“All the way to the bottom, son, if we don’t do something to stop her.”
This was the response I received at age twelve when, in the ‘tow’ of my father during a tour of a submarine, I asked the question, “How far down will she go?”
(As submarine operational statistics are considered classified, this is the stock-response to that question. It’s also a piece of gallows-humor – because every submariner knows that a submerged submarine is, in essence, a sunken ship – it may be operating in a form of balance and harmony with its environment, but it’s also underwater – and because humans can’t breathe underwater, the time the ship can spend in that environment is limited — which means that when the plug is pulled, sufficient resources have to be in place to bring it to the surface again – or the crew dies.)
It’s that simple.
Likewise, economies are fragile things – a deep moral discussion of just-when bankers decided to become the New Age version of Dark Age bandits is well beyond the purview of this post, however. Frankly, the ship has taken on too much water; it’s going to sink, and it’s up to me to tell you why, and why you should pay attention to the next few months.
Here’s the good news: There’s going to be a recovery.
Here’s the bad news: It’s not going to last.
While the trigger to all of this is likely hyperinflation (as I’ve mentioned earlier, you’ll first start to notice this when gasoline goes from $2.50 to $8.00/gal in the next twelve months), you’ll also see it in a rapid increase in credit card rates (Tip #1 for you – if you haven’t already, get rid of your credit-cards. Pay them off, cut them up, and send them back. Now.)
The underlying causes are more insidious – inflation was the government’s means of answering the question, “What do we do now?” after the credit-markets dried up.
A Brief History….
When Greenspan lowered interest rates to near-zero in the early part of this decade to ameliorate the recession, what he put in place was a chain-of-events which led to too much money, too soon, spun up from nothing and put in the most-convenient place – real-estate.
This drove the price of real-estate to unsupportable levels. People were talking about retiring on their real-estate portfolios, and in ’06, the new head-of-the-Fed, Ben Bernacke, said that there wasn’t a ‘housing bubble’; things were fine.
I didn’t share his enthusiasm then, and I see no reason to support his sunshine-and-puppies predictions now.
In late 2007, due to the large banks having taken on far too much debt, the credit markets dried up. Banks simply could no longer capitalize loans – they were underwater by any standard – and there was no way to bring the ‘ship’ to the surface again.
With no credit, American business simply ground to a halt.
Bush, having all but given the order to ‘dive’ by pressuring Greenspan to prevent a recession on his watch, did nothing while the crisis materialized. The nation had taken on debt well beyond its ability to pay, and this debt had pushed the banking system underwater. A crisis of international proportions loomed.
After Election Day in 2008, the new president announced his ‘stimulus’ packages. In essence, he was going to crank up the press and monetize the debt of the Wall Street banks, favoring them over the regional and local banks which are responsible for the loans which create most of the jobs in America.
Doing this was like fighting a fire with gasoline.
When done, Obama had ‘monetized’ (that’s a roundabout way of saying ‘printed’) nearly five trillion dollars. The total of the stimulus packages actually exceeded America’s GDP.
I’ll say this plainly: There’s no way our economy – or any economy – can support this.
What They’ve Done With It……
For their part, the Wall Street banks favored by Obama have sat on this money – you see, they know something we don’t: Serious inflation – probably hyperinflation – is right around the corner.
Most small and intermediate banks are still in trouble. The mortgage-mess is still there. The prior decade saw the dismantling of the regulations put in place after the era of J.P. Morgan and the banking crises of the late 19th/early 20th centuries. In fact, during Bush’s watch, there have been an astonishing number of regulations abolished – banking leverage has been increased; money can flow between commercial and investment banks, and the prior controls on the SEC have all but disappeared.
Putting the fox in charge of the nation’s financial henhouse wasn’t enough – the Bush administration, having created the perfect Petri-dish to breed this mess, turned the economy over to the next group – who administered the coup-de-grace in the form of printed money.
Where We Are Today…..
Banking: The banking system is underwater. (1) Banks simply aren’t doing enough business to keep going; an annual growth rate of 2% isn’t enough to keep them alive; (2) If you watch CNN and read any financial news at all, you’re seeing that banks are failing at a rate unprecedented in the nation’s history (annualized bank-failures have almost gone vertical); (3) The FDIC is bankrupt – holding only $41B in reserves as of March of this year, with four regional banks having failed this month; (4) Defaults are projected to increase through 2011, further impacting bank balance-sheets; (5) We are at or near historic lows in bank credit at 2% growth.
Real-Estate: In March of this year, one in four American mortgages were underwater (more was owed on the home than it was worth). With the economy still shedding jobs as an outgrowth of the credit crisis, fully 50% (one in two mortgages) will be underwater by the middle of 2010.
The Political Implications:
Big banks in America now have a power they didn’t have before – they’ve been favored with more money than the nation can support via GDP. In spite of the support they’re getting from the Right, they’re not opening those purse-strings and creating jobs.
That’s because the large banks no longer believe in America. They believe in more profits – and they’ve monetized their own debt, improved their own balance-sheets, and invested in other currencies to hedge their bets.
What Obama has created is a form of nascent National Socialism; a modern-day feudal system not unlike what was created in Germany in the late 1930’s.
The good news is that the leaks have stopped; there’s pressure in the hull, metaphorically speaking – likely, the recession has hit bottom.
However, as with a submarine, once you’ve repaired the damage and you’re not losing your air-supply, you still have to take stock of things and get the water out of the boat – or she’ll still keep going down – all the way to the bottom.
Ending the recession is well and good -but it’s not what’s needed here. What’s needed is a recovery of near-heroic proportions. I doubt it’ll happen – the forces at play here are going to push us back down into recession, and probably depression.
Over 40% of America’s wealth has been erased – thus far. If the government were to add up everyone not just on unemployment, but those for whom benefits have ended and those who have simply given up looking, the unemployment rate is nowhere near 10% – it’s more like 20%.
The Obama Administration has seen fit to behave in banana-republic fashion, purchasing key industries, printing money and shoveling it into the economy via the large Wall Street banks, which now enjoy an oligarchy-of-sorts not seen since the 1870’s.
I’d hate to think that, having sufficiently turned things over to the large banks by default, we’re going to see a repeat of the banking crises near the turn of the last century – but there’s little in today’s news or the stats (go click on the links) which tell me otherwise.
Remember that the pumps buy you time – but minutes only. Everyone; get to an escape trunk. Red lights lead to green lights; green lights lead to exits, and exits lead to an uncertain future – let’s all hope it’s better than the alternative. seen