Tuesday, May 25, 2010

Depression 2.0

The future will be better tomorrow.
-- Dan Quayle (1947 - )

Those of you who are buying into the recovery underway may want to re-think your plans. As has been mentioned here numerous times, there will be no recovery. We have been heading into a prolonged period of hyperdeflation, deflation or depression, depending upon whether it is you or your neighbor who is suffering the most.
A perfect example of the spin that has been spun was the announcement by GM part 2, that the automaker has paid back its TARP loans after reporting better sales. What was left out of that announcement was the fact that the payback was coming from another TARP account. That same game is played on Canal Street corners with shells and peas.

The economic corruption, often created by political corruption, is now so pervasive that some do not worry about a “Black Swan.” It is a White Swan for some economists. Meaning, that all of the signs were obvious for the dot.com bust as well as the 2008 Lehman disaster, and that the big Kahuna is already on the horizon for all to see.

We have the U.S. debt cost approaching 93% of GDP, an expiring $8,000 home-buying credit, the only mortgages being written by Fanny Mae (which is on life-support and in conservatorship) super-welfare in the name of extended-extended unemployment, and numerous States that are bleeding money. California is actually in worse shape than Greece with New Jersey and New York not far behind (New York’s projected deficit is $15 Billion for next year). If Wall Street is really a prognosticator of the future 6-12 months out, it sees an oncoming train in the tunnel.

New York City is about to experience severe budget cuts. The Town of Southampton is still relatively clueless and has done nothing to reign in the bloated employee roster. While the Police have always been sacrosanct as regards budget cuts in the Hamptons, if that same methodology continues, there will be plenty of cops and no teachers. The U.S. itself is in serious trouble. One of the few states that depend upon taxpayers to support civil service pensions that are not fully funded, New York, will soon come to terms with an impossible situation. It’s like the Social Security System, which is broken – except New York can’t print money and the problem is not many years away but immediate.
While everyone has gotten used to looking to real estate and its associated taxes to cover the shortfalls, that particular party is over. Property values are still dropping as fast as they can increase the tax rate and homeowners with good credit are starting to walk away from insupportable values that are underwater. Fully 14% of all properties in this country are either in default or foreclosure.
As one reader-observer wrote:

“The govt. bailing out lenders, wall street, banks, car companies, insurance companies and paying bond holders 100% on the dollar while throwing it on top of the taxpayers back was the greatest heist of wealth in the history of the world.

consult a lawyer first. Non Recourse vs. Recourse is important too. You will be able to save some money before you leave. Rent in the same area for 1/2 of what you pay for a mortgage.

Get a secured credit card, keep inquiries low, open a small dollar car loan, pay off on time...build your credit back up. you will be able to get that loan in 2 years, Fannie in 4 or less.

Don't let them fool you, there is no shame. Corporations do it all the time. Morgan Stanley just walked away from 1.3 billion loan....The shame comes from rewarding failure and horrible regulation antics of the SEC, FCC, FED, Treasury, Congress etc....”

This brings us to some causes and few solutions. Goldman Sachs, the Grinch of Wall Street, is indicative of the actual greed that still takes $100 million a day out of the market in profits. They do this by virtue of “frontrunning” – essentially, by “seeing” an order coming in and both buying and then selling the trade to the incoming buyer at a profit in a nanosecond – with high-speed computers that are physically closer to the exchange computers. Mayor Motz of Quogue got 8 years in Federal prison for what Goldman Sachs does thousands of times a day.
This is a company that is one of many Wall Street vultures, like JPMorgan Chase, which has essentially destabilized countries (like Greece). Across this country, Villages, Towns, Counties and States have been devastated by the accounting maneuvers and credit default swaps associated with pension funds and financial instruments used to shore up bloated budgets. The same is true for their “expertise” which was exported around the world. The Eurozone is now experiencing this and is heading into a downward spiral of debt via stimulus plans and printing money just as the U.S. has done.

It will not work.

Stimulus plans are predicated upon creating money out of nothing. No new assets are created which serve as the basis for money that is printed. And, the “full faith and credit” of the U.S. government is rapidly fading. We have phony money, which is inflationary, chasing ballooning deficits – because we want to continue on as before. That must end – and it will – badly.

So far, $1.3 Trillion has been removed from available credit – used by small business and individuals – to continue to operate. Another $1.3 Trillion may soon vanish. And, if the banking reform is on track as planned, credit card companies will no longer be permitted to charge rate for credit cards and personal loans based upon where their main office is (the main reason why Citibank moved to South Dakota, for example). If banks can only charge the rates permitted by each individual state, instead of the rate permitted by the state where they are located, they will stop lending in states that have low interest-rate ceilings. If that happens, available credit will be further reduced.

All of this matters because small businesses are in big trouble. And, small business employs 65% of the workers in this country – employment that enables them to pay mortgages and buy goods.

Simultaneously, with the Libor rate rising (which some mortgages are tied to) due to the cost of credit, many interest-only Alt-A loans reset this year and in 2011 and 2012.

Put all of this together.

Rising debt loads, contraction of small business, reductions in employment, reductions in credit-lines, rising “strategic” defaults on mortgages, mortgage resets, “welfare” mortgages through Fannie Mae and Freddie Mac that are subsidized toxic assets from bankrupt entities, and bread lines of “extended” unemployment – and the collapse of Wall Street.
We are in a brief moment of illusory improvement because it is springtime and seasonal employment as well as spending has blinded us.

So, when do the Villages, Towns, States and Countries get the REALLY good news? Starting now -- and coming to a budget office near you by November. That’s when Depression 2.0 will visit.

1 comment:

Geemiz said...

The economy is down but everyone is trying to look for means to survive. Financial Literacy must be taught at an early stage.