A Sub-Prime Society

By: Gordon Long | Mon, Aug 18, 2014
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Delinquency Debt & the Collections Crisis

The 2008 Financial Crisis is often attributed to a sudden freeze in liquidity in the Shadow Banking System, stemming from borrower default problems within the securitization of Mortgage debt.

Six years later we have an even larger problem which is now associated with a national sub-prime economy securitizing its debt through the same unregulated Shadow Banking System. As prior to the 2008 Financial Crisis, credit regulations are once again mistakenly being quietly changed to increase credit flows.

As Yogi Berra said: "Its Deja vue all over again!"

A Bigger "Collections" Crisis

The US collections problem is with little doubt worse than it was six years ago once the government and its' credit pusher lobbyists' 'spin' is removed.

The American family is broke.

Government Policies of Financial Repression have crippled savers and pensioners.

The US middle class which feeds the 70% consumption economy has been 'gutted' with escalating costs in health & education, removal of defined benefits for retirements while have real disposable income shrunk.


The 70% Consumption Economy Problem

The government is caught in a trap where it perceives it must increase credit to thereby increase consumption to sustain a 70% consumption economy. It has only so many options available as shown below.

Government's Only Response: Change the Rules

The simple truth is after an initial period of "Extend & Pretend" Policies, then replaced by "Kick-the-Can-Down-the-Road" Policies it has resorted to "Fake It Until You Make It. To do this they are changing the credit rules. When governments get into a problem you can always count on them to change the rules. John Rubino and I in this 30 minute video show how the government is doing this regarding Credit Card FICO scores, Car Loans, Student Loans, Mortgages and HELOCS.

Sub-Prime II Video

Why It Won't Work

All of this is a waste and won't work. Citi Rob Buckland's lays out the four cycles of credit:

Phase 1: This begins at the end of a recession, when interest rates have fallen, money is cheap, but stocks are still battered.

Phase 2: A bull market sets in during phase 2, when stocks start to rise as easy credit lubricates the economy.

Phase 3: This is the tricky part. Stocks are still flying high, but credits spreads are widening as investors become increasingly unwilling to finance further risk. Corporate CEOs have now experienced a lengthy period of gains and become risk-happy. (And we'd note that central banks are already talking about tightening credit by raising interest rates.) Bubbles can form in Phase 3, Buckland says, as the high-flying stock market ignores the early warning signs of the deteriorating credit market. Hello, tech startup IPOs!

Phase 4: Stocks react to the lack of available credit by collapsing, and we see the kinds of things you get in a recession: "This is the classic bear market, when equity and credit prices fall together. It is usually associated with collapsing profits and worsening balance sheets," Buckland says.

We're in Phase 3 right now, Buckland says, but we may not be very far into it. Here's (Click to see Buckland's checklist of warning signs for Phase 3) .


60% of the families in America have absolutely no buffer for an emergency except to increase their debt levels. A third have nothing saved for retirement with the private sector no longer having meaningful pension plans.

The whole system is being financed within the Shadow Banking System which is borrowing short and lending out long to the Sub-Prime Economy. It is ripe for someone to yell "fire" and to see short term liquidity implode as it did in 2008.

Join the discussion at Financial Repression Authority.


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Gordon Long

Author: Gordon Long

Gordon T. Long
Publisher - LONGWave

Gordon T. Long

Gordon T. Long has been publically offering his financial and economic writing since 2010, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.

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