Economies are governed by numbers; unlike doomsday theories about phantom planets entering our solar system or other 2012 predictions. A power shot of adrenaline to a damaged heart may keep it beating a season longer, but takes nothing away from the realization that an operation, transplant, or death is the only likely outcome.
A US election is just 6 weeks away. Congress is being asked to trust Treasury Secretary Henry Paulson to take $700b of taxpayer money to bail out financial institutions as 'the fix' needed to right the economy. Every twitch of the stock market is a call to act quickly. Paulson is asking for an unfettered hand. One aspect of the Bailout Bill before Congress states:
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
Where is this money coming from? The Federal Reserve will create a bond issue to cover it - in other words, they will print the money. As early as 1974, the national US foreign debt had a $3b surplus. Today, with a national debt of $10 trillion dollars, soon to increase to $11 trillion when the bailout bill is factored in, means that each individual taxpayer is holding about $25,000 worth of public debt. US dollars have yet to find their real value. By 2009 the value of the US dollar will be half what it is today.
The Credit Default Swap will give way to a collapse of Hedge Funds. It has to. Hedge Funds bear good returns for investors because of the freedom they have to act quickly, short-selling to take advantage of a fluctuating stock market. But short trading has been stopped for 900 stocks, and how will they pay for stocks held when 30, 60, & 90 day margin calls come due. With similar debt-to-net capital profiles as Investment Banks, Hedge Funds can only collapse a month or so from now.
Inflation can only increase. The Federal Reserve has held off increasing interest rates to buy dollars since 2000. With Treasury Bills bearing .017 % interest, rates have nowhere to go but up. When - not if, the Fed begins to raise interest rates to protect the US dollar, the consumer economy will grind to a halt. Mortgage rates, credit card rates, student loans, etc. will all increase. Lowered demand for goods will result in a huge increase in unemployment, at the same time as prices begin to increase for necessities like food and energy.
And what about energy? OPEC is refusing to increase production (perhaps because they don't have the reserves they purport to have). Hurricanes have damaged 800 oil rigs in the Gulf of Mexico to say nothing of the damage to oil refining facilities on the US mainland. No new oil fields in the world have been found. America has yet to give the go-ahead for Alaskan exploration and even if new fields are discovered, they will be decades away from production. Wealth, seeking a safe haven, is flowing into commodities. Yesterday, oil futures experienced the biggest 1 day gain ever, going to $125 a barrel. Some people are predicting oil will reach $250 a barrel in 2009. The US auto industry will be the next demanding a bailout. The cost of credit and oil at the pump will combine to cripple it.
Doomsayer? Or Realist? I am not an economist, but the Housing/Investment crisis is only the first salvo. Yet to come will be a cascading series of crisis' that shifts from the investment community, to the stock market, to the banking industry, to the energy sector, to the auto industry. Unemployment, housing defaults, credit defaults and inflation will paint tomorrow's American landscape.
In my next post, I'll talk about the geo-political ramifications.
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