Sunday, March 26, 2006

Worse than you think

This Daily Kos diary by gjohnsit is must-read material. The headline: "America is effectively bankrupt." The message: If we calculate our federal deficit honestly, using the same accounting methods recommended for corporations, our red ink comes down to a whopping $3.7 trillion dollars. That's ten times the amount Bush claims.

Even if the tax rate were 100%, we would not be able to pay what we owe. Printing money will thus become the only way to remove the debt monkey from our collective back. That means inflation. And -- although Williams won't make the point explicitly -- that also means fascism will probably come a-knocking at the door. Such is the lesson of history.

Bad news on unemployment, too. If we count all the severely discouraged workers (the lumpenproles, as Uncle Karl used to call 'em), the government's claimed 5.5% unemployment rate shoots up to 12.5%.

Are these assertions valid? gjohnsit draws his conclusions from the work of respected economist Walter J. "John" Williams. You can hear a good interview with him here. As the interviewer prefaces: "It's not for the faint of heart; strap yourselves in." John Williams' website is here; you'll also want to visit OpEd News.

In the afore-cited interview, we learn that the government has understated the GDP by some three percent -- meaning we are in a recession right now. But you already knew that, didn't you?

Other signs of economic ragnarok:

-- Iran is not the only Middle Eastern nation switching away from the dollar. Saudi Arabia and the UAE look ready to make the jump to the euro.

-- Federal Reserve Chairman Ben Bernanke (an expert in the causes of the Great Depression) has announced that the possibility of a future "disruptive correction" of the trade deficit "cannot be ruled out." When a Fed chairman says something like that, what he really means is "Watch out!" The trade gap will bite us in the ass, and the U.S. dollar -- which has been losing value slowly -- will soon plummet in value. And since oil may no longer be denominated in dollars, that fill-up will hurt your wallet a lot more than it does at present, because we will have to pay in more valuable euros. Higher trasportation costs means higher costs for...well, everything.

-- Isabel V. Sawhill and Alice M. Rivlin of the Brookings Institution announced darkly that
"...the federal budget deficits pose grave risks - a category 6 fiscal storm - to the U.S. economy. The current course is simply not sustainable. Promises to the elderly, especially about medical care, cannot be kept unless taxes are raised to levels that are unprecedented or other activities of the government are slashed. Postponing such action would be reckless and short-sighted. Massive amounts of capital have flowed in from around the world, financing much of America's federal deficit, as well as its international (or current account) deficit. While this inflow of foreign capital has kept investment in the American economy strong it means that Americans are accumulating obligations to service these debts and repay foreigners out of their future income. As a result, the future income available to Americans will be lower than it would have been without the government deficits.
The right-wing spin-meisters are preparing Americans for this by pretending that Bush brought about this problem through an over-abundance of "compassion" -- not through military misadventure and corruption.

-- The percentage of mortgage delinquencies keeps rising. The same dummies who kept voting for Bush also thought that adjustable rate mortgages were just ever so nifty-neato. Truth be told, one cannot easily feel sorry for people operating at that level of doltishness.

The end of the housing bubble may be even uglier than you ever imagined. Check out what John R. Talbott, author of "Sell Now!", has to say:
The problem, he says, is that home prices are way overvalued -- just as Internet stocks were during the 1990s before that sky collapsed. As evidence, he points to the growing discrepancy between Bay Area home prices and rents, an indicator commonly used by economists to determine a property's true value...

To buy these overvalued homes, he says, many consumers overextend themselves financially by borrowing more from banks. They end up paying an inordinately high percentage of their monthly income on mortgages. In Los Angeles, he points out, the average new homeowners, usually a young couple, are spending 55 percent of their monthly income on a mortgage payment...

Banks are lending more, he says, because they are sticking to their old qualifying formula of computing the ratio of the loan applicant's salary to the mortgage payment. They're doing this, he said, without adjusting for inflation.

"So the banks are using the same stupid formula. They convince these young couples to borrow a million-dollar note that they're never gonna get out from under..."
More:
Because of the above factors, Talbott predicts a wave of loan defaults and foreclosures. Bank presidents will be fired for making so many risky loans. The new presidents, wanting to clean up the mess, will unload the properties at a loss, perhaps for 40 to 60 cents on the dollar. This will flood the market and deflate home prices further.

And then, according to Talbott's prediction, the financial impact will, like an especially vicious virus, spread. First, the real estate industry will falter. Then, industries tied to real estate -- including banking, construction, home supply stores -- will be hurt.

"And then you've got a real recession," he says, "that will wash across the middle of the country."
Some of you may be thinking: "That will be the time to buy! Low housing prices!" Yeah, but -- in a depression, will you continue to have a job? Of course, one must ask how to reconcile the predictions of resurgent inflation, due to the printing of money to pay off our debtors, with the falling home prices that will occur once the current bubble bursts.

When that famous fan gets hit by a certain brown-n-smelly substance, rest assured that red-state idjits (the ones who keep voting for pork-lovin' Republicans) will continue to tell themselves that we got into this mess by taxing the rich and tossing too much money at welfare cheats and not praying to Jeebus often enough. Such people are beyond education.
Comments:
Joseph,

Great summary of the dire financial news.

I agree that things look dire, especially in terms of the oversupply of dollars internationally. But there is one 800 gorilla in the living room that no one who talks about the impending crisis mentions: the military budget. That is to say that if there is a real international financial crisis dictated by US trade and budget deficits, in which foreign holders of those dollars and T-bills have the kind of leverage that is usually applied by the International Monetary Fund to other folks' currencies, everything in the federal budget will be on the table including our obscene military budget. All our financial problems are easily solveable if we had the kind of military budget that the next couple of major powers have: about $30 to $70 billion, rather than the ludicrous $400 billion plus Iraq. And for both financial and strategic reasons, I suspect those holding the loans will require some kind of restructing like this.

With some of that $400 billion redirected from labor non-intensive sectors like building cruise missiles, to rebuilding the US infrastructure or providing universal health care, the readjustment, while painful, could be the silver lining in this whole mess.

HamdenRice from DU
 
The contradiction you note -- plummeting home price values, and equally plausible suggestions that inflation will accelerate as the U.S. government prints money to reduce its debts -- has actually been seen many times (in other countries).

What happens is, housing and other prices (as denominated in dollars) don't actually fall, or don't fall commensurate with the actual loss in value. It's just that the dollars needed to purchase them are worth far less, and wages don't begin to keep up with the deflation of the currency.

So, for example, if someone comes in from Tokyo or Germany and exchanges her currency for dollars, American real estate will be very cheap, as will much else. But for anyone buying with pre-inflation dollars, there will be no real savings. Sure, you're getting a house for maybe 50% of the peak price. But those dollars aren't worth what they were at the time peak. In essence, you're paying the same price.

To get a bargain, you'd have to be positioned to take advantage of the devaluation of the dollar.
 
I think you mean that the GDP is overstated by 3%, not understated.

Total obligations of the Federal government are now estimated at 50 trillion--not the 8 trillion that is the so-called national debt. The larger figure includes SS and Medicare and pension obligations.

During the Great Depression, real estate DID drop, by a third. You can bet it will again, by at least that much--and yes, even that will be in inflated dollars.

Trust in this: when the creditors come calling, the last thing we will surrender is our military budget (which has DOUBLED under five the Bush years, if you include Iraq and Afgh., which he doesn't), because as long as we have our military, we can tell the rest of the world to go screw themselves, we won't pay up.

In the last five years, gold has almost doubled and silver almost tripled. You want to protect yourself against what's coming? Buy gold and silver. And a gun. And get the hell out of the city.
 
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