The U.S. Economy Is Still on Life Support 8 comments
John Browne
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On Monday October 13th, the Dow took the fifth biggest upward leap (in percentage terms) in its history and, most notably, since the 1930's. It appeared that Paulson and his fellow G-7 finance ministers had solved the credit crisis. Despite the fact that G-7 taxpayers will be stuck with $3.5 trillion of liabilities to support their governments' bailout plans, the stock markets nevertheless bustled with euphoria. The next day, reality dawned once again, and all markets closed down.
The truth is that these enormous bailouts enacted around the world, most notably in the United States, have done little or nothing to tackle the enormous deleveraging that is driving us into a serious recession and, if badly handled, a depression. Increasingly, politicians and commentators are talking about the need for a massive, new stimulus package, likely to cost trillions more dollars.
The extraordinary thing is that virtually no one dares even to mention the real underlying problem--that America has for the past thirty years been consuming more than it produces. During that time, the American consumer, accounting for 72 percent of Gross Domestic Product (GDP), has been financed from the retained earning of foreigners, most notably of China, Japan and more recently Russia.
Based on the willingness of these foreign producers to provide the funds, Americans have engaged in an orgy of easy credit and excessive consumption. In short, America is no longer paying its way, and is living off the earnings of its economic neighbors.
It is a rake's progress and cannot last much longer, especially as the creditor nations, such as China, will soon need their own money back in order to finance their own leap to 'developed' economy status.
Millions of words have been spoken over the last month alone about how America must solve its economic and financial problems. But the stark realities that will result from massive deleveraging in the face of a massive recession have been barely considered. Apparently, no one dares to mention it.
We feel our readers should maintain an acute awareness of these underlying problems, particularly as the Presidential candidates, financial regulators and Wall Street cheerleaders appear bent on concealing the underlying truth.
The $3.5 trillion thus far committed to lubricate the credit markets have yet to produce any meaningful result. Even that vast total is unlikely to be sufficient to meet the tidal wave of bad loans yet to hit the banking system.
As the massive Bush-Greenspan credit orgy deleverages, corporate profitability is likely to fall dramatically, driving stock prices still lower, further eroding personal retirement accounts. Once confronted with unemployment and bleak prospects, even those who have been model financial citizens will be forced to default on credit card debts, auto and personal loans and, of course, home mortgages.
The tsunami of defaults crashing into our banking sector will ultimately overwhelm all government attempts to contain the damage.
As the mighty American economy shrinks, other countries, such as China, will see their export earnings fall. They may have to sell parts of their vast holdings of U.S. Treasury bonds, driving still higher the cost of dramatically increased U.S. Government borrowing.
On average and adjusting for inflation, U.S. equities have under-performed badly in this century. This will continue until America restructures itself to produce more than it consumes.
Meanwhile, the short-term Treasury bonds of hard currency governments, some offering negative yields, will continue to perform well in capital appreciation against the U.S. dollar.
China is likely to experience genuine, profitable systemic growth. However, in 2008 its stock market has fallen by some fifty percent. As a result, China and the BRIC countries could present good investment opportunities as we move into 2009.
As the recession deepens, gold could fall in price, at least in the near to medium term. But, the world's financial system will remain precariously balanced for some time, which will create a floor for gold. Furthermore, the vast amounts of 'monopoly' money now being injected into the major economies will eventually show up as inflation, possibly even threatening the viability of paper currency. Prudent investors will continue to hold a major allocation in gold.
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This article has 8 comments:
In short, America is no longer paying its way, and is living off the earnings of its economic neighbors.
This is a two nations game in which the US buys what it can not afford, and BRIC (say) sell what they need to keep growing jobs and stability. It is a symbiotic relationship. Historically we have very similar cases - none ended well.
To balance :the US needs to earn credits from its creditors. Tell us how to balance the accounts and we will listen carefully. Trade is too obvious (simple), and our creditors conspire to avoid US exports by pegging their money below its fair value to the dollar. They have in large measure been an bettor in this relationship with full knowledge it could only end badly for both of us. Free trade, not negotiated trade (WTO) is what we need. Tell us how.
"Spend, Forrest, SPEND!!"
In reply Forrest Gump quoted words of wisdom learned at his Mama's knee, "Bankrupt is as bankrupt does."
And that's all he had to say about that.
1) Support the US citizenship and offer large amounts of cash to invest alonside private equity into long-term investment opportunities (no more quasi-government crap thanks). Energy, telecommunications, Internet, roads are all ways to increase upward mobility which creates jobs for the citizenship to slowly but surely pay off debts. Of course, the foreign debt holders would not be happy as we forcefully tell them we will be restructuring our debts and yes would liquidate treasury. There will be geopolitical consequences. My strong opinion is that foreign debt holders will wind up doing this anyways at a point in time, but will bleed us for awhile as our consumption drops.
2) Force US taxpayers to continue footing the entire global tab of paying off foreign debt holders through taxation either inflation, directly or both. In this scenerio the middle class is finished off and civil unrest or perhaps even outright revolution would occur.
So if it were up to me, I would crank up the GDP in the direction of upward mobility especially on energy, spend some real time in conducting economic research in forecasting the effect of such investment which does not appear at this point to have been done.
Washington has finally been shocked out of the denial stage just recently. I would sit down with the largest sovereign debt holders and state clearly what our intentions are and restructure that debt sooner rather then later, then bolster US intelligence on the ground and on our borders to prepare for geopolitical consequences. But so far, is point #2 occuring. I suppose we all will know in short order, probably by the end of Q1 2009 when policy course has been set for the short and medium term.
Remember; not that long ago, transactions were calculated with an abacus.
Now, with ever more powerful computers, it is possible to create and track a myriad assortment of instruments that a select few understand and manipulate to their own benefit. The rest of us are along for the ride, like it or not.
Is the sky falling, as John B says? More likely, no. These current events really represent the birth of a new world order which will continue the inevitable march toward one government very much like that of Aldous Huxley's Brave New World. Credit is soma, people. Huxley had the right idea but the wrong substance I'm afraid.
Do you really believe that credit is going to be tightened and level off? Don't bet on it. There are millions if not billions of people in China and India who can and will afford a "modern" lifestyle. The unborn in these countries will not know or be able to comprehend the suffering their ancestors experienced.
Eventually we will all be rich and unfortunately only we, a few animals, insects, virus' and bacteria will be around to enjoy it. I'm glad that each of us extremely intelligent yet selfish creatures is mortal.
But as the late George Carlin said, the Earth will eventually shrug us off like a bad cold and move on without us. That much is as reliable as death and taxes.
When does God plan to get off of his lazy butt and rescue us from ourselves already. The Bible is notoriously bad at telling us the date of His return. Wow! Marx was right after all wasn't he? I'll take two, please.
But as they say, I have digressed.
Class warfare started during the sixties but the Hollywood film and television industry, under the Reagan administration, classified the war as a battle of the buffoons.
"Riches are a Signe that a Man is of the Chosen by God but Povertee that Hee walks with the Damned."
John Winthrop quoting John Calvin
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