Gold is tanking. The 30-year U.S. bond yield is at an all-time low. Stock markets are struggling. The Chinese real estate bubble is beginning to pop, and the Euro is locked in a downward trajectory in recognition of the beginning of a likely recession with a financial crisis thrown in to boot. Will everything change tomorrow or is this an indication that the second economic downturn, as described on this site on Memorial Day, is about to begin? The title of that article (and the link for those that may be interested) is “The Second Recession in the Second Great Depression.”
Unfortunately, the risks indicated back then seem to be even more applicable today. One significant element that has greatly increased its impact on the explosive mix is the European situation, which has gotten so out of hand that there is a new effort here to bail Europe out with U.S. taxpayer dollars. Greece, which is ground zero for the problem, appears headed for an economic collapse which could involve as much as $1.1 trillion in regime and bank debt. The nations of Portugal, Spain, and Ireland also have serious problems and others, including even France, are struggling.
If the situation gets out of hand, it would ripple through the banking system, starting in Europe. The concern, if it reaches that point, is that the overseas banks are nowhere near as healthy as their statements indicate. The regime debt they hold, as well as their real estate portfolios, are carried at par, well above the true values of these toxic assets. Furthermore, the values of their derivative investments are hidden behind a carefully constructed curtain, which makes it impossible to determine the level of risk in that area. And, another great concern is that there is a growing perception that the European Union is incapable of dealing effectively with the situation.
Undoubtedly, if the dominoes begin to fall, they will stretch across the pond, and, here again, the degree of the threat is unknown. While information regarding the net exposure of U.S. banks is generally available, the gross exposure to Europe’s problems has been a carefully guarded secret.
And, as a general rule, it is not a good sign when critical banking information is withheld.
The main focus of the White House and the Democrats has been on the jobs crisis which now seems to be all the more impossible to deal with. And, behind it all lies the specter of a looming presidential election year.
The decisions by the leaders of both parties have rarely been as important as they are today. Moves to cut outlays out of concern for hyper-inflation should be scrapped for now.
The enemy that faces us is deflation and the battle can only be won by a policy of stimulation carried out - not by the Fed - but by the Congress. For those concerned about the national debt, it should never be overlooked that nothing will reduce the deficits faster than income growth resulting from a recovery in the jobs sector.
Our future at this point may depend on members of Congress forgetting that 2012 is an election year and giving the recovery their highest priority.
However, the biggest question might well be: Is that possible?