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U.S. Economics for the Layman
forexrazor
Project Triumph, LLC
It is difficult during such tumultuous times to turn on the TV or radio without hearing about issues faced by U.S. and Global economies. The average guy or gal however does not know what the current state of affairs means to the future of our global economy.
It is difficult to be a bearer of bad news, especially when it seems so mainstream-ish recently, but facts are facts. Here are some hard facts:
1) Banks are going under at a rate never seen before in history.
2) More jobs are being lost every month 159,000 jobs were last just last month.
3) Financial markets are a deteriorating more rapidly than at an time since the Great Depression.
How did it all happen, was it osmosis, or a few bad apples in the mortgage industry? Not quite government spending, intervention, and decades of recklessness and lack of foresight in many areas have finally converged to spew forth an inevitable mess.
The housing bubble began at the turn of the century. Perhaps you will recall how many people were investing in real estate or the thousands of television ads touting the housing market as easy money, or your friends bragging about their increased equity valuation a year after purchasing their home. Greed and emotion were driving while common sense, for most, sat in the backseat sleeping. Homes got way too expensive to be affordable for the average buyer and like a house on sand, the foundation started to erode. This could be clearly seen in early 2007.
If you have a mortgage, the reality is that your lender is the homeowner. Banks therefore are consuming lots of bad debt as they foreclose on homes with outstanding principles greater than they would fetch at market. Many people, seeing that their home is now worth far less than the mortgage they have on it, may feel some complacency about scraping together every dime they can to pay a mortgage that is simply not worth it and in all reality, never was. The end result is home buyers default and banks are now feeling the mistakes they made; flooding consumers with credit highly disproportionate to the consumers ability to pay.
Most companies operate on the basis of credit. Many major U.S. companies have modeled their financial operations and cash flow around credit. Credit strains therefore are damaging to businesses. If a particular business can survive apart from credit, their growth may slow or they will be incapable of completing a project that is only half complete. Such things then reflect poorly on investor confidence. The next step is massive job losses as businesses are forced to free up capital while they struggle to pay for the most basic and essential components.
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Article submitted Friday, October 10, 2008
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