It’s likely that 2009 will be seen by historians as the dawn of a new era in both the United States and the world. When the full extent of the global financial collapse becomes clearer, the U.S. will likely find itself firmly propelled into nationalization and direct government control of the major corporations that form our country’s economic infrastructure, and into major changes in the global balance of economic power. The now entrenched socialist liberal Democrats may ride the wave of power given them for solving the economic crisis to implement socialist solutions for other national issues and to force their world-view and cultural agenda upon everyone in the nation, even if it requires officially changing the U.S. constitution (it has already be unofficially changed by the judicial branch).
It’s important to be aware of what is happening in the world and understand God’s purposes so you won’t be misled and unnecessarily frightened. This is the first in a series of post in which I want to give you my reasons for the above projection along with some useful Biblical perspective. The issues we face are not simple so get a cup of whatever-you-like sit back and try to digest all this.
If you think I’m exaggerating when I use the word “collapse,” then consider these highlights of the last year:1
- More than 2.3 million home owners faced foreclosure in 2008, an 81% increase from 2007 that set an all time high. One million foreclosures were finalized. Because 2.6 million sub-prime adjustable-rate loans reset to higher interest rates in the last months of 2008, Credit Suisse Group expects 1.3 million homes to enter foreclosure between Sept 2008 and Sept. 2009. The bank says that 1 in six sub-prime borrowers will have negative equity in the next 2 years.
- U.S. stock markets lost about half of their 2006 value, dropping $7 trillion, an amount close to half of the U.S. GDP.
- Global markets lost $30 trillion of their $50 trillion value.
- US investors pulled $216 billion out of mutual funds in the first 11 months of 2008 contributing to the decline of net assets in all types of mutual funds of $2.67 trillion, about half of their 2006 net worth.
- $50 billion of private and public investments vanished when the largest Ponzi fraud in history was recently exposed.
- 25 US banks failed – the most in 15 years; it’s predicted that the U.S. may see hundreds more fail in 2009.
- Washington Mutual, a bank with $307 billion in assets became the largest U.S. bank failure in history while in the same month Lehman Brothers, an investment bank with assets of $639 billion, also failed.
- Bank of America, the largest U.S. bank by assets, has been propped up by the U.S. government with $20 billion in cash and $118 billion in guarantees against further losses since it turned out that Merrill Lynch, the major U.S. brokerage firm they recently acquired turned out to be a heavier dose of financial poison than anticipated.
- The Royal Bank of Scotland is insolvent, basically bankrupting the United Kingdom.
- The nation of Iceland went bankrupt.
- Germany’s largest bank, Deutsche Bank announced its first annual loss in five decades.
- HSBC, one of the world’s largest financial institutions, with $2,547 trillion (yes, that’s $2,547,000,000,000) in assets, says it has losses of $25 billion. While that won’t bankrupt them, they do have 57% of their loans in the US and the UK exposing them to significant future losses.
- Citigroup, the original one-stop-shopping financial institution, with global assets of $1,945 trillion, is dissolving in the face of massive losses.
- AIG, the world’s largest insurer, with assets of $1,022 trillion couldn’t cover their debts and had to be bailed out by the US government.
- Nortel, Canada’s largest company by market value at the height of the technology boom filed for bankruptcy in January 2009.
- U.S. retail sales were down 0.1 percent in 2008, “a sharp turnaround after a 4.1 percent gain in 2007. It was the first time the annual retail sales figure has fallen on government records going back to 1992. Before 2008, the weakest year for retail sales had been an increase of 2.4 percent in 2002, the year after the 2001 recession.”
- Over 10,000 U.S. stores closed during 2007-8. It is estimated that we will see much more than that figure in 2009 alone.
- Well known retailers vanished in the first wave of retail bankruptcies – Circuit City, Sharper Image, Aoha Airlines, Bombay Co., Linens ‘N Things, Mervyns, Woolworths and others.
- The U.S. lost more than 2.6 million jobs in 2008, the most since 1945. 221,000 jobs were cut in the financial industry alone.
- The traditional U.S. automakers have cut 300,000 jobs in the last 3 years. Another 30,000 may be cut in the next few. About 1800 dealerships are expected to close putting an additional 100,000 out of work and significantly impacting local newspaper and TV advertising revenues as well as federal taxes and the railway companies that ship automobiles.
- The number of people filing for unemployment benefits in January 2009 hit a 26 year high. Unemployment is expected to reach, or exceed 1982 levels.
- State municipal bond sales are declining leaving 41 states with potential shortfalls.
- All levels of U.S. governments are seeing steep declines in tax revenue due to the economic slowdown, exacerbating the already fragile economic status of many states and counties. For example due to the collapse of the stock market and related bankruptcies, New York state will face a $12 billion dollar deficit in their 2009-2010 budget. I don’t have figures on how widespread the problem is, but some counties are bankrupt and other nearly so. One major factor is the high cost of pensions for retirees.
- The US government has committed $8.5 trillion to help an economic recovery based on current estimates of the need, but a respected economic expert thinks we may see credit losses of $3-4 trillion requiring far more government spending than currently planned.
- I recently looked at a chart showing a composite stock market index from the late 19th century to the present onto which the author had plotted a straight line that best fit all the data. Over the years the market has cycled above an below that upward sloping trend line. Two things were very clear. First, during the stock market crash of 2002, the index didn’t pass below the trend line and neither has the 2008 drop. Second, if we have truly entered a bear market and the economy repeats the timing of several prior cycles, we shouldn’t expect the bottom in the equity market to appear for nearly 18 years!
One or two of the above changes might result in an annoying, but perhaps mild recession. However when we see so many occurring simultaneously and consider that the full impact of the crisis has yet to be realized, it’s time to be seriously concerned for our future. If these facts were the symptoms of a medical problem, we would want to find out what the underlying disease is, how it will be treated, and what the impact of that treatment will be on our lives.
We can be clear about a few of the major factors that created this crisis. In continued attempts at social engineering, (I leave the judgment of their motives and means up to you.) Democrats in the US Congress forced banks to lower their standards in order to make loans to people regardless of their ability to pay and then deliberately blocked efforts to put in place sound business controls on the packaging and resale of these mortgages as investments. Add in the Federal Reserve’s contribution of very low interest rates and the U.S population began buying houses like they were eating popcorn.2 Home construction rates and prices rose quickly.
Financial leaders, anxious to make as much profit as possible then created and marketed complex bundles of investments containing some of these risky (sub-prime) mortgages. Rating organizations stamped the investment bundles with a seal of approval without doing due diligence to determine their effective risk. With the euphoria of rising profits and relaxed accountability infecting many public and private institutions all over the globe, huge sums of money were borrowed to purchase these investment bundles containing mortgages that eventually failed. The mortgage failures alone would not be enough to create such a deep meltdown as we are experiencing. The problem was that since the bundles couldn’t legally be unbundled easily and since no one wanted to buy them in that state, the value of each entire bundle instantly dropped to zero, greatly multiplying the effect of the mortgage defaults. Vast amounts of investment value simply disappeared.
The whole world is linked together in a big credit and insurance scheme that works as long as most asset values go up. It seems that the concept of the bundled assets together with a lack of sound evaluations and oversight was exactly the system’s Achilles heel. Businesses fail when their debts exceed their assets and their debtors insist on being paid. Huge corporations and perhaps some governments are now bankrupt or very close to it. Worse yet, financial institutions have been so damaged that they have almost quit lending to anyone. Without a normal flow of credit, world commerce becomes severely crippled.3 Perhaps we can get an inkling of the size of the problem when we consider that one crippled company, Citigroup, had assets of almost 140 times the annual value of the entire U.S. economy !! Now they didn’t loose all that value, but even with it, their losses swamped them.
When banks fail, governments become responsible because they guarantee a portion of bank deposits. In the case of other financial institutions deemed to be providing crucial management and loan services to the national economy, governments intervene to keep the economy (and taxes!) from literally coming to a halt. The problem is so severe that governments will probably be eventually forced to replace lost assets by purchasing controlling interest and taking over direct supervision of critical businesses. This would take the U.S. farther down the road called socialism than we have been before. But that’s only the beginning.
Some of the government’s cost of saving and revitalizing the economy could be recovered. For example there is precedent for government purchase (nationalization) of banks yielding a worthwhile future return. The money put into works projects could get the economy rolling again and also restore, or even increase, tax income – eventually. However there are other factors to consider: the problem may just be so large that any helpful return may not happen for decades leaving staggering national deficits in the meantime; other nations may not be willing to help us for that long; and at the same time the U.S. is overspending to prevent a full blown global depression, a significant portion of it’s population will reach retirement age and exit the workforce, not only reducing tax income but simultaneously requiring increased outlays for promised retirement and medical payments. I told you this mess is complex. But there’s more.
Governments only have a few ways to get the money they need for bailouts, purchases and works programs. They can increase taxes, borrow money or print it (or go to war, but that probably won’t happen this time). Taxes won’t easily cover the need so other means will be tried first.
The federal, state and local governments in the U.S. all borrow huge amounts of money by selling bonds and other debt instruments to supplement tax income. Until now, the federal government has been spending roughly $3 trillion a year with about $250 billion of that provided by credit (selling Treasury Bonds). In 2008, the U.S. paid $412 billion in interest on this debt (which is included in that $3 trillion annual budget). The accumulated U.S. Federal Debt stands at about $10.7 trillion. By comparison, the U.S. annual Gross Domestic Product is/was about $13 trillion. Private investors and US government institutions own about 50% of that debt. Foreign governments and institutions own about 25%, with Japan and China being the largest holders by far.
Can we depend on private and foreign investment to ante up enough to double our national debt? (Remember the government has already committed to spending $8.5 trillion to repair the economy) Private investors are buying Treasuries, but it seems unlikely that they can or will be willing to supply all the capital needed. Furthermore, it seems to me that the fact that the U.S. caused this crisis in the first place will discourage other nations from investing in it as heavily as in the past, especially as the crisis deepens their own national hurt. Already China is encouraging it’s people to invest in Gold rather than U.S. Treasuries.
But more importantly, the world is not as it was. Asian, European, Middle Eastern and some Latin American nations are now far more economically powerful than the were when the U.S. faced past economic woes. Before this crisis the United States’ economic dominance was already being threatened .4 5 It is likely that the U.S. will find itself humbled as it seeks allies to provide needed assistance. Other nations, hurt by this crisis as well, may now find the clout and the will to force new global economic controls and trade agreements that are not as favorable to the U.S. as in the past and bring about significant change the balance of international power. The fact that there are many in our own government and leadership already sympathetic to divesting national sovereignty in favor of more global governance, leads me to think that in the next decade we could even see the U.S. give up it’s own currency and join one or more international confederations.
If the U.S. can’t borrow enough, it will print the needed money. In the past, putting more money in circulation6 has inflated prices. Due to the staggering size of the problem, so much new money may have to be created that inflation could render a lot of people’s savings useless, including the large population of near-retirement baby boomers, thus creating a further burden on the government. When significant inflation hits, then I fear that the U.S. government will do what governments have always done, impose price and production controls. Socialism? The economic crisis may have already put us so far down that road that there will be little resistance to expanding it – especially since that’s the preferred method of solving national problems and implementing the social reforms of the party now has a firm grip on federal power.
This has been a pretty long post for a blog, but I’ve noticed that every blog I’ve read that attempts to make a reasonable explanation of the current crisis is very long. I’ve tried to give a layman’s explanation of a very complex situation. I suspect that few politicians and government bureaucrats even understand the economic system well enough for us to have confidence in their leadership. There seem to be too many examples in history of government leaders making exactly the decisions that made economic matters worse. We’ll have to wait and see.
In the next post I’ll start discussing the cultural changes we may soon see and suggest some Biblical issues we need to be aware of as we face a new future.
Footnotes“By justice a king builds up the land, but he who exacts gifts tears it down.”
Proverbs 29:4 (ESV)
- It’s hard to hit a moving target so, while I have researched these numbers, they should be taken more as indicators that will change as more accurate data is collected by the media and government.
Links in the text lead to related news articles. [↩] - FoxNews NRO [↩]
- A few examples : Manufacturers need credit because they don’t get paid until products get delivered. Purchases of commodities from foreign nations require letters of credit to be exchanged before the ships leave their starting port. [↩]
- Outlook 2009 [↩]
- Change in global economic balance [↩]
- One way the government puts new money into circulation is to buy back its own Treasury bonds. Another way is to loan it to banks. The Federal Reserve has recently taken on new powers so it can inject new money into the financial system. [↩]
