Monday, August 25, 2008

Recovery 2008?

Hats off to Dr. Housing Bubble. A great read on why the US economy cannot bounce quickly back.

The Dr. gives us ten reasons for a languishing (optimistic view) economy through the remainder of this year.

Reason #10 - Federal Reserve: A Paper Tiger

Reason #9 - Energy Prices: Still at Record Highs

Reason #8 - Education Getting More Expensive

Reason #7 - Elections and Political Calculus

Reason #6 - Lenders are Stuck

Reason #5 - Employment Still Faltering

Reason#4 - People Don’t Believe the 10% Solution

Reason #3 - Consumer Psychology

Reason #2 - Too Much Debt

Reason #1 - Housing is Nowhere Near a Bottom

I would venture to add two more.

Reason #11 - Asset Redistribution; The destructive quality of false value in the trillions of dollars in derivatives will pave the way for foriegn central banks and sovereign funds to buy long treasured US institutions. Anheuser Busch is a prime example. Because every US bank and most US corporations and equity funds are saddled with toxic derivatives, none could match InBev and its offer price. The profits these newly transferred entities represent will now go into foriegn bank accounts.

Reason #12 - FIRE Economy. The Dr. touches on the FIRE economy (Finance, Insurance and Real Estate), but it is the crux of our problems. The economic model the US has adopted over the past 40 years, that of trading good paying manufacturing jobs for cheaper imports is at its end. We no longer have enough good paying manufacturing jobs to keep that train going. For a short time, we were able to create new good paying jobs in the FIRE industries, but over the last two years, those industries have been laying off people at record rates.

The US had tried to establish itself as the banker for the world. Our currency was the defacto world currency. Our stock market was robust, financing was readily available, and emerging economies were just that; emerging.

Now oil is traded in Euros as much as in Dollars. Brazil, India, Russia and China have learned to trade around us. Many Central Banks are busy in their own countries bailing out those entities which bought derivatives based on US debt. Other than intellectual properties, the US has little of real value to sell the world. China, India and some others are showing a greater disregard to international patent rights, so our ability to sell intellectual properties will diminish over the coming years.

The FIRE economy has also given us record debt. Since the FIRE industries are shrinking, and we have little manufacturing to sell, the ability to manage that debt is increasingly becoming more difficult.

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