The Panic of 2008: Everything you wanted to know but were afraid to ask
You're probably wondering: "How are we going to get out of this mess?" The good news is that there is a way out. The bad news is that few people know what it is.
Having foreseen the current financial crisis for several years, I approach the subject with a certain sang froid. So I've spent the past week putting my thoughts on paper in my latest Cassandra Chronicle, "The Panic of 2008: Everything you wanted to know but were afraid to ask." The title is not hyperbole. I really do explain everything you want to know. Normally I make my Chronicles available only to subscribers; but this one is sufficiently important to warrant immediate dissemination to all comers. You can obtain a copy by clicking here.
Here's a preview:
The problem behind the Panic of 2008 is too much U.S. mortgage debt, some of it "toxic," much of it ultimately owed to foreigners who have been bankrolling America's spending spree for the past decade. The solution is debt reduction -- deleveraging -- which can only be accomplished in three ways, two of them good, one bad.
The good ways are for the U.S. to pay back debt owed to foreigners by generating export surpluses and selling U.S. tangible and financial assets to foreigners. Both of these methods of deleveraging will be forced by the "invisible hand" of the market place, which in the months and years to come will push down the value of the U.S. dollar relative to the currencies of our creditors in Asia, in particular.
The bad way is for American homeonwners to default massively, precipitating another Great Depression. In the process, the U.S. will be forced to default on its foreign debt, spreading the Great Depression globally. The recent measures taken by the Fed and U.S. government are designed to minimize such "cascading defaults" by restoring functionality to the financial system, thereby buying time for the U.S. to reduce its debt load through exports and asset sales to foreigners.
There are huge shifts in the global economy coming, as the U.S. shifts from a consumer-driven economy to an export-driven economy while our trading partners do just the opposite. Market forces, if left unfettered, will make it happen.
It is important the opinion-shapers in the press and policymakers in Washington to understand what has to happen to resolve The Panic of 2008, and to assist rather than resist the “invisible hand” of the marketplace.
The U.S. must avoid the temptation to interfere in currency markets in a jingoistic attempt to “support a strong dollar,” or to succumb to the siren song of protectionism that can only result in retaliation by trading partners to the detriment of America’s exports, or to discourage or prohibit the acquisition of U.S. tangible and financial assets by foreigners other than for national security reasons.
As the United States transforms itself into an export-driven, rather than consumer-driven economy, the U.S. government must support this process.
Given the additional burdens placed on the government’s balance sheet by the programs adopted to ameliorate the financial crisis, the government must put its financial house in order by reducing expenses and increasing revenues so as not to succumb to the poison of the toxic debt it is now shouldering.
Americans must be prepared to work hard while tightening their belts and accept a reduced standard of living until they have paid down a significant portion of their debts incurred during the spending spree of the past decade.
America’s trading-partner creditors must understand, accept and support a reversal of the current global dynamic whereby their economies are driven by exports and domestic consumption is discouraged. They must accept an upward revaluation of their currencies, rely on the strength of their domestic rather than export sectors for growth, encourage the consumption of U.S. goods and services, and exchange their ownership of U.S. debt for U.S. tangible and financial assets. This is their reward, and America’s burden.