[Peace-discuss] Bush-Greenspan hiding looming economic collapse?

[ndahlhei at uiuc.edu]

This might be some of the worst stuff Bush and his oil gang 
have gotten themselves messed up with.  Economic 
mismanagement on a nearly global scale with a crash of the 
U.S. dollar as well as the housing bubble in the near future.

Check out this article from economist Michael Choudvossky's 
website www.globalresearch.ca for July 28, 2004

Is a USA Economic Collapse Due in 2005?
by F. William Engdahl

"The whole world is hostage to the misconceived economic 
policies of a dollar standard out of control."

 

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, signaling 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 Government 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 trillion 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 billion 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.