We’ve established that the US has an untenable amount of debt which is growing at incredible rates, and that foreigners are becoming more and more uncomfortable holding this debt and dollars in general. The US is in a precarious position, and those of us who live here are the ones who will most feel whatever happens.
For decades our leaders have simply kicked the can down the road, hoping that this problem won’t explode on their watch. And it’s probably true that if our economy starts growing at a strong, healthy rate, the problem could be kicked further down the road. My question is – are there any big pitfalls down the road that could exacerbate this delicate situation?
Actually, there are quite a few of them. Let’s take a look:
1) Energy price increases. It’s simply not true that we’re running out of oil. There is a lot of it and more is found all the time. What is true is that we’re running out of the easy, good oil. Light Sweet Crude is the cleanest and easiest to turn into energy. We’ve pumped much of this type which is found near to ground level. There are other types. For instance the tar sands of Western Canada can be turned into energy, but it is much harder to process and must be mined instead of drilled and therefore, it is much more expensive. Also, new deep water finds are found periodically such as were found in the Gulf of Mexico and off the coast of Brazil recently. The technology to find and drill this oil didn’t exist until recently, but now we can find it and drill it. But it costs more. The cost of oil will increase, and there is no other commodity that more effects every area of the economy than this price.
I also expect new instability (wars, etc.) in the Middle East. When Mubarak dies, there will be chaos in Egypt. Iran has been rattling sabers at Israel for some time. Even Turkey has begun insulting Israel, and they’ve historically been the country in the region who most wanted to get along with the West. When trouble next breaks out in the Middle East (where a large portion of the world’s oil is), prices will jump as they always do. This could really hurt a US economy struggling to recover.
2) Another Real Estate bust. “Wait a minute” you might be thinking. “Didn’t we just go through a real estate bust?” Yes, in 2007 & 8 we saw a huge bubble burst when the sub-prime mortgages defaulted in high number. Did you know that 2010 and 2011 will see huge amounts of Adjustable rate mortgages and Alt-A mortgages reset? These are as big a risk to the real estate markets as what we saw over the last couple years. If interest rates have begun creeping up, this could be an enormous mortgage default scenario. Did you know the US government (through FHA, Ginnie Mae, Fannie Mae, and Freddie Mac) is the biggest guarantor of mortgages in the US? In fact, they currently guarantee 9 of 10 new mortgages in the US. If massive defaults hit, the US government must borrow or print more money to pay for these things. Plus the overall destruction of individual families’ financial lives that go with these things. The government has for decades done everything possible to lure people who can’t afford homes into buying homes. They’ve kept rates artificially low and threatened and incentivized bankers to get people into homes so that they can brag about the percentage of home ownership in the US. The problem is that if people can’t take care of their financial lives enough to actually buy a non-subsidized mortgage, what makes you think that they will make smart financial decisions once they’re in the home? I believe it’s cruel to lure someone into a home that they do not have the wisdom and diligence to earn themselves because the destruction that comes when they default on their mortgage is far worse than never having owned a home in the first place. Whether you agree or disagree with me, or with what we have done though is not so important to this discussion. These things happened and these mortgages will be resetting in larger numbers than what we’ve already seen over the next couple years. This could be all it takes to drive the nail in the coffin of the US economy and the stability and strength of the US dollar.
There are several more issues looming on the horizon which we’ll look at tomorrow.
You’re invited to a free event November 18th in Austin to discuss these things in greater detail. If you would like more ideas on how to prepare for this coming storm, please sign up for our free newsletter here. If you’d like to read more about the spiritual realities behind what’s happening, read the series we just finished on Daniel.
This post is Part 7 in the series Financial Outlook of the United States. To continue with this series, click on Pt 8. To gain more insight, you can read about the coming storm here, in Pt 1, Pt 2, Pt 3, Pt 4, Pt 5 and Pt 6.
Photo credit: cayusa