Wished that PAP regime had taken note of the warnings of several
economists that the U.S. housing bubble was heading for collapse
soon:
Is a USA Economic
collapse due in 2005?
By William Engdahl (July 26, 2004)
The US Senate just reconfirmed 78-year-old Alan
Greenspan to an unprecedented fifth term as chairman of the world‘s
most powerful central bank, the Federal Reserve, or Fed as it is
known . The fact that President Bush re-nominated Greenspan
underscores how vulnerable the global financial edifice is, and not
how excellent a central banker Greenspan is.
On the surface, world growth appears to be expanding
finally, after severe recession and the 60% fall of the US stock
market in 2000-2001. The Federal Reserve says it is so confident
that growth in the US economy is taking firm hold, that it raised
its key interest rate from a record low 1% to 1.25% last month,
signalling it would slowly bring rates up to „neutral“ levels of
3.5 -4.5% over coming months. Around the world, strong growth of
exports are being reported from Brazil to Mexico to South Korea.
Growth in China is so strong the government is worried it is
overheating. In Europe, the UK is expanding at the fastest pace in
15 years. France expects GDP to grow by 2.5%, and even Germany is
talking about stronger export growth. The driver is US economic
growth.
The
problem with this optimistic picture is the fact it is entirely
based on the dollar and unprecedented creation of cheap dollar
credit by Greenspan and the Bush Administration.
Their only short-term goal has been to keep the US economy strong
enough to assure re-election for George Bush in November.
Washington reports are that Bush made a deal to re-appoint
Greenspan on the promise Greenspan would keep the economy growing
until the elections. They have done this by a combination of
historic low interest rates, rates only seen before in times of war
or depression, and by stimulating the economy by record budget
deficit spending, issuing government bonds to finance it. The world
has been flooded with cheap dollars as a result.
What is clear now is that this unsustainable effort is
likely to come to an end sometime in 2005, just after the
elections, regardless of who is President. Given the scale of the
money -printing by the Fed and the US Treasury since 2001, it is
pre-programmed that the „correction“ of the latest Greenspan credit
binge will impact the entire global financial and economic system.
Some economists fear a new Great Depression like the 1930‘s. The
world today depends on cheap US dollar credit. When US interest
rates are finally forced higher, dramatic shocks will hit Europe,
Asia and the entire global economy, unlike any seen since the
1930‘s. Debts that now appear manageable will suddenly become
un-payable. Defaults and bankruptcies
will spread as they did in the wake of the 1931 Creditanstalt
collapse.
The US home bubble
The official US myth is that the recession of 2000-2001 ended in
November 2001 and „recovery“ has been underway ever since. The
reality is not so positive. Using record low interest rates,
the Fed has lured
American families into debt at record rates, creating what might be
called a „virtual recovery,“ financed by record amounts of new
consumer debt. There has never been a recovery
before in which debt levels increase, rather the opposite.
The American dream of owning an own home has been the
source of the record lending, helped by the lowest interest rates
in 43 years. Greenspan has often boasted this has been what has
propped the US economy since 2001. When families buy a home, they
need furniture, they employ construction workers, electricians,
engineers, and the economy grows. Record low interest rates have
made it very easy for families to get a bank loan, using their home
equity as collateral or guarantee. These loans, tied to the rising
real estate prices, allowed American families to finance new
furniture, cars, and countless more. In 2003 banks made a record
$324 billion in such home equity loans, on top of $1 trillion in
new mortgage loans.
All this economic consumption has created the illusion
of a recovering economy. Behind the surface, a huge debt burden has
built up. Since 1997, the total of home mortgage debt for Americans
has risen 94% to a colossal $7.4 trillion, a debt of some $120,000
for a family of four. Bank loans for real estate purchases have
risen since 1997 by 200%, to $2.4 trillion. Average US home prices
have risen by 50% in the period since 1998. In 2003 alone a record
total of $1 trillion in new mortgage loans were made. In 1997
mortgages totalled $202 billion.
In many parts of the US, home price inflation has
become alarming. An apartment in Manhattan is now above $1 million.
Home prices in Boston have risen by 64% in five years. California
real estate prices are soaring. On average US home prices have
risen 50% in six years, an unprecedented rise, driven by
Greenspan‘s easy credit. In seven years to 2004, prices of US homes
had risen on paper by $7 trillion to a total of $15 trillion, the
highest in US history. The problem is so obviously dangerous, that
Greenspan recently was forced to deny existence of any real estate
„bubble,“ much as he denied a dot.com stock bubble in 2000.
But
that is exactly what he has created with his low interest rates.
The dot.com bubble has been transformed into a larger and more
threatening real estate bubble. Families have been convinced to
invest in a home as an alternative to buying stocks for their
pension years.
The rise in home prices has been driven by cheap
interest rates and banks rushing to lend with abandon. Because two
semi-government agencies, the Federal National Mortgage
Association, known as FannieMae, and the Government National
Mortgage Association, or GinnieMae buy up the bank‘s mortgage
contracts, taking the risk from the local banks, so the local
lending bank has less pressure to guarantee that he lends to
low-risk credit-worthy families likely to repay the loan.
The US Congress has passed new laws making it even
easier for families to buy homes with no penny of their own money
required initially as „down payment.“ This has meant a huge rise in
mortgage loans to economically marginal or risky families. The
number of such risky or „sub-prime“ mortgage loans has risen by 70%
this year alone, and now makes up 18% of all US mortgages. Many of
these risky mortgages are made under „adjustable rate mortgages“.
Today adjustable rates are low, just above 4%. Because of this some
35% of all new mortgages are adjustable today.
So long as rates stay low, the roulette wheel of debt
rolls on. The problem begins when interest rates rise and families,
lured into buying a home with variable interest rate payments,
suddenly find their monthly cost of paying the mortgage has
exploded as interest rates rise. At that point, US banks will face
a serious bad loan problem, far worse than that of 1990-92 when
several of the largest US banks were on the brink of failure. US
rates began to rise significantly in May, and the Fed was forced to
raise its official rate on June 30 for the first time in four
years. Many banks have loans written in adjustable mortgage rates.
As US interest rates continue to rise over the next twelve months
or so, that will trigger a wave of mortgage defaults. Some industry
experts fear a „bloodbath“ in 2005.
The American family is highly indebted, not just for
their home. The Federal Reserve data show a total US debt level now
above $35 trillions, or some $ 450,000 for a typical family of
four. Average consumer debt for credit cards, autos and such is at
record highs. Carmakers continue to offer car loans, with loans for
up to six or even seven years. Many Americans owe more on their car
than it is worth. The debt grows. As long as Fed rates are at 43
year lows, the debt is manageable. When US rates rise, it becomes
unmanageable for many. The rise has begun. There are two ways rates
are likely to rise from here.
First, the Fed itself has been forced to act, raising
its Fed funds rate the first time since four years, to 1.25% from
1% on June 30 . It had no choice. Greenspan has claimed for months
that the US recovery was „strong“ and that rates would return to
„normal“ soon. It was a calculated bluff. Had he not acted as US
jobs data convinced investors recovery might be real, he faced a
major crisis of confidence in the dollar. The Bush Administration
reportedly manipulated employment statistics to show better job
growth for the election.
Ever since raising rates, Greenspan has calmed nervous
markets by stating that future rises will be ever so gradual. In
other words: don‘t worry, speculators. But if he is to keep the
confidence of the large bond markets, he must convince them that he
is still vigilant against inflation. That is tough when prices for
everything from copper to oil to lumber to soybeans and scrap steel
are rising from 50% to 110% over recent months. His only
anti-inflation tool is higher interest rates, or promise of same.
The longer he fails to raise rates as prices rise, the greater the
risk of a dollar crisis, as foreign investors fear the worst,
namely that the US economy is in far worse shape than officials
admit. The Fed is in a trap.
Yet higher interest rates threaten to explode the
trillion dollar home mortgage debt bubble, where home values are
estimated to be at least 20% overvalued nationally, or $3
trillion.
When private bond investors such as major pension funds and banks
lose confidence in Greenspan‘s inflation commitment, the only other
source of support for low interest rates would be the willingness
of Japan and China above all, to pour billions more of their
dollars into buying US bonds.
Keeping the Bush Goverment afloat
The largest buyers of US government debt have been the central
banks of the Asia-Pacific. The central banks of Japan and China
alone hold more than $1 trillion of US Treasury bonds as foreign
currency reserves. Worldwide foreign central banks hold some $1.3
trillion of US government debt. If private debt is added, the
United States is the world‘s largest debtor, with some $3.7 in net
foreign debt, as of the start of this year, likely well over $4
trillions by now. In 1980 when Ronald Reagan was elected the US was
the world‘s creditor with a plus of $1 trillion.
Nations depending on the large US export market,
recycle their trade surplus dollars back into buying US Treasury
debt, to keep their currency fixed to the dollar. Because Japan and
China and others continue to buy record sums of US debt, paying
with their hard-earned trade dollars, US interest rates can remain
far lower than otherwise. Were foreign buying of US bonds to
reverse or even slow, the US Treasury would have to offer higher
interest rates to lure investors to buy the debt. That would make
interest rates on homes more expensive very fast. Millions of
homeowners would face default. Prices would collapse in many
regions, leading to higher unemployment.
This will not be like the dot.com crash, which was a
deliberate crash caused by the Fed raising rates to deflate that
bubble. In 2000 interest rates were 6.5% and the Fed had room to
lower to 1% and create the housing bubble alternative for money to
keep the economy afloat on a sea of debt. This time, rates are at
historic lows, debt at historic highs, dependency on continued
foreign capital inflows is unprecedented.
Speculation has become global as never before. The
cheap credit in the dollar world has led to cheaper credit
worldwide. The economies of Brazil, Mexico and even Argentina
benefit from banks and speculators like George Soros who borrow at
the super low US or Japanese interest rates to invest in bonds in
high interest rate lands like Brazil or Turkey or Argentina. These
so-called emerging markets have been booming in the past year on
Greenspan‘s promise to keep US rates so low. That now is beginning
to look very risky. As well, Bush Administration talk of possible
terror attacks around election-time, is making many major investors
fear risking investing in US stocks or bonds. They are instead
beginning to cash in their recent profits from the Greenspan stock
boom of 2003-04, and holding it in safe cash.
That is a major reason the US stock and other markets
have been in steady fall in recent weeks. The US debt bubble
depends on maintaining the myth of a US recovery to lure foreign
capital to invest, helping keep the dollar from collapse. Should
foreign pension funds of the central banks of China and Japan be
convinced the US recovery is in danger, there could be a major
shift of funds out of dollars.
Yet China and Japan, fearing the dollar crisis, have
recently begun heavy buying of commodities, from oil to iron ore to
copper to gold. They are using their trade dollars to buy real
commodities, instead of US Treasury debt, which is mere paper.
Chinese panic buying of oil for stockpiling reserves is a major
factor pushing oil prices again to record levels of $42 barrels
despite two major OPEC quota rises. Steel prices have exploded due
to China demand.
When Bush became President he inherited a Federal
budget in surplus. Since then he has created the largest deficits
in US history, near $500 in 2004 and estimated to reach $600
billion in 2005. In 1971, when Nixon took the dollar off the gold
standard, the Federal budget deficit was an „alarming“ $23
billions.
These huge deficits are financed by the US Treasury
selling government bonds or similar paper to investors. Since 2001,
the central banks of Asia, led by Japan and China, have bought huge
sums, some 43% of all US Government debt. They in effect recycled
their trade dollars gained from exporting cars, electronics,
textiles and other goods to the US consumer. In the 12 month period
to this April, the Bank of Japan spent a record $200 billions to
buy US dollar bonds or, in effect, to finance the cost of Bush‘s
Iraq war. The Banks of China, South Korea and Taiwan bought almost
as much dollar bonds.
They did this for clear reasons: Their currencies are
linked to the dollar, and were the dollar to fall against the Yen
or the Yuan, Asian exports would suffer a decline, endangering
their economic growth and leading to explosive rises in
unemployment across Asia. By recycling their trade dollar surplus
into buying US Treasury debt, they argue they are looking after
their own needs. A dollar crisis in early 2005 could signal the
next global crisis. The whole world is hostage to the misconceived
economic policies of a dollar standard out of control.
http://www.studien-von-zeitfragen.net/Zeitfragen/
It's time to take seriously a
US-led global recession: Lau Nai-keung
2005-10-06
I think it is time that we should take a serious
look at the possibility that the US is going to take us down
towards a worldwide recession in one or two year's
time...
http://www.chinadaily.com.cn/english/doc/2005-10/06/content_482807.htm
Others could already see the coming collapse way back in
2004-2005, why the talents at Temasek and GIC couldn't?
Blinded by greed.
