Busted: Bankers and The Global Economy

April 28, 2008

U.S. Mortgage Economic Analysis

It’s different in the United States. This time in history is different. The Federal Reserve won’t let deflation happen. Belief in the Federal Reserve and the avoidance of economic pain is nearly universal. The Fed is a legend in their time. The Federal Reserve won’t suffer. The U.S. economy and citizens will.

There are a handful of realistic economist-type people that see deflation coming. The sophisticates laugh aloud: “For almost thirty years people like you have predicted that our economy will collapse and it hasn’t happened.”

U.S. banks hold record amounts of mortgage-related asset junk on their books. If the housing market were to go into a deep recession resulting in massive mortgage defaults, the U.S. banking system is likely to sustain huge losses similar to what Japan experienced in the 1990s. This scenario seems inevitable to many. Predictably, the Fed could cut interest rates to zero. Would that move enhance economic activity or reduce inflation?

Likely, a monetary deflation would occur under these circumstances, except deflation is already happening today. The deflation is obvious when you compare the current value of the dollar to other currencies. The U.S. banking systems is substantially crippled from the “bursting of asset bubbles” due to the sharp decline in the value of collateral backed bank loans. Why the decline? The decline started with the decline of the inflated housing market that could not be sustained. The decline was one of many events that economic pundits knew couldn’t happen.

If the housing recession worsens into a housing depression, massive mortgage defaults will ultimately bring about a wholesale monetary collapse. There is a rush to forestall the current rash of foreclosures, but the complexity of the situation is creating difficult delays. Many of the foreclosures are being put off with temporary loan financing that will have be refinanced again in about three years.

There could a run on the dollar in the foreign exchange market at any point due to market weakness or global panic. Inflation would quickly evolve into hyperinflation (technically, we are already there but are fooled by propaganda and false figures). The Federal Reserve would have no choice but to raise interest rates aggressively based on economic theory. The rise in interest rates would prompt large scale bankruptcies in the market and the banking industry. The U.S. is closer to this scenario than is generally anticipated because of the insane need of the U.S. government and the Fed to mask the current inflation rate. Checkmate is closer at hand than you might think.

The Federal Reserve faces a growing list of problems never before faced in concert: rising corporate defaults, baby-boomer retirement, solvency issues at banks, massive implosion of banking derivatives, bankrupt consumers, economy in recession, overheating Chinese and Middle East economies, global wage arbitrage, falling U.S. dollar, rising unemployment, hedge fund inequities, ARM mortgage debacle, falling real estate prices and sub-prime/alt-a mortgage disaster.

Rumors are that creation of a new currency might be closer than you think. That distinct possibility won’t make the economic pain much easier for many citizens in the United States. The multinationals will continue to prosper for comparative purposes and after a time, some business would return to the bottomed-out economy of the U.S. if the dollar were left alone. The installation of a new currency will forestall business progress and lengthen the economic pain in the United States. Are these just delusions and hypothetical thinking?


1 Comment

  1. Interesting, hasn’t a new currency been predicted for decades?

    Comment by Shaun Kennedy — April 28, 2008 @ 12:45 pm

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