How America's Economic Meltdown Relates to Everyday Life

By now we have all heard about the sub-prime mortgages and the greedy fiasco that lead to them. Time and time again, the major news media outlets reports on a poor destitute family that will lose their home because the ARM loans they took out will "re-adjust" in the next month or two. Sometimes, the loan has already adjusted and they are squeaking by to make the payments. Our hearts go out to them, and many people scream for a "helping hand". Stop and think for a moment before you let your emotions carry you to the edge of your seat. All of us were offered easy loans for a home with no money down and no verification of income. I admit I even looked over the advertisements with a bit interest for a little while during the frenzy. However, even though I was a very good candidate, I chose to abstain. I suppose the readjustment rate made me wary, but more than anything the length of the loans made me nervous. Let's face it, in today's economy (and even yesterday's economy) having a job for thirty years is never a guarantee. As such, we collectively need to review how we purchase large items. Do we really want to be in debt for thirty years with a volatile job market?

However, this is neither here nor there. What is done is done. People bought into the gimmicks and lies and tricks. People bought that the economy would keep chugging away at full steam, even though there was evidence to the contrary already. I mean we had a "jobless recovery". Where in the history of the United States has there ever been a jobless recovery? It was on the front page of every single paper, how the economy was great, but it was a jobless recovery. How can people pay their bills if their jobs are being exported to China? No one ever worried about that though. At least, not enough people did apparently. This is old news though right? Yes, but we need to look at the past mistakes to see the future course of dominoes that will fall.

Currently, a whole slew of bad news is coming out. According to www.shadowstats.com the real CPI inflation index is around 11%. In case your wondering, the "real CPI" is the original method for calculating the CPI and therefore inflation. That is before Reagan and Clinton tinkered with the works (aka the variables and their weight in calculation) to make inflation look better than ever. I mean, you can't have an accurate scientific study over a long period of time if you keep changing what you are measuring and it's importance. nor can you accurately measure anything if you keep changing how you measure it. I mean do we deal in meters or feet here? (OK I am being sarcastic) The only reason to do such a thing is to try and make the numbers say what you want. It is quite a creative way to fool the public, especially those that sleep walk from bed, to work, to TV, to bed ad nauseum...

OK so why is 11% inflation important to note and how did it get so high? Well, honestly answering why it is important is so much easier. Here's a simple exercise in finding out how inflation affects your money. Using the rule of 72, one can compute how long it will take until their money's "buying power" will be half of what it used to be. For example: If inflation is 4% one would divide 72 by 4. 72/4=18 So in 18 years your money would have half of it's purchasing power. this means 100 dollars would only buy 50 dollars worth of stuff. However, look what happens when we apply this rule to 11% inflation. 72/11+6.5 years! Every six years, at this rate of inflation, your money is half as valuable as it once was!

This leads to high prices, which leads me to my next point. With oil reaching up to 103 dollars a barrel according to www.yahoo.com one can see that inflation is on the rise. Many experts predict up to 4 dollars a gallon as typical prices by summer. Sure major media outlets love to say that it's a rise in demand, but if one were to compare prices in Euros, it's easy to spot the inflation. We all know what high oil prices lead to, higher food, transportation, and higher prices across the board. Therefore it becomes a double whammy across the board. I hope your ready, because there's more bad news. Time on line reports that prices are getting so high, especially in the food sector, that people are getting "priced out". It also hints there may be major food shortages in the future, especially in the poorest countries. Many experts are expecting upward spiraling food prices due to the ethanol subsidies, oil prices, and inflation. This is truly a triple threat to food in particular.

According to www.shadowstats.com non-borrowed bank reserves are negative 20 billion dollars. OK, let's put this into perspective. This means banks are having to borrow from the Federal Reserve in order to retain their minimum reserves. That in essence means they are insolvent. Bankrupt! There are bankrupt banks! How can this happen? You remember those sub-prime loans, well, they were the tip of an iceberg. Essentially banks in general made tons of bad decisions, including investing in essentially worthless mortgage backed securities. If you include all of these bad decisions and the foreclosures it becomes easy to see how banks could be bankrupt. I mean, I have heard anywhere from 400 billion to 1 trillion in foreclosure losses alone are possible. According to www.thestreet.com the FDIC is preparing for a major bank to fail and is even asking for ideas from other banks about what to do. These two things make me very nervous. The street reports that late loans and non-payment on loans is a contributing factor into the reason the reserves are so low. The Wall street Journal On line (online.wsj.com) adds fuel to the fire by saying the FDIC is adding staff and even calling back veterans in the field from the Savings and Loan crisis when I was just a kid. Are you scared yet? You should be.

If this isn't bad enough, there's more. Bloomberg.com reports that January had the first drop in available jobs in four years. The next employment report is due out March 7, 2008 according to Bloomberg.com. If February's numbers are as bad as January's numbers one can expect the stock market to take a nose dive. But on a more mundane level, it means there are less jobs for you and me!

Then Reuters reports Gold might brush 1000 dollars an ounce. This makes Silver look like the only way one could invest in precious metals on a limited income. I guess this is why so many people call Silver "poor man's gold". Gold has historically been tied directly to the value of the dollar, but over time it has become an economic indicator. Which still indicates a dollars worth, but also the stability of the currency. When Gold reaches 1000 dollars an ounce, I will be kicking myself for selling it at 800 an ounce. (Oh let's face it I already am) Also, I will be worried about hyper inflation Pre-Nazi Germany style. Hyper inflation is real inflation exceeding 50% a month according to Wikipedia. One of the signs of rapid inflation are people keeping their wealth out of monetary items and out of the local currency. With this in mind, how many shops in New York are now accepting Euros? How many people are no longer saving their money?

As you can see the defaulting of the sub-prime loans are only a part of the problem. The rapid expansion of the money supply, bad investments by banks, and and the high debt load carried by most Americans all intensifies the problems. If things continue in this manor one of three things can happen, hyperinflation, depression, or stagflation. With stagflation being the nasty combination of higher prices and stagnant growth. My hopes are none of these happen because they are all awful choices. Good luck, and here's hoping the economy doesn't get you down.