Global Economic Crisis

Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, has issued a stark warning regarding the ballooning U.S. federal government annual deficit and cumulative national debt. Hoenig told  the Pew-Peterson Commission on Budget Reform that massive deficits being  projected by the Obama administration would endanger the Fed’s ability to fulfill its mandate of maintaining stable economic growth and price stability.

“Without pre-emptive action, the U.S. risks its next crisis,” stated Hoenig. What this senior Federal Reserve official is saying, on the public record, is that the current U.S. fiscal policies are unsustainable, and unless halted and reversed in short order, will precipitate a hyper-inflationary depression.

Paul Revere has spoken. But who is listening? Certainly not the economic policymakers in Washington DC, who believe only small countries like Greece can face national insolvency. Sooner then they can imagine, they will receive an education  which unfortunately will cost their countrymen dear.

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In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” I project that a growing sovereign fiscal crisis will transform the current Great Recession into a synchronized global depression. The events currently transpiring in the Eurozone are early indicators that my forecast is on track.
 
At the recent summit of European Union leaders in Brussels, which included the head of the European Central Bank, the PR spin doctors released what can best be described as ambiguity in the form of a communiqué, offering unspecified assurances that the Eurozone’s major actors will not permit Greece to succumb to its current sovereign debt crisis. The hope was that the markets would buy this assurance, thus preventing a further slide in the euro.

Not only are the markets, at least terms of the euro’s relative value, not being reassured by the happy talk that emanated out of Brussels; upon his return to Athens, Greek Prime Minister George Papandreou  was harshly critical at the lukewarm words of EU reassurance. He said, “in the battle against the impressions and the psychology of the market, it was at the very least timid, ” in referring to the EU communiqué.

The bottom line is that without a massive bailout by the big guns in the Eurozone, in particular Germany and France, Greece faces fiscal collapse, which in turn will prove destructive to the whole Eurozone. However, if indeed Greece is bailed out, a host of other insolvent EU members using the euro will be lining up for their bailouts. Even ignoring the feelings of the German and French taxpayers (which is not politically tenable) there simply is not fiscal capacity within the Eurozone to backstop the other potential sovereign basket cases.

I foresee no possible scenario that allows for a soft landing from this escalating sovereign fiscal and debt crisis.

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Greece is in the midst of its worst fiscal crisis since the end of World War II, with a budget deficit now officially stated as being 12.7% of GDP. However, given the past shenanigans when it comes to government bookkeeping in Athens, it would not surprise many if the true deficit ratio to GDP is even higher than currently admitted. The Greek government cannot employ monetary policy as a means to inflate down the value of its national debt, as it is part of the Eurozone. The primary policy option it has left is reducing its budget to sustainable levels, but that would require sacrifices on the part of the population that would likely lead to social disintegration on a massive scale. Already, mass waves of strikes are being planned, in protest at austerity measures being promised by Greek politicians.

Athens is hoping and praying that the wealthier and less profligate members of the Eurozone will bailout Greece, reducing the level of austerity that will be imposed on Greek citizens. Greek political circles clearly hope that the systemic risk posed to the entire European monetary union by its fiscal crisis will compel German and French politicians in particular to swallow the risk of moral hazard, and have their taxpayers bailout Greece. The news that the President of the European Central Bank, Jean Claude Trichet, will be attending an emergency European summit on February 11 in Brussels sent stock markets around the globe soaring, in the hope that Germany and France will bailout Greece. It should not surprise anyone at this stage in the global economic crisis that the best news for investors seems to be taxpayer funded bailouts, as opposed to real economic progress.

The speculation is that the ECB and key Eurozone actors will capitulate, and sacrifice their concern over moral hazard for the sake of preserving the euro. However, this is at best short-term thinking. The fiscal catastrophe Greece finds itself in today, and which Iceland has been experiencing for more than a year, threatens many other European countries. Spain, Portugal, Italy and Ireland, not to mention Eastern Europe and the UK, are all wrestling with exploding levels of sovereign debt. Even if the Eurozone political leaders and the ECB cobble together a bailout of Greece, they simply lack the financial resources to bailout the next wave of European sovereigns that will feel the wrath of a savage fiscal crisis that is actually being made worse by the cumulative taxpayer liabilities that are now expanding towards infinity.

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In the bizarre world of quantum mechanics, there is a specific sub-atomic particle that can mathematically be in two places simultaneously. In the even more bizarre world inhabited by the U.S. Bureau of Labor Statistics, it is possible for the American economy to still lose jobs while at the same time the unemployment rate declines. American ingenuity strikes again!

The BLS’s recent report on U.S. unemployment statistics revealed that officially, the American economy lost 20,000 jobs in January. Considering that most economists predicted a small gain in jobs, this is obviously a worse than expected result. Yet, despite the jobs losses, the BLS is also reporting that the official U.S. unemployment rate dropped from 10%  to “only” 9.7%. How did the creative minds at BLS shrink the unemployment rate even though fewer Americans were working in January in comparison with December? Through cunning statistical manipulation. Apparently, someone decided on high that it was not politically expedient to maintain an official U.S. jobless rate in double digits, so despite the continuing job losses, a way was found to report a reduction in the unemployment rate.

What is even more remarkable about this BLS imbroglio is the reaction of mainstream American media. Virtually every significant news source in the United States is heralding the BLS manufactured “drop” in the rate of unemployment as a signpost on the road to economic recovery, and a first rate achievement, demonstrating true progress towards resolving America’s unemployment catastrophe. It seems that there is a collective will in America to drink the Kool-Aid of wishful thinking. One gets the impression that the Democratic Party has borrowed the old faith-based ideology from the Republicans, maintaining that belief that things are indeed getting better will somehow transform celestial thinking into terrestrial reality.

Hidden amidst the opacity of BLS statistics was the admission that the U.S. government had vastly undercounted the number of job losses in 2009, supposedly by more than 600,000. This stunning admission reveals the unreliability of the Bureau of Labor Statistics to accurately gauge jobs destruction in the United States brought on  by the global financial and economic crisis. What we have in lieu of statistical objectivity is PR spin and metaphysical interpretations.

With contradictory statistics pouring out of the BLS, undermining the efficacy of any official analysis of America’s dim employment reality, I offer a more useful gauge of what is actually transpiring. With 70% of America’s economic output derived from consumption, what is actually happening to the financial capacity of American consumers to actively participate in the American economy?  Taking into account  not only high unemployment, but replacement jobs that are part-time or compensated at lower salaries, it is clear that the collective income of American consumers continues to deteriorate. Anecdotal evidence based on plummeting federal and state tax revenues are a clear marker of this calamitous decline in the purchasing power of American consumers.  Unfortunately, not even the creative statisticians and alchemists at the Bureau of Labor Statistics can spin this dim reality into positive signs that America’s economic renaissance is just around the corner.

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I was recently interviewed on the Internet radio show Spin Cycle, featured on the Contrary Investors Café. The show’s hosts, Andy Sutton and Duane Chandler, questioned me on issues raised in my book, “Global Economic Forecast 2010-2015: Recession Into Depression.” We had a lively discussion on current and future economic and financial trends, including the rapidly deteriorating sovereign fiscal imbalance afflicting many major economies, especially that of the United States, as well as the ramifications of peak oil on inflation.

Readers of my blog can hear the interview in full by going to this website’s homepage and clicking on “Interview with Sheldon Filger.”

global economic crisis Contrary Investors Café, global economic forecast, peak oil, Spin Cycle

Ten years ago, the Clinton administration submitted to Congress a proposed federal government budget of $1.9 trillion. Now, the Obama administration has released  a proposed budget for the upcoming fiscal year. It is a whopper: more than $3.8 trillion. As inflation has been low over the past decade, if official U.S. government statistics are to be believed, the great majority of this doubling  in federal spending over the past decade has been actual increases in real terms.

More disturbing than this explosion in federal outlays has been the record deficit that is being projected, following on the heels of previous record deficits. The red ink being forecast for FY 2011 is an eye-popping  $1.56 trillion. Yet, President Barack Obama claims that this is a first step towards deficit reduction.
 
I beg to differ with the president. Far from being a move towards fiscal responsibility, this massive spending fest, with a projected deficit that is the equivalent of more than three quarters of total federal government spending a mere ten years ago, is the clearest indication yet that U.S. government spending is out of control, and has entered the fiscal twilight zone. As I project in my new book, “Global Economic Forecast 2010-2015: Recession Into Depression,” this dangerous path is unsustainable. The ultimate consequences will be frightful.

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Despite all the rhetorical flourishes and grandstanding engaged in by that once august body, the U.S. Senate, when it came time for the rubber to meet the road, they voted overwhelmingly to reappoint Ben Bernanke to a second term as chairman of the Federal Reserve. Let us be clear as to what those 70 senators voted for, in deciding to support President Obama’s preference that Bernanke remain at the helm of the Fed. Failure on a monumental scale has been conspicuously rewarded.

While Bernanke’s predecessor has been rightly condemned for his loose monetary polices and dogmatic conviction that unregulated market fundamentalism is always correct, the current Fed chairman has demonstrated continuity with those now discredited policies, along with a numbing myopia in failing to see a train wreck coming, despite ample warning.

In October 2005 Ben Bernanke appeared before Congress, only days before being nominated to succeed  Alan Greenspan.  Growing concern had already emerged regarding the unsustainability of what was obviously a massive housing asset bubble,  in large part facilitated by  the Fed’s easy monetary policies, fully supported by Bernanke. When questioned on the perception that the residential housing market was a growing danger to the nation’s economic health, the supposedly brilliant and perceptive Ben Bernanke stated that the escalation in U.S. housing  prices did not constitute an asset bubble, and was in fact based on sound economic fundamentals.

Sound economic fundamentals?

In an earlier post, I described Bernanke’s statement to Congress in 2005 as the worst economic prediction in recorded history. Yet this same flawed individual has now been  anointed by the U.S. Senate to have another go at deconstructing the U.S. economy.  A proven failure  now has another four years as head of the world’s most powerful central bank, with executive powers that in may respects exceed those of the president’s, with virtually no meaningful legislative oversight.

The justification for reappointing Ben Bernanke rests on a flimsy pretext. He supposedly saved the world from a global financial meltdown after the collapse of Lehman Brothers in the fall of 2008. This ignores his conspicuous role as a principle architect of the global financial and economic crisis. In effect, he is glorified for indebting  generations of Americans yet unborn for covering the costs of his colossal errors in judgement. Furthermore, the Senate has failed to take cognizance that the very debt load they salute Bernanke for creating  as part of his “heroic” rescue mission has laid the seeds for a far more dangerous  phase of the global economic crisis. The risk of a paralyzing sovereign debt crisis is growing, raising the threat of national insolvency. The current fiscal crisis in Greece, and the economic purgatory being experienced by the people of Iceland, are clear warning signs on the economic horizon of what lies in wait for the American people. Maintaining Bernanke as Fed chairman magnifies the risk that a sovereign debt explosion will occur, creating a whole new level of economic devastation across the United States.

The lopsided vote by the U.S. Senate in favour of reappointing Ben Bernanke was  a clear triumph for the disaster-prone Ben Bernanke. As for the American people, this result is nothing less than a total, unmitigated defeat.

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My blog readers who own an Amazon Kindle e-book reader, please be advised that you can now download my book, “Global Economic Forecast 2010-2015: Recession Into Depression.” You can find my book listed at the Amazon Kindle store.

Deliver to your Kindle or other device How buying works Available on your PC

Try it free     Sample the beginning of this book for free Deliver to your Kindle or other device How sampling works Available on your PC

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The global economic and financial crisis was unleashed when the American real estate bubble, especially in connection with sub-prime housing mortgages, burst. Among several factors that facilitated this disaster, one of the prime ones was the loose  monetary policies of Ben Bernanke, chairman of the U.S. Federal Reserve. While speculation continues on the probability that the Senate will/will not reconfirm Bernanke for a second term as Fed chairman, the same level of monetary indiscipline is still in practice at the Federal Reserve, complemented by the easy fiscal polices of the Obama administration as well as Timothy Geithner`s Treasury Department. Meanwhile, signs that the real estate market in the USA remains very weak continue.

A report on existing home sales has just been released, indicating that in December there was a decline of 16.7%. Sales rose in the previous three months, but that was only due to significant tax credits, courtesy of the  taxpayers of tomorrow, who will be burdened with staggering levels of national debt. Using borrowed money to fund short-term gimmicks cannot provide a cure for long-term structural imbalances in the U.S. economy.

Another jolt points further at commercial real estate’s accelerating descent in valuations and rising rates of foreclosure. In 2006, Tishman Speyer, a major CRE investment firm located in New York City, put together a deal with a consortium, purchasing Manhattan’s giant Stuyvesant Town and Peter Cooper Village apartment complexes from Metropolitan Life for $5.4 billion, the largest real estate deal at the time of its consummation. Over the weekend, Tishman Speyer went into default on the property, handing it over to its creditors. The number of investment interests that have lost money on this deal ranges far and wide, not only in the United States but across the globe. Among the losers is the Church of England, which has just seen £40million go down the proverbial  rat hole. In October, the Fitch ratings agency valued Tishman Speyer’s original $5.4 billion property as having a current value of a mere  $1.8 billion. This represents a loss of  two thirds in valuation in less than four years, a metaphor I should say for the entire U.S. residential and now commercial real estate casino marketplace.

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It is the third week of January, 2010 and the FDIC has already shut down 9 insolvent banks. True to form, these bank closures are typically announced on Friday nights, with the expectation that the weekend will allow only limited news coverage. Nevertheless, this attempt by the FDIC to manage the news and limit media exposure cannot disguise the fact that the American banking system enters 2010 in a state of acute fragility.

The seventh bank of 2010 to be shuttered was the Charter Bank in Santa Fe, the first bank in New Mexico to be closed in more than 10 years. Other bank closings occurred in Oregon, Washington, Florida, Missouri and Minnesota. All in all, not an auspicious beginning to 2010, the year that the Obama administration predicted would show strong economic growth and the emergence of the U.S. from recession and job losses.

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