Wednesday, October 26, 2005

Oncoming Economic Collapse?

It never ceases to amaze me how many armchair experts will prattle away at how healthy the economy is, without taking a look at the bigger picture. Massive foreign trade deficits seem to be the signature of Western economies, yet this is somehow taken as a "good thing". Take Australia for instance. From ABC Radio:
STEPHEN LONG: The mines are working round the clock. The terms of trade are the best in decades. Yet Australian is in hock to the world, big time. Our net foreign liabilities now equal to two-thirds of the economy's yearly output. [...]

ALEX MILLMOW: Fifty per cent of our mining sector's now overseas owned and it would have been higher if Costello hadn't rejected the Woodside Petroleum takeover.

STEPHEN LONG: So far servicing the foreign debt hasn't proved a problem, but economists are warning that could change if sentiment shifts and those foreign investors take their money elsewhere.
For some reason, most people in Australia don't seem worried about this. A few don't care, and the most just see a Federal budget surplus and postive GDP growth as being the be all and end all. Never mind our decimated manufacturing sector:
"Clearly, something different is going on in manufacturing," Mr Pensabene said. "In the 12 months to August, the overall economy added 352,000 jobs. In the same period, manufacturing lost 46,800 jobs."
"So what?" the blind optimists cry, "Construction and housing are bigger than ever". So where exactly is the money coming from that's fuelling the construction/housing boom? The Reserve Bank of Australia says:
The growth in housing debt is, however, also partly explained by an increase in the number of households with housing debt. Although comprehensive time-series data are not available, the number of households with owner-occupier housing debt appears to have increased by over 40 per cent since 1996, considerably faster than growth in the total number of households. With the share of households that are owner-occupiers remaining relatively stable over this period, the result has been an increase in the share of owner-occupier households with housing debt. [...]

The upward trend in the share of owner-occupier households with housing debt reflects a number of factors. One is that households now have larger debts relative to their income than was the case previously, and therefore the average time taken to pay off the debt is likely to have increased. This is particularly the case where households draw down home-equity loans, or refinance and take on a larger loan when the value of their property rises. A second reason is that there has been an increase in the share of households owning investment properties, with investors – who are typically (but not universally) owner-occupiers – often having some debt secured on their primary residence.
Ie - Australians are borrowing bigger loans on their existing houses so they can buy more houses, hoping to make a killing in the real-estate market. This surge in demand artificially drives up the prices far beyond what the houses are actually worth. And the RBA policy of low interest rates only fuels demand, as the credit to purchase these houses with is easily available. So where are the major banks getting their money from?

They aren't getting it from anyone - they create it. Yes, you heard me correctly. Banks in Australia have a license from the government to "print money". Of course, that money is nothing but numbers in a computer system - the issuing of coins and paper notes is a different matter - but the net effect on the economy is the same. Essentially, banks are giving people an illusory mandate to buy houses (based on their 'future income' as specified by risk-managed employment profiling). So any so-called "economic growth" based on housing construction is likely just hot air from a bunch of bankers!

How does this relate to any economic collapse though? Well, a similar system is in place in the USA, only it's waaaay bigger. No real "wealth" (ie. valuable stuff) is being created, only "money" (the medium of exchange), thus it's all just a big fat bunch of lies. Yet the system has worked so far because real economic principles (basic stuff like supply and demand etc) are extrapolated out into a gigantic system of lies, which people believe. However, the real principles can only be stretched so far, and when enough cracks appear in the illusion, more people suddenly start acting in accordance with reality. This then causes the entire system to collapse into chaos, with a sustainable system aggressively reasserting itself to the detriment of people's lives and living standards.

Are such cracks appearing in the US economy? I think so. Recently a major US real estate investor began methodically selling off his portfolio. Alan Greenspan is retiring after umpteen years as Federal Reserve chairman, and Bush has just made his new appointment to the position. Plenty of other indicators are summarised quite well IMO by "Fractal economist" Gary Lammert (quoted from
The stress point of credit deceleration and contraction in a house of cards financial system dependent on continuous credit expansion has resulted in the tremors and shaking of the US composite equity valuation since 3 August 2005. These rumblings have been the warning quakes of the deluge soon to come.

In several months, the probable valuation decline will, retrospectively, be seen to fit perfectly well with the emanating economic data that is now occurring and is so very apparent to those with eyes wide open: the bankruptcy of venerable smokestack and airline industries; the inflationary energy cost pressure placed on America's new bell weather distribution industry, Walmart; the outsourcing pressure on America's higher paying manufacturing and technological jobs; the saturation and overvaluation and higher property taxes associated with the Real Estate South Sea Tulip industry; the narrowing of long and short term interest rate spreads decreasing lenders' profitability; the recent bolus of bankruptcy filings; the massive current account deficits whose continuation is wholly dependent on the cash strapped American consumer and his now cresting housing valuation debit card; the sharply falling consumer sentiment and general confidence in the future; the empty sales rooms of American automobile distributors; the mass of hopelessly insolvent corporate and city pension plans; the overly generous entitlement programs whose sustainability are squarely based on continued consumer borrowing and spending and a lower paying service economy to maintain future GDP growth; the recent ongoing derivative dealer debacle which is but the tip of the iceberg, and the historically low cash reserves in mutual funds. How could anyone miss the ongoing macroeconomic data occurring in our ENRON nation?
If the US economy goes, so will Australia's (and probably most of the globe's) because it is based in the same flawed system of fantasy that believes creating wealth out of thin air is both possible, and commendable policy!

Myself, I'll be looking to buy up a bit of gold. The next few months promise to be very interesting indeed.


At 7:29 pm, Anonymous kaossproject said...

Gold is a good thing to invest in at the moment, just dont hold onto it too long - watch closely.

I like your research and writing. I come across many US based writings and observations and not enough OZ ones. You sum it up real well and make it easier to see how it effects us too.

I find it funny how many are still living in a fantasy land and dont want to or cant see the forest for the trees....but hey, thats what the authority wants isnt it??? hehehe.

At 2:13 pm, Blogger Mr Whippy said...

Thanks for the positive feedback! Yeah, gold is most likely only a temporary thing, because the government can just invoke laws making it illegal for individual citizens to buy/sell or hold it (like in WWII). We're still a little bit away from this yet (I hope), but as you say, watching the signs and acting accordingly is all we can do.


At 12:14 pm, Blogger Torgan said...

did you know that you can get around the compulsory acquisition of gold by having gold in the 'antique, rare, or religeous' category. take a look at the Anglo Far East Company website,where you can get it, and also watch their DVD on Millenium Money- absolutely brilliant.

At 2:54 pm, Anonymous Stuart Dobson said...

I bet you'll be happy now if you had bought that gold back when this was posted...


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