My Personal Finance Journey

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How Healthy Are the Banks?

Contributed by mm | April 4, 2004 7:13 AM PST

Frank Shostak thinks Alan Greenspan is wrong in saying our banking system is in good shape. He summarized some alarming evidences supporting the view that our economy is now only sustained by cheap credit, and once Feb is forced to reverse course, the risks in our banking system will start to surface.

Some of his evidences:

1) Our personal saving rate is in free fall, most recently at 1.8% in January. The rate was above 8% most of the time until around 1985.

2) Income-to-outlay ratio has been in sharp decline since 2000.

3) Consumer credit as % of disposable income is at record high at close to 24% in Q4 2003.

4) Home mortgage as a % of disposable income rose to 82% in Q4 2003, an all-time high.

5) Our banking system creates more money out of "thin air" (aka. without much real savings). $300 billion has been created in the last two years.

6) Our government spending is at all-time high too compared to long-term trend.

7) Federal debt is mounting, most recently at $7 trillion in December 2003.

8) We are collecting a huge current account deficit, and foreign central bank holding of treasuries are rising accordingly ($400 billion in two years), which means our banking system is literally relying on our trading partners to (willingly) provide the real savings.

This article has some similarities to Bill Gross's theory of our finance-based economy, which I blogged earlier. Both are saying it is not going to be an easy ride ahead.

Source: The Kirk Report

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