So here we are, March 2005; in debt up to our nostrils, our government owes everyone, and its currency, the dollar, is falling from grace. How could all of this happen? Well, it didn’t happen suddenly, that’s for sure. Maybe it’s like a bus with failing brakes. The brakes still work, although maybe there is a scraping sound when the driver applies them. Eventually, there will be more pedal push needed to stop, and maybe the pedal goes further and further to the floor. So What? It still stops the bus, doesn’t it? Why worry? The passengers are totally unaware. As the brakes fail more and more, the driver must be extra careful not to drive too close to the car in front, or he may crash into it. Maybe one day, they will totally fail, and it’s all over.
The American financial situation can be compared to brakes going bad, with the government as the bus owner and driver, and the citizenry being the helpless populace who are riding; unaware perhaps of the bad brakes, and trusting the government driver-owner of the bus. He knows it’s dangerous, but he’s broke and can’t afford to fix them. He keeps the situation a secret from his passengers, because he doesn’t want them to panic and abandon his bus, which can easily be the dollar. The dollar is bad brakes. Trusting the dollar, as hundreds of millions do, is riding a bus with bad brakes. The driver doesn’t tell you what’s wrong, because he needs the fares you pay, which can easily be foreign and domestic loaners to him. He needs a constant infusion of dollars to stay afloat, even though he knows the brakes are teetering on total failure, and a crash. If he can just keep them working for a bit longer, he knows it’ll all work out OK, and he can get them fixed. He is continually going more and more in debt, and raises the interest he pays on his loans, to attract more loans. The bus line can’t ever get ahead it seems, and the debts keep piling on, with nothing left to fix the brakes.
Would you ride in such a bus? Would you trust a transportation company with your life, when they are hopelessly in debt, can’t even come close to breaking even, and whose equipment (currency) is in such bad repair, that a crash is almost inevitable? Would you find another way to travel? If the bus equipment became a laughing stock, would you ride the line? The comparison is not silly, but apt. Look at our rickety bus. Our jobs, both white and blue collar, have vanished overseas to lower cost labor. We owe more than any nation on earth. We make little of what we consume. Our dollar is going down in value and respect, because there are so damned many of them everywhere. Our foreign investors are shrinking away from the dollar, as if it were spoiled food at a buffet. A recent letter from a lumber yard owner to Jim Sinclair ( Jim Sinclair’s Mine Set, a wonderful letter to read!) said, “We are seeing double digit percentage increases in items almost across the board. Everything from sheet rock, joint compound, and lumber, ranging down to household items like light bulbs and cleaning supplies.” The letter goes on in the same tone, and finally asks where the government gets its cost of living index from, as it is not even close to what he has experienced in his business.
The bus driver-owner tells his passengers that all is well, and that the brakes are OK, in spite of the screeching. In other words, the government tells everyone all is OK, the inflation rate is microscopic, business is excellent, the GDP is way up, and the dollar is sound. Meanwhile more jobs go overseas, but the GDP is OK. How can this be? Aside from the fact than the war and all government spending is part of the GDP, it really can’t, but there have always been a couple of things which can postpone a crash. The two most recent are autos and houses. Remember when there was no “zero percent financing?” It’s been quite some time, but when people buy cars, that helps the GDP, keeps people working, and keeps dollars circulating. The zero percent car finance really spurred the auto industry on to new highs, and gave a transfusion to the economy. Well, that is over now, and notice that the thousands of clever auto ads on the boob tube, never mention the price. Only the cost per month to lease. A final stab at solvency. In other words, these cars are $40,000, but you can lease one for $250 a month with a final payment of $25,000, or similar. A last gasp.
Last month, General Motors sold its profitable locomotive division (EMD or Electro Motive Division), which had produced over 58,000 high quality diesel-electric locomotives over the years. It claimed it was sold, ’so it could concentrate on its automotive division,’ which is a classic case of horse puckey. They need the cash, because they are tens of millions behind in their retirement fund contributions, and sales are way down. They have eliminated Oldsmobile, are eliminating a couple of other lines and shutting down a couple of plants.. Has Cadillac made a pretty car in the last 50 years? I don’t think so. GM has huge problems, so they sold their seed corn. The auto industry has kept the faltering economy slightly afloat for a few years, but its mostly over. Believe me. Talk about bad management. EMD only had one other locomotive competitor, and that was GE. EMD simply sold the profit making division to bail out failing autos, which have huge competition. Stupid.
Thus leaves real estate. New housing starts are up every month, as the released “official government figures” indicate. You know, the same figures which say the brakes are fine, and the economy is excellent. Maybe they are, because that’s the last prop for the economy. Housing is so over-priced, and mortgages are so easy to obtain, that the figure is probably true. In California and other places, families with moderate incomes are buying homes they cannot afford, and having the entire family work to meet the payments, because they believe that since prices are going up so fast, they can sell at a profit in a year or so, and be OK. I know a fellow who builds houses and lives in one for two years and moves to another, selling the first one at a huge profit and paying no taxes on the profit because he lived in it. Smart? You bet.
The problem with this last gasp scenario, is that while real estate prices are going up so fast and so high, wages are not. Wages and employment, are not going up nearly as fast as are prices of everything, and especially real estate. What to do? Easy! Re-finance at low interest, and combine the credit card debt into the re-finance also. It buys a bit more time, and keeps the economy bus from crashing. Debts increase, but they can be combined into a second mortgage to relieve the pain. No one will ever own anything, be it home or car, because the payments go on forever. It buys a bit more time. Time, when Admiral Greenspan, head of the sinking ship dollar-America can come up with another solution or at least postponement.
You see how it has all come about? Over the decades, politicians, anxious for re-election and approval, have allowed more and more to feed at the public trough. Politicians allowed the economy to be removed from their hands, and placed into the hands of the privately owned Federal Reserve, which allowed them to spend and spend as much as they pleased, without any seeming penalties. So they did. They legislated endless “plans” and “programs,” all of which allowed virtually everyone to get something for nothing. All the while, the taxes increased, the dollar supply increased, and the debts increased. Eventually, the taxes became so high, that American workers were no longer even slightly competitive. Wages had to go up because the dollar became so weak, that in order to stay even, wages had to go up constantly. The ignorant bus riders thought that all was well. The public thought they had achieved nirvana with the huge wage increases, not realizing that they were in reality regressing in life styles, back to the 1960’s. The squeeze became visible, when the jobs began disappearing, and now, in March, 2005, more and more jobs are leaving, prices are going up very quickly, and bankruptcies are at all time highs. The bankruptcies are from people doing everything they can to stay afloat and failing. How long can the real estate re-financing to pay off credit cards and give a bit of relief last? I don’t know, but realize this. Interest must go up to attract suckers into “investing” in America’s debt, and when interest goes up, it merely spawns more bankruptcies in America. Populace ruined if you raise interest, and no one will buy the debt if you don’t. A true “Catch 22” situation, with no answer, as far as I can see, other than eventual crash. I promise I’ll finish this next week! Protect yourself.