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While most investors are focused on the latest stock market rally, hidden from view is a monumental change that few recognize and fewer understand: Unprecedented amounts of old debts are coming due in America, and many are not getting refinanced.
Even worse, borrowers are going into default, lenders are taking huge losses, and outstanding loans are turning to dust.
Indeed, three new official reports are now telling us, point blank, that the credit crack-up is already beginning!
This is not a mere “slowdown” in new lending, which would be relatively routine. This is an actual reduction in the short-term loans outstanding, which is anything but routine ... which implies a rupture in the nation's credit spigots ... and which could deliver a new shock to the U.S. economy.
“There has been a collective failure to appreciate the extent of the leverage taken on by a wide range of institutions — including banks, monoline insurers, government-sponsored entities, and hedge funds — and the associated risks of a disorderly unwinding.” Now, both the OCC and the Fed reports confirm that this “disorderly unwinding” is already beginning.
Now, get ready for more of the same:
More rate cuts, with the next expected as soon as April 30 ...
More Fed bailouts ...
Even wilder money printing, and ...
Larger surges in foreign currencies and commodities, despite intermediate setbacks.
In an interview with the Financial Times, John Dugan, who oversees about 1,700 national banks as comptroller of the currency, said the growing problems for lenders follow a period of almost four years in which no institution regulated by his agency had failed.
Mr Dugan's comments come as US banks report big spikes in reserves for expected losses on consumer and small business loans, reflecting the spread of the credit crisis from Wall Street to the broader economy.
The largest US banks, including Citigroup (NYSE:C) and Bank of America (NYSE:BAC) , have also seen loan losses increase as more consumers fall behind on home equity, credit card, automotive and other consumer loans. The banks have been rushing to raise capital to offset loan losses and writedowns on mortgage-related securities.
Mr Dugan said he did not expect failures to rise as high as during the late 1980s and early 1990s - when 534 banks failed in 1989 alone - because banks are better capitalised, have better underwriting standards and did less speculative lending.
"Banks are better capitalised going into this...but the flip side is they are more concentrated," he said. "Part of it depends on the depth of the downturn and duration of the downturn."
In the last eight years implementing the plans for the Project for the New American Century (PNAC) designed "to promote American global leadership" has backfired.
The United States is hemorrhaging from every orifice, and oil prices can be used to measure the rapidity of its demise.
US dollar versus euro
In 1999 the euro was introduced as an accounting currency (travelers' checks, electronic transfers, banking, etc.) and then launched as physical coins and banknotes on 1 January 2002. The euro replaced the former European Currency Unit (ECU) at a ratio of 1:1. However its value quickly began to drop, reaching a low of 0.8252 relative to the US dollar on 26 October 2000. This proved to be a solid support level for the next two years, and in 2002 the euro began its appreciation reaching a high of 1.60 as of 23 April 2008.
If we take Autumn of 2000 as our base point when the euro was trading at its low of 0.8252 relative to the US dollar and oil was trading at $35 dollars per barrel, we get the following results: The increase in price of oil in euros has been 74% since 2000, while it has been a 237% increase in US dollars.
Taking into account that the euro had a dramatic increase in value from 2002 to 2005, and then began a retraction period through to 2006, the above numbers confirm what Ahmadinejad has been stating, that “the dollar is not money any longer but a handful of paper distributed in the world without commodity support,” and that oil is undervalued at present levels when priced in US petrodollars.