Thursday, April 2, 2009

Global Economic Crisis – The US Story


Why the US economy is going down the drain?

1. Bailout is not working

Despite the $10.5 trillion committed to bailing out the economy and the $2.5 trillion already spent, banks aren’t lending, earnings aren’t improving, people aren’t spending, unemployment is rising, the housing market is tanking and some of America’s most iconic businesses look likely to go to the wall.

2. Team Obama doesn’t get it

What Team Obama doesn’t get, is that companies fail for a reason. Maybe they make products that people don’t want to buy. Maybe they’re badly managed. Maybe they concede too much ground to unions.

The United Auto Workers (UAW) union now has about 190,000 members. In 1979, the heyday of the US auto industry, the UAW had 1.9 million members. This changed because US auto makers got caught napping by the Japanese.

That’s how capitalism works: the fittest survive and productivity innovations clear away the dead wood. Stand in the way of this process and you get zombie companies – ones that can only stand up thanks to government support.

And that’s if you’re lucky. If you’re unlucky you get the likes of Fannie Mae and Freddie Mac – entities that cause massive disturbances in the markets and trigger the kind of disastrous economic collapse we are seeing now.

Given that estimates of the total bailout to the auto industry are in the region of $130 billion, they total $684,000 for each of the 190,000 UAW members.

Everyone should join the UAW now – free money! :p

3. Fed doesn’t get it

In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of US Treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the government’s printing presses.

Few can doubt that it will persist with these operations until the economy returns to its former health. Whether this can ever be accomplished with a printing press alone has never been seriously considered. Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer.

4. More interventions lead to disaster

Rather than solving our problems, more inflation will only add to the crisis. Falling asset prices, the credit crunch, declining consumer spending, bankruptcies, foreclosures, and layoffs are all part of the necessary rebalancing of our economy. These wrenching movements, however painful, are the market’s attempts to resolve the serious problems at the root of our bubble economy. Attempts to literally paper-over these problems will lead to disaster.

5. Dump the Dollar

Now that the Fed has recklessly shown its hand, the mad dash to get out of US Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth. Holders of our debt (China and Japan) understand this dynamic. We must expect that they will not only refuse to buy new bonds, but they will look to unload those bonds they already own.

6. Digging a deeper hole

Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt-laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt than it expects to as it becomes the only buyer in a seller’s market.

6. China No Longer Wants Dollar

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change.

When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan, which it then uses to buy Treasuries. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.


With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status.

Got Gold?


Anna said...

Ren you got it all figure out. Banana republic is a nice touch.

Nice to see you blogging again! Hope all is well.

Anna :)

Rendell said...

Hi Anna, great to see you here again! :)

All is well.

Anna said...

I am glad to hear Rendell, keep up the good work, you are really good at the artwork. BTW thanks for all your comments on all three my blogs, it is appreciated. Anna :)