A Global Bankruptcy

"The Illusion Becomes Reality"

-- Gordon Gekko, an investor from the film Wall Street, 1987

Let me start by referencing this article, an interview with Egon Von Greyerz. Von Greyerz is an investment advisor who's banking on gold and hyperinflation: http://bit.ly/117vtgL

I prescribe to the fact that this world is bankrupt and central banks are creating trillions of dollars to create an illusion that we're not in global bankruptcy. Note Gordon Gekko's quote above that the illusion becomes reality. Indeed it's true that we'll determine value even on a painting with one stroke of yellow paint and one stroke of brown paint on it. Wow! Get a few art critics to like it and it becomes valuable. So, we live in this illusion that our money has value to it because it buys food, gas and houses--all rising in price. And, of course, stocks--rising in costs even though consumer spending is flat. The illusion is based on the fact that the Federal Reserve can print trillions of dollars in currency. We don't see it, but the big banks, investment banks, recipients of investor cash and shareholders can see it in their shareholdings and bank accounts.

What do we see? A financial media pushing economic recovery, albeit a slow one. Blogs that are undermining the national media with a logical streetmap and directions toward economic reality.

A slow housing recovery with ridiculously low mortgage rates. They've risen to 4% and that's the end of the refinance wave. If they hit 6%--a record low 15 years ago--will anyone purchase a home? The illusion of the housing recovery lies in the fact that banks are holding onto foreclosed properties. Remember, banks on no longer have a mark-to-market accounting system. They're on a mark-to-(make up a) model accounting system. That means that trained accountants will make up what they think the value is at this time based on future value and whatever other creative methods they use. The bottom line is that home values are rising but only because investors are buying properties and causing low inventory in the housing market. There's no home construction, in fact it fell last month. There is low supply, higher demand with mortgage rates at 4% and increasing and it gives the banks reason for hope that the housing values will be come back on those valueless loans they still have.

However, banks are going to hold on to properties from investors and anyone else until the price is right. Investors plan to turn homes into rentals and wait for values to increase. The only problem is that some investors are already dropping out of the market. http://cbsn.ws/XXuFL3. The next question will be the time factor for those home prices to rise before they drop.

As mortgage rates increase and (investor) buying slows down, we'll likely see one bubble start to pop. Heidi Moore, editor of The Guardian explains it best in this article/video from Yahoo! Finance. http://yhoo.it/12pz4yh. It's not about negativity, positivity, doom or gloom. It's about what makes logical sense. If everyone won the lottery and was ready to spend like it's 2006, I'd disagree with Heidi Moore. But consumer spending fell in April for the first time in nearly a year. http://nyti.ms/17bJQJt Why are people going to spend thousands of dollars to buy a home? Because mortgage rates are at all time lows? Possibly--yes--for awhile--but how many homebuyers are there if no jobs are available?

We'll find out about May's unemployment numbers this Friday, June 7, but even the President said that the numbers can fluctuate. When people stop looking for work, the unemployment percentages go down. The unemployed are not counted but they're certainly not spending money either. Unemployment for April was at 7.5%, but the civilian labor force participation rate was 63.3 percent in April, down 0.3% from the prior month or relatively unchanged. It's a fact that 4.4 million people have not had work for six months or longer. How many of those people have stopped looking for work? With 835,000 discouraged workers not currently looking for work because they believe no jobs are available for them and the remaining 1.5 million persons marginally attached to the labor force in April who had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities, it means more than 2.3 million people are not included in the unemployment numbers. So, add 2.3 million to the unemployment numbers or people who aren't going to be spending alot of money on items other than necessities--gas, food, clothing and auto repairs. The U-6 number--people without work seeking full-time employment and 'marginally attached workers and those working part-time for economic reasons'--is at 13.9%, an increase from the previous month. Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And the "marginally attached workers" include those who have gotten discouraged and stopped looking, but still want to work.

Tack on student loan payments and the number of people spending significant sums of their income becomes even fewer than before. And, those numbers also don't represent people hit by the budget sequester--some have been hit by layoffs, some lose money in furloughs and some agencies had Friday, May 24th off with no pay, including the Department of Housing and Urban Development, the Internal Revenue Service, the Environmental Protection Agency and the White House Office of Management and Budget. http://bit.ly/1324C8n Those are facts--not illusion. Should we really expect consumer spending to rise?     

And yet, the stock market is another phenomena. Quantitative Easing, three times now, has moved the market up to a record high 15,000+ on the Dow. When the Fed prints money or looks like they'll continue to print money and purchase bonds and treasuries, investors get excited and the stock market rises. It means Wall Street investors, bankers and publicly traded companies start to make money. The only problem is that the capital is an illusion and none of that illusion trickles down to the workers. Executives get most of this illusion and also have most of the stock options in the companies. The mid-to-low-level workers are just making ends meet, hoping to keep their jobs because no other jobs are available. They may even become victims to layoffs. Layoffs, by the way, don't necessarily translate into large severance packages for these workers.

It's a bit of irony that Japanese brand Panasonic will lay off 5,000 workers from its auto/industrial plants: http://reut.rs/19nIlqN. It was Japan that had a housing crisis and, like the U.S. years later, printed money to prevent an economic collapse. It led to a "lost decade" of economic growth. The U.S. is currently half-way there in its lost decade of economic growth. And, look at Japan today. Granted, they may be coming out of another of their many recessions, but their economy remains unstable--and it's the third largest economy after the U.S. and China. http://nyti.ms/11A6LFS. We're not Japan, granted, but we are going through a time of manipulated rules and interest rates to try and prop up the banking system only to see extraordinarily slow economic growth for five years, still relatively high unemployment and sluggish consumer spending.

But then there's Europe. Portugal, Ireland, Greece, Italy and Spain facing staggering unemployment figures are borrowering money, cutting budgets and still will likely face ongoing economic crises until they denounce the Euro. The Associated Press reported in the economically flailing newspaper, The Washington Post, that "the Organization for Economic Cooperation and Development said that protracted economic weakness in Europe 'could evolve into stagnation with negative implications for the global economy.'"

I would say the U.K., France and Germany will be three countries left standing, but even they face economic traumas. And yet, Fed Chair Ben Bernanke keeps printing the money and will likely continue because U.S. manufacturing showed weakness in May--a four-year low. http://reut.rs/19CnnVa. That's no illusion. That's reality. And yet, because of this statistic, the stock market goes up because it adds hope that the Fed will continue printing money and keep interest rates at all-time lows. That's a reality. That's Wall Street. That's investor mentality in today's world. And, they're the moneymakers--creators of debt--who cheer on recovery and attempt to spark the weak U.S. economic engine into a consumer spending blaze of glory. Good for them.

The only problem with the Fed's illusionary tools--manipulated accounting rules, printing money for investment bankers, low interest rates to push higher debt--is that they can't prop up unemployment, nor can they improve recent consumer spending and manufacturing numbers. Those numbers are the true engine to the U.S. economy. The tools are only good enough to sew together the Emperor's New Clothes and keep the lights on at J.C. Penney's. The question is--for how long?

We can only live in illusion for so long before somebody realizes there's just this old man behind a curtain trying to manipulate something awesome and powerful for the few wealthy and powerful people among us. In reality, there is no money of any value and someday that reality will come to fruition. Be assured, though, that when it does, the U.S. will truly show that it is a great country of people--the masses will band together in self-reliance--in spite of a Federal Government polarized by greed, selfishness and foolish politics. In spite of false hopes, an illusory sense of wealth and inherent bankruptcy, the U.S. will continue to survive.