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The Destruction of Wealth

The Destruction of Wealth. by Dennis Carver. Debt Disturbances In The U.S. Capital Deployment Of Massive Debt Accumulation. 1820 – 1830 Erie Canal, Allegany Turnpike & Other Infrastructure 1860 – 1873 Building Of Railroads 1900 – 1930 Expansion Of Plants & Electric Grid For Electric Motors

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The Destruction of Wealth

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  1. The Destruction of Wealth by Dennis Carver

  2. Debt Disturbances In The U.S.

  3. Capital Deployment Of Massive Debt Accumulation • 1820 – 1830 Erie Canal, Allegany Turnpike & Other Infrastructure • 1860 – 1873 Building Of Railroads • 1900 – 1930 Expansion Of Plants & Electric Grid For Electric Motors • 1980 – 2009 Home Ownership

  4. Classic Causes Of Debt Disturbances • Excessively Low Interest Rates • Government Intervention To Smooth Normal Market Cycles • “The Great Moderation.” • “The Greenspan Put.” • Ponzi Speculation Magnified By Debt

  5. Wealth Illusion • Market Value Of Assets Generally Do Not Reflect Real Wealth. • Wealth Illusions Create A Sense Of Financial Well Being & Complacency. • Asset Based Economies Spawn Excessive Risk Taking Due To Wealth Illusion. • Real Wealth Is Measured By The Ability Of An Asset To Generate Cash Flow.

  6. Mortgage Equity Withdrawals (MEWS) John Mauldin, Thoughts From The Frontline

  7. Artificially Low Risk Premiums Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums. Alan Greenspan

  8. Why This Financial Downturn Will Be A Protracted Event 1- Vaporization Of Shadow Banking. 2- Government Control Of The Banking Sector. Nationalization is here. 3- Unwinding Of Derivative Contracts With Counter-party Insolvency. 4- Public Policy Perpetuating Unsustainable Growth Through Debt. 5- Public Perception That Government Can Responsibly Monitize Debts.

  9. Why This Financial Downturn Will Be A Protracted Event (Slide 2) 6- Stealing Growth Through De-globalization. 7- Deployment Of Anti-Free-Enterprise Political Policy. 8- Expansion Of Extremely High Cost Social Programs. 9- “Never Let A Good Crisis Go To Waste.” Trading Freedoms For Security.

  10. What To Expect? • The Normal Business Cycle Will Try To Manifest Itself. • Zombie Banks & Corporations Propped Up By Government Intervention. • Occasional False Bull Market Runs.

  11. Potential Surprises • Extreme Inflation Caused By Government Monetization Of Debt. • Extreme Deflation Caused By Consumer Panic. • Currency Debasement Wars. • Destabilization Of Artificially Low Interest Rates.

  12. Topics Of Interest • Shadow Banking. • Credit Default Swaps. • Interest Rate Swaps. • Brettonwood 1 & 2. • Private Equity Strip & Flip. • Auction Rate Securities

  13. Topics Of Interest(Continued) • Collateralized Debt Obligations. • Collateralized Loan Obligations. • The Lost Decade In Japan. • Manipulation Of Earnings Through Pension Fund Accounting. • Executive Compensation & Options. • Hedge Funds & De-leveraging.

  14. The Significant Problems We Face Cannot Be Solved At The Same Level Of Thinking We Were At When We Created Them. Albert Einstein

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