June 14, 2024

I have a prediction. The economic situation that we are currently going through will ultimately end up to be the worst US financial crisis of my lifetime. We are getting two knockout punches in a row. It’s hitting the biggest asset of consumers – housing. And it’s hitting the biggest private sector of the US – financial institutions. And I can’t imagine what can happen that will be worse than this.

This crisis is also affecting practically everyone in US society. High energy, food, and commodity prices. Increase in defaults of all loan types. Tightening of loans. Drop in stock prices. Drop in dollar value.

We might technically not be in a recession where we have 2 consecutive quarters of negative growth, but the economy sure isn’t looking pretty. People are still talking about if we will be going into recession. To me, there is no debate, we’re already in a recession. Now what I’m wondering is how long and how severe it will become.

One possibility is that it could be a long drawn out period like in Japan. However, our massive debt and negative savings will most likely make our crisis more pronounced than in Japan.

We are seeing a simultaneous injection and disappearance of money from the economy. The FED is injecting billions, but at the same time, companies are losing billions. But one difference is that the injections are only temporary injections. As far as I know, there has not been any permanent injections of money into the system yet. I think once we start seeing that, inflation will accelerate.

People are relying too much on the FED to solve the problem. Especially when it was the policies of the FED in the first place that contributed to the problems. Giving more beer to a drunk going into withdrawal is not the solution.

There is no single group that is the cause of the problems. But many parties are guilty – mortgage companies, people overextending themselves, rating agencies, investors, FED. To me, the root problem is greed. Those who are greedy will eventually get burned.

I’m glad that SWF are bailing out companies instead of the US government (taxpayers). However, I’m not so glad that ownership of US companies are being handed over to foreign governments.

Unemployment will naturally go up as companies are squeezed in profitability with higher costs and lower consumer purchasing power. And when we start having high unemployment, then that will be the final straw on the camel’s back. If we start seeing massive layoffs, then chicken little will be able to justify crying the sky is falling.

One last prediction, I think that Bernanke will be at the helm of the next depression.