The Big Picture
Dave’s Economic Assessment – April 2009
Handy PDF version
This work is the product of years of research and months in the writing. It’s an attempt to give a high-level overview of all the relevant pieces of the economic situation this country finds itself in. Most of the ideas have been gleaned from experts far more knowledgable than myself – I’m not an economist. These are simply the most important ideas and facts I’ve come across in my extensive reading about the current situation over the last nearly two years. None of these facts are a secret, nor have they come to light recently. Much of what legislators claim to be surprised about has been known for nearly two years.
For a long and somewhat technical overview, baseline scenario does a great job. I also recommend their financial crisis for beginners. This American Life did some great episodes as well. Here is the short version: We have had 30 years of steadily increasing debt – public, private, and financial sector. Everyone who remembers the depression is long dead or retired, and modern day economists have spent much of this time convincing themselves that the laws of the market, the business cycle, and recessions in general were a solved problem, never to bother us again. The arrogance coupled with the absolute corruption of our current campaign finance system has ensured that wall street has been dictating policy the entire time. Our treasury and Fed continue to pretend that this is simply a liquidity problem, and not a massive ponzi scheme founded on theft and lies. It is nothing more than legalized theft. Trillions of dollars in profit go to people taking insane risks, and when all that can be stolen has been, the bottom drops out. Insolvent banks (including foreign ones) get bailed out by the tax payers to a tune of (so far) 8.5 TRILLION dollars. This is more expensive in adjusted dollars than every expensive thing ever combined – WW1, WW2, the Marshall plan, etc. Most of the bad debt has already been transferred to the public. Fannie and Freddie bought up every piece of garbage mortgages they could get, expanding their balance sheets till they held $5T of the $11T US mortgage market. 90% of these mortgages were originated by private companies, many of them fraudulent. AIG wrote $2.7T worth of unregulated ‘insurance’ with $100B in capital. The taxpayer now owns them both.
We live in a corporatocracy – privatized profits and public losses. We will be paying for their crimes for decades. The $34T problem of the credit default swap market hasn’t even been touched, and it has the ability to do much more damage than a mere $5T in mortgages gone bad. At least mortgages are backed by something of value.
The naive belief in market fundamentalism combined with corruption on an untold scale has brought the world economy to the brink of disaster, and no one in power is even attempting to address the real problems. Our treasury and Fed continue to pretend that this is simply a liquidity problem, and not a massive ponzi scheme founded on theft and lies. The new bank rescue plan is nothing more than the same crappy plan Bush proposed in 2008, but rebranded. It gives private investors a very small risk with huge potential profits, and the losses will go to the taxpayer.
House prices will continue to decline until they are below the historical mean. The losses from the continued increase in foreclosures will require ever more bailouts for the rich bankers who caused the problem. The recession will feed on its downward momentum, only slightly slowed by any government stimulus attempt. When interest rates rise, government intervention will become impossible and there will be massive spending cuts. This will be the ‘other shoe’ that will bring the second wave of pain and create a true depression. There will be no recovery in the next year or two. The DOW will fall below 6000 inside of 2 years, with only the artificial GDP boost from the massive stimulus spending there to provide a little lift. Once that effect has worn off, the market will go back to dropping.
The only course of action I can recommend at this time is the most conservative possible. Get out of debt, live beneath your means, and save. Invest in safe bonds and hedge inflation concerns with precious metals (I see them as a safe harbor, not an investment that will do well). Individuals and businesses should be prepared to survive on a lot less for a long time. Oil and the energy crisis haven’t gone away – OPEC is cutting back production to get the price back up – I guess they didn’t hear the ‘drill baby drill’ campaign marketing slogan. Oil and oil companies might not be a bad investment, especially if China can keep growing their economy.
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