At Ponder This… we have been publishing calls for a large economic adjustment in the U.S. and global markets since March of 2005. The operating thesis has been that the debt saturated U.S. economy, operating as the primary global product vacuum, would not be able to remain buoyant once the serial Federal Reserve inspired economic bubbles finally ran out of gas.

Before I get to my analysis of the present situation, I would like to briefly review where we have recently been. Without awareness of what came before, one can have absolutely zero knowledge of where he/she currently is and where is headed.

Exiting the Fed inspired tech/telecom/internet bubble of the late-1990s and fearing a systemic meltdown in the overall American debt economy and consumer culture, Alan Greenspan, one of the worst central bankers in history, slashed interest rates and pumped the U.S. (and therefore global) economy with below-market, cheap and easy credit. Coinciding with these moves, which would severely undercut the value of the U.S. dollar (Federal Reserve Note), foreign central banks took on similar policies to ensure that their currencies would not appreciate too significantly, which would have the effect of making it harder for them to export goods. Essentially, Greenspan instigated a global printing press bout.

This “competitive currency devaluation” led to huge cash resources for many central banks. As these entities looked for a place to put their cash, they bought treasuries and mortgage-backed bonds, thereby further over-pricing those types of securities and allowing the government and U.S. home buyers to secure massive amounts of debt at below-market rates of interest. Further, this printing press “capital” reduced the rate of interest for nearly any type of debt any social entity may have chosen to take on.

This bout of global (re)-inflationary psychology led to a massive credit bubble, which became particularly acute in Western, and especially U.S., housing markets. Given that the U.S. had not seen a meaningful housing decline since the early 1990s, and given that numerous forces were aligning to force mortgage rates far below what they would likely be in a true free market, people fell all over themselves to buy houses, condos and other forms of real estate. Given the pop in home buying ability, made possible by ridiculous lending practices that included interest-only mortgages, negative amortization mortgages and adjustable-rate mortgages, among others, housing values surged. Greenspan’s efforts to keep the over-leveraged fractional reserve economy afloat through his tenure had succeeded in stoking the “Mother of All Bubbles” as millions of people took out previously unheard of loans. Wall Street, the government sponsored entities (Fannie Mae and Freddie Mac, among others), global central banks, and generally foolish traditional lending institutions all gathered together to put way too much credit in front of the American home “owner”.

Given that mortgage debt is a drain on the payee’s ability to live a financially healthy life, the outrageous surge in mortgage and other related debt was destined to cause massive headaches for many, many individuals and organizations. For quite a while, however, such sensible, reality-based thinking was tossed aside for instant gratification. As equity built up due to crazy loans stoking housing “values”, many home owners who were spending beyond their means were simply allowed to postpone the day of reckoning by refinancing their mortgage debt into a bigger loan, or, similarly, taking out a home equity line of credit (HELOC). These credit vehicles allowed for further significant short-term buying power, at the direct expense of long-term financial health.

As the system finally came to a situation of total disconnect with economic reality, leveraged speculators, hedge funds, poorly managed government entities, poorly managed households, foolish lending institutions and other social entities had all set themselves up to be whacked by any stalling in the growth of the credit-debt bubble. We have called this a problem for a long time.

Now, roughly a year from the peak in credit complacency, we are starting to see the effects of what happens after a housing/consumer/credit bubble of unprecedented magnitude starts to burst.

Let’s look at some of the clear-as-day signs that the pseudo-reality so many have become foolishly accustomed to is starting to really change back towards fundamental long-term reality:

1. As our central bankers have risked destroying the dollar to try to save a debauched system, the global financial community has bid up the price of commodities to a startling degree. Many on the economic margins are being destroyed by rising fuel and food costs.

2. As the clearly unsustainable housing/mortgage credit bubble has begun to collapse, new home construction has fallen of a cliff.

3. Today, news outlets everywhere are reporting that consumer bull market stalwart, coffee giant Starbucks (SBUX), is going to close 600 stores. This company, a clear symbol of the credit expansion of the last 20 years, symbolizes a great deal of over-expansion that will now lead to a necessary contraction of previous excess. When consumers are struggling to pay for gas and make their bloated mortgage payments, a $3 latte is likely one of the early casualties.

4. In a case of “reality dose directly ahead”, Merrill Lynch is now saying that General Motors (GM), the long time linchpin of the U.S. industrial economy, may go bankrupt. There was an old saying “As GM goes, so goes the U.S. economy.” Well, if that’s true, it is not a good omen for the rest of the economy. The story of the past 40 or so years in the U.S. has been one of a constant descent of U.S. productive manufacturing abilities. We do not really make stuff. We consume. Over time, consumers fall off, while the producers thrive.

5. Numerous massive financial institutions are calling for a total meltdown. The Royal Bank of Scotland issued a global stock and credit crash alert. While there is news flying that Fortis Bank is predicting a total meltdown within weeks. Finally the massive Bank of International Settlements is warning of significant financial turbulence.

This list could be continued nearly indefinitely, but I will hold off from going berserk. To put it simply, the ridiculous credit bubble, debt and consumer culture and related governing policies have put the economy in a serious bind. We are witnessing what many came to foolishly believe was not possible: the day of reckoning for the American consumer economy. Given that this underlying linchpin of economic activity (as foolish as it was) is rapidly coming undone, it is relatively safe to say that there is upon us a new economic reality. Only those who seek reality-based answers will be able to thrive in the upcoming environment. Those who put blind faith in the status quo will face some serious poop hitting the fan then splatting them right in the face. There is no time to be an ostrich. There is simply an environment of long term reality facing us that calls quite clearly for reason, research, independent thinking, personal effort and ingenuity. The solutions that have been propagated in the “mainstream” will not save you from the problems that the mainstream has been so adept at ignoring. Ignorance is only bliss until the laws of reality slap you upside your head.

Peace,
Kemp Moyer




Filed under: Politics, Social Mood, Economics, Current Events