Marcus Cake

Related articles: The decline of the US dollar should hasten the evolution to global markets

A few years ago, there was no discussion of a pending depression. I am only aware of one commentator that was unequivocal in his prediction of a depression. I repeated those predictions here in my articles of the potential .Net boom. Harry S Dent forecast the recession based upon demographic cycles in a book a few years ago. Forecasts of recession are common and the prospect of depression is being discussed. The US Federal Reserve forecasts a 50% probability of recession this year.. Commentators are now starting to question the depth and length of the pending recession. Most consider it to be severe. Some draw parallels with the Depression of the 1930’s.The situation will be exacerbated by unserviceable US foreign debt, unserviceable personal debt and trade deficits. The global community has financed excessive US consumption. In theory, the market forces or independent government agencies or global financial institutions should have implemented corrective measures. In practice, these measures have not eventuated. If the US enters recession, foreigners will no longer have the luxury of maintaining the status quo. They will need to sell their US dollars and the repatriation of capital currently invested in the US to other regions around the world. The global community may be ill-equipped to handle this crisis.

The US consumer has driven much of the world economy for decades. It has been the perceived centre of the world for many industries. This is shifting. The primary source of global growth is likely to be Asia and Europe. This is a demographic reality as hundreds of millions of people in Asia enter the middle class. We need to survive the shift from US centric to global.

“The United States will be unable to dominate global capital markets activity in the 21st century as it has done in the past, but they posit that it can legitimately aspire to lead one global marketplace.” Global capital will need to be looking for investment opportunities in Asia and Europe. Some capital markets are too small and lack the necessary human capital to be viable destinations for international capital. The internet and online industry networks can overcome these shortcomings. Online industry networks will improve the allocation and efficiency of capital.

In addition to my previous article on the decline of the US dollar , the following article provides further commentary on the pending depression.

US Housing Market Crash to result in the Second Great Depression, Marketoracle.co.uk, 24th February 2007

Extract:

• “The US economy is in danger of a recession that will prove unusually long and severe. By any measure it is in far worse shape than in 2001-02 and the unraveling of the housing bubble is clearly at hand. It seems that the continuous buoyancy of the financial markets is again deluding many people about the gravity of the economic situation.”
  Dr. Kurt Richebacher
• “The history of all hitherto society is the history of class struggles.” - Karl Marx
• 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.
• 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.
• 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.
• 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!
• 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.
• 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.
• 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.
• “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.
• Now, 77 years later [after the great depression], 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.