a lot of different people. That money would come around, land in someone else's hands, who would deposit it in the bank, and then the bank would lend it again.

That was a lot of fun, until there was a run on the bank, and a lot of people who thought that they had money didn't. In effect the banks had printed money by lending and relending it. There is no limit to what they can create this way, and as long as payments are made, and people think it works, the structure stands. But when confidence is lost, the entire pyramid collapses.

So various kinds of regulations were invented to prevent that. And the single most important one is that a bank has to keep on hand a fixed fraction of the deposits made into it. This provides a brake on how many times they can relend the same dollar, limiting the creation of money to managable levels. You see, they can only relend the money that has been deposited back, and they can only relend a fraction of it, so each time around the amount relent is reduced.

That is all ancient history. Now let's talk about securitizing debt.

Securitizing debt is the process of taking debt, and turning it into securities - financial instruments that people can trade. For instance a bundle of loans on homes can be bundled together and sold as bonds. (Bonds are a type of security.)

Now watch what happens now. Before how much and how often a bank could lend was constrained by deposits. But now the bank lends money, the loans are converted into bonds, the bonds are resold to investors, and the bank turns around with more money than it started with and makes more loans.

Isn't that a neat trick? If you deposit money in a bank, the bank can only relend part of it. But if you deposit your money in a pension fund, the fund can go to a bank, spend all of your money on bonds backed by some bank's loans, and that bank can now relend all of your money. Because it isn't called a deposit, the existing regulations are all circumvented, and there is no limit to how many times funds can be created.

How much has this happened? Enough that bonds backed by people's houses are now a bigger financial market than the entire US government debt. (Our personal savings rate is negative.)

Of course there are other transactions that can create money out of thin air as well. How many of those are there? Well for instance the swaps market (people trading future streams of cash with each other) is now 9 times the size of the US economy. In other words every dollar we will make has been traded 9 times already before it was made. (Need I mention that - on paper - trading money that doesn't exist yet makes huge amounts of cash in the present? That is one of the big reasons that people do it. Guess where that money came from?)

Wealth is not absolute. It is relative. We feel well off when what we can afford can exceed our expectations. While our natural resources may well put us well off compared to the rest of the world, it is unlikely to sustain us all in the manor to which we have become accustomed.

So when do things readjust?

I don't know. Possibly in 3 months. Possibly in 3 years. I sincerely thought it was about to happen a year and a half ago. It didn't.

But while I can't tell you when, I still believe that it will readjust, and I am willing to bet you that it happens within a decade.

Cheers,
Ben

PS US oil consumption is well beyond what we can produce, and projections are growing fast. Just a specific example of how the US resources don't match the current US lifestyle.