Tuesday, May 24, 2005
The Great Depression of the Twenty-first Century
The Great Depression of the Twenty-first Century
Yes this new century. Worse than the Great Depression of the last century to be sure. Perhaps the end of the United States and Western Civilization as we know it. These great depressions are part of the cycle of economics. Each prosperity carries the seeds of its own destruction.
First we must look at the current situation. We start with the Federal Government. Even during the Roaring Nineties there was no real surplus, just a lower creation of debt. You see the federal accounting is Enron and then some. About half is hidden from view, so there has been deficit spending all along. Yet those turkeys were licking their chops on how to waste the imaginary surplus. Now our deficit, which is nothing more than debt, is at record levels and increasing at record levels. Some say the Debt doesn't matter. It's all owed to the people anyways. Well both are wrong statements. Our debt is being bought up by foreigners, especially the Japanese and Chinese. They do this to prop up our spending so we can buy their stuff. Problem is, now the dollar is sinking and less attractive. When they decrease or stop buying or worse yet sell these issues, we are out of cash stream.
The only way to make the dollar attractive is to reduce the Federal Deficit, reduce our trade imbalance or raise interest rates. How about spending less? I hope you are laughing. The pork-barrel Congress is like a bulimic at a buffet. President Bush has yet to veto a spending bill. The outlays for Iraq, Afghanistan, The War on Terror and Homeland Security are endless. Bush even further increased Medicare commitments with his drug plan. So reducing spending is out. How about a tax increase? Oh yea, I forgot we gave refunds to the rich and child credits to the poor who didn't even pay taxes. This one is very unpopular. Hardly a way to re-election.
Finally you can cop out and "print more money." This has been going on with the creation of credit by the Federal Reserve. This makes our dollars less valuable and fuels inflation. Inflated dollars make debt less expensive. If you can understate the true inflation rate with the Consumer Price Index, then you can look better too. Plus you can use that formula to figure into entitlements indexed to the CPI, when in fact their true value is less. Remember the CPI doesn't include gasoline and food. Most of need the former and all the latter. And inflation is wild with important big items like college tuition, home prices and health care. This "solution" is a quick dangerous fix that will encourage foreigners to get rid of not only federal debt issues, but anything in dollars-like US stocks and bonds. Crash anyone?
Raising interest rates is the only real solution to inflation. But if the Fed raises rates, then the debt machine no longer fuels the false recovery that re-elected Bush. But if the lenders don't want dollars, then rates will have to rise. Between a rock and a hard place? The Fed doesn't really control most rates anyhow, especially longer term rates. Now let us look at the banking industry which includes insurance companies, brokerage houses, savings and loans and anybody else in the lending business. They are out on a limb. The Fed has let them keep almost nothing in cash reserves. The money is out of the vault. They are counting on it to be re-paid. And much of it is actually in complicated leverage positions called derivatives. Nobody really knows how the damn things work. They could work like bombs. And much of the loaning is now in real estate, which we shall see is a shaky place. Pun intended.
Corporate America is seemingly doing fine. Or is it? The big old companies in steel and autos are heavily behind in their ability to meet pension promises. And the federal bail-out agency has limited funds. Companies are beholdent to stcokholders and are still fixing the books Enron style. Gotta keep those stock options too. The best fix is to let go of workers.The stock market is up again. Joy. Now is a good time to buy. Right. Insiders are selling out. Mom and Pop America are still holding the hot potato. Price-to-earning are still sky-high. The public believes they own a piece of the company. Please. A stock price is a social and fluid agreement on what is worth. Based on nothing else.
And finally to Mom and Pop America. They live the middle class middle age life, both employed with two kids and own their home-well sort of. Their budget is tight and they save little, mostly in their retirement accounts. The money goes so fast: Mortgage, property tax, repairs, car payments, various insurances, food, clothing, taxes, memberships,...... There is money owed on the house, the credit cards and cars. Not much room for any problems financially.
Now you only need one event to tumble this house of cards. Another major terrorist attack on our soil. A major disruption in oil supplies. A natural disaster. Or the Japanese or Chinese to balk at our stuff like stocks. South Korea has already decided to leave the dollar.Let us go with the last scenario. Asians see the dollar decline and decide to significantly reduce their US exposure. Bond issues from the Treasury to corporate go down in value raising interest rates. Corporate borrowing decreases and we head into recession. Stocks go down as Asians don't want assets dollar valued. Workers get laid off.Now we have more people unemployed. Some find new jobs with less pay and benefits. And others fearing for their jobs. So spending goes down and/or more debt is built up.
Consumer spending has driven the economy since Y2K. But that debt is ever more expensive. Less spending means less jobs again, accelerating the cycle. After all that car is good another year or two, a driving vacation for a week is OK rather than fly far away, the fridge still works fine,... Some will cut back and survive. Others will not fare so well.
But these A-bombs are only to ignite the H-bomb: Real Estate. Where the money is. Or debt anyways. The real estate bubble is real. Low interest rates have inflated it. The good loan prospects have been tapped. Now they are tapping the less able borrowers. People with no credit history, prior bankruptcies,... And the loans themselves are dangerous: No money down, interest only, adjustable rates. Adding to this problem is that homeowners have fueled a spending binge borrowing against their house. When you "take money out" of your home, you are really just borrowing more money.So rates go up. Harder to make those adjustable payments on that already tight budget. Maybe not possible. Lost or less income is tougher too. The buyers market is tapped out. The market is flat. Tough on all the people in or dependent on real estate movement. This is a huge industry, only afloat via selling and buying. This is the next step in furthering the recession.Demand is down so prices stop escalating. They even start to go down.
The whole economy slows down, each factor building on the others. With higher interest rates and a poor economy, there is little action. We start to see accelerating pace of folks that can no longer afford to keep their home. Some cannot take the higher rates on the adjustable. Others now have higher payments as principle is added. Others cannot keep up due to loss of income. They will sell. Some will be foreclosed on. People will declare bankruptcy.Suddenly it will be a buyer's market. But with few buyers. The "house rich" will find their home values in decent, perhaps owing more now on that house than it is worth. Some will sell at a big loss with no other choice.
Prices will plummet.Shock waves over and over as the cycle repeats. Money in GSE's like Fannie and Freddie and Ginnae spirals down. Companies fail. Unemployment hits new peaks. People are wiped out.Government will have little power here. They cannot bail it all out. They cannot tax more. Likely many programs will have to be cut. We may see New Deal nonsense.It will be a time of crisis. People may not take it so well. There may be mass violence or even revolts. Government response may be harsh, even martial law. Chaos brings the risk of totalitarianism.
Of course it could be good too. People may turn to the real quality things in life-which are not things: Peace and quiet, nature, spiritual paths, friendships, family,... The environment may heal. Our marked decrease in consumption would dry up all the Muslim terrorist funding and the growth of Chinese military and economic power.Of course I could be wrong.
Yes this new century. Worse than the Great Depression of the last century to be sure. Perhaps the end of the United States and Western Civilization as we know it. These great depressions are part of the cycle of economics. Each prosperity carries the seeds of its own destruction.
First we must look at the current situation. We start with the Federal Government. Even during the Roaring Nineties there was no real surplus, just a lower creation of debt. You see the federal accounting is Enron and then some. About half is hidden from view, so there has been deficit spending all along. Yet those turkeys were licking their chops on how to waste the imaginary surplus. Now our deficit, which is nothing more than debt, is at record levels and increasing at record levels. Some say the Debt doesn't matter. It's all owed to the people anyways. Well both are wrong statements. Our debt is being bought up by foreigners, especially the Japanese and Chinese. They do this to prop up our spending so we can buy their stuff. Problem is, now the dollar is sinking and less attractive. When they decrease or stop buying or worse yet sell these issues, we are out of cash stream.
The only way to make the dollar attractive is to reduce the Federal Deficit, reduce our trade imbalance or raise interest rates. How about spending less? I hope you are laughing. The pork-barrel Congress is like a bulimic at a buffet. President Bush has yet to veto a spending bill. The outlays for Iraq, Afghanistan, The War on Terror and Homeland Security are endless. Bush even further increased Medicare commitments with his drug plan. So reducing spending is out. How about a tax increase? Oh yea, I forgot we gave refunds to the rich and child credits to the poor who didn't even pay taxes. This one is very unpopular. Hardly a way to re-election.
Finally you can cop out and "print more money." This has been going on with the creation of credit by the Federal Reserve. This makes our dollars less valuable and fuels inflation. Inflated dollars make debt less expensive. If you can understate the true inflation rate with the Consumer Price Index, then you can look better too. Plus you can use that formula to figure into entitlements indexed to the CPI, when in fact their true value is less. Remember the CPI doesn't include gasoline and food. Most of need the former and all the latter. And inflation is wild with important big items like college tuition, home prices and health care. This "solution" is a quick dangerous fix that will encourage foreigners to get rid of not only federal debt issues, but anything in dollars-like US stocks and bonds. Crash anyone?
Raising interest rates is the only real solution to inflation. But if the Fed raises rates, then the debt machine no longer fuels the false recovery that re-elected Bush. But if the lenders don't want dollars, then rates will have to rise. Between a rock and a hard place? The Fed doesn't really control most rates anyhow, especially longer term rates. Now let us look at the banking industry which includes insurance companies, brokerage houses, savings and loans and anybody else in the lending business. They are out on a limb. The Fed has let them keep almost nothing in cash reserves. The money is out of the vault. They are counting on it to be re-paid. And much of it is actually in complicated leverage positions called derivatives. Nobody really knows how the damn things work. They could work like bombs. And much of the loaning is now in real estate, which we shall see is a shaky place. Pun intended.
Corporate America is seemingly doing fine. Or is it? The big old companies in steel and autos are heavily behind in their ability to meet pension promises. And the federal bail-out agency has limited funds. Companies are beholdent to stcokholders and are still fixing the books Enron style. Gotta keep those stock options too. The best fix is to let go of workers.The stock market is up again. Joy. Now is a good time to buy. Right. Insiders are selling out. Mom and Pop America are still holding the hot potato. Price-to-earning are still sky-high. The public believes they own a piece of the company. Please. A stock price is a social and fluid agreement on what is worth. Based on nothing else.
And finally to Mom and Pop America. They live the middle class middle age life, both employed with two kids and own their home-well sort of. Their budget is tight and they save little, mostly in their retirement accounts. The money goes so fast: Mortgage, property tax, repairs, car payments, various insurances, food, clothing, taxes, memberships,...... There is money owed on the house, the credit cards and cars. Not much room for any problems financially.
Now you only need one event to tumble this house of cards. Another major terrorist attack on our soil. A major disruption in oil supplies. A natural disaster. Or the Japanese or Chinese to balk at our stuff like stocks. South Korea has already decided to leave the dollar.Let us go with the last scenario. Asians see the dollar decline and decide to significantly reduce their US exposure. Bond issues from the Treasury to corporate go down in value raising interest rates. Corporate borrowing decreases and we head into recession. Stocks go down as Asians don't want assets dollar valued. Workers get laid off.Now we have more people unemployed. Some find new jobs with less pay and benefits. And others fearing for their jobs. So spending goes down and/or more debt is built up.
Consumer spending has driven the economy since Y2K. But that debt is ever more expensive. Less spending means less jobs again, accelerating the cycle. After all that car is good another year or two, a driving vacation for a week is OK rather than fly far away, the fridge still works fine,... Some will cut back and survive. Others will not fare so well.
But these A-bombs are only to ignite the H-bomb: Real Estate. Where the money is. Or debt anyways. The real estate bubble is real. Low interest rates have inflated it. The good loan prospects have been tapped. Now they are tapping the less able borrowers. People with no credit history, prior bankruptcies,... And the loans themselves are dangerous: No money down, interest only, adjustable rates. Adding to this problem is that homeowners have fueled a spending binge borrowing against their house. When you "take money out" of your home, you are really just borrowing more money.So rates go up. Harder to make those adjustable payments on that already tight budget. Maybe not possible. Lost or less income is tougher too. The buyers market is tapped out. The market is flat. Tough on all the people in or dependent on real estate movement. This is a huge industry, only afloat via selling and buying. This is the next step in furthering the recession.Demand is down so prices stop escalating. They even start to go down.
The whole economy slows down, each factor building on the others. With higher interest rates and a poor economy, there is little action. We start to see accelerating pace of folks that can no longer afford to keep their home. Some cannot take the higher rates on the adjustable. Others now have higher payments as principle is added. Others cannot keep up due to loss of income. They will sell. Some will be foreclosed on. People will declare bankruptcy.Suddenly it will be a buyer's market. But with few buyers. The "house rich" will find their home values in decent, perhaps owing more now on that house than it is worth. Some will sell at a big loss with no other choice.
Prices will plummet.Shock waves over and over as the cycle repeats. Money in GSE's like Fannie and Freddie and Ginnae spirals down. Companies fail. Unemployment hits new peaks. People are wiped out.Government will have little power here. They cannot bail it all out. They cannot tax more. Likely many programs will have to be cut. We may see New Deal nonsense.It will be a time of crisis. People may not take it so well. There may be mass violence or even revolts. Government response may be harsh, even martial law. Chaos brings the risk of totalitarianism.
Of course it could be good too. People may turn to the real quality things in life-which are not things: Peace and quiet, nature, spiritual paths, friendships, family,... The environment may heal. Our marked decrease in consumption would dry up all the Muslim terrorist funding and the growth of Chinese military and economic power.Of course I could be wrong.
