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Financial Meltdown
Potential U. S. Economic Downturn
Written: 2/1/2007
In a Nutshell:
Predictors of Economic Meltdown:
Paul Volker – Former Federal Reserve Chairman
Ben Bernanke - Current Federal Reserve Chairman
David Walker – Comptroller General of U.S.
Stephen Roach - Chief Economist at Morgan Stanley
International Monetary FundSix Probable Causes – Any one of which could spell disaster:
Baby Boomers and Social Security
End of Cheap Fuel
Petro-Dollars
Globalization
Global Warming
Budget & Trade Deficits
Predictors of Economic Meltdown
Paul Volker:
Paul Volker was Allen Greenspan’s predecessor as the Federal Reserve Chairman. He resigned that position and moved to the number 3 spot at the Fed Reserve before retiring a few years ago. In 2003, “Volker predict[ed] we face a 75% chance of a [financial] crisis within five years”. Running On Empty, Peter G. Peterson, p. xiii.
Ben Bernanke Back To Top
“Speaking to the Economic Club of Washington, Bernanke said that projected funding shortfalls for Social Security and Medicare threaten ‘’large and unavoidable’’ fiscal consequences.
Absent action soon, he warned, the nation could be forced to raise taxes sharply, trim retiree benefits, cut deeply into other government programs and run up the national debt—or some combination of all these problems.”
See: News Article
David C. Walker: Back To Top
David Walker is the current Comptroller General of The United States. He is in his second year of an appointed 15 year term, which leaves him free to express his opinion as the most senior government accountant. He is currently on a “Fiscal Wake-Up Tour,” warning Americans of our national financial uncertainty. This tour started in October, 2006. He says unless congress takes serious action within the next two years we will face
“a catastrophic financial crisis”.
See what he has to say here: See: News Article
“Stephen Roach, chief economist at Morgan Stanley, is an outspoken critic of U.S. fiscal policy and has long warned that America's increasing reliance on foreign lending puts it at risk of a major economic shock. A sudden drop in the dollar could trigger, among other things, a stock market crash, a plunge in the real estate market, a deep recession, or all of the above. "There's nothing stable about America's dependence on the kindness of strangers," Roach wrote in a report last summer. "The funding of America is an accident waiting to happen."
At a recent meeting with fund managers in Boston, Roach said he believes there is a 90 per cent chance the country's rampant borrowing will eventually lead to a disaster for the economy” World, Is America Going Broke, 3/2/05
International Monetary Fund: Back To Top
“In January 2004 the staff of the International Monetary Fund, who normally worry about profligate nations like Argentina, took direct aim at the United States, warning the world that we are careening toward insolvency”.
Running On Empty, Peter G. Peterson, p. xi.
Six Probable Causes Of A Financial Meltdown
Please note that the six listings below not only have very high rates of probability but each on of them alone can decimate the economy.
Baby Boomers and Social Security Back To Top
Over the past thirty years congress has borrowed all of the cash set aside in Social Security Benefits. In place of holding the cash reserves it had, congress gave itself an IOU. Therefore, all current benefits to be paid out this year come from taxes collected this year. So far this system has been working OK. However, in 2008 the baby boomers will begin stepping up to begin drawing their SSI. Then each year that number will begin to swell. Congress will have to pay out much more of its current revenue as SSI benefits.
It is that increase in payouts that is the problem. It is highly probable that SSI benefits, Medicare and Medicaid Benefits, State and Federal and municipal pensions will all have to reduce their benefits by as much as 50%. At the same time it is expected that payroll taxes will have to double in order to keep the cash flowing. This could begin to happen as early as 2008.
For the past hundred years our economy has been running on cheap fuel. Our entire concept of suburbia is based on cheap fuel to commute to work. We no longer warehouse items but instead rely on Just-In-Time inventory methods. Our warehouses are 18 wheelers on the interstate are now our warehouses.
But now we find that cheap fuel no longer exists. Our natural gas supply is predicted to run out by 2015. Mexico and Canada have already stopped exporting gas to us so that they can conserve their dwindling supply. Remember that 20% of our electricity comes from this source.
All of the shallow oil has been expended. The world must now drill deeper and deeper to get at the oil reserves. We continue to hear that there is plenty of oil reserves worldwide. But what we do not hear is that it is becoming more expensive to extract it. The cheap stuff is all used up. There is no more low hanging fruit. Period. And all the while, there is a mad rush to purchase the remaining supply as other countries begin to awaken and demand what the United States has.
Hydrogen cannot be the answer for at least thirty years as the technology is not there yet. Ethanol is not the answer either. It is already forecast that the small amount to be produced in 2008 in the U.S. is all that can be utilized because even at that low level it will drastically drive up the prices of milk, eggs, grain and meat due to grain shortages to those industries. If we were to increase the methanol production much higher, other nations would suffer from starvation as a result of us no longer exporting our surpluses as we have promised to do in the past. This would make the world hate the U.S. even more.
Electric cars may not be the answer either. If they are charged by the electricity grid they will greatly the pollution problem and costs as coal fired generators are far worse polluters than oil based automobiles. Electric cars could be the answer but only if they were all recharged from solar sources. Now however the technology costs to do this are virtually impossible. To do so now still brings us back to the realization that there is no cheap fuel, and without cheap fuel our economy and suburbia is in severe trouble.
If gasoline goes much above $3.00 a gallon, at some point truckers will no longer deliver goods, choking off the cash flow for businesses and retailers, choking off production, causing a spiraling economic downturn.
During World War Two, the U.S. supplied the allies with war goods in exchange for gold only. At the end of the war we controlled the majority of the worlds gold supply. As Europe began to rebuild itself it was agreed that most international commerce would be quoted in U.S. dollars only as that was the only secure currency backed by gold; it was the safest.
In 1970 the U.S. went off the gold standard and began watering down its money supply by printing more of it for government spending. This has gotten out of hand to the degree that our currency keeps dropping in value to the degree that it may soon be rated equal to third world countries currencies. The rest of the world is becoming leery of our money.
The biggest problem this poses to the U.S. is in regards to oil sold around the world. Suppose China wishes to buy a million dollars worth of oil from the Middle East. To do so it must first come to a bank in the U.S. to convert its yen into dollars. The bank would keep a percentage of the dollars for itself for a banking fee. So in effect, the U.S. makes a “commission” off every sale of oil another country produces.
In order to escape the banker’s fees, China must invest in businesses and real estate in the U.S. so that the dollars those investments produce can be used to purchase oil without the bankers. Of course this drives our stocks and real estate prices higher. But what would happen if Iraq were to begin quoting oil prices in Euro-dollars? Those investments would be quickly sold off and reinvested in Europe, leaving the U.S. economy in trouble.
A few months prior to our invasion of Iraq in 2003, Iraq began quoting oil prices in Euro-dollars. Is it possible that that is why we invaded Iraq? Are we the schoolyard bullies shaking down the rich kids for their milk money by keeping our military presence in the Middle East?
Globalization will continue to erode the middle class in America by exporting more jobs until they will no longer be able to prop up our economy by spending. Normally government would counter this by opening up the valve on government spending. This is the lesson that we learned from the great depression. But today we have had that valve opened 100% for the last 30 years. Besides, to do so would require credit from other nations when our credit worthiness is at its lowest point ever.
We now recognize the destruction we are doing to the planet and the ramifications if we do not act soon to alleviate the trend. The U.S. fails to admit it is a problem because to do so we would have to do our share to reduce the damage being done. The U.S. alone creates 25% of the greenhouse gasses. For us to reduce that amount would drastically change the manner we live and destroy our economy. And so we just continue to deny there is a problem. But it is just a matter of time before we must do something about it.
Also consider what global warming is doing to our farming, water and insurance industries. A few more Katrina’s could cause real havoc.
Budget &Trade Deficits Back To Top
Quite simply, our trade deficit is similar to overspending by running up your credit card debts. There must be a day of reckoning. Our creditor nations are beginning to tire of continuously financing us when it is becoming apparent that we will never be able to pay off that debt. We are becoming less and less credit worthy.
There are two causes of the deficits. First is we are buying more than we are selling. We have nearly quit manufacturing in this country and each year it gets worse. Secondly, our government continues to spend more than it takes in each year – budget deficits. So each year we are forced to borrow from other countries to cover those shortfalls. But now our debt is out of hand and nearing the point of being unable to get that outside financing.
Because of these factors our credit worthiness may soon fail leaving us in a state of bankruptcy. When this happens, entitlements and other normal government spending will be greatly curtailed causing a shockwave to ripple throughout the economy.
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