Welcome to America’s Economic War Zone
It’s a no-man’s-land. The paths are ambush havens. Dangers lurk. Trip wires and land mines sleep in the underbrush. This isn’t the Burmese jungle. This is the American economy.
Even the economic gurus are confused. The economy is in uncharted territory, and navigating past the pitfalls and minefields will be like fleeing war-torn Sudan into the Congo.
Said simply: The world faces “total” financial detonation. That’s the conclusion of the governor of the Bank of Spain. “The lack of confidence is total,” he said in December. “This is the worst financial crisis since the Great Depression.”
Why is the Bank of Spain governor so pessimistic? Let’s take a look.
The Point of No Return
America faces a new reality, says Bill Gross, the founder of Pimco, the biggest bond trading house in America. While 2008 will be remembered for its massive stock market crash, “it was really much, much more,” he says. “[W]e … face a new reality, recession may be replaced by a near depression” (Fortune, Dec. 11, 2008).
The mother of all debt bombs has detonated, $7 trillion in U.S. wealth has been obliterated, and America’s financial center lies in ruin.
Many of the most famous names in American-style capitalism are casualties. It began when 86-year-old Bear Stearns, a company that survived World War II and the Great Depression, blew up practically overnight. That explosion was only the first in a chain reaction that left IndyMac Bancorp, Lehman Brothers, Merrill Lynch & Co., Washington Mutual and Wachovia Corp. dead and covered in debris. Other towers of high finance like Morgan Stanley, Goldman Sachs and Citigroup are severely wounded and could die. Many more, such as the $5.2 trillion Fannie and Freddie mortgage twins and insurance giant aig, are walking zombies—alive only as long as the government continues to infuse cash into their hemorrhaging balance sheets. General Motors’ financial arm, Chrysler Financial and American Express are also now taking direct infusions from taxpayers.
The gaping crater left in the nation’s now-discredited financial core is a stark, blaring announcement to the world that the American economic system has passed the point of no return. The world as we know it is radically transformed.
America will never again dominate global finance.
This destruction has left a power vacuum in the world of borrowing. Interbank lending has frozen up despite the Federal Reserve taking the unprecedented step of lowering the interest rate to between 0.25 and zero percent. Banks are insolvent and don’t trust each other enough to lend among themselves, let alone to other commercial and private borrowers.
In fact, banks are calling in their loans and are refusing to roll over old loans. Money is being pulled out of the economy. This is what the credit crunch is. The Wall Street Journal reported in November that half of all U.S. companies are at risk of failure because they may not be able to borrow more money. That’s right: Half of corporate America could fail over the next couple of years if the credit crunch is not alleviated.
Consumers are now being picked off too. Debt levels remain high, and wages are stagnant. Credit card companies are tightening requirements and home equity lines of credit are no longer available to many.
Retirement plans for millions of Americans are shot. The most severe stock market crash since 1929 has wiped out pension plans across the country. Year-end accounting may soon reveal how massively underfunded the plans have become. Pension benefits will be cut, more taxpayer bailouts will be sought, and even some states and cities could be pushed into bankruptcy.
Job Sector Breached
Making matters worse, job losses are intensifying. Global think tank leap/e2020 expects an “explosion of unemployment” in the U.S. and around the world.
As of December, over half a millionjobs are disappearing per month, and the economy has been shedding jobs since December 2007. Official unemployment in the U.S. stood at 7.2 percent, but this statistic is the narrowest measure and does not include those who are underemployed or those who have given up searching for work. The less-reported real unemployment number is approximately twice the officially quoted statistic. By the end of the year, the real unemployment rate will “near the all-time 1930s Depression high of 25 percent,” predicts Roger Wiegand, editor of Trader Tracks. The rustbelt states will probably be even worse off. Already 11 million Americans are receiving food handouts and related welfare, Wiegand noted. And the Greater Depression is only beginning.
Will government-run job-creation programs solve the problem? History suggests they will be inefficient and wasteful. President Barack Obama’s promise keeps growing: He said his administration will create 2.5 million jobs, then 3 million, and as of January, 4 million. But how, exactly? Merrill Lynch economist David Rosenberg notes that, outside of the housing construction sector, the bulk of the joblessness is in financials, retail/wholesale, leisure/hospitality and health/education. “And if investment bankers, shopkeepers, bell captains and medical chart technicians have anything in common, it is that they don’t have much experience in shovel-ready activities,” he said (Investors Insight, Dec. 22, 2008).
Four million jobs makes good headlines, but you need people with the skills to build ocean ports, public transit infrastructure, electrical grids and “green” technologies. And, for the most part, it is not engineers and scientists who need the jobs. Some jobs will be created—but even if Obama is 100 percent successful—at the current rates of job losses, Obama’s taxpayer-created jobs will only replace the jobs that will be lost by September this year.
And jobs will continue to be lost.
Despite the Federal Reserve’s successful effort to drive 30-year mortgage rates down, the housing market remains in free fall. And it may be about to get much worse. Subprime was only the beginning.
“The trouble now is that the insanity didn’t end with subprimes. There were two other kinds of exotic mortgages that became popular, called ‘alt-A’ and ‘option arm’” (cbs, Dec. 14, 2008).
The subprime crisis involved about $1 trillion worth of mortgages. Alt-A and option arms together total around $1.5 trillion. The bulk of these mortgages reset and/or revoke their low teaser rates in 2009 or 2010. That means that monthly payments for many people will rise. And, says respected fund manager Whitney Tilson, “The defaults [on these types of loans] right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall” (ibid.).
So far, government-endorsed plans to prevent foreclosures are failing. An astounding 55 percent of borrowers whose mortgages were modified to help keep them in their homes during the first quarter of 2008 were already delinquent only six months later.
What this means is that the job market will be nothing but a meat grinder for the foreseeable future.
Since a consumer’s biggest asset is his house, when house prices fall it makes people much less willing to borrow and spend. According to housing analyst Robert Shiller, house prices could easily fall an additional 15 percent over the next couple of years. Home prices have already fallen 25 percent from their peak.
Unsurprisingly, Christmas retail sales plummeted this past year, making for one of the worst holiday sales seasons on record—and that was despite unprecedented markdowns.
If retail sales continue to plummet, commercial real estate is sure to take a hit as stores close up shop. That could mean additional big losses in commercial real estate for banks.
Here Come the Helicopters
The collapsing economy, destroyed banking sector, free-falling housing market and rising unemployment is bad news for the dollar. But the trillions the government has proposed in stimulus packages means the dollar has been abandoned.
In what may prove to be an incredibly profound development, the Federal Reserve has announced its intention to monetize the national debt. In December, it said in a policy statement it was “evaluating the potential benefits of purchasing longer-term treasury securities.”
Strap your helmet on tighter. This is Zimbabwe policy.
The U.S. government is broke. Its debts are so massive that, going forward, it will increasingly have to rely on the printing press to finance expenditures. That is what the Federal Reserve was signifying in the above statement (i.e., the Fed will create new money and lend it to the U.S. government by purchasing treasuries). Federal Reserve Chairman Ben Bernanke became famous for once stating that if economic conditions became too bad, money could always be dropped from helicopters to stave off deflation and get people spending again. Despite the fact that dropping money bombs from helicopters would blow massive craters in both the dollar’s credibility and purchasing power, it looks as though the Fed is arming its attack fleet.
According to John Hussman of Hussman Funds, a dollar rout may already be in the making. In his Dec. 22, 2008, article “The Dollar Crisis Begins,” he indicated that if the Fed begins purchasing the U.S. government’s debt, it may end up buying more treasuries than expected “in order to absorb the supply from foreign holders set on dumping them.” When the Fed creates new dollars, it devalues existing currency. That means it makes U.S. treasuries, which are denominated in dollars, worth less too. This provides a powerful incentive for treasury owners to sell their holdings.
A number of factors could cause the dollar to devalue. But if treasury holders begin selling, the increased supply on the market could really trigger a dollar crisis.
And there is nothing like a falling dollar and a global economy in crisis to ignite a trade war.
A weak dollar typically means that Americans purchase fewer foreign-made goods, while foreigners purchase more U.S. goods. This is generally seen as a benefit to American manufacturers and positive for jobs. But global economic conditions are eroding so rapidly that many nations are trying to devalue their currencies in order to grab trade. In addition, America’s manufacturing base is already pretty well shot. America’s economy mainly produces services and other less-tangible goods that are less essential to a global economy in lockdown mode.
Is the world about to embark on a beggar-thy-neighbor policy of competitive currency devaluation to boost domestic exports? History indicates that, in times of economic crisis, governments tend to go down this road. The effects on global trade could be disastrous.
First Shots of Trade War
French President Nicolas Sarkozy, in a speech to Congress back in November 2007, warned that America risked triggering “economic war” with Europe if it attempted to devalue its way out of economic trouble by allowing the dollar to plunge in value. “Those who admire the nation that has built the world’s greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates,” Sarkozy said. “The dollar cannot remain solely the problem of others. If we’re not careful, monetary disarray could morph into economic war. We would all be its victims.”
When Sarkozy talks about economic war, what he means is tariffs and subsidies—and a lot of financial fallout that will affect your bank account.
During the Great Depression, countries sought to protect their domestic industry by limiting trade. This greatly intensified and prolonged the downturn.
The winds of trade war are blowing.
“The Fed keeps telling us they will not repeat the mistakes of the 1930s, yet they continue to repeat the very same mistakes—on steroids,” writes investment adviser Mike Morgan. “The only difference this time is we have labeled the mistakes with different names and explain things away with magic dust” (Dec. 20, 2008). Today’s new code for subsidies is “bailout.”
What is the difference, Morgan asked, between the auto bailout and foreign government subsidies to industry?
The same day that the White House announced the $17.4 billion automaker bailout/subsidy, the U.S. began legal action against China at the World Trade Organization for supposedly subsidizing its industry. Tensions are heating up.
“We continue to believe that trade protectionism, competitive devaluations and military conflicts are the major risks for investors for 2009—this is, after all, the most broadly based global recession (according to the imf, not just us) in the post-World War II era,” warned David Rosenberg. “Since the G-20 meeting in … October, five of those countries—Russia, India, Indonesia, Brazil and Argentina—have announced their intentions to raise import tariffs or otherwise restrict trade” (op. cit.).
Vietnam, China, France and the European Union have also recently strengthened import taxes, duties, subsidies or export rebates.
Global leaders say they don’t want a trade war. Most economists and business leaders don’t want trade war, and the average worker certainly doesn’t want trade war—but trade tensions could easily ignite soon regardless.
This is most likely going to be a tough year. That is what the best experts say. More importantly, that is what God’s Word says.
The Bible prophesies that Europe will emerge the big winner out of the current economic crisis—at America’s expense. Revelation 13:16-17 show that a European power is destined to totally control the world’s economies and become the next global superpower as America topples.
God has said in His Bible that He will take away every one of our national blessings and replace them with curses—because of disobedience to Him (Leviticus 26). As Herbert W. Armstrong wrote in The United States and Britain in Prophecy, “We have to learn that material goods are not the source of happiness. … Our peoples have basic lessons yet to learn. The true values are spiritual.”
The prosperity and blessings that America and other English-speaking nations have enjoyed as a result of their forefather Abraham’s obedience are being taken away by God because our peoples have failed to acknowledge the Source of those national blessings. “Punishment implies correction,” Mr. Armstrong wrote. “Correction means a change of course. … God is going to keep multiplying chastening—correction—upon our peoples until they do turn from their evil ways—until they turn to the ways that cause peace, happiness, prosperity, all the good things!”
And that is why we warn of America’s impending fall.