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Friday, November 20, 2009

The next government created bubble is assured.

All we need is rising interest rates and pop ! There goes another few trillion in wealth.

by StFerdIII



The next financial crisis, caused yet again by government, is a certainty. It will of course be blamed by politicians and the really smart people on 'markets', or maybe Anglo-Jewish 'greed'. Perhaps a too timorous genuflection and sub-par sacrificing to Mother Earth will be named as the culprit. But the terribly well-educated superiors of society running the most complex political-economic system in man's history, have assuredly set us all up for the next great financial collapse – engineered by following the same mistakes which have caused all past economic contractions and bubbles. Namely, ignoring reality and trying to engineer the world to suit political and ideological preferences.

Government inspired bubbles are not new – especially in housing. One can read the economic history of 1815-1819 and find the exact same factors at work in creating what was at that point in time, the worst financial contraction in US history and one which reverberated throughout Europe. In the main, government meddling was the genesis of the 1819 debacle. Zero interest rates, easy loans with no money down, lax regulation or non-regulation, poor lending policies, politicians pushing home and land ownership as a 'necessity', bank-political corruption and government created land value spikes for cotton-arable land – all these and more resulted in a devastating eruption in 1819 which forced hundreds of banks to close, millions of land or home owners to foreclose and a high rate of job loss across the spectrum of the economy.

The same policies are still in existence today, even after the recent financial collapse. The US government is still pursuing a negative interest rate policy. A weak US dollar is still being used to stimulate exports and the housing-financial sector. And money is still being printed and debt still being expanded ensuring inflation and financial bankruptcy in some measure at some point in time. Interest rates are negative since the US central bank is terrified that home defaults and business credit line non-payments will rise if rates are increased. Banks and financial firms can earn huge profits which they need to repair their balance sheets. Export jobs will also be affected if rates are increased.

Political preference – keep housing 'stable'; protect politician's second best friend [after unions] the banks, and reward unionized firms which export – conspire against the average tax payer in the creation of yet another bubble.

The above were the same factors which impelled Bush policy following 9-11. Rates were kept too low for too long; too much excess money liquefied the financial sector; far too much was spent; and the US dollar was pummeled which translates into a consumer tax and a loss on the part of business to buy new technology and improve productivity and profits. Add to this the huge corruption which existed and still exists between the financial industry, politicians and regulators, and the fact that the US housing market is not a market but a zone of political interference.

None of the factors which caused this meltdown have been dealt with. In fact they are being exacerbated.

There are 4 main reasons why the US economy and by connection the European and East Asian areas will suffer yet another bursting of a financial bubble:

  1. The US Central Bank long ago ceased to operate independently and is a follower of political preferences. 

  2. At least $2 Trillion of bad debt, mortgages and sub-prime loans of many varieties are worthless. This is more than what has been written off to date [$1.5 Trillion] by First World banks. 

  3. Inflation. It won't happen tomorrow, but sometime in the next 2-4 years, inflationary levels will rise to above 5 % per annum, thanks to a rapidly declining US dollar. You can't spend and print your way out of a debt-leveraged inspired 'fantasy' economy. 

  4. Rising asset and housing bubbles caused by the weak dollar in parts of Asia which will explode once interest rates go up forcing a sharp reduction in the borrowing of the US dollar at zero % to finance investment in Asia at 3-4 %.

These bubbles are caused by government. Political preference which gets translated into central bank policy, serves only the two main vested interests of the US political elite – the financial system and now in the case of the MIMH [most important man in history], the Great Obamed, the unions. No rational, independently minded person can look at US policy today and declare that any of it makes sense.

The US dollar has fallen by 40% in 8 years. The money supply has tripled in the past year. The national debt will double within 4 years. Fannie and Freddie who account for 2/3 of all bad mortgages are nationalized and will cost the US taxpayer up to $500 billion in bailouts. Housing is still being subsidized and supported in both the supply and demand side, and house-prices compared to incomes, are still far too high which presages another large price correction, which will of course affect the banks and cause a further round of write-offs and stock market declines.

A round two of an economic decline is assured. Government policy has not 'saved' anyone. It caused the crisis in the first place, and it will cause the next one. Yet the really smart people will again somehow, in tortured reasoning illuminated by ideological dogma and stupidity blame the 'market'. Or maybe the alignment of the stars. With these people reality does not exist. So on and on it goes.....