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Financial Crisis Alarm
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by PIM of SPAIN | June 8, 2009 at 07:48 am
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When reading the newspaper headlines the question does arise whether they ‘are sleeping’ in DC?
"Americans had the habit of spending huge amounts of money with no intention of ever paying it back.” Consumers did it in the '90s until last year. Now the feds have taken over and are doing it themselves. The federal deficit for this year alone is four times last year's record. The official US public debt is exploding. It is estimated to be 100% of US GDP within 5 years, while that level could be reached much sooner.
"At 100% of GDP, even mainstream economists believe the situation will be irreversible, because interest payments will be more than the US can pay for”. At that point, the US is forced to borrow more and more just to keep up with its interest payments. That is the moment when the system will go into the ‘Ponzi’-mode endgame.
"It is expected that government won't be able to exit from its deficit spending positions”, is said on Bloomberg Radio.
"Once you go down that road, it is hard - maybe impossible - to come back.” The US won't be able to pay off its debt, and it won't be able to unload GM either. Nor will the Federal Reserve be able to sell its holding of bonds onto the open market, without causing interest rates to rise.
"Even Ben Bernanke says that 'long-term deficits threaten the financial stability’ of the nation”.
The Fed eventually will monetize the debt. Monetizing debt is paying off government debt by printing more money, which leads to inflation.
In fact it is theft on the grandest scale. Rather than honestly repaying what it has borrowed, a government merely prints up extra currency and uses it to pay its loans. Subsequently the debt is "monetized" or transformed by an increase in the money supply in doing so, lowering the purchasing power of everybody's savings.
Of course, the Fed will not want to do such an immoral deed; but it will do it anyway. Even good people do bad things when they are cornered. The feds are already pretty deep in this financial mess it looks like they still are going much deeper.
As is shown in attached graph ‘Government debt of selected G20 countries’, Japan with 200% and Italy (110%) are both ahead of the US, but their currencies aren’t the world’s reserve currency like the US Dollar, whereas their respective scale of debt are smaller, therefore consequently influencing less the world economy.
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PIM of SPAIN
San Pedro de A, Malaga, Spain
Most RecentMost Recommended Comments (3)
at 08:01 on June 8th, 2009
The Alarms are ringing loud and clear and yet no one seems to be listening.
at 08:58 on June 8th, 2009
How to motivate politicians to do the job for which they were elected?
at 01:36 on June 9th, 2009
Again nice worded your thoughts reflecting reality Roy, receive my sincere compliments.
Unfortunately people are too selfish to take the effort to understand what is happening nowadays and translate that in consequences for themselves and their children and grand children and further in the coming generations. More alertness from the people and accepting the pain now by avoiding worse in the future is something we only can wish for. People prefer to walk to their own economical (financial) dead with open eyes.
The majority of them have become homeowners and they really should realize what is happening:
Houses, as everyone knows, are deflating. There are signs that the fall in housing prices is becoming less violent, but the trend is still down.
This from Robert Shiller, in the New York Times:
"Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.
"There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan's major cities fell every single year for 15 consecutive years.
"Why does this happen?"
Shiller goes on to explain that housing markets don't adjust quickly. People make their housing decisions years in advance...based on changes in their lives. They may have found a job somewhere...or gotten a divorce...or their children may have left home...or they might just want to live in a different area. These plans take years to come together...and years to execute. They can be reversed by changes in market conditions...but not quickly.
And then, when people are planning to sell a house, they may not be in a hurry. If prices slip, they may decide to hold off - maybe for years.
Then too, decisions about buying or selling a house are often decisions taken by two people together. The husband may be desperate to get out of a sinking housing market, for example, but the wife may not want to leave her home. Even when they must sell for financial reasons, that decision can take months...even years...to reach. Often, they hesitate. The wife expects to get a better job...or the husband expects a raise...or they anticipate some other economic change in their lives that would forestall the need to sell their house.
Then, after the decision is made, there's the actual process of selling a house -- setting a price...and finding a willing buyer. In a downward market, buyers' expectations tend to adjust most quickly. Reading in the paper about a correction in the housing market, the prospective buyer expects a great deal. The prospective seller, on the other hand, tends to deny the severity of the downturn. He reluctantly and belatedly acknowledges that he'll need to lower his price. But as he gives in the market gives way further. The prospective buyer hears about more great deals that other buyers are getting...and he lowers his price targets even faster than the sellers lower their asking price."
With other words as you already mentioned, once they have to re-mortgage their house, they are not only in trouble due to higher interest rates, but even more to the very long term devaluation in house prices, it they are able to stay in their house at all!