Aftershock

In Aftershock, the brilliant book by David Wiedemer, Robert Wiedemer and Cindy Spitzer, the authors dissect our “bubble economy” and declare that the bubble machine will turn itself off with the worst meltdown yet. The authors believe our politicians will not prevent the next series of Meltdowns, but I believe they can avoid making it worst with spending and budget cuts. I wrote the following before I read the book:

We’ve experienced the 2008 Meltdown and the artificially sustained recovery based on hype and the Federal government spending spree, but all of that will end soon

The 2008 Meltdown had several causes. The Fed kept interest rates too low, housing prices soared and about half of the people who bought houses in the past 10 years shouldn’t have done so. Now, despite the billions the government is squandering on remediation, home ownership will drift down from 65% to 50% to exclude the working poor and the unemployed.

Federal laws like The Community Reinvestment Act coupled with threats by HUD and ACORN to sue lenders for not accepting non-creditworthy borrowers prompted lenders to temporarily profit from this extortion. Fannie Mae and Freddy Mac bought these bad mortgages, bundled them up and sold them off as securities to all kinds of investors. These investors believed the bogus AAA ratings on these securities. They all lived on Fantasy Island until the 2008 Meltdown. When the music stopped, there were no chairs to land on. Toxic security holders had no buyers for their securities and were left holding the bag. This caused a liquidity freeze and the largest financial institutions and insurance companies had lost $20 trillion. When housing prices started to fall, foreclosures followed and borrowers and shareholders lost another $30 trillion in equity.

We should have let these banks, investment houses and insurance companies fail and file for bankruptcy. The Federal Reserve could have stepped in to lend money at 5-7% to the most creditworthy borrowers. The gamblers who went in to bankruptcy would be out of business. Their depositors would have collected their FDIC insurance funds and deposited their funds in a surviving bank or credit union. Other assets, like credit card debt could have been assumed by other surviving lenders. Investors who bought toxic securities would have to sell them at a loss or hold them and deal with recovering the collateral. Fanny Mae and Freddie Mac should have filed for bankruptcy and been liquidated.

The Aftershock Meltdown will be worse, will certainly result in even higher unemployment and could last for years (think 2nd Great Depression). The federal government bail-outs, stimulus plans and 30% higher federal budgets will trigger this Debt Meltdown. The federal government panic of 2008 and the multi-trillion dollar government spending spree of 2009 and 2010 has caused this debt bubble to worsen. It includes, $ 14 trillion in U.S. government debt, $80 trillion in U.S. government unfunded liabilities and $ 34 trillion in personal debt. Government debt can crash our economy, like Greece.

To make things worse, federal and state government operations cost structures are 50% too high. Pension plans for government employees, delivering a defined benefit equal to full salary for 20 years of service are unsustainable. These Pension plans can be terminated and replaced by defined contribution plans like the rest of us have. Government must be rolled back to abandon half of what it is attempting to take over and control.

The Aftershock debt crash can’t be far away. Greece is providing us with a preview. U.S. Federal government debt is nearing $14 trillion, the same as our annual GDP, just like Greece. This year the Federal Reserve had to buy U.S. Treasury Notes because we didn’t have enough buyers for these Notes, just like Greece. The inflation this will cause will rival the 1983, 13% mortgage interest rates we paid and the 10% return we got on our fixed income savings and retirement accounts. Government spending will necessarily be lowered to meet expected revenue. The burst of this bubble should end government deficits, bloated operating costs and end the increases we’ve seen in the National Debt. The U.S. Federal Government must cut its spending by $1 trillion per year, now.

With government budgets cut 30-50%, stated unemployment will expand to 15% (30% real unemployment) . The stock market will tank, again, on its own; it is its own bubble. The Aftershock is a multiple bubble burst, not a correction, there will be no upturn until the borrowed, printed, inflated dollars have worked their way through the system. Inflation will be 10% making our dollars worth 10% less every year. Having given away all of our manufacturing, the U.S. will have no economic engine to stop the decade after decade decline in U.S. economic activity. Illegal immigration will decline as government employee layoffs increase, but after Mexico crashes, it will surge, so we better have the border closed. U.S. GDP could stall and slide back to $10 trillion a year. The U.S. government should begin ads for us to buy U.S. Savings Bonds, like it did in World War II as the only way to find enough Treasury Note buyers to fund the National Debt. However, you shouldn’t expect any of us to buy these with less than a 7% annual return. The U.S. government is headed for a BBB rating.

In this environment, it’s unconscionable to consider anything that will increase costs. It’s not a good time to propose the Cap & Trade or Card Check scams or more subsidies for government employees, healthcare, education, foreign aid or anything else. It would be suicide to create a carbon tax that will double our energy bills every year for the next several years. It would be homicide to cripple any more organizations with union parasites. It would be treason to not close the Mexican border and allow illegal immigrants to stay.

Half of our tax dollars have been wasted for decades and now that we don’t have the money to fund that half; it’s time to cut all government budgets by 50%.