Visions of financial apocalypse

Martin Sosnoff still doesn’t think there’ll be a recession, but is considerably less optimistic than the last time I saw his column:

The vise on new home construction tightens inexorably. Cancellation rates run close to 35% and the glut of existing homes for sale swells. Not only is it unlikely for the home building cycle to bottom before 2009, but prospective bankruptcies of home builders with national footprints could mar the 2009 landscape. Loan covenant violations could loom by mid 2008. Home building is capital intensive, and many banks are involved. . . .

The cresting of home prices is a critical macro event as it limits the wherewithal of consumers to spend more than their normalized amount of disposable income. For several years, middle America has monetized home equity and increased spending by a couple of percentage points. Housing stock is more than half the net worth of many individuals. Even a 10% decline in home value runs into trillions of bucks.

Retailing is impacted directly and the stock market indirectly, as corporate profits flatten out, maybe decline even if the Fed cuts the Fed Funds rate in lock- step fashion. Clearing our existing homes inventory could take years. After all, prices elevated for a couple of decades. . . .

Today, systematic inflation is not a policy issue, just a worry.

Maybe not. John F. Ince looks at debt:

Debt today in the United States is at an all-time high in each of the three primary sectors: public, corporate and consumer debt. The national debt last week topped $9 trillion, up from approximately $5 trillion when George Bush took office. . . . Consumer credit is now at scary levels almost: $2.5 trillion, and analysts are beginning to speculate that credit card debt could be the next bubble to burst. . . .

25 years ago the United States was the world’s largest lender nation by far. Today we owe more to other nations than the rest of the world combined. Almost 5 percent of our GDP flows into foreign hands every year, as reflected in our current account trade deficit of approximately $700 billion annually.

How bad could it get? The Fed will likely put it in a position where the only option is to monetize the public debt. . . . Kenneth Rogoff, a Harvard economics professor and former chief of research for the IMF, puts it bluntly: “People who think that the government will never monetize the debt are just out to lunch.”

The United States doesn’t have to default on its debt. It can simply pay back lenders with dollars that are worth less than the dollars that were borrowed. And if this happens to the public debt, private debt will be similarly affected and the entire monetary system will be destabilized.”

That would raise inflation, which the Fed keeps claiming its policies are intended to prevent.

With America now addicted to foreign imports, it is unlikely that our appetite will go down significantly. Classic economics says it will, but a lot of pain will be felt along the way. So the American standard of living will decline and people living on the margins are pushed ever closer to the brink.

Mike Whitney points out that it is getting harder to get any financing for mortgates. Referring to a bank run in Britain that compelled the government to guarantee the full value of deposits, Whitney writes:

A more powerful tsunami is about to descend on the United States where many of the banks have been engaged in the same practices and are using the same business model [“borrowing short to go long” in financing their mortgages] as Northern Rock. Investors are no longer buying CDOs, MBSs, or anything else related to real estate. No one wants them, whether they’re subprime or not. That means that US banks will soon undergo the same type of economic gale that is battering the U.K right now. The only difference is that the U.S. economy is already listing from the downturn in housing and an increasingly jittery stock market.

Whitney also makes explicit Ince’s point about imports:

Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring.

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