It’s the economy, stupid!… is the slogan given large credit for Bill Clinton’s victory over G.H.W. Bush (41) in 1992. The 1987 stock market crash had presaged the bursting of the savings and loan bubble, which sent the US economy officially into recession in 1990. The primary cause of the bubble/recession was unsound real estate lending practices. Sound familiar?
The problems in real estate lending then were much like now, poor internal lending controls, inappropriate deregulation, insider trading, executive and corporate malfeasance and fraud, chasing large speculative returns, and overbuilding (commercial versus residential). However, important differences between then and now exist, as the national debt was only about $2T (trillion), inflation had been brought well under control by 1987 and oil prices were falling. Contrast that with today’s $9T debt and oil prices that are climbing higher than ever, in large measure because of rampant, but well-disguised inflation that has risen continuously above the US government “official” CPI since the 1987 crash. See John Williams’ (Alternate Data) for the US economy at: http://www.shadowstats.com/.
Much of the basis of this inflation is rooted in a large increase in the US money supply, which has been growing at ever-increasing rates, particularly since 2005 after the re-inauguration of G.W. Bush (43). The monetary inflation rate stood at about 8% at the beginning of 2006, rising to almost 16% by the end of 2007. (See shadowstats.) There have been 2 major causes of this increased monetary inflation: first, the Federal Reserve made money so cheap for so long that credit-based consumer spending multiplied exponentially over the last few years; and second, banks and mortgage companies – using fractional reserve banking – loaned hundreds of billions in poorly secured mortgages to a pool of borrowers with ever-decreasing financial wherewithal.
Where did all this money come from? First, from US productivity, which has fallen short of our appetite for goods and services, and then partly from China and Japan, who each bought a trillion dollars, or so, of Treasury Securities, as well as Europeans and others who also bought our paper money. Now that Treasuries aren’t selling so well, the Fed just buys them, itself, presto-digitizing money from thin air into the US banking system. This is a problem – money created with no basis other than the full-faith-and-credit pledge of the US Treasury.
Fractional reserve loans are based on money the banks and mortgage companies don’t actually have – allowed by US gov’t de-regulation and more full-faith-and-credit “insurance” provided by the US gov’t. Today, the capital reserves required of banks and mortgage companies to “guarantee” outstanding loans (to depositors and commercial creditors) have fallen to about 10 cents on the dollar, leaving the difference between the outstanding loans for real estate and the declining real estate value, plus the 10% banks have, to be paid by gov’t… I mean taxpayers.
Unfortunately, the US government is broke, bankrupt, kaput… given the $9T outstanding debt , not to mention Social Security and Medicare promises for about another $50T. In fact, the Federal government needs to borrow more than $2B a day just to keep things going. Our trade deficit last year was over $800B, and we’re in the Never Ending War. The new recession has hit and the Fed must decide – save the banks or save the dollar – you guessed it, the banks win and your dollar value spirals, spirals, downward.
What is the point of all this rambling? See the following:
These are just the most recent serious analyses I’ve found about the financial iceberg in our collision course. Only one politician in DC seems to understand it. Only one Presidential candidate even acknowledges our horrendous economic future. That one, the monetary expert, has the only plan to fix it. The rest are clamoring for the Fed to presto up another heretofore nonexistent $150B, or so, to soothe your nerves until election time… clamoring for universal health care for which there is NO ability to pay, and allowing our current Commander in Chief to spend $1T per year to “save us” against the forces of evil – even if we’ll be dead broke and homeless – assuming there’s something of this country left to save. It’s probably the bankers and corporate chiefs he’s more worried about too.
So all you neocons, war mongers, abortion activists of both persuasions, universal healthcare demanders, socialists, and panderers of every stripe: Take Heed… when it comes to the MOST IMPORTANT CHALLENGE of this new 21st Century, It’s The Economy, Stupid!