America 's Financial Apocalypse Heralds Decade Long DepressionEconomics / Great Depression II Sep 14, 2008 - 04:28 AM GMT
Despite attempts made by Greenspan and Bernanke, there is no way to avert the payback period that has been building for over two decades. Over this stretch, America has consumed much more than it has produced. As a result, both consumer and federal debt have ballooned to record levels. And now, the payback period is upon us. The bailout buffet won't end with Fannie and Freddie. There's a lot more where that came from because the “Fed's food court” remains open, as does that of the U.S. Treasury. In fact, the autos are in the process of being bailed out with $50 billion in “loans.” I expect the airlines to also receive some form of a bailout as well.
Washington 's Three Stooges
But Greenspan and Bernanke have not been alone in what will surely be remembered as America 's Financial Apocalypse - the eventful period ushering in a decade-long depression, as predicted in my 2006 book by the same title. Certainly, President Bush did not create these trends. But his financial irresponsibility has accelerated their magnitude. In less than eight years, he has managed to increase the national debt by 90%. As the data shows, not only has he led the worst recovery since the post-WWII era, he has also positioned his successor with budget shortfalls for many years to come due to Part D Medicare, the Iraq War, and his tax cuts for the wealthy.
Combined with the staggering deficits for Medicare and Social Security , America 's economy will be in the gutter for many years to come even after the banking and real estate troubles cool down. No one else is talking about these issues because they're wrapped up in the daily drama. But save this article and others I've written because I've been mentioning the longer-term problems ever since writing my book. In a few years, more people will begin to address these issues once they are transformed into daily drama.
President Bush's attempts at a recovery have been so horrendous they've actually led to the current recession, which will turn out to be the worst in decades. I would venture to guess he is desperately pleading with officials to come up with even more gimmicks to hide the full realities of the economy so the worst will be reported only after he leaves office. But I will guarantee you if Washington and the Fed continue this reckless game of applying band aids instead of letting things play out, we will see a much bigger crisis down the road, similar to what happened after Greenspan tried to mitigate the dotcom collapse. You can bet this is going to happen because Washington does not understand the meaning of preemption.
Altogether, we have had eight years of no gains in real median wages, flat stock market returns, and minimal net new jobs. Despite what you have heard, after adjusting for debt spending, population growth and realistic adjustments to the GDP deflator, there have only been 3 or 4 quarters of GDP growth since 2005. If you adjust for military, government and minimum wage positions – i.e. jobs funded by tax payers and jobs that don't pay anything - there have been absolutely no net new jobs. Bush's largest gains have been with inflation, oil and food prices, debt, trade deficits, bankruptcies, foreclosures, and healthcare costs. If an assembly of the world's leading economic strategists were to design the most destructive economic disaster possible, they could not match the results of Bush's tenure. Even the most loyal Bush supporters will admit he has been an absolute disaster – that is if they're being honest. America is now more dependent on foreign nations than ever – not only for oil, but also credit and manufactured goods.
America 's “Resilient” Economy
Many of the pundits flood the propaganda networks with repeated denials of the problems, boasting how resilient the U.S. economy is. You know who they are. I'm not quite sure what they've been smoking. But it appears to be some sort of hallucinogen because they seem to expect Superman to bend the economy back into shape. Ladies and Gentlemen, in case mommy never told you, there is no Santa Claus and there is no Superman. And if you think Bernanke's printing presses have an endless supply of ink and paper, just wait until the real crisis appears. So you had better get ready because it's coming. It is virtually inescapable. And it's going to cause devastation around the globe. Of course I'm taking about the likely implosion of the CDS market.
Let's take a look at America 's “resilient economy.” Let's see…the entire financial system is in the process of blowing up. Already there have been over $500 billion in bank losses, with over $1 trillion more to come. Over one dozen banks have failed, with hundreds on deck. A handful of large hedge funds have blown up, with hundreds more on the way. Already, over $1 trillion has been transferred from the Fed to the banking cartel. But I estimate another $1.5 trillion will be needed to maintain liquidity as banks de-leverage over the next few years. Unemployment is now over 6% and inflation is over 5%, even with Washington 's manipulation of the data. Virtually every metric in the housing market is at multi-decade lows, except for foreclosures which are hitting new highs.
Taxpayers are now on the hook for billions of dollars of potentially worthless debt held by Fannie and Freddie. It's now official. America 's free market economy is really a socialist system for corporations. One could argue this to be a form of Fascism. My best estimate for losses due to the Fannie and Freddie taxpayer bailout are between $200 to $500 billion. The worst case scenario would be $800 billion. If this economy is resilient, I can't wait to see how it magically bounces back. When Superman fails to show up, Washington might consider giving David Copperfield a call. But this would be one illusion he won't be able to pull off. Get the popcorn ready.
The Economy Under a Microscope
Let's take a closer look at the economy. America imports oil, credit, and manufactured goods, while exporting jobs, junk bonds and inflation (via the dollar-oil link – see http://www.marketoracle.co.uk/Article5414.html for an explanation). That doesn't sound like the type of trade policy that would support claims of a superpower, unless you're only counting the number of nukes. Surely Washington is beginning to wonder how much longer Asia and Europe will continue fueling America 's credit bubble. They've already faced massive losses from sub-prime securities with much more carnage to come.
China holds about $1.4 trillion in U.S. Treasuries, but only due to their its surplus with the U.S. It can't dump Treasuries yet because the Yuan remains greatly undervalued. China pegged it to the dollar back in 2001, knowing the dollar would plummet so they'd lure dollars from U.S. consumers looking for bargains. What most people don't realize is that China 's support for U.S. Treasuries helps finance Bush's irresponsible spending sprees. By financing up to 90% of each annual deficit, China helps keep interest rates low in the U.S., which facilitates credit expansion for consumers to buy more imports - mainly from China (due to the low cost items created by China's currency peg).
Keep in mind when you buy that Dell computer or Fossil watch, you're really buying imports. Dell and Fossil actually resemble distributors more than manufacturers because virtually all of their products originate overseas. The same is true for most U.S. companies that sell branded goods. In many cases, the same is also true for the service segment of the economy. Many American IT and software development firms outsource projects to India , Canada , and other nations so they can escape the costly retirement and healthcare benefits Americans expect.
By no means does it end there. For several years, U.S. banks, tax providers, telecommunications and several other industries have outsourced to Asia - so much for the “strength” of America 's service economy. If this service economy is so “strong” someone explain to me how Asia has been able to increase its living standard by leaps and bounds in such a short period. Before you answer, keep in mind that income and wealth are finite over short periods since they are limited by human and natural resources. Make sense? If not, let me know and I'll do a write-up explaining it next time.
Corporate America 's new trend is to outsource even lower on the food chain to nations like Argentina , as a way to find more desperate workers to enslave at a lower cost. While these jobs seem like a Godsend, foreign workers will soon see the longer-term effects of corporate globalization. Already, many U.S. corporations have finessed themselves into the hip-pocket of foreign politicians and other officials to discourage unions, ensuring wages remain low and benefits never materialize.
?? (See Ya' Later) Yankee
As the economy continues its downward spiral, it remains to be seen how much longer China keeps its currency undervalued once it realizes U.S. consumers have no more money to buy their goods. Once the verdict is out, China could begin to focus on internal growth as the recession spreads globally. The global effects are already surfacing, with inflation soaring, real estate plummeting and foreign banks scrambling as they wait for the next Bear Stearns. The Chinese government could encourage its consumers to spend domestically. This would prove as a great strategy to buoy its economy since Chinese have amble savings (they save 25% of household income). Thus, once China is convinced U.S. consumers are finished, there is a good chance it will begin a gradual sell-off of U.S. Treasury securities. And this is going to be a huge problem.
The Middle East also has a huge trade surplus with the U.S. But unlike China , it has no incentive to hold U.S. Treasuries. Instead, Middle Eastern investors use their petrodollars to buy hard assets – commercial real estate like the Chrysler building, businesses and other critical U.S. assets. Yet, they still can't seem to find enough things to buy, so many Middle Eastern cities are being gutted and turned into modern architectural wonders. In the recent past when U.S. banks have begged for mercy, Dubai , Kuwait and Saudi Arabia have handed over billions from their sovereign “oil extortion” funds. But they've learned their lesson, so I wouldn't expect anymore bailout money anytime soon. Never fear! The Fed and the U.S. Treasury are here!
The Federal Reserve Disaster
The Fed needs to let a real recession run its course to clear out the trash so the economy can begin a real recovery and expansion. They've been playing this boom-bust game for several years now. And all we have seen are illusions of growth followed by the realities of mismanagement and excess consumption. Running the printing presses in overdrive won't get America out of this mess. It hasn't helped in the past and it's not going to now. In fact, using the money supply to hold off a recession and prevent bank failures ensures there will an even more devastating crisis down the road . Greenspan tried the same move in response to the Internet meltdown. And as we all know, this led to the current real estate bubble and banking crisis.
But even shutting down the Fed's printing presses is insufficient for a lasting and real recovery. Washington absolutely must restructure free trade so that the playing field is level for all participant nations. This implies that America structure a universal healthcare system. And America 's badly broken free market system must be repaired, because as it stands today, it represents socialism for the wealthy.
As a result of the combined actions of Washington 's Three Stooges, the harsh effects of this corrective period will send America into its worst recession in several decades. Thereafter, a silent depression will persist for many years as Americans struggle to keep pace with inflation, job quality continues to decline and opportunities for the working class vanish into thin air. While U.S. living standards have been in decline for over two decades, the silent depression will accelerate and make these declines more permanent.
It's highly unlikely the rest of the world will be able to escape the pain caused by Washington 's Three Stooges because the dollar-oil link is used to hold every nation financial hostage. China will feel the effects as will India ; and yes, even Brazil . Unlike America 's fate, these developing nations will mount a full recovery. And the lessons learned could strengthen the pressure to dethrone the dollar as the universal currency. But don't expect Washington to take this lying down. In fact, it might eventually lead to a major war.
Perhaps the only region that will have some insulation from the meltdown will be select oil-rich nations in the Middle East . But they aren't likely to walk out of this completely unscathed due to contained oil demand. But let's not forget that OPEC has control over pricing. The payback period is going to affect virtually everyone. And for those who think they will avert the payback – namely those most responsible for this mess - like Washington 's Three Stooges and bank CEOs - their payback will last eternity because their role in America 's Financial Apocalypse will be recorded in history books.
By Mike Stathis
Copyright © 2008. All Rights Reserved. Mike Stathis.
Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.
The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.
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