- For a picture of the US real estate crisis, imagine New
Orleans wrecked by Hurricane Katrina, and before the waters even begin
to recede, a second Katrina hits.
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- The 1,120,000 lost US retail jobs in 2008 are a signal
that the second stage of the real estate bust is about to hit the economy.
This time it will be commercial real estate -- shopping malls, strip malls,
warehouses, and office buildings. As businesses close and rents decline,
the ability to service the mortgages on the over-built commercial real
estate disappears.
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- The over-building was helped along by the irresponsibly
low interest rates, but the main impetus came from the slide of the US
saving rate to zero and the rise in household indebtedness. The shrinkage
of savings and the increase in debt raised consumer spending to 72 percent
of GDP. The proliferation of malls and the warehouses that service them
reflect the rise in consumer spending as a share of GDP.
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- Like the federal government, consumers spent more than
they earned and borrowed to cover the difference. Obviously, this could
not go on forever, and consumer debt has reached its limit.
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- Shopping malls are losing anchor stores, and large chains
are closing stores and even going out of business altogether. Developers
who borrowed to finance commercial ventures are in trouble as are the holders
of the mortgages, derivatives and other financial junk associated with
the loans.
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- The main source of the economic crisis is the infantile
belief of US policymakers that an economy could be based on debt expansion.
As offshoring moved jobs, incomes, and GDP out of the country, debt expanded
to take the place of the missing income. When the offshored goods and services
were brought back to be sold to Americans, the trade deficit rose, adding
another level of financing for an economy that consumes more than it produces.
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- The growth of debt has outpaced the growth of real output.
Yet, the solution offered by Obama's economic team is to expand debt further.
This is not surprising as Obama's economic team consists of the very people
who brought on the debt crisis. Now they are going to make it worse.
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- The unexamined question is: Who is going to finance the
next wave of debt?
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- The US budget deficit for fiscal year 2009 already appears
to be on a path to $2 trillion, and that is before Obama's stimulus program.
What we are looking at is a $3 trillion budget deficit if Obama's program
is enacted in time to impact the economy this year.
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- Foreign countries can finance a $500 billion US budget
deficit out of their trade surpluses with the US. But foreigners do not
have the funds to finance a US budget deficit in the trillions of dollars,
and they would not finance such a deficit even if they had the funds. Foreigners
are over-weighted in dollar holdings and prefer to lighten their holding
than to add to them. America's economic prospects are dim as are the dollar's
prospects as reserve currency. An annual budget deficit in the trillions
of dollars makes the dollar's prospects appear even dimmer.
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- The federal government's likely solution to the debt
problem will be to monetize the debt, that is, the government will finance
its deficit by printing money. Debt will be inflated away. But for those
Americans without jobs or whose incomes do not rise with inflation, life
will be cruel.
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- Life is already cruel for Americans living on retirement
savings. Not only has the stock market bust reduced their wealth by half,
but also their remaining assets are producing no income. Interest rates
are so low that debt instruments produce no income, and there are scant
capital gains in the stock market. Retirees are living by consuming their
capital.
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- America's economic policy of low interest rates and debt
expansion bodes ill for everyone living off their savings. Their future
prospects are even worse as high inflation will destroy the value of their
savings, especially if held in cash or debt instruments, including "safe"
US Treasuries.
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- There are more intelligent ways to try to escape from
the current crisis. However, the financial gangsters and their shills that
Obama has put in charge of economic policy are thinking only of their own
interests. What happens to the American people is not a concern.
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- A compassionate government would handle the crisis in
this way:
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- The trillions of dollars in credit default swaps (CDS)
should be declared null and void. These "swaps" are simply bets
that financial instruments and companies will fail, and the bulk of the
bets are made by people and institutions that do not hold the financial
instruments or shares in the companies. The ideology that financial markets
were self-regulating allowed illegal gambling free rein. There is no reason
under the sun for taxpayers to bail out gamblers.
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- The bailout money, instead of being given to favored
financial institutions to finance their acquisition of other institutions,
should be used to refinance the defaulting mortgages. This would slow,
if not stop, the growing inventory of foreclosed properties that is driving
down home prices.
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- The mark-to-market rule should be suspended until the
real values of the troubled properties and instruments can be determined.
Suspension of the rule would prevent the failure of sound institutions
and lessen the need for a bailout.
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- Interest rates have to be raised in order to encourage
saving and to provide incomes to retirees.
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- To preserve the dollar's status as reserve currency,
a credible policy of reducing both budget and trade deficits must be announced.
In the near term the budget deficit can be reduced by $500 billion by withdrawing
from Iraq and Afghanistan and by cutting a bloated defense budget that
represents the now unattainable goal of US world hegemony.
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- The trade deficit can be significantly reduced by bringing
offshored jobs back to America. One way to do this is to tax corporations
according to the value added to their output that occurs in the US. Corporations
that produce their products for US markets abroad would have high tax rates;
those that produce domestically would have low
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