In case some of you are still not too bored about economic discussion,
here is a very good article about how we got into the mess we are in.
The combination of low interest rates, outsourcing, and deficit spending
both in government and industry has created a witches brew that is
expected to produce economic collapse in the very near future,
regardless of what China does. Bush et al., based on the submitted
budget, show no awareness of the problem and are continuing to base
policy on lies. The only defense is personal awareness on which you can
base a personal defense before the axe falls.
Regards,
Ed
GREENSPAN'S WHOPPER
by Bill Bonner
You are wasting your life and your talents writing about Alan Greenspan
every day, said an old friend.
For years, we have been working on Greenspan's obituary. As far as we
know, the man is still in excellent health. But we do not want to be
caught off guard. Maybe we could even rush out a quickie biography,
explaining to the masses the meaning of Mr. Greenspan's life and work.
Perhaps our friend is right. But then again, we weren't doing anything
special before we started keeping up with the Fed chairman. Besides, we
see something in Alan Greenspan's career...his comportment...his
betrayal of his old ideas...his pact with the Devil in Washington...and
his attempt to hold off nature's revenge at least until he leaves the
Fed...that is both entertaining and educational. It smacks of Greek
tragedy without the boring monologues or bloody intrigues. Even the
language of it is Greek to most people. Though the Fed chairman speaks
English, of course, his words often need translation and historical
annotation. Rarely does the maestro make a statement that is
comprehensible to the ordinary mortal. So much the better, we guess. If
the average fellow really knew what he was talking about, he would be
alarmed. And we have no illusions. Whoever attempts to explain it to him
will get no thanks; he might as well tell his teenage daughter what is
in her hotdog.
We persevere anyway, more in mischief than in earnest.
The background: The U.S. economy faced a major recession in 2001 and had
a minor one. The necessary slump he held off by a dramatic resort to
central planning. The invisible hand is fine for lumber and poultry
prices. But at the short end of the market in debt, Alan Greenspan's paw
presses down, like a butcher's thumb on the meat scale. The Fed quickly
cut rates to head off the recession. Indeed, never before had rates been
cut so much, so fast. George W. Bush, meanwhile, boosted spending. The
resultant shock of renewed, ersatz demand not only postponed the
recession; it misled consumers, investors and businessmen to make even
more egregious errors. Investors bought stock with low earnings yields.
Consumers went further into debt. Government liabilities rose. The trade
deficit grew larger. Even on the other side of the globe, foreign
businessmen geared up to meet the phony new demand; China enjoyed a
capital spending boom as excessive as any the world has ever seen.
What the Greenspan Fed had accomplished was to put off a natural,
cyclical correction and transmogrify an entire economy into a monstrous
ECONOMIC bubble. A bubble in stock prices may do little real economic
damage. Eventually, the bubble pops and the phony money people thought
they had disappears like a puff of marijuana smoke. There are winners
and losers. But in the end, the economy is about where it began -
unharmed and unhelped. The households are still there...and still
spending money as they did before...and the companies still in business.
Only those that leveraged themselves too highly in the bubble years are
in any trouble - and they probably deserve to go out of business.
Even a property bubble may come and go with little effect on the overall
economy. House prices have been running up in France, for example, at
nearly the same rates as in America. But in France there is very little
mortgage refinancing...or taking out of equity. The European Central
Bank was repeatedly urged to lower rates in line with those in America.
It refused to budge. Without falling rates, there was no refi boom.
Nor were European banks offering home equity lines of credit. Property
could run up...and run down...and the only people who cared would be the
actual buyers or sellers, who either cursed themselves or felt like
geniuses, depending on their luck.
But in Greenspan's bubble economy something remarkably awful happened.
Householders were lured to take out the equity in their homes. They
believed that the bubble in real estate priced created wealth that
they could spend. Many did not hesitate. Mortgage debt ballooned in the
early years of the 21st century - from about $6 trillion in 1999 to
nearly $9 trillion at the end of 2004. Three trillion dollars may not
seem like much to you, dear reader. But it increased the average
household's debt by $30,000.
