The perfect economic storm?? - Mountain Buzz
 



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Old 08-24-2008   #1
 
Denver, Colorado
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The perfect economic storm??

“It is easy to ignore the storm if you look at the opposite horizon. When the storm reaches your location there can be no more ignorance.”


Here is a nice sobering article to start your Monday... enjoy..

http://prudentbear.com/index.php/com...y?art_id=10098

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Old 08-24-2008   #2
gh
 
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Not sure its that sobering. The writting has been on the wall for a while.
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Old 08-24-2008   #3
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Old news.. economists have been talking about America's problem/love/addiction with credit for years... The mantra has allways been kill your TV when everyone really should have been saying kill your credit cards.

As a small business owner, I do not accept credit cards. Even though credit card companies are vultures.. feeding off the businesses that use them to collect money as well as the people that use them.. The ultimate responsibility comes down to the individual. No one forced anyone to buy the $5 latte over the $.50 cup of coffee at the gas station.. or the Hummer over the Geo. No one forced the homeowner to take out a zero down or interest only variable rate loan. I have no pity towards those that have chosen this path and am actually pissed because these people ruin it for others and then cry when they need to be saved from their own stupidity.

I think the sooner people say no to credit and work and save to pay cash or to pay that 20% down we will all be in a better place.
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Old 08-24-2008   #4
 
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Actually, this isn't old news. The article is dated August 18th 2008.
Maybe you didn't read the entire article?

I agree with your last sentence, but for that to happen will take a deep American recession... the last 2 paragraphs in this article sum it up well.
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Old 08-25-2008   #5
gh
 
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i love the warren buffet quote.

Only when the tide goes out do you discover who’s been swimming naked.”
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Old 08-25-2008   #6
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So studying economics is a new devotion of mine, and I'm starting to sort a lot of new stuff out as I learn from my prof's in business school.

There's nothing wrong with the data, as I see it. The analysis of causality is also reasonable (but his analysis is indeed "old news"). I really dislike his social commentary in this piece. It makes him look petty (who's he trying to convince? Why does it matter why people borrowed?)

Economics is an interpretive field. It's really debatable whether we'll see an actual "recession" or almost imperceptable growth (the latter seems more likely from what I read). There's also a debate about whether the definition of "recession" should finally change from the standard (2 successive quarters of negative growth). The data right now show no recession yet. But they do show inflation that has to be a cause for concern. The answer to rising inflation is increasing interest rates. The Fed is almost there, but walking a fine line on "waiting for more data before we make a decision."

At some point, waiting becomes a dereliction of duty, but I wouldn't accuse the Fed of that right now. Not Bernanke anyway (Greenspan was a douche). The problem with raising interest rates is that all those Home Equity lines of credit are tied to the Fed rate. If those equity credit lines reach the point that they start increasing bankruptcies and foreclosures, you add fuel to a fire, with unpredictable consequence.

We have our finger on a leaking dam, and we wait.

The overall economy is probably better off letting the capitalist cycle play itself out. Let companies, including banks, fail, and see who emerges to make competitive advantage out of that cycle (watch for a lot of foreign acquisition of US firms, which is in no way something to be alarmed about). But watching inflation remains a key job to controlling the speed at which consequence takes its toll.

What present data cannot predict is new economic activity, which could happen (in new sectors of an always adaptive economy). But relying on hope of future good news is no way to run an economy.

His last paragraph is his best, by far. Let me emphasise his points:
Quote:
Companies need to fail, housing needs to find its bottom based on supply, demand and price. Those who gambled must be allowed to lose and suffer the consequences. If the government attempts to shift the losses to those who lived lifestyles of thrift, an angry uprising will ensue. Government intervention in this natural process could lead to a decade long depression. Letís hope that reasonable heads prevail.
The sentence after my highlight is also worthy of examination:
An angry uprising should ensue but probably won't.

Banks like Fannie Mae and Freddie Mac should really be allowed to fail this time. There are other lenders and investment agencies that should also be allowed to reap what they've sown.

The problem is an American psyche that refuses to deal with consequence of its own behavior, and a government that still has too much access to foreign credit (or any credit for that matter). The US voter will freak out and demand the government ensure its economic stability. The politicians will borrow today, with no idea how it'll pay in 20 or 40 years, and provide that stability, and the people will forget about yesterday's close call.

Tell the people you care about to keep a steady job, and to understand the difference between "need" and "want" right now, and to pay off their debt before all else.
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Old 08-25-2008   #7
 
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Helio,
Have you had a chance to read Crash Proof by Peter Schiff? If you are studying economics right now this book would be right up your alley. His book has made me want to focus on the study of Austrian economics. Peter Schiff is also right up your Libertarian alley.

If the Fed doesn't raise interests rates wouldn't they be interfering with the normal business cycle? Aren't the Fed and the gov't already interfering with normal business cycles by bailing out the banks? Greenspan kept America out of longer recession after the tech stock bubble burst by lowering interest rates to an unprecedented low. By doing that he created one of the worst speculative episodes in American history. And, now Bernake has held up the system by bailing out the banks. It seems to me that any which way the Fed moves will have negative consequences. Let's get on with it so we can clean out all of the horrible imbalances and start rebuilding a better economy.

Quote:
.... The storm will pass and we will rebuild. Our country is resilient. The purging of this massive debt will result in the creative destruction that is the hallmark of American capitalism. New opportunities, new technologies and a new attitude will put us back on course.
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Old 08-25-2008   #8
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Quote:
Originally Posted by marko View Post
If the Fed doesn't raise interests rates wouldn't they be interfering with the normal business cycle? Aren't the Fed and the gov't already interfering with normal business cycles by bailing out the banks? Greenspan kept America out of longer recession after the tech stock bubble burst by lowering interest rates to an unprecedented low. By doing that he created one of the worst speculative episodes in American history. And, now Bernake has held up the system by bailing out the banks. It seems to me that any which way the Fed moves will have negative consequences. Let's get on with it so we can clean out all of the horrible imbalances and start rebuilding a better economy.
The Fed is going to have to raise rates. It's a matter of how much, how high, and how often (and when to start). The fed doesn't bail out banks, Congress does. Perhaps it should save some. Some it should not. Among those it should not are Fannie and Freddie. They have epitomized the fascist playbook of economics, keeping profit private while promising (if not guaranteeing) risk is public. Letting them fail could have radically bad consequence on the economy, though, given their percentage of market share. It's an interesting debate.

I agree, let's get on with it. Start doing some reaping of what's been sown. Let the chips fall where they may.

But bear in mind, if all this calamity starts coming due on Obama's watch, he WILL get blamed for it (much as Carter got blamed for Nixonian decisions that didn't have consequence till Carter was president). That would be a shame for Democrats (among whom I am not a member).

I say: Raise interest. Raise taxes. No new entitlements (i.e., this is the worst time to try to nationalize health care).

If this nation's government doesn't start dealing with the bills that Bush created, its decline will be bigger than if it deals with them. Unfortunately, as the data in your original link points out, Americans live in fairy-tale economic land.

I've come to the conclusion that this nation is at a parallel point to two great empires that went into decline: Imperial Spain, and post-World War 2 Great Britain. We're the last generation to know the United States as a true superpower.
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Old 08-28-2008   #9
 
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The interesting thing is despite all the arguments laid out in that article or books like "Crash Proof", I've never heard a counter argument. I only hear financial advisors say, "now is the time to invest because historically the market has always bounced back". Well, given the course we're on, one of these times it won't bounce back. It's not a question of if but when. They never are able to explain how an economy based on consumerism and debt can bounce back indefinitely.

And the whole "China can't let us fail because they need us to buy their shit" argument is really nuts. I actually heard someone argue that point adamantly in a restaurant the other day.

It was worrying listening to any of the presidential candidates (with the exception of Ron Paul) discuss this issue. They either have no clue or don't want to frighten the voters. Great leaders we have....that and idiotic citizens.
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Old 08-29-2008   #10
 
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Wait a minute. The Fed IS the one that bails everything out (banks, etc, etc, keep adding etc's lately) since they are the PRIVATELY owned Bank that prints US CURRENCY. They print the money, loan it to the gov't (congress) to pay Freddie/Fannie/etc, and we promise to pay it back with interest. Amazing! And now we've had our own "Shock Doctrine" (you better know that term or else you don't know economics (Mr Wonderful Milton Friedman)) here so that now the Fed can also be in charge of investment firms, not just banks! Our own little financial crisis has given even more power to the private banks and free insurance for invetment houses. Socialize the risk, privatize the profit.

The difference between the great depression and now, is that during the GD the banks and businesses were allowed to fail, to protect the dollar, and the average consumer. Now, we see (see Schiff's book for one source) the dollar being deep six'd to protect the banks and corporations, and the average person is going to pay.

And it IS a problem if China, or any other country, buys up all US corps. Who is going to make us clothes, shoes, WEAPONS, cheap plastic crap, when those foreign investors are no longer our friends, and instead our enemies???
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