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The All But Forgotten Doomsday Crowd

By: Steve Johnson

1/31/2008 - 14 Comments

When you ask 50 economist about the direction of the economy, 25 say up and 25 say down.

The experts cannot agree because globalization has entangled the once individual national economy’s of the world into a giant web of complex financial instruments created by hedge funds and investment banks.

The Great Depression was the last financial crisis that genuinely threatened the fabric of our society. Since the Great Depression, the United States has built a system of regulatory checks and balances to protect the financial system and for the most part – it has worked.  The system of regulations has enforced some resemblance of transparency – such that companies abide by a set of rules and file information on their profits, losses, and assets.

The problem is that there is a lot of financial reword in finding ways around the regulations. The goal is to make more money than the next guy.  The first thing to do is find a way to invest without having to keep capital to back up your investments.  The mortgage-driven securities are highly leveraged with no reserve cushion to back them up, and nobody really knows what they are actually worth.  The modern global economy is a shadowy banking system.

The Banking Game

Banks have been playing this game for decades as they did with the interest rates on CD’s in the 80’s.  Each bank was in the game of confusing the customers into thinking they were getting a better return on their money by manipulating the terms of the loan with fees and different compounded periods.  To help consumers make a meaningful comparison between potential accounts, the US government created the Truth in Savings Act, 1991,  which requires the clear and uniform disclosure of interest rates and the fees that are associated with the account – by using the same terms to calculate the annual percentage yield or APY.

The mortgage-driven securities that have been making headlines are but the tip of a much larger iceberg. It has been estimated that investors worldwide hold more than $500 trillion worth of derivatives – while the global GDP is about $60 trillion. The world’s money has been leveraged to 10 times its value. The unregulated derivatives comprise a huge web of bets, reaching across every sector in the world and entangling a massive amount of money.  Even a little panic could trigger investors to start selling them to cover other losses, leading to catastrophic results on the financial markets around the world.

This article say, The black box economy

“Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.”

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 defend 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. 

If we do have a global economy meltdown, it will surely be followed by a wave of new regulations – but not just in the US – at the global level so that all investment firms throughout the world will follow the same rules to protect their customers.  The World Bank will need to become a powerful entity like the UN.  This will only be a temporary solution as greet and corruption will probably invade the World Bank as it has the UN.  No one can be trusted.  Without a moral standard to live by, capitalism does not work.

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Nemesis: The Last Days of the American Republic

Like ancient Rome, America is saddled with an empire that is fatally undermining its republican government. Johnson surveys the trappings of empire: the brutal war of choice in Iraq and other foreign interventions going back decades; the militarization of space; the hundreds of overseas U.S. military bases. Retribution looms, the author warns, as the American economy, dependent on a bloated military-industrial complex and foreign borrowing, staggers toward bankruptcy.

Freedom: America's Competitive Advantage in the Global Market

Gamble argues that globalization brings far more benefits to the U.S. economy than it takes away. Gamble shows that both Europe and emerging economic powers like China and India have serious long-terms problems linked to their cultures, political structures, occasional instability, and state ownership of companies. These and other factors will eventually put a brake on the economic growth of hot emerging economies. The fundamental protections of property and free speech, a culture that promotes and rewards entrepreneurship, banking policies that make capital easily available, are still more supportive of economic growth and wealth creation than can be found anywhere else.

Crash Proof

Peter Schiff has predicted the economic hardship more accurately then any other economist in the world in this book. Everything from the housing crash to the credit crunch to the stock market. Peter has a plan to help you servive the crash. Peter explains why the Wall Street investment firms are still trying to sell you stocks, and was the house prices are likely to continue to decline for years to come.

The Coming Economic Earth Quake

Larry Burkett explains how the financial troubles in America started back in the 1930s. Larry explains the economics of huge goverment and public deficits and how it leads to hyper-inflation. We may be headed for another great depression.