An Historic Challenge for New Leadership
[From Euro Pacific Capital]
At long last it is official. Even the government’s own statisticians now admit that we are in a recession. They have even concluded that it began in late 2007. How wonderfully candid of them!
To fight the downturn that it can no longer deny, the government has budgeted some $3 trillion to spend the economy out of recession. However, there is increasing evidence that the recession is deepening, just as we have forecast over the past year or so. It is now rumored that a further $8 trillion (some $25,000 dollars for every American man, woman and child) is being considered. Many people are worried and are beginning to wonder where it will all end.
But, as the saying goes, even the darkest cloud has a silver lining. Provided the incoming Obama Administration makes the right decisions, great opportunities lie ahead. The situation we face is terrible. Indeed, we that a full-blown depression in looming. Some may ask for the source of this pessimism given the relatively benign forecasts favored by most economists.
The answer lies in the range of our economic perspective. Perhaps arrogantly believing that the sophisticated modern economy lacks historical precedent, most economists and analysts look back only as far as World War II. Somehow it is assumed that 99% of recorded history offers no lessons for the modern world. This is naïve.
If we adopt a far longer-term perspective, we can find some parallels to the Bush-Greenspan bubble that we now see unwinding: the bursting of the South Seas bubble in 1720, and the Stock Market Crash of 1929. Both events led to unprecedented losses and took years to recover from. We believe that history will record 2008 as the year in which a decade long boom, which began with the tech boom of the late 1990’s and continued with the real estate boom of the middle years of this decade, was finally pricked.
All three crashes were based, essentially, on massive, irrational, speculation. But the potential depression that will follow the most recent crash will face two problems not seen by the first two: massive leverage and institutional corruption.
Today, vast numbers of consumers are highly leveraged with credit card debt, auto loans, student loans, overdrafts and mortgage debt. In normal times, such levels would have been considered grossly imprudent. But the past 10 years have been anything but normal. Given that many of these consumers have scant ability to service the loans they have taken, the debt has been characterized as the “toxic waste” of the financial industry.
The banking system carefully hid most of this “toxic waste” within derivative structures and an abuse of off-balance sheet accounting to a degree that amounts to the greatest financial fraud in history.
The fraud was directly caused and tolerated by policy makers. In an effort to avoid healthy recessions and to perpetuate the good times, the Administration, under Bush and Greenspan, pumped trillions of unearned dollars into the world economy, laying the foundation for the unprecedented real estate and consumption booms of the 2000’s.
In order to postpone and disguise the inevitable pain of America earning less than it was spending, Bush and Greenspan quietly depreciated the currency and borrowed massively.
Although the risks were systematically dismissed for years by the Government, banks and corporations, the horrors that result from the ‘deleveraging’ from such massive speculation, debt, leverage and fraud, are now dawning with ferocious intensity.
On the bright side, things may be so bad by January 20, 2009, and people so scared, that they will be prepared to accept policies, delivered by an outstanding level of oratory by President Obama, that they would have been totally unaccepted only months before.
We know that he has the skill. But if he also has the vision and the nerve, Obama may even be able to convince America to accept the excruciating pain necessary to restructure our economy and restore our national wealth. This must involve boosting production at the expense of excessive consumption.
It is a long shot, but at least it is a possibility that could end in a resurgence of American prosperity and power. Should Obama fail to seize this painful but historic chance, the markets will be left to deliver the inevitable pain. The credit rating on American debt will be cut and the U.S. dollar and markets will plummet, delivering a blow to the standard of living of most Americans that will threaten insurrection.