What are we to do???-- see below
For me, the best part is that my malady is getting better, because I believe the most likely outcome is clear. And if an outcome is known, action can be taken. I am not advocating everyone run for the hills. But in 1972, with perfect foresight, nobody would have invested in long-term bonds when interest rates and inflation were set to skyrocket over the coming decade eroding purchasing power of interest payments and maturity value.
So clarity feels good... Even on a negative basis...
If the economy can pull out of this situation by mortgaging the future, it all but ensures, there is no saving the next situation that should happen within 4 years. Next situation? As any behavioral professional will tell you, when someone is being enabled in a dysfunctional system (America's financial structure is textbook) and consequences for actions are removed, the person ALWAYS attempts to get more next time.
The enabler in this situation (China) owns almost $2 trillion of our country now, and if they choose to let this one go by continuing to hold our government, corporate, and yes, subprime debt without dumping it at any cost, they won't next time.
Even if they (who are not exactly our allies) dumped all their US debt on the market at once, and only got pennies on the dollar for their holdings, they would still be a cash positive country. They don't have debt, and own debt of other countries that are not bleeding red. I read somewhere earlier this year that in 2 years China will reach economic parity with the US--meaning we are as dependent on them as they are on us. Prior to that they needed us more (as we imported more goods and bought them).
I haven't seen the numbers, but I would bet with this crisis, 2 years to parity went by pretty fast.
So if I were China (especially with the Olympics in the books), I would aggressively dump US debt at almost any cost. Maybe they are which is why our credit markets are frozen. In reality the short-term debt (commercial notes) has been the issue in the past month, and that doesn't require sale, simply no reinvesting.
Here is some sarcasm to use with friends:
Yes the moral decline of our country led to this situation (but indirectly). After all if politicians and the public still read the Bible they would know that the borrower is servant to the lender. So keep in mind that road you are driving on, and your public water supply, and now AIG and the country's largest banks are not REALLY owned by the American government, but by China.
--So maybe I feel better because my clarity is that I plan to learn Chinese.
For you, avoid the financial dysfunction. Find objectivity. And ignore everything else, especially the media. CNBC is likely increasing their price for advertising, since you all are watching.