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That is correct, book the funeral, because if common sense and the free market are not allowed to resurrect themselves, we are destined to fall into the hole we have created. A hole which we have now realised was not the foundation of a perpetual consumer-driven
jacuzzi but the final touches of a dark and ugly economic grave.
The exuberance of the past decade not only fast forwarded
consumption on the back of cheap money and lax lending standards, but it also spawned
production, retail, lending,
housing and employment paradigms that were bound to hit a brick wall.
The teaser rates and falsified
borrowing applications came to an end as rates adjusted and the owners defaulted. With them, the house prices to which everyone's personal ATM was attached, started to collapse
and this in turn reversed consumption. This set
off a shrinkage in employment,
which then destroyed asset prices and hence the solvency of banks once mortgages went underwater. The spiral continues.
Greece is close to (formally) defaulting and others may well
follow because the deficits and debts of nations
have for years ceased to represent investments in civil
society. Instead they
have been vote buying sprees
to secure the approval of
the unwashed masses and to enrich
the economic titans through
corporate welfare and reduced regulation so they could
enrich themselves even more so by transforming citizens into consumer serfs.
Governments everywhere created positions and gave nose
bleed increases and unbelievable pension benefits which in turn created households with expectations and commitments
based on unsustainable incomes. The jobs, pensions and lifestyles
of policemen, teachers and firemen
are now being decimated.
We saw the repeal of the Glass-Steagall Act, the outright "ignoral" of Brooksley Born
in relation to over the counter derivatives,
a multiplicity of toxic financial products and the SEC decision in 2004 to allow just 5 firms to lever up to 30 and even
40 to 1, instead of the previous
rules that limited broker dealers debt to
net capital ratio to 12-to-1.
These changes were loopholes on the way in and will now (no doubt) be defences
on the way out for the scoundrels
that gamed the system.
Globalisation also played its part in magnifying the downturn. No doubt it is
good in theory but only where the world functions on
the principal of trade and financial
transactions being both sustainable and mutually beneficial.
This has clearly not
been the case as we have seen
massive imbalances in trade
and unchecked borrowings across borders which have been complicated by rivalries, armed conflicts and lack of consensus
on the political level. Which nation, in any case, is willing to reduce its trade
surpluses so as to benefit a deficit neighbour?
Derivatives which were once the icing on the corporate cake will turn out to be asbestos powder that will magnify
the final unravelling.
Prior to World war II, Hitler's Germany started to rearm itself in violation of
the Treaty of Versailles and then
proceeded to mobilise troops
in the French occupied German
territory of the Rhineland.
Rather than stomp on the rise of Hitler,
the indecisive French and English adopted a policy of appeasement that allowed Hitler to gain traction. The rest
is now history.
Why do I mention this? It
is my opinion that the Greenspan Put, as well
as the subsequent QE's
and stimulus packages have also been nothing more than a policy of appeasement which have bought some time but no peace and stability. The proposed EFSF
(in Europe) with all its
variations is also nothing more than a policy of appeasement which itself risks buckling as soon as Greece defaults formally.
A market left to its own
devices will cleanse itself through higher rates, tighter lending standards and failure of the weakest parts. The
process is ugly but effective.
Just ask yourself why US house sizes went from an average of 1400 square feet in 1970 to 2900 square feet in 2009 despite the size of households dropping from just over three in 1960 to about 2.6 in 2010. This translates very roughly to 150% more housing
per head of population (if you
have not been evicted).
The US is not alone with the number of vacant properties in
Spain and China being equally
alarming.
Just ask yourself why the number of real estate agents in
California went from just over 250,000 to just over 398,000 between 2004
and 2008?
The list of malinvestments goes on and on
and one has only to look at
the proliferation of fast
food outlets, self-storage places and armed conflict (without end) to realise that the whole show was not about reasoned investment but more
about extreme financialisation
of any activity which could yield
bonuses for bankers and even greater wealth for those that had no need
for more.
Make no mistake, no matter how much quantitative easing the UK and the USA unleash,
no matter how leveraged
the EFSF becomes, no matter
how much infrastructure spending
the US undertakes, they can only provide
temporary relief.
The problems of high unemployment, trade imbalances, sovereign debt tremors, crumbling demographics and tremendous wealth and income imbalances are conspiring to bring us undone.
The more they try to reverse the decline with these strategies,
the greater the final reckoning.
The baby boomers have
not only created the problem, they are also making it
worse. It is also clear that
they have no plan whilst still expecting the young to buy their McMansions and share portfolios as well as pay for their social security and Medicare.
The baby boomers by
right are not entitled to any
Social Security. Their contributions were spent on wars and pork barrelling.
Contradictions abound when one considers that the Obama Administration continues the spending policies of the Bush era whilst Greece,
Italy, Portugal and Ireland are subjected
to austerity.
Even more contradictions are apparent when one considers that margin requirements
for gold and silver go up even
when the price is receding, and the margin requirements for shares go down even when their prices
go up. Chairman Greenspan could not spot a property bubble
in the making but the CME and others
can spot a bubble in precious metals. You don't need a nose to sense the stench.
The only advice I can offer is for you to take hold
of the gold and silver railing
around that gaping hole IF you can get
your hands on it. Otherwise, I am warning you.........the edges are slippery.
Let's pray for a miracle because any plan that does not contain real and fairly distributed pain is a fraud on the future and an outright
fraud on the young to which the future belongs.
Peter
Souleles
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