Whatever headwinds the country now faces economically can be directly attributed to the inherently flawed ideology of market fundamentalism.
Tuesday's 449 point bloodbath on Wall Street is the beginning of an unavoidable market crash. Regardless of Paulson's plan, there's more pain on the way. According to Bloomberg: "More than $19 trillion has been wiped off global stock market value since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy." All of the economic indicators point to greater losses. Once the system begins to deleverage, there's nothing anyone can do to stop it. Paulson can place himself in front of a market avalanche if he so chooses, but it won't change the outcome. Market corrections are as inexorable as the force of gravity. That's why equity bubbles cannot be allowed to develop without interest rate intervention. Responsible action by the Central Bank could have prevented the present crisis.
On Wednesday, Forex.tv reported that the net long-term TIC flows came in below the consensus forecast, totaling $6.1 billion in July, while total TIC flows for the month fell to $74.8 billion, according to data released by the U.S. Treasury on Tuesday morning. Economists had been expecting net long-term flows to rise to $55.0 billion compared to the previous month's previously reported figure of $53.4 billion.
$6.1 billion does not begin to meet the requirements of our current account deficit of $700 billion. The dollar is headed for a fall.
On Wednesday, New York Mayor Michael Bloomberg warned that the "next wave" of financial pain may come from overseas if foreign entities stop buying U.S. debt."It's not clear who's going to be buying our debt," said Bloomberg. "It may very well be that the next wave is going to come back and bite us."
The New York Times tells a similar story except this time about Asia:
"Asia’s savings have, in essence, bankrolled American spending for decades (but) Asian interest in American assets is wilting, a trend that seems to have started over the summer...Little-noticed data released by the Treasury Department on Tuesday showed that a sharp shift in international capital movements began in July. Private investors pulled a net $92.9 billion out of the United States, after putting $46.8 billion into American securities in June. ("Asia rethinks American Investments Amid Market Upheaval", Keith Bradsher, New York Times)
Foreign central banks and investors have turned off the spigot. They can see that the US financial system is teetering and that the dollar is weakening. "The perceived risk of U.S. government debt, long held to be absent of any default risk, also climbed to a record yesterday as the government's involvement in bailing out financial markets weighed on its own balance sheet." (Bloomberg News) The "full faith and credit" of the United States government is slipping. US debt will be downgraded. Triple A is no longer guaranteed. America's stock just moved to Level 3 assets. The US is now a subprime economy on life support.
Presently, "there is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion." (Mish's Global Economic Trend Analysis)
$273.7 Billion is a paltry sum, insufficient to meet the needs of even a minor run on the banking system. The storm hasn't even touched ground in middle America, and already the system is buckling. 2009 is shaping up to be bleak, indeed.
The battered and over-leveraged US financial system is facing its greatest challenge in the months ahead. The frantic search for capital has already begun, but with predictably disappointing results.
Neither China nor the Saudi princes are buying any more failing investment banks. They'll leave that to the US taxpayer. What started off as a brilliant plan to offload garbage mortgage-backed paper to gullible investors around the world has suddenly backfired and now threatens to bring the entire system crashing down and change the geopolitical power paradigm for the foreseeable future.
Reid: "NO ONE KNOWS WHAT TO DO"
On Monday night, Senate Majority Leader Harry Reid was briefed on the gravity of the financial situation in a secret meeting with the Treasury Secretary and Federal Reserve Chairman. Reid's remarks are the best summary yet of the troubles that lie just ahead. He said, "We are in new territory, this is a different game...No one knows what to do."
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