Hold on to your hat, the entire financial market could quickly become a level 5 financial meltdown. The first sign of the problem started when giant investment firm Lehman Brothers failed to find a solution over the weekend and was forces into filing for bankruptcy protection early today.
The problem is that Lehman Brothers has about $600 billion in debt and $30 billion in assets. Nobody wants to buy that. Investment brokers have been playing with high risk derivatives with massive leveraged positions for decades. That game is coming to an end. Last month the government saved Bear Stearns, today Lehman Brothers filed for bankruptcy and Merrill Lynch was purchased by Bank of America for $50 billion. Each one of these large investment firms has enough positions to bring down the financial markets, but one way or another they have to go. The days of easy money by repackaging mortgages is over.
The really bad news is that this could just be the beginning, as the Auto, Airline and Retail industries are still hoping for a miracle.
Hoping for the Best
The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to fix it. The primary bases for this reasoning is the historic strength of the economy to overcome many recessions and return to create jobs and increase the standard of living. Besides, the dooms-day crowd has been wrong so many times, that the financial markets are num to hear anything they have to say.
The real strengths of any economy are in its factories and firms, widgets and workers. Confidence is not enough. Sincerity is not enough. We need to rebuild our manufacturing sector.
The government is running out of options. The last remaining option is to print enough money to keep the system afloat. But, last month the U.S. Labor Department reported that consumer prices rose by 0.8% last month, twice the 0.4% gain that economists had been expecting. The jump in inflation marked the third straight month of oversized inflation increases following jumps of 0.6% in May and 1.1% in June, leaving inflation rising by 5.6% over the past year, the biggest 12-month gain since January, 1991.
The Wall-Street cheerleaders and the Bush administration and many others that are not facing reality. They believe we are in a short recession that will only last a few months and then the economy will return to its bubble state. The goldilocks economy is gone forever and we are at the dawn of a lengthy economic decline.
The Dawn of a Lengthy Economic Decline
A 500+ point drop is another reason to realize that we are on the dawn of a lengthy economy decline. The importance of whether or not America is in an official recession is not as important as understanding what's really happening.