By: Jim Taylor

Is the prosperity bubble ready to burst?

Last week, the Dow Jones Industrial average of Wall Street stocks crested past 14,000 for the first time. That sounds as if the U.S. economy is booming, doesn’t it?

Apparently not.

        Because, as a Merrill Lynch study noted, “The artificially pumped-up housing industry accounted for 50 per cent of U. S. economic growth.”

        “We are only selling houses to each other and not making anything that the rest of the world wants,” charged an article by Mike Whitney. “The $11 trillion that was pumped into the real estate market … hasn’t produced a single asset that will add to our collective wealth or industrial competitiveness…”

        Before I go any further, I need to say two things.

        First, any journalist who ventures into the rarefied world of economics takes about as big a risk as a man lecturing a woman about pregnancy. Economics is an exact science in which each economist weights his or her favourite factors to produce conclusions that will almost certainly be contradicted by some other economist.

        Both will, however, agree that amateurs simply don’t grasp the complexity of the situation.

        Economists actually understand mind-numbing terms like “collateralized debt obligations,” “hedge funds,” and “sub-prime residential mortgage-backed securities.”

        Second, the alternative media dislike George Bush and his administration the way the rest of us dislike cobras. Even if he did something right – however unlikely that possibility – his critics would treat it as an attempt to distract the American public from his other malicious policies.



Disturbing facts and figures

  Despite those caveats, I find myself concerned by some facts and figures I encountered in the non-mainstream media recently.

• In the last months, U.S. housing starts are down 22 per cent.
• Mortgage applications have fallen 18 per cent.
• Home sales are down anywhere from 24 per cent to 37 per cent, depending on whose figures you accept.
• In Detroit, one out of 21 houses is in foreclosure.
• More than 80 “sub-prime” mortgage lenders have gone bankrupt. The country’s second-largest mortgage corporation, New Century Financial, which did $52 billion business in 2006, filed for bankruptcy in April 2007.
• The national debt burden – personal, corporate, and governmental – has passed $45 trillion.
• The U.S. as a whole is running an $800 billion deficit a year.
• Its external liabilities have increased over $4 trillion since 2001.

        “The U.S. and world economies are on the brink of collapse,” warns former federal analyst Richard C. Cook of Global Research.

        The Associated Press – hardly a bastion of socialist conspiracy – wondered if last week’s Dow Jones record resulted from “investors buying more on speculation than fundamentals.”

        It noted that the last time the Dow rose so spectacularly was the dot.com bubble in the 1990s.

        Ambrose Evans-Pritchard, financial analyst for the U.K. Telegraph, points out that each previous economic crash “was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived.”

        Even the bankers’ bank, the Bank of International Settlements, expressed jitters. One report commented that “the conditions which led to the Great Depression of the 1930s and the Asian crises in the 1990s were reflected in the current environment.”

        The International Monetary Fund and the United Nations have issued similar warnings.



Falling benchmark

 Economists seem divided into two camps – those who think the world economy will continue to grow for several years before tough times hit, and those who think the tough times have already hit.

        The worst pessimists anticipate monetary upheaval and a possible stock market crash as early as December 2007.

        I can’t offer forecasts. But I do notice that Canadian news outlets invariably compare the Canadian dollar only to the U.S. dollar.

        Just a few years ago, the Canadian dollar barely exceeded 60 cents U.S. Today, it hovers around 95 cents U.S.

        But the Canadian dollar hasn’t really risen that much, compared to other world currencies. Rather, the U.S. dollar has been plunging like a sky-diver with a faulty parachute.

        Bank of Canada statistics show that, in the last decade, the Canadian dollar has gained only fractionally against the British pound, with slightly larger gains against the Euro.

        Over the same period, the U.S. dollar dropped 20 per cent against the pound, 13 per cent against the Euro, and nine per cent against the Chinese yuan.

        “Foreign investors,” wrote Richard C. Cook, “have been propping up our massive trade and fiscal deficits with their capital… These investors are increasingly uneasy with their dollar holdings and are bailing out…”

China, he claims, dumped $6.6 billion of U.S. Treasury bills in May.



Dangerous debts

 That’s not the only factor making investors uneasy. In what’s been called the “Bear Stearns Meltdown,” Merrill Lynch failed to sell two major hedge funds. The highest bid was apparently 30 cents on the dollar.

        In the fallout that followed, at least five other massive offerings were cancelled, and another billion dollar hedge fund, Caliber Global Investments, failed.

        The chief culprit in the Bear Stearns collapse was something called “collateralized debt obligations” or CDOs. CDOs are bundles of debts—some good, some near gangrenous – bundled together and sold to the financiers of Wall Street as a package of mortgage-backed securities which can be leveraged in hedge funds for maximum profitability.

        No, I don’t understand that description either. But according to the Bank of International Settlements, those CDOs amounted to $470 billion – plus another $524 billion in “synthetic” CDOs, plus another $753 in “leveraged buy-outs” (mergers).

        “Sooner or later,” warned the Bank, “the credit cycle will turn…”

        When it does – if it does – a tremor in the U.S. economy will have massive aftershocks worldwide.

        I hope that the pessimists are wrong.

        But I worry that complacency about the U.S. economy’s invincibility might lead us to ignore a potential crisis until it’s too late to affect it.

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Copyright © 2007 by Jim Taylor. Non-profit use in congregations and study groups permitted; all other rights reserved.
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