ISSUE 2 - The Economy

Issue 2 THE ECONOMY - Going Down The American Way

“ IF IT LOOKS LIKE A DOG AND BARKS, ITS PROBABLY ..… A CAT?”

The amazing thing about the unfolding demise of the American economy is not that it is happening but the seeming lack of foresight of mainstream pundits.

“We could still be feeling a little pain from the sub prime sector for a few more weeks maybe even a few months” sang the business cheerleaders of many newsrooms up until recently, as they tried to foretell a more upbeat version of what is obviously the collapse of the American economy and possibly the empire.

For the past 12 – 24 months I have been reading commentators forecasting exactly the economic tragedies we are now seeing unfold, so what have our experts been reading – comics?

In the book The Road Less Travelled the reader is initiated in the first line “that life is difficult’ stating that a refusal to accept this hard truth leads to an unrealistic worldview which makes life so much more difficult than it needs to be.

Substitute the word life for The Future - “The Future is going to be difficult”. Our refusal to accept this makes the challenges we face so much harder; physically, financially and psychologically.

Being positive is not about standing on a sinking Titanic and arguing the case that its half floating rather than half sunk. This is not helpful. Getting real is helpful. If there was ever a time to get real – this is it.

In 2004 the NZ Treasury predicted oil would be costing $26 a barrel today. This would be laughable except that profound long-term decisions are based on the advice of Treasury. Ignorance may be bliss but it can also be really expensive. Two months ago mainstream pundits and analysts in the US were saying Fannie Mae and Freddie Mac would dodge the mortgage problems. Now, those stocks have been cut in half!

The effects of US economic collapse are likely to be at least a major world recession possible an all out 1930’s style depression. Yet at best we can only hear a few officials talking in whispers – we’re just so hooked on talking up the future as an endless sea of even happier consumerism, “Our cell phones will make coffee and the cheeseburgers will give eternal youth ..at half the price”

In the last Great Depression - World trade fell by 62% between 1929 and 1930. It took 50 years for share markets to regain their pre-collapse value in real terms. 20% unemployment was not uncommon in many countries. Hollywood had to make musicals about happy homeless people, - it was that bad.

Here in New Zealand we need some official discussion about how to prepare our society for the very dramatic consequences of a major world recession, (and for that matter Peak Oil and climate change). Luckily communities up and down the country are doing it from the ground up under the banner of Transition Towns, but it sure would help if central and local government could get there heads in the game too.

Naturally no one wants to be an alarmist but if no one is sounding the alarm
…….doesn’t that make us kind of vulnerable?

GOING DOWN THE AMERICAN WAY

“Every day, Wall Street says the news coming out of the real estate and mortgage industries couldn’t get worse ... And every day, the news does get worse!”

“The U.S. is probably in its worst economic condition since the Great Depression” Money & Markets

“By the end of 2008, the economy will be on life-support and Wall Street will look like the Baghdad morgue. America's biggest financials will be splayed out on a marble slab peering blankly into the ether.” Mike Whitney

Don’t get me wrong, there is no pleasure in considering the economic demise of America and I would dread the day it’s left to Russia or China to define the terms of democracy on this planet. My concern is best summed up in the old adage, that “When the United States sneezes the rest of the world gets the cold” To which has been recently added “…and since the United States is risking a serious case of protracted and severe pneumonia, the rest of the world should start to worry” Prof, Nouriel Roubini, Stern School of Business at New York University.

So what’s happening? - America’s economy has been riding high for sometime on artificial mechanisms that are now ending. The bursting of the US property bubble was always going to hit the US economy hard, but due to a range of factors, hard could mean catastrophic. Mainstream commentators seem unable to connect the obvious dots so I’ll give it a go…..“US debt, along with the price of oil are at all times high, while; the dollar sinks to all time lows, the credit is crunched, the accounting is crooked and the property bubble (that has upheld ¼ of all consumer spending and 30% of all new job growth since 2001) has now burst wide open. These are no small compounding factors so let’s have a look at them.

THE PROPERTY MARKET: The US property bubble has been the biggest in history and now is suffering the biggest falls in history. “Just in the past 12 months home sales are down nationally almost 24%. The prices were down 5.1% from a year ago, the biggest drop on record, - A Trillion dollars in Home Values VAPORIZED! Meanwhile, new home prices plunged an astounding 13%,” Money And Markets Fri, Nov 30, 2007.

But this is just the start. According to a Goldman Sachs economist “home prices nationally will decline 15% from their highs —and COULD DROP AS MUCH AS 30% if the economy slips into recession” Article here In California prices have already dropped roughly 12 per cent (‘off the cliff) state-wide and sales have plummeted 40 per cent for the last 2 months.

This would be unfortunate enough but the property bubble has been the lifeblood to the US economy for sometime disguising just how many US jobs (3 million) were outsourced (sent offshore), not just in manufacturing but also in the service industries, e.g. 360,000 Americans got their tax returns done in India last year. Article

Property inflation creates a lot of un-produced wealth – so everyone cranks up the spending; the new car, home appliances, landscaping projects, throw in a new wardrobe, overseas holidays and maybe a few investment properties too. Heck why not when you just made on paper 10 - 100% on your property’s value. With the collapse of the property market the consumer spending frenzy of past years will drop dramatically leading to all sorts of liquidations, cutbacks and layoffs in retail, construction, property services and off course finance – which in-turn will lead to more housing foreclosures as many other stretched mortgage holders fold, (and following the biggest credit bubble in history expect more than a few to be stretched). Promised bail out plans at this stage look to be false promises.

ITS CALLED DEBT: America has been running on credit - lots and lots of easy credit for everything: houses, consumer spending, government shortfalls, foreign wars etc. During the last five years, President Bush has borrowed more money abroad than all previous American presidents combined. The government paid $327 billion in interest in 2005 just to carry the national debt (owed by the US govt) which increases at a rate of more than $7.4 billion per day!

It is estimated that US pension and Medicare programs owe $35 trillion more than they will be able afford to pay.

“Relative to their incomes, household debt as a percent of disposable income in the U.S. is now 130%. That means the typical American household has $1.30 in debt for every one dollar of income. In the early 1990s they had 80 cents of debt for every dollar of income. There is NO way ... simply NO WAY ... that the average American household can survive that financial strain, especially with property values falling” http://www.moneyandmarkets.com

Hand in hand with the property bubble has been a huge credit bubble, All across the globe that credit bubble has now swung to a credit crunch and the effects will be very unkind. “As banks are forced to raise capital and stop lending, consumers find new credit hard to get or not available at all. The same goes for businesses. You then get system wide credit collapse, and the resultant collapse in economic growth. And if no recovery is made quickly, you get a depression. Not a recession, a depression, due to collapsing economic demand.” Christopher Laird Nov 15

Credit Crisis Meltdown Is a Prelude to Global Economic Depression

ITS CALLED FRAUD

Enron was an incredible story, one of the America’s largest corporations run in its last years as a big scam with the complicity of highly respected; business leaders, politicians, Wall St analysts and auditors. 22,000 people lost their jobs & pension plans & a whole bunch more lost their investment money – a couple of guys stood trial. The subprime mortgages and all its derivatives have being a much bigger scam, running systemically through the whole of the financial sector - but now the scam is up.

“We had to run false accounts because all our competitors were doing the same”

reported an accountant for one of the largest general finance companies in the US.

A big part of the reason why bank to bank lending in the world has seized up is because the players aren’t sure if they can trust each others financial statements. Some of the experts aren’t so much lying as they don’t have a handle on what they have been peddling – “The new "creatively-innovated" financial "derivatives" of recent years are now so divorced from any real activities or product that often the people trafficking in them don't understand what they're supposed to represent. I'd bet that more than half the people in the New York Stock exchange any given day could not explain the meaning of a credit default swap if a Taliban were holding their oldest child over a window ledge across Wall Street. Peak Money, Kunstler November 12, 2007

Actually if you want to try and understand CDS’s (credit default swaps) & CDO’s try to chew through these pages where you will also learn that the same financial mechanisms that have caused the subprime crisis have also been used in the much bigger arena of corporate credit – “By implication, the problems that might ensue could make the subprime mortgage problem look like a walk in the park”. Ted Seides, Mon, Nov 26, 2007 John Mauldin’s Outside the Box

“In the end the invisible hand devoured its own fingers and became the invisble stump” W. A Jones

THE DOLLAR ON THE DOWN

The U.S. economy accounts for about one quarter of the world economy. The dollar is not just the currency of the U.S., it is the basis of the world financial system. The dollar is the leading currency in international trade, and dominates world financial transactions. By holding the position of the reserve currency of the world the US has enjoyed wealth well beyond its productivity through a variety of mechanisms, such as; world trade of oil into dollars, the purchasing power of America, the favourable set up of American companies in other countries, the desirability of rich nations to hold US dollars and the foreign investments into American stocks and bonds, and the ability to raise international loans.

But the US dollar is losing its value and its power. During the current administration the US dollar lost 60% of its value. (50% versus the Euro since 2002). “The reason the dollar has not completely collapsed is that there is no clear alternative as reserve currency” Impending Destruction of the US Economy by Dr. Paul Craig Roberts Global Research, December 1, 2007

If the Chinese and Saudis dumped their large US reserves the dollar would become a basket case but many feel confident that this will never happen because those nations wouldn’t want a) to devalue their US reserves or b) see a major reduction in their export sales through a US & world recession. Yes but all the same the US dollar's reserve currency status is increasingly looking very fragile and there are warnings that not everyone will play the game forever. “The dollar is losing its status as the world currency,” warned Chinese central bank director Xu Jian on Nov 7th and “China should shift more of its $1.43 trillion of currency reserves into stronger currencies, such as the euro, to offset weak currencies like the dollar”, said Cheng Siwei, vice chairman of the Committee of the National People’s Congress. “They get our oil and give us a worthless piece of paper,” joked Iranian President Mahmoud Ahmadinejad recently.

OIL ON THE UP.

The lower value of the US dollar coupled with Peak Oil impacts are increasing the cost of imported oil for Americans at a time they can least afford it. Unlike the Europeans, Americans have created an ultra oil dependent nation based on mega sprawling suburbs full of big energy dependent houses, relying on fuel inefficient cars rather than good public transport.

THE US IS IN RECESSION NOW - Yep it’s a Dog

SO WHERE’S IT ALL HEADED?

"...I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. Professor Nouriel Roubini, Stern School of Business at New York University.

“The avalanche-like fall of US house prices will be closely followed by the same in linked economies worldwide, and presage a harsh and very different world than the one we have lived in. In short, the party is over. We are a civilisation in collapse” Stephen Biddulph, Sydney Morning Herald Thurs 29 Nov

“………credit paralysis has infected the entire euro banking system. German institutions have almost a trillion euros of covered bonds outstanding. The mechanism for converting covered bonds into cash has broken down” Mike Whitney A Generalized Meltdown of Financial Institutions Nov 24

So far, Central bank infusions (Over $1trillion worth in a few months since July!) have been the only thing that has stopped a massive bank liquidity crisis from shutting down commerce. Credit Crisis Meltdown Is a Prelude to Global Economic Depression Christopher Laird, Nov 15, 2007

“We are coming dangerously close to a money panic”

Martin D. Weiss Money & Markets 12/3/2007

Don’t feel silly if you still find yourself asking “But is it really a dog?” I do it every time I watch mainstream media cover the Dow jumping 100 points. Maybe I have it wrong? Maybe the dire state of the US economy along with the compounding issues of climate change, peak oil, environmental devastation & emerging world food shortages don’t need to concern me for a long-time to come.

And then I wake myself up look at the unsustainable wheels falling off the unsustainable cart - right now and ask myself the question that counts - HOW CAN WE MAKE NEW ZEALAND A MORE SUSTAINABLE, RESILIENT NATION IN LIGHT OF WHAT WE FACE? – and how do we do it today?

The answer of course is a whole lot and Next issue of TOMORROW TODAY

is dedicated to bringing you the solutions - advanced, fast moving, exciting … Solutions – Today!

TE KAHA!

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“…..you can go up on a steep hill in Las Vegas and look West, and with the right kind of eyes you can almost see the high-water mark

-- the place where the wave finally broke and rolled back." Hunter S Thompson