Tuesday, October 07, 2008

BAILOUTS for Wall Street and Corporate America; Is the US Economy Safe?

The US government has spent unfathomable amounts of money attempting to attenuate the consequences of thirty years of Reaganomics. Still there are signs that the economy is deteriorating as more people realize that the polyannesque view of the US is not realistic. Banks do not lend to each other because they do not believe the financial statements of their counterparts. Financial institutions do not lend to individuals because they have realized that credit ratings mean little or nothing. People cannot buy products and services because they have always bought things on credit in fact living past their means. Companies are firing people, foreclosures are increasing, and the latest shoe to drop is the credit card defaults.

Bank of America, just before announcing it would attempt to raise an additional $ 10 billion, released its financial statements. Among the normal $ 6 billion in additional mortgage right-downs slipped in that is was taking a “prudential” $ 1.2 billion in credit card losses. As other institutions announce their results we will see that the credit card losses will rival the CDO and mortgage paper sectors.

This week Corporate America announced another 100k firings of employees and new unemployment claims has been touching 500k. The government says Unemployment is at 6.1 %. Unfortunately if you do not find a job in 6 months or are new to the labor market you do not count. Perhaps the most telling sign of the disastrous economy is that retailers have decided we are going to skip Thanksgiving altogether and start the Christmas sales right after Halloween!

Some “talking heads” are telling us to have patience that all will be well. Others are telling us that the problem was caused by the EU and they must make the same mistakes the US administration is making to “Save us All”. How dare the Europeans employ the wisdom and experience of 3,000 years of finance and trade instead of tanking their economies to support the USA. WE ARE NUMBER 1!

The worst is not here yet. The depression has just begun and we will not be able to stabilize the decline until we recognize the real problem and start working as a nation to fix it. The problem is the service economy. We no longer produce anything. Our greed has focused us on the short-term gains to the detriment of long term stability while borrowing more and more money from the future. Yes we are consumption junkies, always searching for the next fix.

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Blogger Jim Belshaw said...

David, I know Australia pretty well so feel comfortable about making judgements in this contex. My knowledge of the US is much patchier.

One of the funny things about this crash has been the gyrations in the Australian dollar. I understand some of the reasons for this, but it leaves us with a dollar that is (in my view) undervalued in terms of purchasing power parity.

The US is still in the opposite position, although the value of the dollar has declined over the last year or so.

Taking the value of the US dollar into account and assuming that global markets stablise to some degree, just how long do you think it will take for the US economy to right itself?

4:05 PM  
Blogger Small Business USA said...

Jim Thanks for commenting. The question about stabilization is extremely difficult (at least for me). The US has serious dislocations in every facet of the economy. Since we no longer have a production based economy there is no reason for the economy to ever stabilize.

We can treat the symptoms but the underlying illness goes undiagnosed. In this light we could see moments of health and moments of distress but the general tendency will be wealth destruction.

The dollar should follow the same trend. The problem is that in any given window of time "perception overcomes reality" so we may see the dollar strengthen when it should be tanking.

All this said, I do not know the Australian market but Australia's recent implementation of Corporate Socialism will, over time, take you down the same path as the US.

5:59 AM  

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