�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
�The history of all hitherto society is the history of class
struggles.� --Karl Marx
This week�s data on the sagging real estate market leaves no
doubt that the housing bubble is quickly crashing to earth and that hard times
are on the way.
�The slump in home prices from the end of 2005 to the end of
2006 was the biggest year over year drop since the National Association of
Realtors started keeping track in 1982.� (New York Times)
The Commerce Dept announced that the construction of new
homes fell in January by a whopping 14.3 percent. Prices fell in half of the
nation�s major markets and �existing home sales declined in 40 states.�
Arizona, Florida, California, and Virginia have seen precipitous drops in
sales. The Commerce Department also reported that �the number of vacant homes
increased by 34 percent 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.
One trillion dollars 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 former Federal Reserve 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 homes. 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
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 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
Why, indeed? Why would central banks hold onto their flaccid
greenbacks when the foundation that 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 holding 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
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 percent) while millions of good-paying
factory jobs are being airmailed 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. Forty-four thousand more desperate workers have been
given their pink slips so they can join the huddled masses in Bush�s Weimar
December�s net capital inflows are a grim snapshot of the
looming disaster ahead. As the housing bubble loses steam, maxed 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 that 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 shockwaves through the global
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 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 1920s,
and the extensive stock market speculation that took place during the latter
part of 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 1920s 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 percent to $4.085 trillion and accounts for 58.8 percent 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 percent 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 1920s kept the
stock market artificially high, but eventually led 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 1920s. While the disposable income per capita rose 9
percent from 1920 to 1929, those with income within the top 1 percent enjoyed a
stupendous 75 percent 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 percent in manufacturing. During
that same period, average wages for manufacturing jobs increased only 8 percent
(This ultimately causes a decrease in demand and leads to growth in credit
�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 percent of the combined national income; while
the top 25 percent of the population took in more than 55 percent 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 result will 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 seven 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. Ten years later the country was still reeling from
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 were more evenly distributed as it was in
the �60s and �70s. But that�s not the case; so we�re headed for hard times.
Whitney lives in Washington state. He can be reached at: email@example.com.