Archive for the ‘recession’ Category

The Fraud of Bushenomics: They’re Looting the Country

January 19, 2008

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The New York Times made it official. The Economy is a problem!

So, now, at last we can discuss it.

Not just discuss it, in rapid order “recession” became the word of the day, from White House, Congress, the Fed and the media.

It’s blamed, mostly, on the subprime crisis.

But that’s not the problem. It’s a symptom. It is the logical, and probably one of the necessary results, of Bushenomics.

Along with low, or no, job growth. Little or no business growth. Depressed wages. And the crashing dollar. (The president has a different vision of the economy. In his vision it’s booming! And the number of jobs is growing! Though there is this little blip.)

The idea under which Bushenomics was sold is this:

  • The rich are the investor class.
  • If the rich have more money, they will invest more.
  • Their investments will create more business.
  • Those businesses will create more wealth, thus improving everyone’s lives and making the nation stronger. They will also create new and better jobs.

Whether or not the people who say such things truly believe them, I cannot say. But that’s their pitch, and the media certainly seems to buy it, as do most of the establishment economists.

A more realistic — and less idealistic — view of Bushenomics is that the Bush administration and its cronies came at the economy with the attitude of oilmen.

  • They inherited a vastly wealth country.
  • They looked at it like the oil under the Alaskan wilderness. They craved to pump it out, turn it into cash and grab as much of that cash as possible.

Wherever possible, they literally sold off the assets. This was called privatization. Our biggest asset — in terms of size — is, of course, our defense establishment. With privatization, one dollar out of every three for direct military operations in Iraq and Afghanistan goes to private contractors like Halliburton and Blackwater. So when someone says, “Support the troops!” with budget appropriations, they should really yell, “Two-thirds support to the troops! One third support to Halliburton, et al.!”

This is just an estimate. The degree of privatization is unknown. Presumably, that’s deliberate. Nor does it count the amount of money the military spends with private purveyors to supply the troops and their operations. It is only the amount that goes directly to private contractors.

But for the most part, the assets of the United States, our collective wealth, could not be sold off in such a direct manner.

In order to turn them into cash, what the administration did was borrow against them.

That is, they cut taxes while continuing to spend lavishly, creating debt.

The debt is owed by all of us, the collective people of the United States.

The tax cuts hugely favored rich people. They also favored unearned income (dividends, capital gains, inherited money) as opposed to the kind of money people have to work for. The very richest got richer.

The spending was — to the degree possible — directed to themselves, their friends and their supporters: Big Pharma, the medical industry, insurance, banking and financial, among others. And, of course, Big Oil, from whom they have spent close to a trillion dollars of our money to conquer a big oil field for private exploitation.

Now let’s take a look at some numbers.

The numbers will tell us if their idealistic tale about unleashing the capitalists to create a better world for us all is correct. Or if it’s a fairy story that masks uncaring greed.

The big number is that the economy has grown.

As measured by the GDP it has. From 2001 to 2007 it went by 35 percent.

GDP stands for Gross Domestic Product. It could more accurately be called Gross Domestic Transactions, because it is the sum of all the financial transactions in the country.

Now let us look at job creation.

In the first six years of the Clinton administration, 13.7 million jobs were created. In the same period, under Bush, only 3.7 million jobs were created. Barely keeping up with population growth, if that. (Source: Fox News)

Now let us look at median income. That’s as opposed to average income (If Bill Gates walks into a bar with 10 people, the average income of everyone in the room goes up by $17,5000,000. But the median income just moves up half a notch, from between the fifth and sixth person, to the sixth person’s income). From 2001 to 2005, median income, for people under 65, went down $2,000.

That’s worth restating. From 2001 to 2005, the income of the average working person declined by $2,000.

Now, let’s look at the value of America’s businesses.

A good rough measure of the market value of America’s best businesses is the stock market. Under Clinton, the Dow Jones went up 324 percent. Wall-to-wall, after the dot.com bubble burst, it more than tripled in value.

Bush arrived in 2001. Since then the Dow Jones is up just 10 percent. Adjusted for inflation, that’s absolutely flat. (It was briefly up 23 percent. It is now below the 10 percent mark, and tumbling down as this is written). Just pain, no gain.

If jobs have not increased, salaries have gone down, and the value of business has not risen, where is that 35 percent growth in the economy?

There is a number called the M3 money supply.

The M1 is basically cash, plus checking and “current” accounts. The M2 adds savings accounts, money market accounts and CDs up to $100,000. The M3 adds in the big CDs, Eurodollar accounts and other large exotics.

Already rising very fast, the M3 took off like a rocket after 2001. The Fed stopped publishing the M3 in 2006 (conspiracy theorists, please note.) But a quick look at the chart of its growth, and assuming its trajectory continued, clearly shows that the M3 grew by something in the range of 35 percent.

The entire growth of the economy under Bushenomics is accounted for by growth in the money supply.

The administration did not directly inflate the economy by 35 percent.

They pumped it by the size of the deficit. The rest happened this way.

When a government is “printing money” (running big deficits), the big fear is inflation.

Particularly in the financial community. Bankers make their money on interest, and inflation eats their profits, point for point.

The administration, very proudly, grew the economy (or at least the amount of money in circulation), without inflation. Which actually is a pretty good trick.

In part, they were able to do so precisely because the policy was a failure.

If it had created business growth — actual business, not just financial business — that would have created jobs. Then there would have been inflationary pressure. Especially if they were good, high paying jobs. If salaries for ordinary people go up, even a little, the total is a big sum because there are so many of us.

But due to free trade, outsourcing, bad economic policy, policies aimed at keeping wages down, and relentless union busting, good jobs were lost, to be replaced with low-wage jobs, when they were replaced at all. The proof is in that median income figure (down $2,000 per worker).

Due to free trade and outsourcing, consumer goods mostly went down too. The exception being in favored industries like pharmaceuticals, insurance and oil.

Finally, and this the key to the next step in the process, the Fed kept interest rates down.

Low interest rates mean that it’s cheap to borrow.

The administration largely believes in supply-side economics (otherwise known as “trickle down,” or “piss on the people.”); if you increase the supply of something, consumers will appear to buy it.

The actual results are a perverse triumph of the idea.

The supply of money was increased. The price of money was kept artificially low.

Think of borrowing as buying money. It is.

People (and businesses and corporations) did rush forward to buy it. Once they had it, what was there to do with it? There was no new trend, no dot.coms, no high techs, no bio techs, no nothing.

So they went out and sold money. That is, they made loans.

There are two big retail loan areas, credit cards and housing loans. Both were pushed very aggressively. With cheap, cheap money available to finance home buying, that market heated up. At the same time, commercial interests started aggressively buying up loans, packaging them together, and reselling them as financial instruments. That created more desire to make more loans (sell money). Financial institutions bought more money (borrowed), in order to sell it at a profit (make loans). Since the loans were quickly resold — and profit taken off the top — the quality of the loans didn’t matter to the people who made them. The housing market — or rather the loans that fueled it — grew into a bubble.

The subprime crisis, the housing bubble, whatever you want to call it, is not the problem.

It’s a symptom of pumping in money with no place to go.

Other symptoms are no job growth, no business growth, no stock market growth, falling median incomes, disappearing pensions and health plans, and the fall of the dollar.

When Bush came into office, a Euro cost 95 cents. Now it costs a $1.50. The Canadian dollar (the Loony) was 70 cents. Now it costs a dollar. Most mainstream economists and pundits will opine that a low dollar is good for American industry, because it will help us sell our goods. That’s only true if we’re producing things that no one else is — or producing them better or cheaper — and we’re not.

Also, many foreign exchange rates are being kept artificially low against the dollar. Some, like many of the oil countries, are pegged to the dollar. They’re making up for it by raising the price of oil (currently traded in dollars). Others, like the Asian manufacturing countries, are keeping their currency down to retain their edge in selling here, thereby canceling whatever advantage we’re supposed to get from declining currency.

One way to think of what the administration has done, is as a leveraged buyout. That’s when someone buys a company, using the company itself as the collateral for the loan used to purchase it, usually at very high interest, then pays off the interest by cutting the work force and salaries, selling outsets and even breaking up the company.

It’s good for the guy who makes the deal, skims the cream off the top and gets rich. (The company that Mitt Romney got rich working for specialized in doing that.) It’s good for the lenders, who get a good return (if the buyer is able to squeeze enough money out of his purchase), but it’s bad for the work force, bad for the company, and, if no one comes along to replace it, bad for the business as a whole.

We’ve experienced a leveraged buyout of the national economy.

Our politicians, the media and economists are just now waking up to the fact that the economy is in trouble.

The current numbers make it clear that we are probably in, or probably headed for, a recession.

Also, the polls show that people are concerned about the economy, and it’s an election year. The people are out ahead of our governing and media and professional economic classes on this, because they live in the real economy, the one that’s been leveraged, and the professionals are either in, or work for, the investor class that has been doing well.

So there is, at last, talk about doing something about the economy.

The Feds will cut interest rates!

George Bush wants a stimulus package. Tax cuts, tax cuts and make my tax cuts permanent! After all, that policy has worked so well. He said the cuts must be at least 1 percent of the GDP. That will be $145 billion.

Harry Reid and Nancy Policy (the King and Queen of Effective Politics) will offer a competing one (tax cuts, tax cuts!). Although they promised pay-as-you-go economic policies from a Democratic legislature.

Pundits in the media talk about a crisis in consumer confidence. And how the fix is to restore it. So we will go out and buy. Presumably on credit.

How about consumers think there’s a problem because there is one. Not because they’re weird emotionally. They reasonably see themselves so overextended, with so little hope of being better earners, that they won’t be able to pay things off. Not even with a one-time government check of somewhere between $300 and $1,200.

In short, most of those solutions will go to making things worse.

The real solutions are pretty obvious and pretty simple.

First, we have to make a choice: Do we want a sound economy for all of us and a strong America? Or do we want to have a few people of unlimited wealth who use that wealth, among other things, to control the government so that it helps them milk more money from the rest of us?

By the way, this is not a call for socialism! Or other ism! Except a call for sensible and effective capitalism. Based on what we’ve seen work and seen fail.

In the real world, there are no such things as free markets.

In the real world, business people manipulate and conspire to control markets, and governments both control and collude with business, while tax policies and government spending have a major affect on the economy.

Let us accept that, and then the argument is only over how best to do it.

Simply giving money to rich people doesn’t work.

Bob Novak, the conservative commentator who calls the investor class “the most creative class,” is flat out wrong. As we’ve seen, outside of their ability to buy influence in politics, the media and the law, the rich are like the rest of us, relatively passive and unimaginative, prone to putting their money in the easiest place that promises a return, in whatever bubble is in fashion at the moment and wherever some salesman who gets their attention tells them.

Money has no mind of its own. It has to be directed toward areas that will generate and support business and good jobs at good wages. As it happens, our economic goals are on the same road as the social good.

The No. 1 target has to be alternative energy.

Energy that can be produced here, in the United States, renewable, nonpolluting, and not, like corn-based ethanol, requiring as much petroleum to produce it as it replaces. One-third of our balance of trade deficit is oil, year in and year out. If the United States can become the world leader in alternative energy and conservation technology, we will, at last, have something to export.

The No. 2 target is infrastructure.

By it’s nature, infrastructure has to be largely produced here with local labor and it stays here.

Hard infrastructure, like roads and bridges, cleaning up New Orleans and the Gulf Coast, protecting our coasts from future storms, internet and phone service as good as Europe’s, Japan’s and Singapore’s.

Soft infrastructure, like education, youth services, parks and recreation programs, public safety, and a saner criminal justice system. The United States has 5 percent of the world’s population and 25 percent of the incarcerated population. That’s expensive. And wasteful. Unsafe streets and high crime are expensive and wasteful.

Infrastructure makes doing business easier, quicker and cheaper. It becomes an invisible subsidy for all businesses. Try to imagine, for example, Fed Ex, that entrepreneurial triumph, without a national web of airports, flight controllers and roads.

The No. 3 target is health care.

Health care in the United States costs at least 50 percent more than the next-highest spending country and double what it does in most other modernized countries. All of them have better health than we do. They live longer and in better condition.

The difference is that they have national health plans. Mostly single-payer, usually tax-supported. Our plans are based on a hodge-podge of a thousand private insurers.

A single-payer national health plan should cut the costs of our health care by at least 25 percent, possibly 50 percent. That’s an astonishing number. That money could go to more productive things. Or to even more health care.

American businesses who supply health care to their employees claim they are noncompetitive with companies from countries that have national health. This will make them more competitive. This will make American labor more competitive.

The No. 4 four target is a balanced budget.

There are, in fact, times for deficit spending. Just as there are times in our personal lives to borrow and times for business to borrow.

This is probably not one of them.

There is an ocean of money sloshing all around the world, looking for a home. If there are real business opportunities in America (like taking the lead in alternative energy, bio tech, and whatever is next around the corner), it will come.

Especially if there is a sound business environment and dollar investments return to being the most reliable in the world. That means paying down our debt.

How can all this be done?

Raising taxes.

On the wealthy. And on corporations. That’s not class warfare. That’s simple practicality.

After your first $20,000, how much of the next 20 do you need, to live, thrive and survive? Damn near all of it. After your first 20 million, now much of the next 20 million do you need? Not a nickel.

The rich will whine, writhe and scream that they won’t do business, they’ll be driven out of business, that business will collapse. Bullshit. If they dislike keeping 20 or 30 or 40 cents of each dollar of profit so much that they won’t take the dollar, someone will come along who gladly will. That’s how markets work.

All of this is pretty straightforward and common sense.

The illogic of Bushenomics is obvious. The results were foreseeable. After all, similar effects took place under Reagan and Bush the Elder, until they reversed courses.

The alternatives are equally obvious. The facts bear out the theory. Go back to Hoover and Roosevelt, then look at the down, up, down, of Bush the Elder, Bill Clinton, and Bush the Lesser. (We do note that there are minor industries dedicated to proving that Franklin Roosevelt was, in the words of CNN’s Glenn Beck, “an evil son of a bitch,” that the New Deal really, really, really didn’t work, and that Bush the Elder was really, really, really responsible for the boom of the Clinton years and that Clinton was responsible for the first recession during the reign of Bush the Lesser. But they are like people who see the image of the Virgin Mary in bread sticks and crullers.)

None of our politicians, pundits or economists are addressing the fundamentals.

The last time we switched from the nonsense of worshiping unmitigated greed, disguised as free marketeering, it took a market crash and the Great Depression to move us out of our public relations-manufactured delusions and make us understand that when we all do well the rich get richer too, so let’s start with the common good.

Based on the dialogue as it stands now, we will go with tinkering and twaddle, doing more of what doesn’t work. And only if the whole things collapses will we address the real problems.
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About authorLarry Beinhart is the author of Fog Facts: Searching for Truth in the Land of Spin. Robert McChesney called it the book on the subject “against which all others will be measured.”

His novels include Wag the Dog, on which the film was based, and The Librarian which Rolling Stone described as “John Grisham meets Jon Stewart.”

He was a Fulbright Fellow, he’s won an Edgar, been nominated for two more, a Gold Dagger, an Emmy. He’s been a political consultant, made commercials, lectured at Oxford and he’s a part time ski instructor. His email is beinhart@fogfacts.com

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Outlook worst since dotcom bust

January 5, 2008

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By Chris Giles and Delphine Strauss

Published: January 2 2008 02:00

Britain this year faces the most difficult economic conditions since the dotcom bubble burst, according to the Financial Times ‘ annual survey of leading economists. It shows deepening pessimism about the impact of the global credit squeeze.

The survey of 55 top economists shows confidence has tumbled from a year ago. The experts also fear that compared with 2001-02, the scope for financial authorities to mitigate any downturn is far more limited.

Nearly nine in 10 think public finances are not in good order so there is no leeway for discretionary tax cuts or increases in public expenditure. The third most-mentioned risk to the economy is inflation, limiting the ability of the Bank of England to cut interest rates.

Nearly two-thirds of the economists – from the City, academia and including five former members of the monetary policy committee – thought house prices would fall this year [2008], although there was wide disagreement over the effect of a housing downturn on the economy. Even those usually optimistic sounded a more cautious note after five months of deepening financial market problems.

Sir Alan Budd, provost of Queen’s College Oxford and former chief economic adviser to the Treasury, said: “I’m quite worried … mainly because some of the problems are unprecedented and don’t seem to be responding to treatment.”

Many of the problems stem from abroad, especially the likelihood of a housing market slump in the US.

Sir Howard Davies, director of the London School of Economics, saw a high probability of a recession in the US. He added: “That would be likely to spread to the UK and some other European countries where property prices seem similarly out of line.”

But at home, concerns centre on the limited ability of the government to mitigate any slowdown because it was still running a large deficit when the economy was performing strongly between 2004 and 2007.

Martin Weale, director of the National Institute of Economic and Social Research, said: “The public finances are in very poor shape … HM Treasury has managed several years of self-delusion. No doubt it will explain that it did not foresee the credit crisis and use this as an excuse.”

With inflationary pressures likely to be evident in the first half of 2008, the majority view was that life had got much tougher for the Bank of England, particularly since banks’ unwillingness to lend had reduced the ability of the Bank to influence monetary conditions.

Most, nevertheless, hoped the Bank would choose to turn a blind eye to short-term inflationary pressures and cut interest rates, since they believed that the coming economic slowdown would control inflation and the economy needed the stimulus of looser monetary policy.

With house prices falling across the country, most economists did not think a troubled housing market would be the cause of further weakness.

Some of those predicting the sharpest falls in house prices were also the most confident about the economy’s ability to withstand a housing downturn.

Willem Buiter of the LSE, a former MPC member, predicted prices would decline by 30 per cent over the next couple of years with no major effect.

Richard Lambert, director general of the CBI, said that 2008 would be a difficult year, but that it was important not to exaggerate risks and “talk ourselves into something much worse” than the soft landing he thought likely.

The Empire Is Over

September 30, 2007

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The American government has come to resemble the characters in The Wizard of Oz. We have the Cowardly Congress, a president without a brain, and a foreign-policy establishment without a heart.

Our politicians are still trying to play the empire game long after the age of empires has ended. Blinded by arrogance, they cannot see that with every passing day, the world needs us less and less and hates us more and more. We are passing through that phase when the grandeur of the empire exists only in the minds of politicians who have insulated themselves from reality.

A friend of mine, a classical scholar, sometimes tells his students, “No one woke up one morning in 476 A.D. and said, ‘Gee, I’m in the Dark Ages.'” The transition from the heyday of Roman power to a stage of barbarism was a gradual process. We are in a process of change. No one is going to announce on TV that the U.S. is no longer a superpower.

Nevertheless, the signs are there if you look for them. A nation that was able to help crush the Axis powers in three and a half years hasn’t won a war since then. We have had four years of struggling with an insurgency in a small, poor and broken country. Our economy is shaky under mountains of debt. Half of our people make less than 42,000 inflated dollars a year.

Where we were once the arsenal of democracy, today there is hardly a major weapons system that doesn’t rely on imports of one kind or another. Much of the industry that is left is foreign-owned. Japan, which once lay prostrate, dominates the American car market. It is extremely difficult to find anything today that is not made in China or some other cheap-labor country.

In the meantime, the cowardly Congress doesn’t have the guts to tackle any of the major problems confronting the American people. Our president continues to embarrass us practically every time he opens his mouth in public. The foreign-policy establishment is riddled with aging draft dodgers agitating for more wars – against small countries, of course.

True, we still have lots of nuclear weapons, but do you think any American president would want to get into a nuclear shooting match with China or Russia? Look at how we reacted to two airplanes crashing into two office buildings. What do you think we would do if San Diego, Los Angeles and San Francisco became radioactive ruins with millions of casualties? We are not prepared mentally, spiritually or materially to deal with a nuclear war.

We are like all empires in their final stages. We have grown soft. We like our comforts. We don’t wish to be inconvenienced. We like poor Mexicans to do our stoop work and poor Americans to do our fighting, provided they do it far away so we won’t be disturbed by explosions and screams. We enjoy our decadence, and there are always people in the media who can rationalize anything, no matter how sick and revolting it is.

As for trying to understand the world, we are just too busy being amused and following the adventures of Britney Spears and other celebrities. We like to let the TV and the politicians do our thinking for us. It saves energy. They tell us whom to hate.

The only way to avoid a bad end is to find some realists and put them in public office. We need a brave Congress, not a pack of cowards. We desperately need a president with a brain. We need to retire the warmongers in the foreign-policy establishment. Otherwise, we will join the other third-rate countries, once empires, on history’s discard pile.

Charley Reese [send him mail] has been a journalist for 49 years.

Can you say recession?

September 29, 2007

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Good news: the loonie is soaring higher. Bad news: it’s because the U.S. is in crisis

COLIN CAMPBELL AND JASON KIRBY

From the moment the United States government came into being in 1789, it was in the red. Saddled with a US$78-million debt from the revolutionary war, a fledgling Congress made it a priority to get out of hock, eventually setting limits on how much money the country could borrow. So much for that. Last week, U.S. Treasury Secretary Henry Paulson sent a stark message to modern-day legislators: on Oct. 1, America’s IOUs will surpass the current debt cap of US$8.9 trillion. Unless Congress jacks up the limit yet again and piles on even more debt, the government of the world’s largest economy will cease to function.

It’s the kind of dire situation you would think might grab headlines, but it has raised barely a ripple. In spendthrift America, this is just par for the course. Since the Bush administration took office in 2000, America’s national debt has ballooned by more than 50 per cent. Congress has already hiked its limit on how much the U.S. can borrow four times in the last five years. Meanwhile, American consumers, spurred on by low interest rates after 2001, racked up huge debt loads of their own. America’s appetite for borrowed money seemed limitless.

Not anymore. As global financial markets seize up, and lenders come calling, alarm bells have begun to ring. Observers are talking seriously about the threat of a punishing recession. America’s addiction to cheap and easy money has put the country’s economy, not to mention the world’s, on shaky ground. “What we’ve done as a society is borrowed a tremendous amount of money,” says Peter Schiff, president of Euro Pacific Capital in Darien, Conn., nicknamed “Dr. Doom” for his dour outlook. “Now the bills are coming due and we don’t have any money to pay it back.” Surveying the threat of a crumbling housing market and rising unemployment, Schiff is brutally blunt. “We’re screwed,” he says. “It’s not just going to be a mild recession. It’ll be the worst one we’ve ever had.”

The sinking reality of America’s dire financial state has sparked a simmering panic in financial markets over the past several weeks, and that has been reflected in the plunging value of the U.S. dollar against virtually all world currencies, including Canada’s.

 

As the Canadian dollar crested above the value of the greenback for the first time in three decades last week, shoppers celebrated by beating a path to cross-border outlet malls. But for a country whose economy is inextricably linked to the financial health of U.S. consumers, the rise above parity is anything but good news. The loonie’s rise is not so much a resounding statement of confidence in the Canadian economy, but a reflection of absolute panic over the financial mess south of the border. Yes, Canada’s abundance of minerals, oil and gas provides some protection against economic turmoil. But any claim that Canada can glide easily through a major U.S. recession, especially if it spreads to other parts of the globe, is seriously off base. Analysts are just beginning to come to grips with what the U.S. reckoning means for us.


Christopher Howard doesn’t exactly look like a working-class hero, but for a few days earlier this month the former British businessman played the part when fears began to sweep through the U.K. that Northern Rock, Britain’s fifth-largest mortgage bank, might fail. Bank failures aren’t supposed to happen in this day and age, yet Northen Rock, caught off guard by the recent global credit crunch, had to be bailed out by an emergency handout from the Bank of England. Upon hearing that news, Howard joined thousands of other customers, desperate to withdraw their savings. When the manager of Howard’s local branch refused to hand over his money, he and his wife staged a sit-in and barricaded the woman in her office. Never mind the one-time hotel owner was pulling out nearly $2 million to put a down payment on a home in Cyprus, he instantly became an icon for folks who feel helplessly caught up in the economic upheaval spreading around the globe.Signs of anxiety are everywhere. American housing starts have fallen to their lowest levels in 12 years, while the number of mortgage foreclosures doubled last month. Economists predict the British economy is at the beginning of a serious downturn thanks to a dismal housing market that will lead to a recession there. Big merger and acquisition deals around the world are either stalled or falling to pieces, as deep mistrust sets in among major financial institutions. No one knows exactly where the bad debt bombs are buried. All around, investor and consumer confidence is in free fall.

Experts admit they are astonished just how fast things turned sour, even with all the warning signs. After the tech bubble burst in 2000, followed by the terrorist attacks in 2001, economists predicted a long and painful recession. The U.S. Federal Reserve, under then-chairman Alan Greenspan, slashed interest rates to one per cent. A deep recession was averted and low rates touched off a sustained housing boom. As quickly as tech investing fell out of style, real estate speculation came back in — anybody could buy a house, with no money down and no credit record to speak of. Shares in Cisco gave way to condos in San Francisco. And as house prices soared, owners tapped their equity to go on a lavish spending spree. Few seemed genuinely concerned that once interest rates started to rise, millions of homeowners would be stretched to the limit. In fact, analysts widely and blithely predicted that inflation was a thing of the past, and interest rates might just stay low forever.

This summer, mortgage defaults began to soar as more and more Americans found themselves suddenly unable to keep up with rising interest payments. Investment funds heavily invested in sketchy mortgages buckled, touching off credit fears in other sectors. One estimate pegs potential losses in the mortgage market at US$200 billion — a sum roughly equivalent to the GDP of Greece. Meanwhile, Standard & Poor’s, the debt rating agency, believes U.S. corporations could default on loans worth US$35 billion by next year. As consumers tighten their belts, it will only exacerbate matters.

Even Uncle Sam is in a pinch. Demand for the dollar is sinking fast. Foreign investors and central banks in Japan and China own a huge chunk of America’s public debt, and the fear is those investors will lose confidence in the U.S. dollar. As the dollar falls, Americans will have to pay more for the imported goods they rely on. Inflation follows.

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