The Commerce Department also reported that “the number of
vacant homes increased by 34% in 2006 to 2.1 million at the end of the
year, nearly double the long-term vacancy rate.” (Marketwatch)
The bottom line is that inventories are up, sales are down, profits are
eroding, and the building industry is facing a steady downturn well
into the foreseeable future.
The ripple effects of the housing crash will be felt
throughout the overall economy; shrinking GDP, slowing consumer
spending and putting more workers in the growing unemployment lines.
Congress is now looking into the shabby lending practices that
shoehorned millions of people into homes that they clearly cannot
afford. But their efforts will have no affect on the loans that are
already in place. $1 trillion in ARMs (Adjustable Rate Mortgages) are
due to reset in 2007 which guarantees that millions of over-leveraged
homeowners will default on their mortgages putting pressure on the
banks and sending the economy into a tailspin. We are at the beginning
of a major shake-up and there’s going to be a lot more blood on the
tracks before things settle down.
The banks and mortgage lenders are scrambling for creative ways to keep
people in their homes but the subprime market is already teetering and
foreclosures are on the rise.
There’s no doubt now, that Fed chairman Alan Greenspan’s plan to pump
zillions of dollars into the system via “low interest rates” has
created the biggest monster-bubble of all time and set the stage for a
deep economic retrenchment. Greenspan’s inflationary policies were
designed to expand the “wealth gap” and create greater economic
polarization between the classes. By the time the housing bubble
deflates, millions of working class Americans will be left to pay off
loans that are considerably higher than the current value of their
home. This will inevitably create deeper societal divisions and, very
likely, a permanent underclass of mortgage-slaves.
A shrewd economist and student of history like Greenspan knew exactly
what the consequences of his low interest rates would be. The trap was
set to lure in unsuspecting borrowers who felt they could augment their
stagnant wages by joining the housing gold rush. It was a great way to
mask a deteriorating economy by expanding personal debt.
The meltdown in housing will soon be felt in the stock market which
appears to be lagging the real estate market by about 6 months. Soon,
reality will set in on Wall Street just as it has in the housing sector
and the “loose money” that Greenspan generated with his mighty printing
press will flee to foreign shores.
It looks as though this may already be happening even though the stock
market is still flying high. On Friday, the government reported that
net capital inflows reversed from the requisite $70 billion to AN
OUTFLOW OF $11 BILLION!
The current account deficit (which includes the trade deficit) is
running at roughly $800 billion per year, which means that the US must
attract about $70 billion per month of foreign investment (US
Treasuries or securities) to compensate for America’s extravagant
spending. When foreign investment falters, as it did in December, it
puts downward pressure on the greenback to make up for the imbalance.
Everbank’s Chuck Butler put it like this:
“Not only did the buying stop in December by foreigners in December,
but the outflows were huge! Domestic investors increased their buying
of long-term overseas securities from $37 billion to a record $46
billion. This is a classic illustration of ‘lack of funding’. So, the
question I asked the desk was… ‘Why isn’t the euro skyrocketing?’”
Why, indeed? Why would central banks hold onto their flaccid greenbacks
when the foundation which keeps it propped up has been removed?
The answer is complex but, in essence, the rest of the world has loaned
the US a pair of crutches to bolster the wobbly dollar while they
prepare for the eventual meltdown. China and Japan are currently hold
over $1.7 trillion in US currency and US-based assets and can hardly
afford to have the ground cut out from below the dollar.
There are, however, limits to the “generosity of strangers” and foreign
banks will undoubtedly be pressed to take more extreme measures as it
becomes apparent that Team Bush plans to produce as much red ink as
humanly possible.
December’s figures indicate that foreign investment is drying up and
the world is no longer eager to purchase America’s lavish debt. The
only thing the Federal Reserve can do is raise interest rates to
attract foreign capital or let the dollar fall in value. The problem,
of course, is that if the Fed raises rates, the real estate market will
collapse even faster which will strangle consumer spending and shrivel
GDP. In other words, we are at the brink of two separate but related
crises; an economic crisis and a currency crisis. That means that the
unsuspecting American people are likely to be ground between the two
mill-wheels of hyperinflation and shrinking growth.
In real terms, the economy is already in recession. The growth numbers
are regularly massaged by the Commerce Department to put a smiley face
on an underperforming economy. Industrial output continues to flag (In
January it was down by another .5%) while millions good paying factory
jobs are being air-mailed to China where labor is a mere fraction of
the cost in the USA. Also, automobile inventories are up while factory
production is in freefall.
In addition, new jobless claims soared to 357,000 in the week ending
February 10. 44,000 more desperate workers have been given their pink
slips so they can join the huddled masses in Bush’s Weimar Dystopia.
December’s net capital inflows are a grim snapshot of the looming
disaster ahead. As the housing bubble loses steam, maxxed-out American
consumers will face increasing job losses and mounting debt. At the
same time, foreign investment will move to more promising markets in
Asia and Europe causing a steep rise in interest rates. This is bound
to be a stunning blow to the banks which are low on reserves ($44
billion) but have generated $4.5 trillion in shaky mortgage debt in the
last 6 years.
It’s all bad news. The global liquidity bubble is limping towards the
reef and when it hits it’ll send shock-waves through the global
economic system.
Is it any wonder why the foreign central banks are so skittish about
dumping the dollar? No one really relishes the idea of a quick slide
into a global recession followed by years of agonizing recovery.
Maybe that’s why Secretary of Treasury Hank Paulson has reassembled the
Plunge Protection Team and installed a hotline to his Chinese
counterpart so he can quickly respond to sudden gyrations in the stock
market or a freefalling greenback; two of the calamities he could be
facing in the very near future.
Greenspan has successfully piloted the nation into virtual insolvency.
In fact, the parallels between our present situation and the period
preceding the Great Depression are striking. Just as massive debt was
accumulating in the market from the purchase of stocks “on margin”, so
too, mortgage debt between 2000 and 2006 soared from $4.8 trillion to
$9.5 trillion. In both cases the “wealth effect” spawned a spending
spree which looked like growth but was really the steady, insidious
expansion of debt which generated economic activity. In both periods
wages were either flat or declining and the gap between rich and
working class was growing more extreme by the year. As Paul Alexander
Gusmorino said in his article, “Main Causes of the Great Depression”:
"Many factors played a role in bringing about the depression; however,
the main cause for the Great Depression was the combination of the
greatly unequal distribution of wealth throughout the 1920's, and the
extensive stock market speculation that took place during the latter
part that same decade".
The same factors are at work today except that the speculation is in
real estate rather than stocks. Just as in the 1920’s the equity bubble
was not created by wages keeping pace with productivity (the healthy
formula for growth) but by the expansion of personal debt. Also, one
could buy stocks without the money to purchase them, just as one can
buy a $600,000 or $700,000 house today with zero-down and no monthly
payment on the principle for years to come. The current account deficit
($800 billion) could also weigh heavily in any economic shake-up that
may be forthcoming. Bob Chapman of The International Forecaster made
this shocking calculation about America’s out-of-control trade deficit:
"US debt was up 10.1% to $4.085 trillion and accounts for 58.8% of all
the credit issued globally last year. That means the US expanded credit
at a much faster rate than the economy grew. This was borrowing to
maintain a higher standard of living and attempt to pay for it
tomorrow."
Think about that; the US sucked up nearly 60% of ALL GLOBAL CREDIT in one year alone. That is truly astonishing.
There are many similarities between the pre-Depression era and our own. Paul Alexander Gusmorino says:
"The Great Depression was the worst economic slump ever in U.S.
history, and one which spread to virtually all of the industrialized
world. The depression began in late 1929 and lasted for about a
decade....The excessive speculation in the late 1920's kept the stock
market artificially high, but eventually lead to large market crashes.
These market crashes, combined with the misdistribution of wealth,
caused the American economy to capsize.
(The income disparity) between the rich and the middle class grew
throughout the 1920's. While the disposable income per capita rose 9%
from 1920 to 1929, those with income within the top 1% enjoyed a
stupendous 75% increase in per capita disposable income…A major reason
for this large and growing gap between the rich and the working-class
people was the increased manufacturing output throughout this period.
From 1923-1929 the average output per worker increased 32% in
manufacturing8. During that same period of time average wages for
manufacturing jobs increased only 8% (This ultimately causes a decrease
in demand and leads to growth in credit spending)
The federal government also contributed to the growing gap between the
rich and middle-class. Calvin Coolidge's (pro business) administration
passed the Revenue Act of 1926, which reduced federal income and
inheritance taxes dramatically…(At the same time) the Supreme Court
ruled minimum-wage legislation unconstitutional.
The bottom three quarters of the population had an aggregate income of
less than 45% of the combined national income; while the top 25% of the
population took in more than 55% of the national income...Between 1925
and 1929 the total credit more than doubled from $1.38 billion to
around $3 billion”. (Just like now, the growing wage gap has spawned
massive speculative bubbles as well as a steady up-tick in credit
spending. Wage stagnation forces workers to seek other opportunities
for getting ahead. When wages fail to keep pace with productivity then
demand naturally decreases and business begins to flag. The only way to
spur more buying is by easing interest rates or expanding personal
credit, and that is when equity bubbles begin to appear. That's what
happened to the stock market before 1929 as well as to the real estate
market in 2007. The availability of credit has kept the housing market
afloat but, ultimately, the resultwill be the same.
On Monday October 21, 1929, the over-valued stock market began its
downward plunge. It managed a brief mid-week comeback, but 7 days later
on Black Tuesday it plummeted again; 16 million shares were dumped and
there were no buyers.
The game was over.
Confidence evaporated overnight. People stopped buying on credit, the
bubble-economy collapsed, and the mighty locomotive for growth, the
American consumer, hobbled into the Great Depression. Tariffs were
thrown up, foreigners stopped buying American goods; banks closed,
business went bust, and unemployment skyrocketed. Tens years later the
country was still reeling from the implosion.
Now, 77 years later, Greenspan has led us sheep-like to the same
precipice. The economic dilemma we’re facing could have been avoided if
the expansion of personal credit had been curtailed by prudent monetary
policy at the Federal Reserve and if wealth was more evenly distributed
as it was in the ‘60s and ‘70s. But that’s not the case; so we’re
headed for hard times.
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