Busted: Bankers and The Global Economy

April 30, 2008

U.S. Economy: Bad News Rolls In

Filed under: banking, credit, money — Tags: , , , , , , , — digitaleconomy @ 8:32 am

Standard & Poor’s wrote that prices in 20 major markets dropped an average of almost 13% from a year ago in February. “There is no sign of a bottom in the numbers,” said David M. Blitzer, chairman of the Index Committee at S&P. “Prices of single family homes continue to drop across the nation.” This market correction is very real and not a short-term adjustment. This indicates the level of intense inflation promoted by predatory and negligent lending.

One of the large problems with easy credit is that prices for whatever items are being financed are continually inflated over time. You should also see a major correction in the new car market as most car makers take large hits for lack of sales. Corrections are part of a normal business cycle fostered in large measure by the inability of consumers to buy larger ticket items on their own. As a result, financing has for years propelled an artificial boom resulting in inflated prices that can no longer be maintained in the real market.

The business results for the lack of buying power has become quite pronounced and will only worsen as business continues to reap the results of overproduction. A buyer’s market for anyone that has cash or viable credit will ensue.

Another sign of rampant overspending was created by home equity financing. Dropping home prices will effectively prevent homeowners from funding consumption by tapping their home equity, a new tradition for financing major purchases and emergencies.

Bill Gross wrote that “foreign and domestic investors are being fleeced with negative real interest rates, and the weak dollar, stratospheric commodity prices and steadily rising import inflation are the result.”

This result of rising import inflation is that local business will be stimulated to adjust for decrease in national supplies. Unfortunately, this can also result in higher prices and shortages because the nation has become somewhat dependent on cheap imports, especially for some food items, thus affecting national production. Luxury and specialty items will see lower sales and lower prices to clear overstocks. Overall, markets that lag in making fast adjustments will suffer.

The impact of higher energy costs and spiraling unemployment threaten the resilience of the U.S. economy further. The artificial boom economy gone bust resulting from upward-spiraling financing has finally come to roost.

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