By Roger Caldwell
History repeats itself and the credit expansion schemes have created a U.S. financial crisis which can trigger a global financial and economic meltdown. The U.S. has experienced two major deflationary depressions which lasted from 1835 to 1842, and 1929 to 1932. The impending deflationary crash that lies ahead will be bigger than the two largest episodes, because the U.S. economy is colossal, and the economic crash will be global in scope.
The U.S. financial crisis was caused by the largest leveraged asset bubble and credit bubble in the history of the planet by many countries, but led by the U.S. This crisis has a cumulative effect on all the economic industries and no one market can take blame for this financial debacle. Everyone was under the impression that the bubble would continue to grow bigger and there was no need to worry, because the economy could regulate itself.
When confidence is high, investors will continue to trade debt and play the game of ‘hot potato.” In the game of “hot potato” whoever is left with the potato at the end loses the game. Many of the large banks and investment companies are holding large amounts of debt and there is a liquidity crunch.
During a liquidity crunch, big banks get nervous and become cautious and credit markets freeze up and economic growth disappears. Large banks borrow from each other in order to operate, and now there are concerns that they don’t have the ability to repay loans. Many investors are reluctant to buy debt and the banks are left holding the debt.
The U.S. Federal Reserve has made a cash infusion to the large banks to increase confidence, fund operations, and make trades. The federal government is considering seeking an equity stake in major U.S. Banks to provide private companies with short term cash. The bail out is not working, because the confidence and value of the dollar has collapsed and the liquidity crunch has a ripple effect around the world.
The housing bubble, mortgage bubble, credit bubble, loan bubble, equity bubble, commodity bubble and the hedge fund bubble are bursting and exploding all at once. International investors who were involved in hedge funds and bad sub-prime loans are causing an economic meltdown in international markets. As there are more widespread bank failures, can international banks and countries reduce fear and panic and free the money supply.
The U.S. government “bail out” is only another form of welfare for large banks and companies which will eventually create a deflationary crash. The devaluation of capital debt creates deflation which eventually creates a depression. People and businesses are deeply in debt, when price deflation occurs or demand for product decreases, and banks cannot get credit and markets are paralyzed.
Businesses began to fail as construction work, factory orders plunge, and massive layoffs are created and incomes fall. During the depression of 1929 to 1932, debts became heavier, prices and incomes fell by 50 %, and the downward spiral accelerated. Billions of dollars were loaned to corporations and wealthy individuals and most of the money was lost in stock market speculation.
The crisis was not corrected or fixed through government “bail out” or welfare to large banks or corporations. Industrial production fell by 45% and 13 million people become unemployed. Home building dropped by 80% and 5000 banks went out of business.
In order to avoid these conditions, our government must control consumption by keeping people working and maintaining the national income measured by current values. Fixed charges may have to be adjusted during the impending financial crisis represented by the ability to pay debt. In order to prevent an international depression or greatly moderate the economic collapse, our leaders will have to think outside of the box and institute financial reform.
It will become extremely important to stimulate and provide the working class with increased government spending and set minimum prices, wages, labor standards, and competitive conditions in all industries. By controlling consumption, restarting the economy, and balancing the budget, America and its leaders may avoid an international economic and financial meltdown.