Monday, December 24, 2007

The New American Dream – The Debt Bubble Credit Crisis Oil Oxymoron

Ever try digging out of quick sand? They say the more you fight the faster you’ll be sucked under. Survival is for those with nerves of steel, measured strength, agility and a strong persistence dedicated to getting out alive. As a nation, we’ve been led directly into a bed of quicksand. The question now is how many of us will sink under our own weight?

Back in September, in our posting, Bernanke Going for Broke, we warned of coming inflation and further difficulties in the housing sector. Why does The Cosmopolitan Charlestonian continue to discuss boring economic issues? Well, because over time economic policies seep into every one of our lives. Additionally, if you have anything financed currently or require financing in the near future, you are duly affected. That financing will cost you more.

A giant leap in December’s inflation reading inspired this post since direct cost is almost immediate and something none of us can escape. The quote below by Dr. Stephen Leeb, investment advisor and author of “The Oil Factor,” expressed a reaction similar to our own when we noticed the marked move of this month’s Producer Price Index number measuring inflationary pressures. He described it as:

…an inflation reading the likes of which hasn't been seen since the early 1970s: Wholesale prices rose 3.2 percent in November. When we first saw the headline we thought it was an annualized figure, rather than simply the monthly increase. Unfortunately, that wasn't the case. The Producer Price Index (PPI) truly did increase by that much last month--its biggest monthly increase since August 1973.

Energy and food deserve much of the blame, but higher import prices (due to the weak dollar) also took their toll. It's a safe bet that none of these problem areas will be resolved anytime soon.

At this moment, we stare headlong into a murky spot in economic history where the average American, trying hard to keep up with interest adjustments and inflation, may come to eventually find them selves flailing and fighting, only to be further engulfed by the quick sands of debt.

Here in Charleston, we can report that just over the last three months several notices were received. First, our local power company established a rate increase of 4.4%, while our water company increased somewhere between 4 and 7% on average. At the same time, food expenses have gone through the roof, especially if one tries to eat well, i.e. organic. On top of these increases, one credit card increased its interest rate for no reason at all. They mailed a nice notice like the power and water company. Last, because of the Sofa Super Store fire tragedy, there is talk of increasing property taxes, meaning our house payment will go up a little too by the amount of the tax increase. Now, this is just a snapshot of our lives and we don’t even have to factor in rising gas costs, nor do we have an adjustable rate mortgage. We were really excited when we got rid of the car; however, feelings of gloom and doom are ever present with the cost savings quietly being transferred to the support of basic necessities. You can probably take a look around and notice a few similarities, wherever you live.

As a nation, we’ve gotten in this deep as expenses have outpaced incomes for years. Take a look at the trail we walked that led to the quick sand – the expansion of credit closed the gap between income and expense. Many Americans took the bait and levered up. On a macro scale, the credit expansion naturally contracted when artificial stimulation of our economy met global limits. Artificial stimulation of the economy provided funding for a war of choice and simultaneous tax cuts for mega-corporations and the wealthy. Artificial economic stimulation inflated a housing bubble as war in Iraq inflated oil prices. Artificial manipulation of currencies jeopardized the dollar and now poses additional risk to future oil prices with each downward jolt of the dollar’s value. Since oil is the driving factor behind our economy, every cost will increase as its price goes up. Because oil is priced in dollars the driving factor behind our economy soars when the dollar falls. Credit can no longer be extended to bridge the ever-growing gap.

This government elected to waste trillions to conduct aggressive policies, securing nothing more than a magnificent deficit for the trouble. Consequently, inflationary pressures will be testing the limits of a strapped American public who will most certainly choose food and heat over making their house, credit card and auto loan payments. The contraction of credit is a clear testimonial to the number of Americans sinking under their own weight. The sub-primes and Alt-A’s stopped making payments and the wheels came off the financial vehicle.

Looking back, we now realize the credit expansion really took off when financial managers figured out how to export our debt en masse. Financial engineers created what are known as derivatives. Rather than holding mortgage assets (which was the normal process just, say, ten years ago), banks artificially increased earnings by wrapping up the mortgages they wrote (the assets) and selling them off as stable investments all over the world. This creation allowed banks to write tons of new mortgages without having to hold any of the paper on their books. Drunk by profit and blurry eyed by abundance, lending restrictions were loosened until qualifying for a mortgage loan was ridiculously easy, even for NINJAs (no income, no job; no documentation loans). With interest rates artificially low after the 2000 tech bubble crash, thanks to Mr. Greenspan, and under his own admission, constant manipulation of policy by the White House, the stage was set for a whole new bubble to form and explode, i.e. housing.

As the banks are now learning, nothing disappears; all is simply transformed. The limits being tested in the credit markets do not exist in a vacuum, despite Fed Chairman Bernanke’s persistent declarations of “containment” to all of us watching this progressive march toward the next chapter of the Globalization experience. In the wake of financial default The American Dream itself has now become an oxymoron. It’s almost certain this economic situation will continue to slowly tumble out of control, if not naturally now, then later, with greater drama for the additional cost of the defibrillations President Bush, Treasury Secretary Paulson and Federal Reserve Chairman Bernanke expended on arresting financial institutions via creative rate reductions and monetary injections designed to keep the economic heart pumping so it should continue staggering down the path of unsustainable growth.

When dissecting the housing dilemma this country faces, it doesn’t take long to realize that the promises of government rescue are empty like so many promises in the past. The Hope Now plan will end up a false savior as did the Enron-like Super SIV (meant to fix the financial derivatives mess), Invasion of Iraq (meant to secure oil flowing to the U.S.), and No Child Left Behind (meant to provide a future). The plan promises to offer relief to MILLIONS of homeowners facing a rate adjustment over the next few years. Picked apart, Hope Now equates to an elaborate smoke and mirrors illusion concocted only to separate those knee-deep in the debt sands from those neck-deep in the debt sands. Basically, it’s Housing Darwinism. Only the strong homeowners with an adjustable rate mortgage will survive. Homeowners with one late payment or less than 3% equity in the home will not qualify to enter the program. And if a homeowner does qualify for the program (on primary residence only), said homeowner must meet particular credit score criteria to receive the bail-out loan. Now how many people do you think will actually meet all the criteria? Ironically, the strict mortgage qualification process of yesteryear abandoned for higher returns during the boom has been turned on its head, conversely keeping many homeowners from qualifying for the no hope now of any relief program. Frankly, we lost all hope from the moment Bush gave out the wrong number for the hotline. Jackass.

Giving up our car was one of the best decisions we’ve ever made, especially in the face of this impending inflationary cycle. Luckily, we live in an area that supports urban transport, although there is room for improvement. Our decision was fueled by both a yearning for the creation of a better lifestyle, as well as a deep sense of dissatisfaction for this administration and their shenanigans.

The consumer controls over 70% of the U.S. economy. Knowing this alone is a powerful feeling. Understand this with complete clarity. What we are watching right now is a lesson in sustainability. Endless credit and reckless mortgage writing in no way leads to a secure future for our nation. What it does lead to is people losing their homes and economic erosion. These unsustainable practices are resulting in a calamitous outcome that will take years to unravel. The same can be said for our energy policy, our global warming agenda, mass food production, and shopping our way through a war (we could go on and on). Think about it.

Maybe when enough of us make bold decisions to keep ourselves from sinking in the debt sands while refusing to accept bad governmental policy, the powers that be will begin to recognize our purchasing power, thereby attempting to provide bubble-free products in bubble-free markets. For instance, design us a pollution-free, affordable car that runs on something that does not cost lives via war or starvation, and we just might buy it. Until then, we’ll continue using the money saved each month on the car to protect our personal interests in a landscape that is appearing to look more and more like 1929, or 1973, depending upon which economist is analyzing the information at hand.

The next year or so may be rocky and will hinge on the strength of the consumer. On one hand, cutting back discretionary spending could throw the country into recession; on the other, not cutting back secures a metaphorical patch of real estate in the debt sands. So, what will the mighty consumer do? Let’s all hope it’s not this.


Anonymous said..., here--

This darn work thing has gotten me behind reading your blog. LOVE the new(ish) tone of the economy and debt. We are the same person.

'bout that recession. I'm ready. SO READY. I want a deep, hard total correcting recession that will buckle the landscape and shake loose all the extreme excess. Maybe it will take a couple of Hummer and McMansion repo's to get the concept of moderation and responsible acquisition. The top has to fall off before the bottom can rise.

Harry Brinson & Stacey Barrington said...

Thanks, Bitsy. Thought we lost you for a while there, but clearly, you were just temporarily sold into slavery again. LOL.

We suspect the Hummers and McMansion owners will be visited by Ghosts of Christmas Past throughout '08 and '09. The previous owners will be recognized by their broken knee-caps. And, considering our "caps" on oil extraction and U.S. refining capacity no sane buyer will want either one of those products being that both SUCK oil to no end.

Might be a lot of angry Mexicanos in '08 also. Once this economic erosion leads to job losses, there may be a lot of X-McMansion owners deciding they want those jobs after all.

Got a great chuckle out of your ban on Christmas. You and the Professor must be positioning yourselves for an economic collapse. Read Peter Schiff if you're unshackled anytime soon from the Corporate Pharoah.