I think it’s time I reveal my little secret to where I’ve been acquiring financial news and commodity trends. While none of these can be considered a penultimate resource, their combined effervescence should explain at least a fragment of my pessimism concerning our economy.
As I elucidated back in December, the over-leveraging of our fractional reserve banking system in the housing market to the tune of several trillion dollars has, like your hopes of being the first to impregnate Jessica Alba, tragically ended. Good investors practice risk management, and normally this is a behavior we the public should encourage. In this case however, investment profits in one market being spread across several others is a terrifying catastrophe–this includes consumer activity. In several parts of the country, housing doubled or even tripled in price over a mere five or six years, while incomes didn’t even pace inflation. Now with ethanol driving up food and energy costs–elements which are conveniently excluded from the official inflation rate–wages are demonstrably down since 2000.
Please consider what this implies for banks. Creative financing may win a creative writing contest, but wages can’t support current home prices, and further, subprime ARM resets will eject existing homeowners as their financial well runs dry. Worse, even prime loans were commonly refinanced by duped owners hoping to cash-in on their unexpected windfall, which not only increased their mortgage and associated risk, but also provided them with a kickass Hummer and an awesome kitchen stocked with granite and an Honest to Fucking God Viking Range. But… oops, now that $200k loan is $400k and that magical nonexistent $200k extra has bought solid consumer goods. Viking increases stove production, contractors hire more plumbers, granite companies blast a few more quarries, increased property-tax revenue builds some more infrastructure, and so on.
But eventually that refinancing will hit a wall, because even considering negative amortization, the consumer’s wealth is eventually–like a porn starlet at the end of an all-day gangbang–exhausted. Either he defaults or can no longer to afford anything else. This ripple is much like the first in reverse: Viking cuts production and workers, granite companies do the same, ad infinitum, further exacerbating the problem and removing even more liquidity from the marketplace. Walmart has recently announced a 7% profit increase while banks everywhere are writing down hundreds of billions and retail has recorded two concurrent months of decreased sales. Spring and Summer are normally the hottest season for Realtors, but we just racked up a 26-year low.
But the central bank isn’t really helping matters. At a time when commodities are illustrating the dollar’s incontinence, we’ve been liquidating our own gold reserves to boost the failing currency. Never mind the dollar has slid shockingly against the Euro, which is currently worth $1.54 from an average of $0.92 back in 2000. It’s fine we have a fiat currency, but exhausting possible financial reserves at this point is like participating in a power-lifting competition with a hernia. This means the very source of our capitol is likely hedging on bankruptcy, or they’d never be so obviously desperate. I giggled mockingly at the Euro back in 2000, now I wish I bought a few thousand for a healthy 67% profit.
So, a checklist: consumers bankrupt, banks bankrupt, US bankrupt, in thanks partially to an uncontrolled lending smörgåsbord that spread the damage to every sector of the economy, all that during an extravagantly expensive war while economies such as India and China continue to bootstrap and increase resource competition (re. oil). I don’t know when the last nail was inserted into this proverbial coffin, but that’s it: the end. It’s fine the rest of the world will force the mountainous US economy into global parity (for them, anyway), but nobody will envy us the transition–it’s already begun, and not a pretty sight. Me? I’m 30 with a heart condition; I’m lucky to be alive at this point, so I’m just going to sit back and watch the show.