Fasten Your Golden Seat Belts
The credit crisis just cost us $2 trillion.
It went poof. Just like that.
For years, now, financial talking-heads have been telling us how the Fed’s credit expansion of six years ago would come back and bite us in the butts. Last week, it did just that.
The question is, will it keep biting? The unhappy answer is, probably and for longer than we’d like to think. There’s a Ludwig von Mises quote floating around the Web that says, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Von Mises should know. He had grandstand seats to the economic collapse of pre and post-war Nazi Germany. Of course, what we are wrestling with today couldn’t come close to those darkly historic days.
We hope.
MILES OF BAD ROAD?
The road isn’t just getting bumpy, it’s fast approaching an “Ice Road Trucker” kind of treacherous.
We don’t have to look any further than the above-mentioned credit/mortgage woes. How bad will it get? It depends on where the dominos stop falling. Last week they stopped, for the time being, for three Bear Stearns mortgage funds, investments which instantly became their investors’ worst nightmares. They shut down without so much as a courtesy call. So what happens to these investors’ hard-earned money? Sadly, it’s out of their hands.
Bear Stearns wasn’t alone. The French bank Paribas also shut the door on three of its funds when the mortgage derivatives they held went into freefall. The bank reported a “complete evaporation of liquidity” as the value of its three funds plummeted by nearly a quarter in little more than a week.
Then there’s the story of American Home Mortgage Investment Corp., the 10th-largest mortgage lender in the US. Shocking the industry, it announced its bankruptcy on August 6th. The scariest thing wasn’t that the lender had a spooky portfolio brimming with sub-prime customers, but that it actually dealt with an impressive number of “Alt-A” clients—borrowers with good, if not painstakingly confirmed, credit.
The mortgage crisis may be deeper than we imagined, and it could lead us to a liquidity crisis. Last week, the European Central Bank lent a whopping $130 billion to head that off. This was so “unusual” that a Financial Times column wondered whether “there is something truly nasty lurking out there in relation to credit losses that only the ECB knows about.”
Japan and the Fed quickly followed suit, bringing last week’s total capital infusion to over $200 billion (at least, that’s the reported amount). According to Financial Times, “published reports put the total number of unsold loans sitting in financial institutions' warehouses waiting to be resold at around $260 billion in the U.S. and another $200 billion in Europe.” So the Fed’s capital infusion relieved some of that pressure, but that’s little more than a stop-gap measure. "There are now some indications that the sub-prime mess is leading to an indiscriminate rationing of credit," warned Strategas Research's Jason Trennert.
TOUGH TO JAM INTO REVERSE
The danger of a liquidity crisis is that it’s a tough road to do a “180” on. According to New York Times columnist Paul Krugman, “…when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.”
So that pretty much leaves things up to human nature. Yikes.
ALL ROADS LEAD TO ROME?
America’s outspoken comptroller, David Walker, is worried where this mortgage emergency—and all of today’s other economic emergencies—is ultimately taking us.
According to FT.com, Walker said our recent “...fiscal imbalance meant the US was ‘on a path toward an explosion of debt.’”
“With the looming retirement of baby boomers,” Walker said, “spiraling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks.”
He even warned that there were “striking similarities” between America’s current situation and the factors that brought down Rome.
This is America’s comptroller speaking. Yikes.
THE SMOOTH, GOLDEN ROAD
With all these scary developments, you can end up feeling a trifle bit overwhelmed. But there’s no need to get anywhere near that point.
I keep talking about how gold can act as a sort of reassuring insurance against the economic mischief of the day. Well, I stand by that statement. Since gold tends to move contrary to the ocean of paper investments most of us possess, it will always serve a wonderful purpose for the wise, diversification-minded investor.
And since we obviously face a scary fiscal road ahead—mortgage generated and otherwise—it only makes perfect sense to fasten our golden seatbelts.
Far as the credit crisis goes, the sooner the better.
You’ve seen him on Fox News Television and heard him on the Rush Limbaugh Show. He’s a published author, writer and an expert guest on more than 1000 radio programs discussing today’s economy and gold.
Kevin DeMeritt, President of Lear Financial, is a nationally renowned analyst whose insight into the future of domestic and global economies is unmatched.
His book, The Bulls The Bears and the Bust, reviewed by the Associated Press, predicted the market crash of 2001 and the ensuing rise of gold to the status of best investment.
At the helm of Lear Financial, Kevin DeMeritt has made Lear one of the most highly endorsed gold companies in the country. Relying on his insightful recommendations, uncanny market and trading skills and 20 years of experience in investment quality gold, Kevin has navigated thousands of portfolios to profitability through boom and bust times.
And, now more than ever, his insights are welcome by nervous investors.
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