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A Disturbing Economic View- The Unraveling

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posted on Aug, 15 2004 @ 12:43 AM

by Jim Puplava
Storm Watch Update
June 18, 2004

The markets don't look right to me. They appear to be out of order. Uncertainty is everywhere. Geopolitical risks abound from Central Asia and the Middle East to the American ballot box. Financial risks have never been greater with asset bubbles consistently inflating, fed by an avalanche of debt. Speculation is rampant with banks and hedge funds borrowing short and investing and lending long as well as households borrowing short and investing long in real estate. Despite record amounts of consumer, business, and government debt, financial markets remain complacent to the threat of higher interest rates...

Well worth reading!

And then, there is the real estate bubble.....

"The whole world is hostage to the misconceived economic policies of a dollar standard out of control."

The US Senate just reconfirmed 78-year-old Alan Greenspan to an unprecedented fifth term as chairman of the world's most powerful central bank, the Federal Reserve, or Fed as it is known. The fact that President Bush re-nominated Greenspan underscores how vulnerable the global financial edifice is, and not how excellent a central banker Greenspan is.

On the surface, world growth appears to be expanding finally, after severe recession and the 60% fall of the US stock market in 2000-2001. The Federal Reserve says it is so confident that growth in the US economy is taking firm hold, that it raised its key interest rate from a record low 1% to 1.25% last month, signaling it would slowly bring rates up to "neutral" levels of 3.5-4.5% over coming months. Around the world, strong growth of exports are being reported from Brazil to Mexico to South Korea. Growth in China is so strong the government is worried it is overheating. In Europe, the UK is expanding at the fastest pace in 15 years. France expects GDP to grow by 2.5%, and even Germany is talking about stronger export growth. The driver is US economic growth.

The problem with this optimistic picture is the fact it is entirely based on the dollar and unprecedented creation of cheap dollar credit by Greenspan and the Bush Administration. Their only short-term goal has been to keep the US economy strong enough to assure re-election for George Bush in November. Washington reports are that Bush made a deal to re-appoint Greenspan on the promise Greenspan would keep the economy growing until the elections. They have done this by a combination of historic low interest rates, rates only seen before in times of war or depression, and by stimulating the economy by record budget deficit spending, issuing government bonds to finance it. The world has been flooded with cheap dollars as a result.

What is clear now is that this unsustainable effort is likely to come to an end sometime in 2005, just after the elections, regardless of who is President. Given the scale of the money-printing by the Fed and the US Treasury since 2001, it is pre-programmed that the "correction" of the latest Greenspan credit binge will impact the entire global financial and economic system. Some economists fear a new Great Depression like the 1930's. The world today depends on cheap US dollar credit. When US interest rates are finally forced higher, dramatic shocks will hit Europe, Asia and the entire global economy, unlike any seen since the 1930's. Debts that now appear manageable will suddenly become un-payable. Defaults and bankruptcies will spread as they did in the wake of the 1931 Creditanstalt collapse.

The US Home Bubble

The official US myth is that the recession of 2000-2001 ended in November 2001 and "recovery" has been underway ever since. The reality is not so positive. Using record low interest rates, the Fed has lured American families into debt at record rates, creating what might be called a "virtual recovery," financed by record amounts of new consumer debt. There has never been a recovery before in which debt levels increase, rather the opposite.

The American dream of owning an own home has been the source of the record lending, helped by the lowest interest rates in 43 years. Greenspan has often boasted this has been what has propped the US economy since 2001. When families buy a home, they need furniture, they employ construction workers, electricians, engineers, and the economy grows. Record low interest rates have made it very easy for families to get a bank loan, using their home equity as collateral or guarantee. These loans, tied to the rising real estate prices, allowed American families to finance new furniture, cars, and countless more. In 2003 banks made a record $324 billion in such home equity loans, on top of $1 trillion in new mortgage loans.

All this economic consumption has created the illusion of a recovering economy. Behind the surface, a huge debt burden has built up. Since 1997, the total of home mortgage debt for Americans has risen 94% to a colossal $7.4 trillion, a debt of some $120,000 for a family of four. Bank loans for real estate purchases have risen since 1997 by 200%, to $2.4 trillion. Average US home prices have risen by 50% in the period since 1998. In 2003 alone a record total of $1 trillion in new mortgage loans were made. In 1997 mortgages totalled $202 billion.

In many parts of the US, home price inflation has become alarming. An apartment in Manhattan is now above $1 million. Home prices in Boston have risen by 64% in five years. California real estate prices are soaring. On average US home prices have risen 50% in six years, an unprecedented rise, driven by Greenspan's easy credit. In seven years to 2004, prices of US homes had risen on paper by $7 trillion to a total of $15 trillion, the highest in US history. The problem is so obviously dangerous, that Greenspan recently was forced to deny existence of any real estate "bubble," much as he denied a stock bubble in 2000.

But that is exactly what he has created with his low interest rates. The bubble has been transformed into a larger and more threatening real estate bubble. Families have been convinced to invest in a home as an alternative to buying stocks for their pension years.

The rise in home prices has been driven by cheap interest rates and banks rushing to lend with abandon. Because two semi-government agencies, the Federal National Mortgage Association, known as FannieMae, and the Government National Mortgage Association, or GinnieMae buy up the bank's mortgage contracts, taking the risk from the local banks, so the local lending bank has less pressure to guarantee that he lends to low-risk credit-worthy families likely to repay the loan.

The US Congress has passed new laws making it even easier for families to buy homes with no penny of their own money required initially as "down payment." This has meant a huge rise in mortgage loans to economically marginal or risky families. The number of such risky or "sub-prime" mortgage loans has risen by 70% this year alone, and now makes up 18% of all US mortgages. Many of these risky mortgages are made under "adjustable rate mortgages". Today adjustable rates are low, just above 4%. Because of this some 35% of all new mortgages are adjustable today.

So long as rates stay low, the roulette wheel of debt rolls on. The problem begins when interest rates rise and families, lured into buying a home with variable interest rate payments, suddenly find their monthly cost of paying the mortgage has exploded as interest rates rise. At that point, US banks will face a serious bad loan problem, far worse than that of 1990-92 when several of the largest US banks were on the brink of failure. US rates began to rise significantly in May, and the Fed was forced to raise its official rate on June 30 for the first time in four years. Many banks have loans written in adjustable mortgage rates. As US interest rates continue to rise over the next twelve months or so, that will trigger a wave of mortgage defaults. Some industry experts fear a "bloodbath" in 2005.

The American family is highly indebted, not just for their home. The Federal Reserve data show a total US debt level now above $35 trillions, or some $ 450,000 for a typical family of four. Average consumer debt for credit cards, autos and such is at record highs. Carmakers continue to offer car loans, with loans for up to six or even seven years. Many Americans owe more on their car than it is worth. The debt grows. As long as Fed rates are at 43 year lows, the debt is manageable. When US rates rise, it becomes unmanageable for many. The rise has begun. There are two ways rates are likely to rise from here.

First, the Fed itself has been forced to act, raising its Fed funds rate the first time since four years, to 1.25% from 1% on June 30. It had no choice. Greenspan has claimed for months that the US recovery was "strong" and that rates would return to "normal" soon. It was a calculated bluff. Had he not acted as US jobs data convinced investors recovery might be real, he faced a major crisis of confidence in the dollar. The Bush Administration reportedly manipulated employment statistics to show better job growth for the election.

Ever since raising rates, Greenspan has calmed nervous markets by stating that future rises will be ever so gradual. In other words: don't worry, speculators. But if he is to keep the confidence of the large bond markets, he must convince them that he is still vigilant against inflation. That is tough when prices for everything from copper to oil to lumber to soybeans and scrap steel are rising from 50% to 110% over recent months. His only anti-inflation tool is higher interest rates, or promise of same. The longer he fails to raise rates as prices rise, the greater the risk of a dollar crisis, as foreign investors fear the worst, namely that the US economy is in far worse shape than officials admit. The Fed is in a trap.

Yet higher interest rates threaten to explode the trillion dollar home mortgage debt bubble, where home values are estimated to be at least 20% overvalued nationally, or $3 trillion.

When private bond investors such as major pension funds and banks lose confidence in Greenspan's inflation commitment, the only other source of support for low interest rates would be the willingness of Japan and China above all, to pour billions more of their dollars into buying US bonds.

Keeping the Bush Government Afloat

The largest buyers of US government debt have been the central banks of the Asia-Pacific. The central banks of Japan and China alone hold more than $1 trillion of US Treasury bonds as foreign currency reserves. Worldwide foreign central banks hold some $1.3 trillion of US government debt. If private debt is added, the United States is the world's largest debtor, with some $3.7 trillion in net foreign debt, as of the start of this year, likely well over $4 trillions by now. In 1980 when Ronald Reagan was elected the US was the world's creditor with a plus of $1 trillion.

Nations depending on the large US export market, recycle their trade surplus dollars back into buying US Treasury debt, to keep their currency fixed to the dollar. Because Japan and China and others continue to buy record sums of US debt, paying with their hard-earned trade dollars, US interest rates can remain far lower than otherwise. Were foreign buying of US bonds to reverse or even slow, the US Treasury would have to offer higher interest rates to lure investors to buy the debt. That would make interest rates on homes more expensive very fast. Millions of homeowners would face default. Prices would collapse in many regions, leading to higher unemployment.

This will not be like the crash, which was a deliberate crash caused by the Fed raising rates to deflate that bubble. In 2000 interest rates were 6.5% and the Fed had room to lower to 1% and create the housing bubble alternative for money to keep the economy afloat on a sea of debt. This time, rates are at historic lows, debt at historic highs, dependency on continued foreign capital inflows is unprecedented.

Speculation has become global as never before. The cheap credit in the dollar world has led to cheaper credit worldwide. The economies of Brazil, Mexico and even Argentina benefit from banks and speculators like George Soros who borrow at the super low US or Japanese interest rates to invest in bonds in high interest rate lands like Brazil or Turkey or Argentina. These so-called emerging markets have been booming in the past year on Greenspan's promise to keep US rates so low. That now is beginning to look very risky. As well, Bush Administration talk of possible terror attacks around election-time, is making many major investors fear risking investing in US stocks or bonds. They are instead beginning to cash in their recent profits from the Greenspan stock boom of 2003-04, and holding it in safe cash.

That is a major reason the US stock and other markets have been in steady fall in recent weeks. The US debt bubble depends on maintaining the myth of a US recovery to lure foreign capital to invest, helping keep the dollar from collapse. Should foreign pension funds of the central banks of China and Japan be convinced the US recovery is in danger, there could be a major shift of funds out of dollars.

Yet China and Japan, fearing the dollar crisis, have recently begun heavy buying of commodities, from oil to iron ore to copper to gold. They are using their trade dollars to buy real commodities, instead of US Treasury debt, which is mere paper. Chinese panic buying of oil for stockpiling reserves is a major factor pushing oil prices again to record levels of $42 barrels despite two major OPEC quota rises. Steel prices have exploded due to China demand.

When Bush became President he inherited a Federal budget in surplus. Since then he has created the largest deficits in US history, near $500 billion in 2004 and estimated to reach $600 billion in 2005. In 1971, when Nixon took the dollar off the gold standard, the Federal budget deficit was an "alarming" $23 billions.

These huge deficits are financed by the US Treasury selling government bonds or similar paper to investors. Since 2001, the central banks of Asia, led by Japan and China, have bought huge sums, some 43% of all US Government debt. They in effect recycled their trade dollars gained from exporting cars, electronics, textiles and other goods to the US consumer. In the 12-month period to this April, the Bank of Japan spent a record $200 billions to buy US dollar bonds or, in effect, to finance the cost of Bush's Iraq war. The Banks of China, South Korea and Taiwan bought almost as much dollar bonds.

They did this for clear reasons: Their currencies are linked to the dollar, and were the dollar to fall against the Yen or the Yuan, Asian exports would suffer a decline, endangering their economic growth and leading to explosive rises in unemployment across Asia. By recycling their trade dollar surplus into buying US Treasury debt, they argue they are looking after their own needs. A dollar crisis in early 2005 could signal the next global crisis. The whole world is hostage to the misconceived economic policies of a dollar standard out of control.

Scarry stuff!

[edit on 15-8-2004 by loam]

[edit on 15-8-2004 by John bull 1]

posted on Aug, 15 2004 @ 12:52 AM
The corporate and consumer debt that is on a fixed rate of ineterest is fairly bullet proof due to the historical lows it was fixed at...

THat being said I agree in part with this guy's assessments. I beleive the F.O.M.C. will hold steady in their September meeting and not raise the overnight rate, barring any spectacular rise in economic indicators (non farm payrolls specifically).

I beleive the ONLY reason Greenspan and Company raised last week was to save face with market.

If they tighten again in September without the spectacular economic performance this man's theories stand a good chance fo coming true IMHO...


[edit on 8-15-2004 by Springer]

posted on Aug, 15 2004 @ 09:55 AM
It could be a good thing for the economy to crash.

" Everything in nature has a tendency to balance itself out one way or another."
No wait thats not right
"Man is the center of the UNIVERSE and his gold is his only love. If only he knew his gold was worthless."

[edit on 15-8-2004 by IXRAZORXI321]

posted on Aug, 15 2004 @ 12:41 PM
Ill tell you I realized this when I bought my home last augest at 5.4 I knew befor hand that there was NO way I would be able to keep my home if a repeat of the 80des happens where the rates go through the roof .I would have never taken a home lone based on a rate that could be changed .
And all i can say to anyone who did is i feal bad for what your going to find out the hard way.
Ps personly I figer most people relize the trap with flexible rates and most probly got a fixed rate like me. I hope .And if more then even 30% of people fell for the flexible rate thing then we are in real trouble.
Ps only thing that realy worrys me is the bank can sell my deat to another bank and I dont know if this means my fixed rate can be changed or not . But im not to worryed .Wish I knew more about morge laws here in florida.I asked about this point 3 or 4 times and was told my fixed rate was heres hoping that no one trys any funny stuff.
now a days you need to be a lawer for everthing lol

posted on Aug, 15 2004 @ 03:37 PM
hey guy, according your theory a good way to stop a plane is to crash.

Hey everyone get those economic hemets on and padded flameproof crash suits ready.

posted on Aug, 15 2004 @ 04:13 PM
I do think we are headed for a brick wall.

There is much more information here

for those who are interested.


posted on Aug, 16 2004 @ 01:01 AM
In 1994 as you may recall Mexican Economy colapsed because of major deficit, it was a nightmare!!!

Luckily I did not had debt or large credit or mortage, I just had 5400 of debt because of a Dodge Neon I bought. The interest was 9% anually then in 3 months it went to 34% anually and the next it went to 44% (that month I took my savings a paid the car) I did not get into defaults or anything.
Now 10 years after and after making a lot of correct choices I have a House of MINE 3 cars no debt and some savings and a retirement plan (in dollars). BUTTTTTT

I se the us Economy is going EXACTLY the way Mexicos goverment did 15 years ago, I AM SURE YOU ARE GOING TO GET


What can it be done? change money to gold? Buy bonds, Buy Euros, Buy Silver, spend all>>>!!!!


posted on Aug, 16 2004 @ 01:22 AM
Im wondering too Kix. Anyone have any other tangible strategies besides the standard precious metals? I have a little food and other stuff stored up for complete collapse, but i hate to buy precious metals at these prices.

Should I just bite the bullet and do it? Or are there other options?

Cash would be ok unless they get inflation going strong. I fear this when all the baby boomers start retiring and drawing SS that isn't there, all the gov can do is print more money, which causes inflation. And with so many baby boomers it will be politically impossible to deny the Seniors much of anything and get elected.

Also is there a way of putting IRA money directly into tangible assets, not just certificates and other garbage, but real actual metal?

posted on Aug, 16 2004 @ 03:48 AM
A couple of strategies you can use if you believe a crash in the U.S. economy is comeing (personally I don't) Invest in euro based securites, Buy euro's on the forex, short the dollar, keep your money in cash to buy foreclosed properties, purchse gold etc. Bottm line is this I dont believe any such crash is comming but if it is don't lsten to the propagandists who shout about "billions trillions etc LOST" money is never lost from the economy. Anyone remember the headlines reading billions lost from market in 01-02? Do you think wall street has huge ovens where they burn money? The fact is that money didn't get lost it just changed hands from those without sense to those with sense. Anyone who bought at 250 dollars gave thier money to someone who was selling thier shares at 250 dollars. The buyer lost the money but the money wasnt lost. Never forget that during the great depression those who had saved up money and bought real estate, stocks etc. during the depression made a fortune in the long run. The key to wealth building is saving money and only spending it on things that appreciate over time. The difference between the millionaire and thier hand to mouth neighbors is that the millionaire lives frugally saves money and obly spends it on things that gain in value while thier next door neighbor who buys a new car every 4-5 years, spends money on movies video games eating out and other non appreciating assets. If you truly want to build a personal wealth I would reccomend reading "The millionaire next door"

lways remember that the chinese character for crisis is the symbol for danger overlayed with the symbol for opportuniy which I think sums up ALL financial crises perfectly.

posted on Aug, 16 2004 @ 05:36 AM

(in the words of mick and keith...)-

"here it comes,

here it comes,

here it comes,

it's just your 19th nervous breakdown..."

truly scary stuff. so much more in these modern times, society is a thin, fragile strand of "civilized" human behaviour... that could all change for the worse very quickly.

posted on Aug, 16 2004 @ 05:45 PM
mwm1331, I think you are not recognizing the fact that everytime someone borrows money, money is created.

Mr. A borrows money from Bank. Mr. A gets money (presumably spends it), the Bank shows an asset of accounts receivable. So where originally the bank had x number of dollars now they show an asset of x dollars and Mr. A also has x dollars, ergo now 2x dollars show in the economy where only x were there originally. You may argue that Mr. A also shows a liability of x dollars, he is still operating with the 'float' of having the actual money and the projection that he will pay the debt off in time. It works like pulling money out of some hypothetical future.

Much of the booming economy of the 90s was due to the huge bubbles of debt [and some bubbles of outright fraud]. Question is, are the current bubbles going to sag off slowly or pop suddenly? If they pop suddenly cash is good, If they go slowly the government will have time and be politically pressured to print more money and inflate [devalue existing] dollars.

just an odd note: I think it is useful to try to comprehend when people lose money in bad investments such as Enron or World Comm, they complain [rightly or wrongly] about losing all their money, but in fact there was really nothing there but an illusion. In theory they could have sold when the illusion was still working and gotten actual cash. It illustrates how ephemeral a lot of investments are. Money itself is basically something traded on the faith/belief in the economics of a particular nation, which makes money itself as ephemeral as current political and resource/economic stability.

With SO much fraud and shenanigans in Mutual funds, investment banking, fraudulent accounting, government collusion with big business and it's CEOs, I find it very hard to have much of any faith in the American marketplace anymore. Then when Multinational corporations sit on patents for technologies that are only long run hope of a sustainable economy, it is just the poisonous icing on the cake.

posted on Aug, 16 2004 @ 07:59 PM
Senario (cont.):
interest rates rise. Mr. A cannot make the payment to Bank. Bank forecloses on loan. Mr. A declares bankruptcy, Bank has to write off loan amount. Mr. A goes from - x dollars to zero dollars, the bank goes from an accounts receivable asset of x dollars to zero dollars. The bank which thought it had x dollars in assets now has nothing, therefore there is a net loss of x dollars in the economy.

Wrap up: It is sort of illusitory. You start with x dollars, it is loaned and shows as 2x dollars. Then an 'interim' economy which is working with 2x dollars upon foreclosure and write off is back to operating on x dollars. A net loss of x dollars from the interim economy.

We are currently in that interim economy. There is a great deal of money lent to government, corporations, and individuals all at historic low interest rates [almost free infact]. When some of those variable rate loans start rising and payments go up and/or there are job losses, there will be foreclosures on loans. Loans will be written off as bad, the money supply will shrink.

odd addtional note: every time you write and spend a check it temporarily creates money [expands the money supply] until it clears at the bank it was written on. It is refered to as 'float'. It is the same mechanism that people from time to time use to 'kite' checks. Soon the bank clearance speed is going up so watch out for overdrafts at the end of the month.


posted on Aug, 16 2004 @ 10:43 PM
Thats is exactly my piont the mexican peso went from 3 for a dollar to 7 for a dollar so to make things easier a car that used to cost 20K dollars was 60K pases and overnight irt went to 140K pesos and guess what you salary did not double .....

Also the interest rates went to 89% a year !!!! (thats why ist called a crisis) Mr clinton loaned us 20 billion JUST to get out of the pit not to get to our previous level.

Each time a gornment prints m,ore money th emoney base gets diluted ence the value of the currency goes down, if you mix that with a huge DEBT thats the resulting escenerio....


posted on Aug, 17 2004 @ 03:31 AM
Slank- I'm familiar with how our economy works, and while your explanation is a bit simplistic, it is none the less correct in general. In fact the process you just mentioned is one of the reasons that a budget defecit is a growth enabler in rough economic periods. While I understand the fears of Mr. Puplava and his theroy does have some merit, he is in my professional opinion overly worried. The advice I gave was merly general tips protect your assets if you believe a crash is comming, which as I have said, I do not. However were a crash as described in "The unraveling" to occur the Euro would by default strengthen aginst the dollar making Euro based securities more profitable to those living in Dollar based economies. However The relative strength of the Euro over the Dollar currently is why "The Unravelling" will not occur. American exports are more attractive to foreign consumers than ever before, while European exports into the U.S. are less atrractive to American consumers due to thier prices. Ths has the effect of bringing more foreign capital into the U.S. system. In addition also due to the Euro/Dollar relative values U.S. securities are far more attractive to European investors. Over the course of the next few years as the U.S. economy expands the dollar will begin to gain strength making the investments by those in Euro based economies more profitable, which will in turn stimulate more investment into the U.S. markets. As for corporate scandals, the Sarbanes-oxley act, by placing accountability for any future corporate scandals on the shoulders of the CEO will, in my professional opinion, make corporate fraud far less likely in the future. The question those reading this thread must ask is how likely is a crash of the U.S. economy as the strategies for maximising growth in a falling dollar environment as opposed to a rising dollar environment are diametrically opposed.

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