VHeadline commentarist and money market expert Fred Cederholm writes: I've been thinking about 2008, the great CONs, blowing bubbles, the illusion(s) of wealth, three more zeros, and politics. Calendar 2008 is just about over. I'm not sorry to see it go. Many of the underlying economic/financial negatives and the spun non-truth(ful) positives I've been warning about unraveled to where they can no longer be ignored -- or denied.
A string of crises forced the hands of those in charge both domestically and globally. It is now obvious that we were fed a bill of goods and a toxic stew mix of bad policies and investments. Illusory paper profits are gone as is the false sense of well being ... the party is over and the tab must now be paid.
You see since WWII the normal modus operandi to fix any economic bubble passing its gas and leading into an economic downturn (recession) was to cut interest rates and increase the money supply. The American consumer was thus fired up to… consume. The scam was to induce UBER-consumption. Spending was "the fix" and if consumers didn't have the money, they could borrow it at cheap rates and have all the stuff they wanted -- now!
- The difference was that during the 1950s, 60s, and 70s much of what the public was urged to consume was still made here by American workers earning a living wage with benefits - including a "defined benefit" retirement plan.
The 1980s, 90s, and 0Xs saw a continuation in the cult of the fix a bubble bust with a newer bigger bubble -- but here there was a twist! Inflation was taking an annual bite out of the buck, yet wages "seemed" to be increasing. More cash flowed thru the fingers even though it bought less. Supplemental "income" from borrowings (at the household AND government levels) fostered the illusion that we were no worse off. The "on-paper" appreciation of any so-called marketable values of stocks, investments, and real property gave a false sense of well being and also gave the illusion of an easy out.
If push came to shove, "assets" could be sold at the inflated values and the fixed debts could be paid off with the proceeds. This fix would work, if and only if, somebody new (most likely with more borrowed money) came along and paid the higher price. It also required that a finite group took their money and ran at any given point in time. Households and government were running their own Ponzis!
Meanwhile the nation as a whole continued moving from an economy which actually made things to a nation who traded, swapped, and leveraged -- making their primary (un)real gains on paper appreciation alone. Tangibles behind US Gross Domestic Product (GDP) continued morphing from agricultural goods to manufactured products to services to the virtual paper values added by a new economy.
GLOBAL took on a double significance in that we as a nation depended more and more on entities outside our borders for supplying the goods and energy we consumed. We also depended on these overseas $ugar daddies to underwrite this ballooning debt financed consumption of their products.
This new-bubble-for-old-bubble fix it methodology "worked" for almost 60 years. Every twenty years, the fix it model from the US Treasury and the FED added three more zeros to the fix-mix. MILLIONS became BILLIONS; which now became TRILLIONS!
Unraveling actually began in 2007 (in some respects 2006). 2008 was an election year so denial and a political song and dance attempted to keep the writing on the wall obscured thru November. The DC politicos and the Wall Street moguls almost pulled it off!
This week you got background for the debacle that was 2008. Next week you get the appalling numbers...
Fred Cederholm
asklet@rochelle.net
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