Plunged into Economic Darkness: The Financial Blood Bath of 2008/2009
By Ryan Healy | June 20, 2008
The U.S. economy is growing weaker by the month. Here are four major factors that will cause the U.S. economy in particular, and possibly the world economy in general, to collapse during the next 6-18 months.
Factor #1: Foreclosures
The housing market continues to take a beating. All you have to do is search for “home sales” on Google News and you’ll see dozens of dismal headlines. The rate of foreclosures is increasing every single month.
And the worst is yet to come. Here’s why:
Starting in April 2009 we could see a major acceleration in ARM recasts. Basically, when an Adjustable Rate Mortgage (ARM) recasts, the interest rate ratchets upward. Since most Americans are tapped out as it is, even a small increase in mortgage payment can put them on the brink of foreclosure.
And that’s exactly what experts are forecasting. According to an excellent BusinessWeek article “The Next Real Estate Crisis”:
With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset.
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According to Credit Suisse, monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010.
The article goes on to quote William Purdy, a lawyer at Simmons & Purdy in Soquel, Calif., a firm that specializes in home refinance issues. Purdy says, “This year is going to be a blood bath.”
Proof: By some estimates, one out of every four homes for sale will be bank-owned by the end of 2008.
This will put an incredible amount of downward pressure on home prices. Home owners who are resistant to lowering their asking prices will be forced to compromise as banks slash prices to unload foreclosed properties. Not a pretty picture.
If I were the late ’80s action hero Crocodile Dundee, I might compare what’s already happened in the housing market to what is expected to happen like this: “That ain’t a crisis… this is a crisis.”
Factor #2: Inflation
Inflation is the systematic destruction of the value of a dollar.
Example: If there are 100 dollars in circulation and you add 100 additional dollars, the value of each dollar in circulation has effectively been cut in half.
This is happening at a rate never before seen in American history.
The trouble with inflation is that the prices of goods always go up before wages, which reduces your purchasing power.
Furthermore, additional dollars injected into the economy benefit those who receive those dollars first–before they’ve had enough time to actually effect the economy.
So average Americans like you and me feel the pain of inflation acutely.
Every week there is news of record prices for crops, oil, and other commodities. Some of the high-price issues we’re facing are caused by shortages. But they are compounded by inflation.
Ron Paul writes in The Revolution:
Any government that inflates the money supply runs the risk of hyperinflation, which occurs when the money supply is increased so much as to render the currency completely worthless. It can occur very quickly and suddenly, and has a very rapid snowballing effect. (p. 150)
What happens when a fiat currency is destroyed by hyperinflation? Take a look at Germany in 1923. Paul writes on page 151:
The result was the complete ruin of the German mark, which German children began gluing together to make kites and German adults burned in order to keep warm.
If you’re interested in learning more about inflation, I recommend reading this brief article: “Silver, Gold, and the IRS.”
Factor #3: War with Iran
The question is not if, but when.
Israel wants to bomb Iran… and soon. Their biggest fear is if Iran develops an atomic bomb. And so they’re intent on doing whatever they can to stop Iran before that happens.
The current political climate in Washington, D.C., is favorable to bombing Iran. Of course, Israel would love it if the U.S. would bomb Iran on their behalf. But their second choice would be to bomb Iran themselves with the approval of the U.S.
And so Israel is already planning to bomb Iran before President Bush leaves office. That is the hard deadline they’re facing. If they wait until after the election, the political climate could change so that the U.S. would no longer support an unprovoked attack on Iran.
Here is an excellent article that explains Israel’s position: “‘Mission Doable’: Israeli Ministers Mull Plans for Military Strike Against Iran.”
Of course, I’m firmly against any military action against Iran. But if the U.S. decides to become involved in any such military action, it will be funded by taxpayer dollars and–what else?–inflation! They’ll simply print the money they need to pay for the war.
The Global Europe Anticipation Bulletin (GEAB) concludes, “Iran: 70 percent probability of an attack by October 2008 confirmed.”
Factor #4: Price of Oil
Last but not least, the price of oil is the fourth major factor impacting the American economy.
Where I live, gas has cracked the $4 a gallon mark. It has dropped a bit since then, but I expect we’ll be seeing $4 gas for a while.
This impacts Americans on many levels. It reduces the total disposable income that can be produced by a job that requires you to drive to work. It cuts into the profits generated by the sale of physical products (both for manufacturers and retailers). It hurts airlines and truck drivers directly and tourism indirectly (because of the high cost of travel).
I just noticed an article today that reports a massive plummet in RV sales. Winnebago, an RV manufacturer, reported a 73% drop in 3rd quarter profits from a year ago.
I imagine this is not only a result of tightening credit, but also of high gas prices. Many Americans simply can’t afford to fuel an RV.
First, one industry goes; then another and another and another. It’s the domino effect. And since so many industries are dependent on cheap energy to survive, I expect businesses will continue to be negatively impacted.
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These are the four major factors influencing the U.S. economy. Each one has significant implications for how we should live and how we should plan.
How long before the economic lights turn out? And what do we do until then? Perhaps I’ll write an article with some recommendations in the near future.
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Topics: Economics, Foreclosures, Mortgages |
One Response to “Plunged into Economic Darkness: The Financial Blood Bath of 2008/2009”
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July 24th, 2008 at 1:14 pm
18.6 Million Empty Homes
What happens when debt levels spin out of control?
Bankruptcy, of course.
And foreclosure.
Banks have seized so many properties that 18.6 million houses, apartments, and condominiums now stand empty.
In case you didn’t know, that’s an all-t…