Thursday, January 30, 2014

Have we reached the tipping point?

Folks, I've been warning for years now that our economy can't continue on its present path.  Government over-spending (at an insane level), the Fed printing money like there's no tomorrow (with nothing whatsoever backing it up), and a bunch of other factors have been piling up trouble for all of us.  The response of the authorities has been to 'kick the can down the road' at every opportunity, borrowing and/or printing more money to take care of short-term problems while ignoring (not to mention exacerbating) the long-term issues that have caused, are causing and will continue to cause the real problems.

I begin to think that the economic chickens may finally be coming home to roost.  Consider these developments:

  1. The Fed has begin to wind down, or 'taper', it's long-running Quantitative Easing program.  It's just taken the second step in doing so - and the stock market, which has been boosted to insane levels on the back of the flood of QE funds, immediately fell in reaction to the news.
  2. International markets are cratering as the Fed 'tapers', and the IMF and the World Bank are warning of severe consequences if the process continues.
  3. Many emerging market currencies are taking a pounding as the Fed tapers QE and the world economy staggers.  Nations such as Turkey, India and South Africa have had to sharply increase their central bank interest rates to stem the fall in the value of their currencies.  This means real problems for borrowers in those nations - problems that must inevitably affect First World economies in due course.
  4. As if US quantitative easing weren't bad enough, it now appears that China is riding for a fall too.  It's QE program is four times larger than ours, having pumped about $12 trillion into its economy since 2006.  China is the world's largest manufacturing economy.  If the First World markets for its products contract due to financial recession, and simultaneously its internal market contracts due to predicted banking and liquidity crises . . . guess what that combination might do to world stability?  I'm not just talking economic stability, either.  China's leaders are notorious for using external crises to distract attention from internal problems and policy failures.  How about a war over the Senkaku Islands?
  5. Corporate profits are tumbling, and appear to be set for ongoing decline.
  6. It wasn't just retailers on Main Street who had a ghastly Christmas shopping season.  Even's turnover stumbled, and it looks like durable goods orders fell sharply too.
  7. The US housing market (about which we've spoken before) continues to slide.
  8. US vehicle manufacturers have been disguising the parlous state of the new vehicle market by booking a vehicle as 'sold' the instant they move it out to a dealer's lot.  However, that doesn't necessarily mean it's been sold to a consumer.  Those questionable accounting practices are now coming home to roost, because dealer inventory for Ford, GM and Chrysler is now claimed to be equal to more than 100 days' sales.  Just think of what that means long-term.  When next year's models are introduced, dealers will be stuck with almost a third of a year's inventory of the older models.  Many customers won't want them.  They'll want the newer versions.  What happens to that older inventory?  Will the manufacturers subsidize it at fire-sale prices to get rid of it?  Guess what that will do to their profits?  (Not to mention what it'll do to the sales of the newer models, as customers seize the chance to buy an older model at a steep discount.)
  9. One economist has gone so far as to withdraw over $1 million from Bank of America, because "even an infinitesimal chance Bank of America will not repay me in full, whenever I ask, switches the cost-benefit conclusion from stay to flee".  The prospect of bank runs is growing (and has already occurred in some countries).  Last week this led a major UK bank to try to limit large cash withdrawals (a policy since amended due to furious customer protests).  What makes you think that same problem won't occur here?  As PBS put it, 'Is your money safe at the bank?'  (I think you can guess my answer.)

My friends, put all of the above together.  By all means follow the links I've provided and make up your own mind . . . but I see so much smoke that there's got to be, not just a fire, but a bloody great conflagration brewing beneath it all.  I'm seriously, seriously worried about the state of the US and world economies right now.  If these problems continue and get worse (as I believe they will), I think the problems that so many have forecast for so long may be almost upon us.  Decide for yourselves whether I'm being unduly alarmist.

Personally, I'm going to batten down my economic hatches as best I can . . .



Well Seasoned Fool said...

One swallow, etc. Local Chevy dealer's reader board, "2014 Silverado, up to $8,100 in rebates".

Sunnybrook Farm said...

I have bought my last new car, they are too over priced and then the government seems to punish anyone with taxes. I plan on getting my 1930 Ford on the road, I can work on it and it will run on a variety of fuels. No computer in it!

Pribek said...

Wow! That ties it all together really well.
I would add one thing about this: "Fed printing money like there's no tomorrow (with nothing whatsoever backing it up)"
The only thing that backs up a Federal Reserve note is the power of the government to tax it's citizens.
The increasing number of people leaving the work force and the low number of people (especially young people) signing up for the healthcare reflects the government's waning power to effectively tax.

Rudi said...

I've just been talking to some colleagues about the general tendency across the board (government especially, but also the private sector) to want/need to charge more and more for services that either remain the same or are actively on the decline. They can't maintain their level of service at the same level of compensation, and the increasing costs (of EVERYTHING) are linked in a vicious feedback loop with inflation. It's as if the corruption and ineptitude which led to this global economic mess has reached critical mass and we're starting to see the nose dive. I have no theories about who to blame, but the global economy is so inextricably tangled that it doesn't really matter. I'm in South Africa but the same stuff we're seeing here is what Americans have been seeing of late.

Rolf said...

Collapse the system is the PLAN, if you believe Alinski, so that the government can "ride to the rescue" and take over. Failure and devastation isn't a bug, it's a feature. Allowing, nay, encouraging unsustainable debt chains the private and corporate world to the government teat, by binding the honest (why desire to repay and play by the rules) while freeing the amoral (who desire to take what they can and leave others holding the bag). I'm not a big conspiracy guy, but the only way their actions make any sense is if they are utter fools, or they are evil and destroying the system for a FedGov takeover is the plan. Or, of course, both.