Wake Up! Economic Catastrophe Ahead
Posted on January 18, 2008
Filed Under Economic Crisis, Stock Market Crash
America is in a dire situation with our economy imploding and the traditional tools with which to fight the crisis unavailable due to fiscal mismanagement. We are approaching a tipping point, yet nobody seems to be discussing these issues, focusing instead on tears, nuance, and innuendo. The Dow is down another 100 points this morning and over 1200 points this year-that’s in 3 short weeks. The stock market is reacting in part to the collapsing housing market and a report this week showing that new home starts are down by more than a third. Food costs are soaring as we see the impact of $100/barrel oil finally working its way through the economy. Our currency is collapsing and no longer able to withstand our countries irresponsible fiscal policy. 
The falling dollar is inflationary as it drives up the cost of imported goods. With banks mired in the sub-prime mortgage crisis and unwilling to loan money, real estate prices continue to drop with those combined factors causing foreclosures to mount. Add to that witches brew the rising unemployment rate and we have some real trouble on our hands.Rising food and energy costs, coupled with insecurity over the economy and employment prospects, coupled with declining equity and the inability to tap into our only form of savings-our real estate-to offset these forces is having a chilling effect on consumer spending-the engine that has driven this economy for several years. So we’ve heard this all before, right? The Fed will cut rates, stocks will rally, housing will pick up, and all will be like before. Lets just say Perhaps Not.A recent Brookings Institute study pegs the daily cost of the Iraq War at $270 million a day. A day! A recent congressional study has suggested a higher amount. With that huge chunk of change being taken out of the economy how exactly have our lives changed, those that haven’t actually gone to serve? I don’t’ know about you, but everyone I know has gone on to buy their HDTV’s, their ipods and computers, sushi, Xboxes, and all the other things that make America go round. How is that possible?  In previous wars taxes were raised, resources were diverted, and citizens felt the pain. The reason that’s not happening now is because its all being paid for by credit card in the form of government bonds. In the past that was still ok because we were the ones buying our governments bonds, so we owned our own country, but now it is the Chinese who has been buying and has become the largest holder of our debt.So now take the fact that our debt is held by the Chinese, combine it with the currency crisis we have been in, and then mix in economic storms that have been blowing and you see a perfect storm developing. In the past we’ve crisis in the stock market were met with a loosening of Fed policy in the form of lower rates. This put money into the system, which then boosted the stock market, staving off the crisis.  Crises in the housing market were met the same way-lower rates would make for cheaper mortgages sending real estate prices climbing. Along with other monetary tools, an interest rate adjustment was a powerful Fed elixir that helped keep our economy stable in recent history. It is not a free lunch, though. Lower rates put pressure on the currency. As rates drop other currencies become more attractive to investors causing the dollar to drop. Historically our dollar has been so strong that we could weather an short-term fluctuations in our currency, but this is no longer the case.  The dollar has been in utter free-fall now for years Foreign investors in our currency are getting nervous as their enormous dollar investments continue to lose value. They are not going to stand idly by forever. If the dollar continues to drop one of two scenarios will take hold: The Chinese and other foreign governments will demand that we protect the dollar by raising interest rates lest they shed themselves of their dollar denominated assets. Speculation has been rampant that Federal Reserve chairman Bernanke is readying an interest rate cut of ¾ point, a historically huge figure, and suggestive of his concern over the economic crisis facing us. It is not a stretch to call a rate cut of that size a panic move. The question is will that be enough to reverse a collapsing stock and housing market?  Imagine if the Fed couldn’t make that rate cut because his hands were tied by the Chinese. Imagine further that he had to instead boost rates by a full point or two. The ramifications would be calamitous. Forget about a stock market down 1200 points; try 4-5000 points on for size. And with mortgage rates going through the roof what sort of impact would it have on housing costs? It wouldn’t just be a recession we’d be talking about but Depression, something most of us have never experienced in our lifetimes.What about the other scenario? What if instead of pressuring a rate hike the holders of our debt just begin to liquidate, transferring their investments to more stable currencies? You know how the market works-increased supply coupled with dried up demand leads to lower prices. The dollar would plummet leading more holders of the currency to jump ship and initiating a vicious cycle. Inflation would soar, as the cost of imported goods would be impacted by our eroding dollar. This is the sort of dynamic that took hold in Weimar Germany after World War I. As the currency continued to lose value Germans were arriving at stores with wheelbarrows full of marks unsure of whether they’d be worth anything the next day. These aren’t far-fetched lunatic rantings. I’m not a lunatic, am I? Well…  This is what happens when you finance your countries wealth, retirement benefits, health care, and national defense with your children’s money. We have got some serious economic problems to deal with. And this all leads to my question: Here we are in an election year with these absolutely huge issues at hand, so why I ask you are we not talking about them? Why are we talking about Lyndon Johnson and who deserves credit for civil rights advances, whether this one teared up intentionally, whether this one has a bad temper, whether this one tried pot as a teen, or whether that one should have invoked Reagan’s name as an agent of change.The only one who has even come close to broaching these subjects is Ron Paul and he’s been branded an utter whacko.How can nobody be addressing these issues? They say we are at a tipping point with the environment and that very well could be, but we are also at a tipping point with the economy and if we tip we will never be able to do a thing about the environment, we might never recover. Empires fall. Ask the Brits. Ask the Romans. Think about these things when choosing your candidate.
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