U.S. Economy Between a Rock and a Hard Place Facing Dire Options

Tuesday, August 10, 2010
By Paul Martin

By: Lorimer Wilson
Market Oracle
Aug 09, 2010

“The U.S. is in an untenable position – between a rock and a hard place – in an inescapable debt trap – where the options are, at best, dire – either hyperinflation or a deflationary depression! It would seem that all we can do is ride out the storm in a boat laden with gold” said Jeff Nielson (BullionBullsCanada.com) in a recent speech* going on to say:

“The U.S.’s severe debt problems are exacerbated by its $70 trillion in unfunded liabilities to fund the social ‘entitlements’ of the mass of baby boomers who will be retiring by the tens of millions in the next few decades and there is absolutely NO likelihood of the U.S. government ever reducing those entitlements. Any attempt to do so would cause severe economic disruptions and civil unrest.”

Nielson maintained that there are numerous practical reasons why the U.S. will make no attempt to alleviate the dire situation.

1. A Looming Pension Crisis

His first reason was the looming pension crisis “where it is estimated that U.S. pensions were underfunded by about $3 trillion as of the end of 2008 and even after the recent rally in U.S. equity markets that pension deficit still amounts to roughly $2 trillion. Thus, even if the U.S. government could somehow make full pay-outs on the entitlement programs which U.S. seniors will be relying upon, they would still have to raise an additional $2 trillion just to maintain their standard of living not to mention the consumption level which this consumer economy relies upon for its very survival. Why? Because, with over 40% of Americans having less than $10,000 in savings, Americans are more dependent today on these entitlement programs than any other generation of Americans in history.”

2. A Further Collapse in House Prices

“With 75% of the ‘assets’ held by retired and soon-to-be retired Americans consisting of real estate,” said Nielson, “they will need to dump roughly $2 trillion of real estate onto the U.S. market – the most over supplied real estate market in history – in order to maintain their standard of living. To preclude such an event the U.S. government has been desperate to ‘re-inflate’ the U.S. housing bubble – at any cost – to buoy up American ‘real estate’ accounts and bail out the banks holding the mortgages on houses in foreclosure. Nevertheless, I believe the U.S. will see a second housing bubble because:

1. the U.S. Federal Reserve has taken the interest rate all the way down to zero – and left it there.

2. millions of U.S. houses have either been held off the market by U.S. banks or are tied-up in U.S. foreclosure proceedings. Both such actions have artificially reduced “inventories” of unsold homes by at least 50% putting in place a (very) temporary ‘bottom’ in prices.

3. the U.S. government agencies which are responsible for 90% of all new mortgages, have, once again, lowered their lending standards. In fact, when the government buyers’ ‘credit’ is factored in, more than half of all U.S. homes purchased in 2009 had zero down-payments.

4. the Federal Reserve has been buying up every U.S. mortgage bond in sight given the record default rates which currently exist in the U.S. In fact, more than 25% of all U.S. mortgage holders have “underwater” mortgages and 15% of all U.S. mortgages are currently in default and/or foreclosure – an all-time record.

5. buying all these bonds with newly-printed dollars has temporarily kept U.S. mortgage rates several percent lower than they would have been without this hidden and very expensive taxpayer subsidy. This has resulted in the Federal Reserve absorbing more than $2 trillion of bonds and securities which – to be polite – are of extremely dubious value and the moment the Fed stops buying up all these debt instruments, U.S. mortgage rates will shoot higher.”

Nielson made the point that with all of the aforementioned “occurring at a time when millions of option ARM mortgages are about to reset, and more than 40% of the millions of Americans holding these mortgages have been making minimum payments, it follows that when these mortgages reset, borrowers could see their monthly payments not merely increasing by 40% or 50% per month, but by up to several times their current payments.”

“In addition”, Nielson went on, “These millions of mortgage resets are occurring at the same time that long term unemployment in the U.S. is at its highest level in at least 70 years, and U.S. ‘real’ housing inventories are at their highest levels ever. As such, once this second collapse begins, there will be no means of stabilizing the market because, as I see it;

1. Interest rates can literally only go higher

2. U.S. homeowners have less equity in their homes than at any time in history

3. Retiring baby boomers will have to dump $1 to $2 trillion of real estate onto this market just to partially fund their under-funded retirements – and much more than that if entitlement programs should have their benefits slashed.”

Nielson maintained that the above “will not only undermine the U.S. housing market for many years to come, but any reductions in U.S. entitlement programs will directly make the next collapse of the U.S. housing sector that much more severe – because it would force the sale of much more real estate.”

3. The Future Cost of Interest Payments and “Unfunded Liabilities”

The Rest…HERE

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