Since the announcement of the federal government’s plan to purchase all bad debt from ailing financial institutions, my head has been spinning. I’ve started and stopped this post more often than a driver with a manual transmission in a ten-mile traffic backup. How did it come to this? What does it mean going forward? How much influence did foreign creditors have on this decision? Like the writer with writer’s block portrayed in old movies, I now sit waist deep in the cyber equivalent of crumpled sheets of paper yanked in frustration from my typewriter.
Finally, I’ve realized that there’s no way to do this justice in one post. This fed action has spawned a series of posts that will probably dominate this blog for some time to come. There’s no way to comment on just how this can possibly work because, as I heard Mitch Albom explain on yesterday’s radio broadcast, that’s like trying to analyze how well the toilets flush before the blueprints are even drawn. But what I can tell you already is that it’s a blueprint for a house of cards.
So I’ll begin with the basics, keeping in mind the mission of this blog – to explain these events in light of the theory I’ve presented in Five Short Blasts. How did it come to this? How could we ever have arrived at a point where our federal government repudiates the very principles upon which our economy was built – hard work, investment, risk and reward? Now we learn that it was all meaningless. In the end, good old Uncle Sam will be there to dump a load of cash in your lap, regardless of how lazy or stupid you may have been. It’s as though we’ve all been like Lot, living among the Sodomites while avoiding their wicked ways, in anticipation of our final reward. But in this twisted version of Genesis, upon revealing to the angel his devotion to a good life, Lot receives a one-word reply from the angel: “Sucker!”
How have we come to this? It all goes back to the effects of overpopulation and low per capita consumption – both home-grown and imported through free trade with overpopulated nations. (If you’re new to this blog, the only way you’ll understand this is to read about the new economic theory I’ve presented in Five Short Blasts.) As millions upon millions of our best-paying manufacturing jobs were steadily lost to misguided trade policy, the government looked to the housing sector to take up the slack. Immigration was used to prop up demand. But, as unemployment worsened and dragged down the real median income, lending standards had to be loosened to stoke the supply of “eligible” mortgagees.
As long as this Ponzi scheme was sustained – driving home values ever higher by increasing the supply of buyers, everything would be alright. But, of course, it was never possible that the least qualified of these buyers would ever be able to keep up with their mortgages. The sub-prime mortgage crisis was born and the effects spread like a cancer, slowing the economy, driving unemployment still higher and picking off the next layer of stressed home buyers. Foreclosures escalated, home prices began falling and the assets on the banks’ books began vanishing. An unstoppable downward spiral had begun.
Unstoppable but for one temporary fix: the government had to step in, shovel up the mess, and toss it on the curb for someone else to deal with. That “someone else” is your children and grandchildren. The mess they’re being left is over a trillion dollars, the combined total cost of the bail-outs of the past two weeks – the figure admitted to by the government – which means it’s very likely that it’s at least ten times that amount. The government is now flooding the nation and the world with dollars. Not boat-loads of dollars. Not truck-loads of dollars. But container-ship-loads of dollars. The idea is to restore “confidence,” that false sense of prosperity that potential home buyers need to jump back in the market. This may work for a while, but the exponential growth in the money supply has set the stage for hyper-inflation. Just look at what happened to the price of oil when this deal was announced. It made the biggest one-day jump on record. In the meantime, median income will continue its slow decline, and the downward spiral will soon resume. Then what?
The government’s action has done nothing to address the root cause – the steady drain of wealth from our economy by a $2 billion per day trade deficit. Until this is addressed – until the trade deficit is completely eliminated – the downward spiral of our economy, though temporarily interrupted by the government’s bail-out, will resume and intensify. Bank on it.
More to follow.