Second Financial Crisis Coming

From what I understand, the mortgage crisis was brought on by the falling prices of real estate, with homeowners who had homes more than they could afford being unable to refinance as the value of their homes dropped. Something is fishy about this I don’t understand: Why were suddenly so many homeowners not able to pay? I understand that it was building up bad mortgages, but I can’t help but think in 2005-6 something must have been slowing in the economy for so many homeowners to all be behind in 2007…

So here we are, in the second dip of the Recession, arguing whether balancing the budget will get us out or if overspending, as the government did after the Great Depression will help. Currently the US government is backing Freddie Mac and Freddie Mae, which means they are responsible for about half the mortgages in the U.S. If unemployment continues to skyrocket, and the housing market continues to tank, the government may have to bail out even more mortgages. Thanks to a dwindling taxable population, “Obamacare”, the continued “wars” and democrat spending, we’re looking at an increasing deficit.

Interesting, banks and the Fed have had exactly opposite reactions to the economic crisis. While banks are looking to deleverage, (one friend told me small banks were at 40x debt to equity before), the Fed has been leveraging up, loaning and purchasing $7.8 trillion over two years. All while keeping interest rates, the amount banks pay to borrow, at nearly 0%. This was down to stall deflation after the market crashed by pumping money into the market, thinking this would spur growth. Except it hasn’t.

There’s four big problems right now:

1. Small businesses are struggling
2. Investors are moving money overseas
3. The Fed’s money policy has us set up for inflation
4. We’re not making things

First thing to remember about small businesses is they grow into large businesses. Without entrepreneurs we have little innovation in industries. According to the small businesses association, they generated 65% of new jobs over the last 17 years and employ half the private sector workforce. They generate 13 to 1 more patents per employee. The account for 97% of all exports. Now, small businesses are having a harder time borrowing money from banks and investors are more wary. Obamacare has added burden on small businesses with the health care bill. If we’re looking to reduce unemployment, look at Main Street.

Goldman Sachs is predicting up to 14% growth in non-Japan Asia. Why non-Japan? As an industrialized nation Japan has already seen its biggest spur in growth, so when investors are looking to high returns they’re going to look at economies which still have a long way to go. Although many say China is currently “overleveraged” and admits to stalling out because of reduced exports to bankrupt Western nations, they will still see about 7% growth rate. Four reasons for that: 1. As our WalMart nation goes further in the red we’re relying more on cheap Chinese goods, 2. They are not dumb enough to float their currency and will continue to subsidize businesses 3. They have a had a higher savings rate so consumers still have money to spend 4. They are a developing country and so have farther to climb. Other countries to look at include developing Southeast Asia, South Korea and wait for it…Mongolia, whose gold mines are riding the gold boom.

As said before, the Fed has been pumping money into the economy to increase growth, but there has been no increase in growth. Add a 33.8% increase in fuel import costs in the last year and you have inflation. After WWII, the government was in a similar position, highly leveraged and set up for inflation. At this point we were going from an industrialized nation to a manufacturing nation. Most of the government’s money had been put in things like new technologies and infrastructure – roads to move military goods which would soon serve to move consumer goods faster than trains and cheaper than planes. Our only hope for avoiding inflation as in the 1950s would be major economic growth so the rising cost of goods was offset by increases in productivity and new products.

That’s not happening because we aren’t innovating fast enough. From Obama who has no idea how to run the economy to Bloomberg who kicked the Occupiers out, politicians are finally getting we have a problem with the innate value of the economy. Obama’s Presidential Address was littered with references to South Korea and their impressive focus on infrastructure and technology, including putting high-speed internet into every home in the country. Bloomberg recently visiting Hong Kong made a speech “Stop Blaming China” calling out Congress for focusing on a “trade war” with China and trying to label their clean energy as noncompetitive. His argument was why would we want to attack a country for creating cheaper ways to green energy, innovations that would benefit every nation, especially our own? Instead the U.S. needs to focus on what it is we’re going to offer the world in return.

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