Cash and Crash

…How the Merchants & Politicos Gambled Away American Prosperity

By Dene McGriff

Main Street America is being raped by their own government and the bankers that control it, ever amassing more and more wealth through various bailouts, incentives and stimulus designed to make the rich richer and the poor poorer.  The greatest transfer of wealth the world has ever seen is going on in broad daylight and no one gets it.

We have been raised to believe the best in people, our government and our nation.  By using the financial crisis as an example, we can prove that those appointed and elected to office and CEOs knew the truth, deliberately lied and continue to lie about the causes for the crisis.  Rather than be thrown in jail, most have been rewarded with wealth beyond measure and put in charge of the very crisis they created.  All we have to do is look at their statements just before and after the financial crisis began.  Probably the most disturbing thing is how the American people put up with it.  The source for all of the data below is the government itself, mainly the Federal Reserve and the Treasury Department.  For them to go to Congress and plead ignorance as to the cause of the recent debacle is beyond the pale.

Rumor has it that throughout the “developing world” politicians and law enforcement is in “on the take” – e.g., get stopped in Mexico by a cop, pay on the spot and he’ll let you go…money talks and bribes walk!  But here in the good ‘ole USofA where we drape ourselves in the flag as they kiss your money goodbye – my, it can’t get any better than that!

If the experts got it wrong, how do we ever expect them to “get it right”? 

·        Recently, Bernanke blamed the housing bubble on the lack of regulation (not the easy money policy of the Fed) – and sure enough, we’ll elect him for another four years – better to deal with the devil we know than the one we don’t – good grief, we might get stuck with Paulson!

·        But in 2008, big Ben Bernanke blamed the housing bubble on the savings glut? (since when did savings ever cause bubbles?)

·        On July16, 2008, Bernanke declared Fannie Mae and Freddie Mac were adequately capitalized and in no danger of failing.  Twenty eight days later, they were both nationalized.

·        Secretary of the Treasury Henry Paulson declared in April 2007 that all indications were that the housing market was at or near the bottom.  In July of 2008 he declared that the banking system was safe and sound.

David Walker, the Government Accounting Office Controller from 1998 to 2008, warned that the unfunded liabilities if the U.S. government exceed $100 trillion.  The only way to pay them off is to print currency and inflate the liabilities away.  He warns that US government immorality will lead to national bankruptcy.  So who can we trust?  Well, let’s vote for Bernanke again for another four more years!

The recovery is not on the way.  You cannot have a recovery without increasing a nation’s productivity rather than its rate of buying things as if consuming were a wealth producing activity!  So in this report, we are going to glance at what is happening in some of the major areas of the economy such as housing, employment, banking, and stocks.

HOUSING

It seems we are condemned to repeat history.  The chart to the right shows the first and second wave of the housing crisis.  Notice, we are in the calm before the storm.  What caused the housing bubble in the first place?  Low interest rates, low down payments and sloppy underwriting, right?  Houses soared to three and four times their real value over a five year period.  We got through the first wave, but most of the Option ARM resets don’t occur until 2011.  That’s wave number two.

Talk about repeating history!  We’re setting up wave number three.  What has the Federal Reserve done?  Today, we have the lowest interest rates ever – essentially zero (floating from 0 to .5 percent – and today the Fed decided to keep it at zero – January 27, 2010).  Although banks have tightened credit standards, there is a $8,000 tax credit for new home buyers and $6,500 for others.  It has also been possible to get loans for nearly nothing down as the government guarantees 95 percent of the loans.  Now they are forcing the banks to rework failing loans but the great majority of those are failing again.  In their desire to help people buy or stay in their houses, the government is only creating a greater problem down the road.

The securitization of loans into debt instruments that sold and resold loans into instruments of financial self-destruction called derivatives created huge bubbles of debt that could easily bring down the whole financial house of cards.  And guess what?  That practice still continues.  The bubble is beginning to inflate again caused by the same malfeasance as before.  As Martin Hutchinson, the contributing editor of Money Morning says, “Of course it looks like the housing market has recovered! The question is what happens when some of these subsidies are taken away?

Even if we wanted to provide gigantic subsidies to housing finance in every form for evermore, we couldn't afford to. The U.S. government is running trillion dollar deficits, and something has to change. So at some point the feather cushions that have surrounded every aspect of the housing market will be taken away.”

And what do you know?  Here comes the President’s State of the Union (January 27, 2010) and he sounds like a penny pincher…that leads me to this bridge across a Katrina swamp down in Louisiana I can sell you on the cheap if you buy now!

According to Reuters “the Fed aims to buy $1.25 trillion of agency MBS in a bid to bring down mortgage rates and to stimulate the battered housing sector and the overall economy.”  Isn’t this policy of loose and easy money what got us into trouble to begin with?  What is wrong with cheaper affordable housing anyway?  The Fed policy will re-inflate providing a temporary reprieve for some home owners, but keep prices artificially high as before. 

According to Case-Shiller, the real estate market has fallen by 30 percent so far and will fall another 30 percent once all of the props are removed.  CNN Money gave three reasons why foreclosures will increase: 1) A huge increase in defaults of Adjustable Rate Mortgages (ARMs) that are resetting in 2010, 2011, and 2012) increasing interest rates caused by the sale of so much US debt causing long term rates to rise (because of the increased risk of the falling dollar) and 3) the end of the tax credits in April, 2010.  Fear of inflation will result in the inevitable increase in the Federal Reserve Target rate.  “Mortgage bonds are poised to slump after a record rally as the Federal Reserve’s unprecedented buying of $1.25 trillion of the securities ends as soon as March 2010, driving up interest rates on new home loans.”

“The last Mortgage Bankers Association report estimates that the total number of loans in some sort of delinquency, default, or foreclosure status to be about 8.2 million, or 14.41% of all loans. There were around 3.9 million foreclosure notices given in 2009, but if the total number of loans that are in some sort of delinquency, default or foreclosure presently is 8.2 million, it’s obvious that we have a bigger problem beneath the surface.  You can try to hide 8.2 million people in default, but at some point, you gotta know that you are only looking at the tip of the iceberg.”

Even though the number of foreclosures should be rising dramatically, we don’t have the will or the capacity to deal with the millions of delinquent home owners.  The policy of “extend and pretend” will probably continue for years to come.  Home owners in the “trial modification program” often fail six or more months down the road to qualify and find themselves in foreclosure anyway.   “Moody's upped its estimate of defaults recently because of shortcomings of the government-led mortgage modification programs. Trial workouts are not being made permanent and completed modifications are re-defaulting at high rates.”  The latest, bomb-shell headlines are that U.S. residential rental vacancies are at their highest level in 30 years. Simultaneously, U.S. shopping mall vacancies just set an all-time record. Meanwhile, foreclosures/defaults in both markets continue along near/at all-time record highs – and there are over 20 million empty homes in the U.S.  Hey, talk about going home to Mama – and talk even more about doubling up and tripling up – things are getting crowded in here!

The Fed will stop buying mortgage securities the end of March.  This had the effect of keeping mortgage rates low as well as funding the federal debt indirectly because the banks would turn around and buy Treasuries.  The United States home mortgage market has been nationalized.  Over 95% of all new loans for single-family homes in the U.S. were made with federal assistance, either through Fannie Mae, Freddie Mac, or the FHA.  These nationalized companies currently have a blank check in spite of the mounting losses.  They are currently facing a 20 plus percent default rate on loans issued since 2007.   The government guarantees will dry up because the bond market will eventually choke on all the paper being printed and bonds being issued, forcing interest rates up.  The private sector home loan companies will not be able to pick up the slack without demanding much more down and raising interest rates to reflect real risk.  Once bonds and interest rates soar, the price of housing will resume its decline.  It’s like a solid diet of Big Macs – eventually the guy explodes as a toxic waste dump!

THE ECONOMY

No matter what we may think about the fall of America, our economy is still four times larger than China’s, and Japan is number two in size.  I have written a lot about Japan before.  It was the post WWII miracle; really on a roll in the ‘80s but 20 years ago, it hit a brick wall and their real estate and stock market lost three quarters of its value.  After 20 years there still is no recovery.  The Japanese government continued to intervene, support broke banks and prop up the economy with more and more debt.  The government mounted huge public works stimulus projects and pumped money into the economy – all to no avail.  Sure, it worked as long as they the government kept stimulating the economy, bailing out banks, doing public works projects, etc.  But as soon as they let up, the economy sputtered and stalled again.  So, in America today we’re telling President Obama—don’t stop the stimulus money or we’ll dry up – keep pumping out the stimulus – we need it now more than ever!

America is following in Japan’s footsteps.  Howard Kunstler put it this way:

“2009 was the Year of the Zombie. The system for capital formation and allocation basically died but there was no funeral. A great national voodoo spell has kept the banks and related entities like Fannie Mae and the dead insurance giant AIG lurching around the graveyard with arms outstretched and yellowed eyes bugged out, howling for fresh infusions of blood... er, bailout cash, which is delivered in truckloads by the Federal Reserve, which is itself a zombie in the sense that it is probably insolvent. The government and the banks (including the Fed) have been playing very complicated games with each other, and the public, trying to pretend that they can all still function, shifting and shuffling losses, cooking their books, hiding losses, and doing everything possible to detach the relation of ‘mone’ to the reality of productive activity.

But nothing has been fixed, not even a little. Nothing has been enforced.  No one has been held responsible for massive fraud. The underlying reality is that we are a much less affluent society than we pretend to be, or, to put it bluntly, that we are functionally bankrupt at every level: household, corporate enterprise, and government (all levels of that, too).”

It has been estimated that 90 percent of the growth in GDP is due to government stimulus.  Stimulus works.  There is no doubt about it.  The economy is deleveraging after years of debt creation, the assets are losing value and the balance sheets readjust downward.  Just as Japan, all asset values decline for many years and the situation is made worse if the government interferes and tries to stop the slide.  It only postpones the inevitable correction.

We are experiencing deflation now but inflation is on the horizon.  And don’t think the rest of the world (check out the Greeks) isn’t doing the same thing! You can’t create money at the rate the governments and central banks of the world are creating it without causing massive inflation down the road.  As Puru Saxena puts it, “Inflation is a hidden tax, an insidious crime against the public. It is the easiest way for any government to confiscate the savings of the public and for generations, wealth has been transferred in this manner.

Remember, money is supposed to be a store of value, however due to reckless central bank-sponsored inflation, it can no longer fulfill this critical role. Unfortunately, nobody questions the inexplicable loss of the purchasing power of their savings, thus, central banks get away with financial murder.

Inflation distorts the economy, it brings great harm to the public and it encourages speculation and mindless risk-taking. In fact, inflation acts as a poison for retired people since they are no longer able to earn more money in order to maintain their standard of living. So, thanks to inflation, most senior citizens are unable to enjoy the fruits of their labor.”

Inflation is creeping up to nearly 3 percent, offset somewhat by the decreases in housing and commercial real estate.  The deflation is giving us a false sense of security because inflation by definition has nothing to do with prices.  It is related to the increase in money supply.

Last year, the government debt was the highest ever at $1.4 trillion, 10 percent of the GDP, about 4 times higher than Bush’s deficits which all considered to be high.  So how does the government handle this?  Smoke and mirrors and a little help from our friends such as China who have been willing to buy Treasury debt at ridiculously low rates.  In the past, the interest on national debt has been up to 3 to 4 percent of GDP but now, according to economists Westbury and Stein, it is only 1.3 percent, the lowest in 40 years.  “In other words, lose money has created a temporary mirage in which a massive increase in government spending appears to be an easy burden to carry”.  This allows the government to push the cost out into the future, but there is already upward pressure on Treasuries and China and others are unwilling to carry us at such low rates.

EMPLOYMENT

There absolutely is no such thing as a jobless recovery and jobs need to be more than flipping burgers at McDonalds.  They have to be the kind of manufacturing jobs making things people need at a price they can pay.  So what is new on the horizon?  What new product is America producing that the world needs (other than military weaponry which we successfully export around the world)?

“So what’s the term for 10 years of no growth in jobs, the slowest GDP growth in 70 years and a 4% fall in inflation-adjusted net worth?  Dormancy?  Depression?  Whatever it is… ouch. “ (Daily Reckoning)  What’s different about this recovery?  The Washington Post article goes on, "There was zero net job creation in the first decade of this new millennium, compared to healthy job growth in each of the previous six decades," continues the report.

"No decade going all the way back to the '40s had job growth of less than 20%."   

How many jobs were created since 2000?  None.  Not a single one, none!   The GDP numbers were positive only because Americans were borrowing their way to prosperity through credit and home equity loans.  A nation does not become wealthy by consumption but by production, not by spending but by saving.

The only thing keeping the economy propped up as we start into 2010 is government spending and more debt.  Just like Japan for the past 20 years, we need big government spending or the economy will continue to shrink.  And to add insult to injury the average salary for a government employee is double that of an employee in the private sector.

The assumption is that during a recession or depression people stop spending - which is true.  Since they stop spending, demand goes down and more people are laid off.  In order to stop the downward cycle, the government is convinced that you can replace private spending with government spending.  Of course government doesn’t really have any money so it borrows and spends creating a huge bubble of public debt, and eventually higher taxes, lower demand; and the cycle goes on and on.  As the experts say, “There is no such thing as a jobless recovery.”  We have lost many jobs permanently and continue to lose more every month and this doesn’t even count the 150,000 new jobs needed each month.  The chart to the left shows how difficult it is for the unemployed to find jobs.  The numbers of unemployed six months or longer is greater than at any time in post war history.  New jobs aren’t being created either.  Recovery comes from producing something of value which creates jobs.  How on earth everyone (Americans, politicians, the Federal Reserve, etc.) believe that we become wealthy by consuming is the most incredible deception!  The U6 unemployment figure (unemployed and those still looking but out of benefits) is over 17 percent. 

STOCKS AND STIMULUS

So what is happening with the stock market?  Stocks are way overvalued.  Why?  Companies are cutting costs and laying people off which improves their bottom line (profits).  But they are not increasing sales (their top line).  In September, insider selling hit an all time high of 30:1!  Until jobs and income recovers there will be no recovery.  There will be no increased consumption.  The printing of money, monetizing our debt (buying up our own debt) and stimulating the economy through government spending will give temporary increases followed by further collapse.  These are not long term solutions but temporary fixes that only drag out the inevitable adjustment (called a depression).

The pundits and experts are so sure the recovery has begun.  After 20 years, Japan is still scrapping bottom.  Government stimulated the economy, bailed out banks, lowered interest rates.  They did everything we are doing over and over again.  Their markets and housing lost 80 percent of their value and have not recovered – this in spite of the fact that Japan was a saving and exporting nation in contrast to America where we don’t save, but borrow, spend and consume.  This is Japan’s legacy:

“Effacing the landscape did little to bestir the economy. The concrete hardened, but the markets gave way. More wealth was lost than in any other country at any time in history. Commercial real estate dropped 87%. Banks lost $1 trillion as they wrote off bad loans in the property sector. Golf club membership prices dropped 95%. Stocks ebbed down for 20 years and then hit a new low in March of 2009. After 20 years of bear market, they were back to 1982 levels. In the real estate and stock markets alone, $15 trillion was wiped out, an amount equal to three times the GDP of the entire country. By way of comparison, during America’s Great Depression, between ’29 and ’33, only one times GDP was erased.”

The trouble, according to most economists, was that what was good for individuals wasn’t good for the whole economy. As businesses and consumers paid down debt the money went into banks and didn’t come out again. How could it? No one wanted to borrow; they wanted to save. Sales fell. Then prices fell, prompting consumers to save even more. The more the private citizen repaired his finances; the more the finances of the nation fell apart… But instead of tapering off its deficits, they grew larger and larger. Why? Because deficits no longer stimulated the economy; they WERE the economy. The Japanese tried to cure an alcoholic with heroin.

BANKS

How are banks paying back TARP funds and big bonuses?  Ever heard of a shell game?  Well, in this case the $11 trillion injected into the economy is moving around like crazy underneath those shells – a sad game of magic and you’re the fool to guess under which shell the money is now!  TARP stands for “Troubled Asset Relief Funds” – loans to the banks by the Fed.  So how do they pay it back?  Think about it.  The prime rate is zero.  Banks borrow money for nothing, loan it out at high rates (we see credit card interest rates going to 25 to 30 percent; bank charges increasing for everything; annual fees for credit cards, etc.); not to mention fractional banking where the banks multiply their money indefinitely as they loan it – whoops, now your cruising for a monster boondoggle.  Check here to see how the mad math works.   Meanwhile, banks are still getting cash for bad assets.  They recycle the money back to the government by buying Treasuries and paying off TARP so they can resume paying themselves big bonuses to their fat cat executives as the “merchants of the earth are made rich from trading with Babylon!”  Talk about prophetic fulfillment!  And, guess what:  AT YOUR EXPENSE!

Banks look good on paper.  Last April, they changed the “mark to market” accounting rules.  If an asset’s value were to fall by half, they would have to revalue it to the market.  Now they value is at whatever they think it is worth.  “Mark to fantasy accounting rules” allow banks to hide their losses.  Banks like Goldman Sachs which received $90 billion indirectly from the government through the AIG bailout know precisely how to hide their money.  Now Goldman is set to pay out twice the amount in bonuses as last year for a total of $23 billion although worthy recipients must donate 4% to charity.  What a PR coup!  The Fed continues to try to block bail out secrets basically claiming it’s none of our business.   Anyway, greed is alive and well in Babylon on the Hudson!  And, besides, isn’t our President’s biggie going after them awful bankers – isn’t he poised to protect the middle class?  Man, I can’t wait to see “Act II” – Gone With The Cash – A Tale of Executive Complicity in the Great American Rip Off!

How tough is it to make money when you can borrow money for nothing and lend it back to the lender at 400 basis points more interest?  Even then, there is little incentive to lend.  Why don’t banks lend?   In a world where banks can profit from the ‘spread’ between the money they borrow for free from the Fed and make money on the yield on Treasuries with zero risk… there’s no reason to lend to business or consumers. 

FUTURE DEBT

Watching CNBC this morning, I saw analysts and politicians declaring that the recovery is on the way.  Based on what?  New Jobs?  More consumer spending?  Where are these people getting money to spend?  From their increased wages?  From savings?  From home equity?  The only increases we see (e.g. 2.2% increase in GDP) is from the trillions of dollars the Government and the Fed have pumped into the economy.  Take that away and we are minus 6 percent on GDP growth.  Look at the chart below and you see the stagnation of the past ten years and project that out and downward for the next ten.  Even experts agree that we have been losing ground for the past 40 years but again, Rome wasn’t built or destroyed in a day.

Why haven’t we been affected by the huge amount of debt?  Why doesn’t the government or Fed seem to care?  As a percent of GDP, debt payments are low because of the low interest.  What happens as the dollar devalues and the central banks of China and other nations want higher interest?  Short term interest is resetting and $1.6 trillion in debt must be refinanced by the end of March, 2010.  Treasury is trying to lock in low rates but they are having trouble doing that because we are competing with Japan, Germany, France, Britain and other countries who are also financing record debt. 

The rates today are .37 percent for a one year note – pretty low but when you go out 10 years or so it is up to almost 4 percent.  The problem is, who will buy this debt and how much are they willing to pay?  Recently, debt has been purchased not only by China, Japan, Germany and others, but these countries have problems of their own.  What interest rate will they need to cover the risk they perceive?  How reliable is the US as a debtor?  It goes without saying that most of the world is very suspicious about our support for the dollar.  After all, the easiest way to deal with massive debt is to inflate it away, which is exactly what we are doing as we print money, engage in “quantitative easing” (“Fed Speak” for printing money and buying our own debt) .

One of the greatest threats is the failure of a bond auction.  What if the Chinese, Japanese or other central banks decided to sell dollar-denominated Treasury bonds or refused to buy any more?  Investors and central banks are not sure we will be able to pay them back with dollars of current value.  Treasury issued $5.8 trillion in Treasury bills over the last year.  Our leaders are gambling on foreign investors and central banks financing our deficits.  The government ran a record deficit of $91.85 billion for December.  Compare that to Clinton’s surplus or Bush’s final year deficit of $480 billion.  This is just one month and this level of debt goes out for years.

WHERE DO WE GO FROM HERE?

You can’t cure a problem of too much debt by borrowing more.  It worked in the short run as people lived beyond their means and used their home equity as a piggy bank.  But people must save and invest rather than spend.  It is not going to work for the government to borrow trillions of dollars to pay for wars, incentives and bailouts.  This is not going to promote investment.  This is not going to encourage small or middle sized business.  Compulsory health coverage, cap and trade charges for carbon emissions, not to mention the failure of state and local governments who can’t deficit spend but must either cut expenses (causing more unemployment and a depletion of the tax base) or raise taxes which decreases consumption, savings and investment. 

The problem with the government is that every action has a corresponding reaction.  If you increase unemployment from 26 to 72 weeks and people know they can count on extended benefits, they are less likely to get a job.  Estimates are that this raises the unemployment rate by 2 percent.  So if we pay people not to work, they won’t.  If we bail out business, more businesses will act recklessly and expect to be bailed out.  If we lower the cost of credit and encourage borrowing, people will go deeper in debt.  If we retire a working old car and finance a subsidized new car, we increase debt.  If we raise taxes or go deeper into public debt to fund jobs and new programs, we ultimately take money away from the private sector where real jobs are created.

So where is this all going as a practical matter?  Unless there is a world war or disaster, it probably means that America will continue to slowly decline, but it won’t crash over night.  China may look like the up and coming economy but it has its own problem with an aging population, a huge population with massive demand on natural resources, land and water.  It has traditionally been unstable because of regional differences (wealthy along the coast and poor in the interior).  Yes, they will be a power to be reckoned with but will be bogged down by their own internal problems.  The same may be said for India.  And Europe is facing the same problems we are and still battling over regional differences and nations that are progressing or digressing at differing rates.  Even though Japan has been floundering for two decades, it is still the number two economy! 

As I said in the book “In Search of Babylon”, America is here to stay and is not going to disappear as modern day prophets expect (most of these are American evangelical prophets, by the way).  It is still the only country that matches the description of Revelation 16 to 19.  It is the military, economic, political and even apostate Christian superpower and erstwhile supporter of Israel. 

What does this mean for us personally?   There is little doubt that those in power believe that government is the last bastion of solving our problems and righting the wrongs, so expect greater taxes, greater controls, decreased freedoms and decreased opportunity.  Couple the economic crisis with the “terrorist” threat and you have a nation of sheeple willing to do whatever the government tells us to do.  The government has to regulate our food, our water, our families, our schools, our health care, even our churches and do it for our own good!  Whether we like it or not, we are headed for control of our personal lives as we have never seen before.  As Christ’s followers, there is no point worrying about it.  Just follow Him and do what He tells you to do.  What is the main sign of our times besides wars, rumors of wars, earthquakes, famine, etc. – Deception!  And unfortunately many of our so-called Christian leaders are the most deceived and the most invested in this world.  So we need to be aware and not believe everything we hear or read.  Notwithstanding all this deception – most of it in high places with the trickledown effect falling to the masses – “knowledge of the prophetic shall increase and become great – and they that lead many to righteousness shall shine as the stars, forever and ever!” (Daniel 12)