from the
Sandy Eggo Union Tribune
World economies, including that of the United States, have been built not only on a house of cards, but on a foundation of beach sand as well. The tide, which had been going out for some time, convinced us of the soundness of our financial structure and the brilliance of our government stewardship and individual decisions. However, the tide is now coming in again (via the Federal Reserve), and we are failing to grasp the magnitude of the danger before us. It is a tsunami.
Let's take a hard look at what has transpired over the past decade:
(some of the mentioned notes...see the full article to get the rest)
From 1995 to 2000, the United States experienced a boom in the equity markets, which evolved into one of the greatest financial bubbles in history.
From 1997 to 2000, real estate prices began producing remarkable growth rates based largely on the dramatic wealth creation of the congruent equity market bubble.
From 2000 to 2002, the U.S. economy suffered the enormous shocks of the collapsing equity bubble (Nasdaq - 75 percent, Standard & Poors 500 - 38 percent) along with the Sept. 11, 2001, terrorist attacks. Nearly $7 trillion of U.S. investor wealth was wiped out.
Sensing that political talk was not enough to avert a financial disaster, the Federal Reserve took the unprecedented action of reducing the federal funds rate from 6.50 percent in January 2001 to 1 percent by June 2003 - the policy being to keep consumers purchasing to prop up the economy.
According to the February 2005 Housing Affordability Index of the California Association of Realtors, the median-priced home in San Diego has now reached $580,860, a level only 11 percent of the area households can still afford to purchase.
According to the National Association of Realtors, 36 percent of all new homes purchased in 2004 were secondary homes either for investment (23 percent) or vacation (13 percent). This is evidence of rampant speculation.
Speculators in California and Florida are reportedly day-trading homes and lots and using the illiquid rise in value in one spec home to finance the purchase of yet another. Echoes of the margined equity day traders of 1999 to 2000.
The personal savings rate in the United States has declined from 6 percent in 1993 to under 1 percent today. (Note: the personal savings rate has averaged 7 percent over the previous three decades.)
By February 2005, Americans were carrying a record $803 billion in revolving credit card debt, up $40 billion in the past year alone. (Note: debt levels typically do not increase in economic recovery periods.)
...The principal cause of the Great Depression of the 1930s was the speculative bent of the late-1920s equity markets matched with the 90 percent margin rates. This dangerous combination led to a massive worldwide destruction of capital. Though a new 50 percent margin rate was instituted to prevent this from happening again in the equity markets, we have inadvertently allowed the same leveraged speculative scenario to exist today in the real estate markets. Are we on the threshold of another massive destruction of capital? This remains to be seen. However, if we are, we may be facing one of the most gut wrenching global economic downturns yet seen.
Just as a tsunami is nearly impossible to see as it travels through the deep sea, so too is this one, but it is coming, and it is big.
