Date:   10/26/2004 9:54:48 AM ( 20 y ago)
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US ECONOMIC COLLAPSE LOOMING IN 2005

By: LightEye Tuesday 26 Oct 2004


The bubble is just getting bigger and bigger and when it bursts, as it always does, well...watch out.

http://www.proliberty.com/observer/20040808.htm

U.S. economic collapse looming for 2005

by William Engdahl

The U.S. Senate just reconfirmed 78-year-old Alan Greenspan to an unprecedented fifth term as chairman of the world's most powerful central bank, the Federal Reserve, or the Fed as it is known. The fact that President Bush renominated Greenspan underscores how vulnerable the global financial edifice is, and not how excellent a central banker Greenspan is.

Perceived global economic growth tied to U.S. dollar

On the surface, world growth appears to be expanding finally, after severe recession and the 60% fall of the U.S. stock market in 2000-2001. The Federal Reserve says it is so confident that growth in the U.S. economy is taking firm hold, that it raised its key interest rate from a record low 1% to 1.25% last month, signalling it would slowly bring rates up to “neutral” levels of 3.5-4.5% over coming months.

Around the world, strong growth of exports are being reported from Brazil to Mexico to South Korea. Growth in China is so strong the government is worried it is overheating. In Europe, the UK is expanding at the fastest pace in 15 years. France expects GDP to grow by 2.5%, and even Germany is talking about stronger export growth.

The problem with this optimistic picture is the fact it is entirely based on the dollar and unprecedented creation of cheap dollar credit by Greenspan and the Bush Administration. Their only short-term goal has been to keep the U.S. economy strong enough to assure re-election for George Bush in November. Washington reports are that Bush made a deal to re-appoint Greenspan on the promise Greenspan would keep the economy growing until the elections. They have done this by a combination of historic low interest rates, rates only seen before in times of war or depression, and by stimulating the economy by record budget deficit spending and issuing government bonds to finance it. The world has been flooded with cheap dollars as a result.

What is clear now is that this unsustainable effort is likely to come to an end sometime in 2005, just after the elections, regardless of who is President. Given the scale of the money-printing by the Fed and the U.S. Treasury since 2001, it is pre-programmed that the “correction” of the latest Greenspan credit excess will impact the entire global financial and economic system. Some economists fear a new Great Depression like the 1930s. The world today depends on cheap U.S. dollar credit. When U.S. interest rates are finally forced higher, dramatic shocks will hit Europe, Asia and the entire global economy, unlike any seen since the 1930s. Debts that now appear manageable will suddenly become unpayable. Defaults and bankruptcies will spread as they did in the wake of the 1931 Creditanstalt collapse in Germany.

The U.S. home bubble

The official U.S. myth is that the recession of 2000-2001 ended in November 2001 and “recovery” has been underway ever since. The reality is not so positive. Using record low interest rates, the Fed has lured American families into debt at record rates, creating what might be called a “virtual recovery,” financed by record amounts of new consumer debt. There has never been a recovery in which debt levels increase!

The American dream of owning your own home has been the source of the record lending, helped by the lowest interest rates in 43 years. Greenspan has often boasted this has been what has propped up the U.S. economy since 2001.

When families buy a home, they buy furniture, employ construction workers, electricians, engineers, and the economy grows. Record low interest rates have made it very easy for families to get a bank loan, using their home equity as collateral or guarantee. These loans, tied to the rising real estate prices, allowed American families to finance new furniture, cars, and countless other items.

In 2003 banks made a record $324 billion in such home equity loans, on top of $1 trillion in new mortgage loans.

All this economic consumption has created the illusion of a recovering economy. Behind the surface, a huge debt burden has built up. Since 1997, the total of home mortgage debt for Americans has risen 94% to a colossal $7.4 trillion, a debt of some $120,000 for a family of four. Bank loans for real estate purchases have risen since 1997 by 200%, to $2.4 trillion. Average U.S. home prices have risen by 50% in the period since 1998. In 2003 alone a record total of $1 trillion in new mortgage loans were made. In 1997 mortgages totalled $202 billion.

In many parts of the U.S., home price inflation has become alarming. An apartment in better parts of Manhattan is now above $1 million. Home prices in Boston have risen by 64% in five years. California real estate prices are soaring. On average U.S. home prices have risen 50% in six years, an unprecedented rise, driven by Greenspan's easy credit. In seven years to 2004, prices of U.S. homes had risen on paper by $7 trillion to a total of $15 trillion, the highest in U.S. history. The problem is so obviously dangerous that Greenspan recently was forced to deny existence of any real estate “bubble,” much as he denied a dot.com stock bubble in 2000.



 

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