The Unavoidable U.S. Reality: The Upcoming Economic Collapse (Con't)
2. The safety of the derivatives market. There is approximately a $600 trillion notional value market in derivatives. The derivative market is designed to fundamentally be a means of eliminating risk. If you have a variable cost loan, you can buy interest rate swap that permits you to lock in you cost. If you are concerned that your loans to Italy are at risk, you can buy a derivative to protect you. So in theory, this is a market of large numbers, but in theory should have very little risk.
In reality, this is the biggest casino in the world for a small part of the total players. Principally, the risk is concentrated in those selling the coverage, not those buying the coverage. Yet it takes only one important player a la AIG (American International Group of insurance companies) to bring the system down. The US government had to put in $150 billion to save AIG in 2008. If the US had not done so, it would probably have brought down Goldman Sachs and many others in addition to AIG.
One big player that defaults puts the whole system in risk of default as one bank collapse brings on another bank collapse. It would take a 3 % loss in the derivatives market to wipe out the worldwide capital of the banking system in the world. The probability that numerous of the world's major banks will fail in the coming years due to derivatives is extremely high, putting at risk the solvency of the worldwide banking system.
3. Making the US Banking System Safer. Stimulus has lowered the long-term cost of funds to be very similar to the short-term cost of funds. Therefore, traditional banking has very little ability to make money the old-fashioned way as most of the profit has disappeared from its traditional form of making money because Stimulus has pushed long and short rates down so far.
The US banking system is being driven to take higher risk bets because its traditional profit structure has been harmed by Stimulus. Most of the higher risk items are closer to betting at the casino than traditional banking. There is a high probability that many of the world's major banks fail in the coming years, primarily because of lower gross margins on lending, bad credit or high risks on derivatives. This week, Spain's largest bank, Bankia, failed due to bad real estate loans and has to be bailed out with $125 billion of government funds. The financial cost for bailouts will begin to soar shortly, first in Europe and later in the US.
4. The safety of the US residential and commercial real estate markets.While the perception exists that the real estate market may be on the mend, the fact is average prices are down over 19% on average since 2007. Untold losses still exist there, but most people could not take another 20% to 30% drop in prices. If any one of the three issues above explodes, it will inevitably lead to another round of declining prices in real estate - which affects not only the individual homeowners, but the viability of the banking system and the enormous bond and derivative market associated with the underlying real estate loans.
The above explains why stimulus cannot work at this time and the negative unintended consequences for large parts of our financial system coming from the well meaning Stimulus by the Fed.
Furthermore, we must now add in the polarization of the political process between the Tea Party on the right and the Democratic left. The traditional US government is effectively paralyzed due to the inability of the parties to find common ground. This is largely, but not exclusively due to Tea party intransigence. The political process is effectively paralyzed and cannot take essential decisions to solve the problem.
Furthermore, it is my belief that the polarization of the political parties is not the cause of the problem, but a consequence of the problem.
In January 2011, I wrote an article "A Possible Market Timeline to 2015". This article made a number of predictions about how this market would develop in the coming years. This article predicted the Southern European countries banks would fall and this would invariably lead to contagion in Europe that would then follow to the US. These scenarios seem to be playing out very much as described in this article of 18 months ago. This article in some ways complements the views expressed here, although it focused more on the coming events than the underlying causes for why they will happen.
Summarizing: The Tea Party position is shown to be not practical by three critical measures: economic theory, historical fact in similar circumstances, and common sense.
The Democratic position supports Stimulus as the solution. But stimulus will only defer the problem; it is not capable of solving the problem at this stage of the economic cycle. We are at the end of a historical bubble where there is no real place to profitably make new investments that will have a positive multiplier effect on the economy, an essential condition to making stimulus work.
The inevitable consequence is that shortly (possibly months or a couple of years), the US and most of the developed world will enter into a several year-long major economic decline causing terrible consequences. Nearly all people will be affected negatively, including billions of the world's inhabitants that will experience truly terrible economic upheaval. An extremely small minority will see and understand the coming collapse and be able to actually improve their economic position. I hope to be among them.
As always with economic and business cycles,
the downturn will end after several years and the world will begin a major new cycle of economic renewal and growth.
Link -
http://seekingalpha.com/article/652661-the-unavoidable-u-s-reality-the-upcoming-...===============================
As I said earlier, this author does provide some reasonable indicators of what is happening & why.
In fact, IF this current scenario had happened at nearly any other time during the modern era, say over the last 150-200 years, I would also agree with his final assumption that
the downturn will end after several years and the world will begin a major new cycle of economic renewal and growth.
However, whilst there are a great many things that can & do, affect the everyday health, wealth & general lives of every human, it is also true that there are only a few things that affect humanity on a global basis, over time.
Of these, the most influential have been, are now & will be over the coming decades -
1) Demographics - It has been & will continue to be, the major influence on Global Economics, as it provides the basis for Demand of the full range of "Products & Services".
Since the Global birthrate bottomed out around 1933 and then started to grow, including the massive additions of the "Baby Boomers" from 1945-1964, Demographics has virtually guaranteed grow in the Global Economy, albeit within the usual "Boom/Bust" Economic cycles.
However, this situation has started to wind down, via the massive Baby Boomer generation. As they first go into retirement & then leave us forever, the Boomers are leading Demand irrevocably lower, as they go into a more frugal retirement mode and by virtue that the numbers in following generations are too few to regenerate Demand, particularly in the Larger end of the housing market.
2) Energy - Along with Demographics, the other great influencer of modern Economics & indeed life in general, has been the sheer abundance of Energy to fill our Energy needs, the cheapness of that Energy & the amount of Spare capacity in the Global production of Energy.
First via Coal & then via Crude Oil, that situation enabled a massive increase in productivity, which literally fueled the massive jump in the modern Global Economy, along with Population increases.
However, that has also started to wind down, with many countries already experiencing a slow decline in the Production of Coal, including the current production being of lower grades and therefore less Energy output, but also & more importantly the decline in Crude Oil Production, which is now relentless and has already seen the Oil Price per barrel go from $10 to nearly US$150 per barrel, from 1999 to 2008, before falling back to around US$35 per barrel, then regaining ground to trade etween US$80-100.
As the Global Economy slows again, the Oil Price will again fall, perhaps not as much this time, before finally starting a relentless rise, due to the imperatives of "Demand & Supply".
Unless a new, currently unknown Energy source comes from a well hidden place & does so very quickly, then the impact on Demand & Economics in general will be truly massive!
3) Climate - We, the Human Race, have experienced a very favourable climatic period, for thousands of years, with the minor impact of the Medieval "Little Ice Age".
This period assisted our agriculture, our transport & in enabling our Populations to grow, assistling in the growth of our modern Economy.
However, scientific records of our past shows a long record of climatic swings between heat & cold and we are now nearing the end of that usual warm period, before the natural climate again swings towards a colder period ahead.
Whether the current climatic change has been "assisted" by human input, via additional & vast amounts of Carbon Dioxide & other Greenhouse Gases in still being debated by some, although the general concensus amongst scientists clearly says WE HAVE PUSHED THE CLIMATE CHANGE FURTHER & FASTER, than what may have otherwise happened.
The upshot is, it will also make our agriculture less productive, which means it will be more difficult to support the current population!
In short, this time is different!
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