Asset prices are shrinking across the globe. America, the world’s largest economy, has had its credit markets seize up and its government forced to socialize its mortgage market.
How did all this happen? Is this just another “bubble” of speculation that periodically appears on the American scene, creating a recession that hangs around for 12 to 16 months then disappears? Or is it something potentially much worse?
Worse. Take a look at Chris Neider’s “Bailouts, Hedge Funds and Energy” article at the Energy and Capital website. Among other tidbits, Neider points out that he underestimated the influence of hedge funds this summer in the runup, and consequent selloff, of commodity prices.
Hedge fund assets climbed from $13 billion in 2003 to $206 billion by March of this year. In some cases these funds could be levereged by 100-1. Neider cites a recent report by Masters Capital Management, an Australian investment firm, estimating that $60 billion went into the oil futures market in the first five months of this year, but that $39 billion has exited since.
That’s a bubble, all right. But its “popping” has suddenly focused everyone’s attention on a much more serious problem: America’s monumental debt and leverage.
The official national debt stands at nearly $10 trillion, but total debt obligations become closer to $53 – $85 trillion when unfunded mandates like Social Security are factored in. “The numbers really beggar belief,” Neider writes.
Total credit market debt now stands at a record 342% of GDP, a level even above the last all-time peak of 1929. And that is definitely not a good thing.
Leverage can be a positive thing, particularly if it is used to make productive improvements, such as those that will flow from an aggressive national energy policy. The transition away from fossil fuel dependence will create millions of manufacturing jobs right across the board. Almost every segment of manufacturing, and manufacturing support, will benefit dramatically from this purposeful use of leverage.
Instead of using massive leverage in a chase to gain nominal paper returns, such as the debacle witnessed this summer, this leverage will make real things that make more real things. Within this effort are the antidotes to what ails America.
But as the ill-conceived uses of leverage quickly collapse and create havoc with asset prices, America will have to move quickly because this is a race against time–and not a lot of time either. As T. Boone Pickens has so starkly pointed out, we are transferring our wealth overseas at an unprecedented rate. If we don’t do something quickly, we won’t have the financial muscle to make the investments that need to be made.
War-like efforts which rally a country’s resources to a tremendous threat are made by Government fiat and intervention. Recent government actions, socialist in nature to be quite honest, shoring up credit markets and the housing market, are probably just the beginning.
Hello McCain and Obama. Who wants that job?
Five years of Nuclear Regulatory Hearings listening to every citizen speak who wants to speak, no matter that the same message is repeated endlessly, won’t get nuclear power going soon enough. And the government will have to insure these projects because no private entity can.
Rebuilding a rail transportation system will have to be done by fiat, as in “The new line is going from here to here, you have to move. Here’s a fair payment. End of story.”
The government will have to pump money into a wide variety of industries, ranging from automobiles and trucks, to turbines and solar manufacturing, from batteries to investments in research and development in almost everything related to this “war effort” to energy independence.
In the meantime, money has to be pumped into America’s own gas and oil deposits. At least that effort can be funded to a large degree by private investment, and royalty income from leases.
While all this is going on, Americans are going to make some sacrifices. Rationing is quite likely. You want to cut back on oil imports, you use less oil. It may come to the point where using less won’t be an independent choice. Odd-even days come to mind. The plastic water bottle industry, a hugely wasteful user of energy, comes to mind.
Oh yes. And taxes. They will have to go up on the upper income groups. For folks who complain these people already pay the majority of taxes, it should be noted that’s because they have the majority of money. On the other hand, any tax that benefits corporate investment in “things that make things” should be encouraged. Depreciation schedules come to mind.
What about global competition? McCain supports NAFTA, Obama would like more direct negotiating on an individual basis. Politically, Obama may have the edge here, particularly if the economy continues to worsen. Unemployed people tend to dislike American manufacturing jobs going overseas. However, the danger of trade restriction wars could plunge the world into depression if America suddenly becomes more defensive.
And finally, the last time America went into a Depression and weakened, enemies were emboldened.
Investment icon Jim Rogers has predicted America is about to enter a “lost decade” as it suffocates under debt. This won’t be a 16 month deal, he predicts. The last “lost decade” of the 1930′s ended only with the beginning of World War II.
Drill, Drill, Drill. Manufacture, Manufacture, Manufacture. Goodby consumer economy.
If you want an Obama/McCain comparison re: economy and investments, you can get one at Money and Markets. The report, “The Pied Pipers of Washington,” is authored by Martin D. Weiss Ph.D., Founder of Weiss Research Inc.