That giant sucking sound you hear is the sound of liquidity draining out of global financial markets. Gurgle.
Cheap money made everything go up. But what now? The Fed’s attempt to reflate the U.S. market appears to have stalled. The Dow fell below 13,000. Gold, oil, and base metals were off too, as investors begin to rethink just what’s ahead for the global economy.
Jim Melcher from Balestra Capital Partners says he’s worried about a recession. “Not a normal one, but a very bad one. The worst since the 1930s. I expect we’ll see clear signs of it in six months with a dramatic slowdown in the gross domestic product.”
He was talking about American GDP, of course. And last we heard, that recession in the 1930s was not a recession but a depression. Could it get that bad?
Well, it could. A normal business cycle would cause some pain as the misallocated capital from the previous boom is written off. It’s looking like there may be as much as US$400 billion in dodgy subprime loans in the U.S. And estimates of the size of the losses have been consistently low and consistently wrong.
Still, half a trillion dollars isn’t so much when compared to American GDP. There are other problems of course, in the job market and with foreclosures. But it all comes back to debt. America has been living beyond its means for thirty years, ever since the greenback was cut loose from gold.
The current world economic order is a product of America’s debt-based lifestyle. As that lifestyle-based on cheap energy and available credit-becomes untenable, how will the world change? That’s what we try to figure out every day here at the Old Hat Factory. And how to profit, of course.
Lately, though, we are worried Australia is repeating many of the mistakes made in America. “In a sign of increasingly hard times, over half of Australians have admitted to using their credit cards to get them between pays and cover cash shortfalls, a survey reveals,” reports Nicki Bourlioufas at News.com.au. This is good for credit card companies. Did you know Visa is going public next week in the United States?
There are two ways you can look at this use of credit to make ends meet. On the one hand, in a world of flat wage growth and a global labour market, but with rising consumer and house prices, you almost have to go into debt (if you want to own a home.) This debt-based prosperity is a fraud. It’s a modern day kind of serfdom which many people enter into voluntarily, and never escape.
On the other hand, nobody puts a gun to your head and forces you to use a credit card. We are probably entering an era when people will have to revise down their expectations about material prosperity. They will have to delay consumption and live within their means, making sure expenses do not exceed income. It’s revolutionary.
Markets and Money