It's the end of the world as we know it

Not feeling grim enough yet? We are pretty focused on the U.S. economy here in America, obviously, but things are very interconnected in the world financial systems and they trauma is global. No one seems to know what to do, and that is dangerous because when the pressure is on to DO SOMETHING, it almost always ends up being wrong (i.e. the $700 billion bailout). There is a very insightful article by Niall Ferguson in Time Magazine called The End of Prosperity? and it is pretty sobering stuff. Here is a sample:

The U.S. — not to mention Western Europe — is in the grip of a downward spiral that financial experts call deleveraging. Having accumulated debts beyond what's sustainable, households and financial institutions are being forced to reduce them. The pressure to do so results from a decline in the price of the assets they bought with the money they borrowed. It's a vicious feedback loop. When families and banks tip into bankruptcy, more assets get dumped on the market, driving prices down further and necessitating more deleveraging. This process now has so much momentum that even $700 billion in taxpayers' money may not suffice to stop it.

In the case of households, debt rose from about 50% of GDP in 1980 to a peak of 100% in 2006. In other words, households now owe as much as the entire U.S. economy can produce in a year. Much of the increase in debt was used to invest in real estate. The result was a bubble; at its peak, average U.S. house prices were rising at 20% a year. Then — as bubbles always do — it burst. The S&P Case-Shiller index of house prices in 20 cities has been falling since February 2007. And the decline is accelerating. In June prices were down 16% compared with a year earlier. In some cities — like Phoenix and Miami — they have fallen by as much as a third from their peaks. The U.S. real estate market hasn't faced anything like this since the Depression. And the pain is not over. Credit Suisse predicts that 13% of U.S. homeowners with mortgages could end up losing their homes.

Banks and other financial institutions are in an even worse position: their debts are accumulating even faster. By 2007 the financial sector's debt was equivalent to 116% of GDP, compared with a mere 21% in 1980. And the assets the banks loaded up on have fallen even further in value than the average home — by as much as 55% in the case of BBB-rated mortgage-backed securities.

To date, U.S. banks have admitted to $334 billion in losses and write-downs, and the final total will almost certainly be much higher. To compensate, they have managed to raise $235 billion in new capital. The trouble is that the net loss of $99 billion implies that they will need to shrink their balance sheets by 10 times that figure — almost a trillion dollars — to maintain a constant ratio between their assets and capital. That suggests a drastic reduction of credit, since a bank's assets are its loans. Fewer loans mean tighter business conditions on Main Street. Your local car dealer won't be able to get the credit he needs to maintain his inventory of automobiles. To survive, he'll have to lay off some of his employees. Expect higher unemployment nationwide.

Anyone who doubts that the U.S. is heading for recession is living in denial. On an annualized basis, real retail sales and industrial production are both declining. Unemployment is already at its highest level in five years. The question is whether we're headed for a short, relatively mild recession like that of 2001 — or a latter-day version of what the world went through in the 1930s: Depression 2.0.

Is that sobering enough for you? We are drowning in a sea of debt, and there isn't an easy way out of it. Ferguson actually knows what he is talking about as a recognized expert on economic history, unlike many of the talking heads on CNN, Fox and even CNBC.

What is even more troubling is the very real chance that the world governments will band together and DO SOMETHING that will further cement the global nature of not just financial systems but governments. Spurred on by the International Monetary Fund and other international groups, look for a call for greater consolidation of economic governing bodies. I am all for free trade in the global marketplace, but I am not in favor of foreign nations, many of whom envy and hate the U.S., making policy decisions that are binding on the U.S. Nor am I enraptured with the likely other results, a massive set of new regulations that will further cripple our ability to compete economically. I am pretty much at the when Obama, instead of if Obama, becomes president mindset at this point and you know given his voting record that we are looking at bigger government on a scale we haven't seen since the New Deal and the War on Poverty. Once government gets involved in something, it is virtually impossible to extricate ourselves, and massive government interference has already led to America going from the economic engine of the world to teetering on the brink of total economic collapse and ruin.

Be afraid. Be very afraid.