PIM of SPAIN | May 8, 2009 at 07:56 amby
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“World markets are enjoying a rebound.” Leaders who had no idea there was anything wrong with the world financial system two years ago, now say the problem has been fixed. How has it been fixed? With the same medicine that caused the problem: The problem is called DEBT. Who makes sure the crisis won't rupture again? The same leaders still in charge that didn't see the problem coming last time!
Question: Can the feds now fix the crisis they never saw coming? Can the leaders who ran banks into the ground now run the banks that will help the financial recovery? Can investors who bought worthless investments with borrowed money now recognize the good investments that are on offer?
Either, Ben Bernanke, Tim Geithner, Hank Paulson nor Alan Greenspan could see that something was going wrong with the Bubble Economy between 2001-07.
"We expect the recovery will only gradually gain momentum," Ben Bernanke forecast, trying to manage expectations, "and that the economic slack will diminish slowly." "I think we are in much better shape than we were in September and October." "Recession is over by Christmas,” continues the Fed chief.
"That sense of unremitting free fall we had a month or two ago is not present today," says White House economic advisor Larry Summers.
However a real boom requires a real increase in profits. And that is not likely to happen soon. Housing prices may be nearing a bottom, but they're not likely to begin another huge rise again in our era. Once a bubble pops, it's usually over for that sector for a very long time. It also will be a long time before homeowners forget what happened to their house prices. And it will be a long time before investors are willing to make big risks on housing debt. "Nearly a quarter of US homeowners are underwater." Reports Bloomberg.
It also will be a long time before consumers return spending money beyond their means. Not only they no longer have the collateral of their house to back-up more debt, they are also growing older and wiser. Consumers have learned that they can't spend money what they don't have. Now they must save for their retirements, while knowing that their houses and stocks could lose value again at any time. The last report seen showed the saving rate was back towards 5%, a big jump up from zero a year ago, and it has to further increase to between 10-12%. Savings AND spending cannot go up at the same time, they are opposing financial powers.
Besides consumers’ incomes are falling. Wages and salaries are down 1.2% over the last year.
"Economy contracts 'faster than in the 1930s,'" says a headline in the Financial Times. A research institute is forecasting a drop in British national income of 4.3%, substantially worse than the government's forecast. The reason for this new outlook is that "world trade has collapsed by over 30%, more than forecast," explained an economist on the case. This story is not much different elsewhere. In the US GDP is falling at a 6% annual rate in the EU it is said to be 4.2%. If this continues for a few years, it will make this depression worse than the Great Depression of the '30s.
It is calculated that the U.S. economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a hallucination. Getting rid of that debt either involves a long, hard period of work and sacrifice as debts are paid down. Or, it involves something much worse.
Karl Gotthardt - albertacowpokeThese members have powered this story: