Five Doomsday Scenarios For The Economy
What if the pessimists are right, again? What if the United States isn't in the slow-lane to recovery, but rather on the precipice of another decline -- a double dip?
Housing Mini Bubble Pops
Did "the housing bailout" just create another mini-bubble that's beginning to pop now that the support has been withdrawn?
Weak home sales and continuing foreclosures result in climbing real estate inventory. This has two effects.
First, it makes new homes even less attractive which further reduces construction jobs.
Second, it puts downward pressure on home prices, which makes it harder for struggling homeowners to sell their home to avoid foreclosure and also keeps strategic default rates high, exacerbating the problem.
Lower home values encourage Americans to save more and spend less, since their wealth is effectively reduced.
The Dow drops and credit markets tighten even further, suffocating private investment just as homeowners bunker down and slash spending.
Consumer's Go Under
Consumer sentiment continues to fall slowly, and spending turns negative again.
Small businesses hold off to replenish their inventories or add new workers. Wages and hours freeze, and unemployment takes a leap toward 10 percent in October.
Toxic Debt Shock
We see waves of defaults, as modification program participants re-default at rates of 30% to 50%.
Commercial mortgage-backed securities continue to deteriorate, as some businesses struggle with weak consumer demand.
Home and commercial real estate values keep declining, and so do the value of the assets that back them.
Banks with exposure to these toxic securities see another round of losses, and investors question their stability.
The market plummets, credit freezes, and growth turns negative.
Europe Tanks
Slow growth in weak Eurozone states like Greece, Spain, and Italy turns negative and spooks investors, who demand higher returns on government debt.
Europe's bond rates spike. The EU central bank responds by announcing a plan to write down troubled debt.
In a flight to quality debt, the dollar appreciates. This hurts our exports even more.
As the trade deficit gapes open and manufacturing's good run dead ends, the stock market plummets, taking household wealth down with it.
Families looking to restore balance sheets cut back on spending, and the American producer loses the American consumer and the European buyer. Growth turns negative.
Debt Timebomb Finally Explodes
Current interest rates are low. The IMF recently said the United States has a 25% chance of seeing dramatically higher interest rates in the near future.
But the bond market can strike without warning, as it did in Europe earlier this year.
55% of our debt has to be rolled over in the next three years.
Pension and mutual funds with government debt would be written down, causing Americans to save even more of their paychecks.
We'd be left with two bad choices: tax cuts to juice consumption or tax hikes to please our lenders.
The Nattering One muses... Well is it A, B, C, D or E? How about F? ALL OF THE ABOVE.
These bailouts are all gone: Automotive (cash for clunkers), Banker (TARP), Wall Street (Countless), Real Estate (homebuyer credits).
Without any visible support on the horizon, the "false bottoms" created for these industries (automotive, housing, stock market) should crater in the next two years.
No durable job creation has been seen, let alone McJob (service, hospitality) creation.
Advertised Unemployment would be 10.2% were it not for 1.2 million job seekers GIVING UP and falling off the long term rolls.
REAL Unemployment is around 17% nationally, in some parts of the rust belt and Florida, its 25%.
The consumer has nowhere to turn and will continue to pull back further, causing what is left of service and hospitality to crater.
Laundering toxic assets by shuffling paper, changing accounting rules and printing money will do no good. These debts HAVE to come out in the economic "wash".
Greece was just the tip of the iceberg for Europe. Their and our public and private debt rollover will occur with nervous investor's charging higher risk premiums.
Debt service will rise along with an onslaught of public, private and governmental defaults and write downs.
The bond market will be the last shoe to drop as its massive bubble pops.
Thats not a light at the end of the tunnel, that's a train heading straight for a full speed wreck.
Excerpts from The Atlantic Full Text
Housing Mini Bubble Pops
Did "the housing bailout" just create another mini-bubble that's beginning to pop now that the support has been withdrawn?
Weak home sales and continuing foreclosures result in climbing real estate inventory. This has two effects.
First, it makes new homes even less attractive which further reduces construction jobs.
Second, it puts downward pressure on home prices, which makes it harder for struggling homeowners to sell their home to avoid foreclosure and also keeps strategic default rates high, exacerbating the problem.
Lower home values encourage Americans to save more and spend less, since their wealth is effectively reduced.
The Dow drops and credit markets tighten even further, suffocating private investment just as homeowners bunker down and slash spending.
Consumer's Go Under
Consumer sentiment continues to fall slowly, and spending turns negative again.
Small businesses hold off to replenish their inventories or add new workers. Wages and hours freeze, and unemployment takes a leap toward 10 percent in October.
Toxic Debt Shock
We see waves of defaults, as modification program participants re-default at rates of 30% to 50%.
Commercial mortgage-backed securities continue to deteriorate, as some businesses struggle with weak consumer demand.
Home and commercial real estate values keep declining, and so do the value of the assets that back them.
Banks with exposure to these toxic securities see another round of losses, and investors question their stability.
The market plummets, credit freezes, and growth turns negative.
Europe Tanks
Slow growth in weak Eurozone states like Greece, Spain, and Italy turns negative and spooks investors, who demand higher returns on government debt.
Europe's bond rates spike. The EU central bank responds by announcing a plan to write down troubled debt.
In a flight to quality debt, the dollar appreciates. This hurts our exports even more.
As the trade deficit gapes open and manufacturing's good run dead ends, the stock market plummets, taking household wealth down with it.
Families looking to restore balance sheets cut back on spending, and the American producer loses the American consumer and the European buyer. Growth turns negative.
Debt Timebomb Finally Explodes
Current interest rates are low. The IMF recently said the United States has a 25% chance of seeing dramatically higher interest rates in the near future.
But the bond market can strike without warning, as it did in Europe earlier this year.
55% of our debt has to be rolled over in the next three years.
Pension and mutual funds with government debt would be written down, causing Americans to save even more of their paychecks.
We'd be left with two bad choices: tax cuts to juice consumption or tax hikes to please our lenders.
The Nattering One muses... Well is it A, B, C, D or E? How about F? ALL OF THE ABOVE.
These bailouts are all gone: Automotive (cash for clunkers), Banker (TARP), Wall Street (Countless), Real Estate (homebuyer credits).
Without any visible support on the horizon, the "false bottoms" created for these industries (automotive, housing, stock market) should crater in the next two years.
No durable job creation has been seen, let alone McJob (service, hospitality) creation.
Advertised Unemployment would be 10.2% were it not for 1.2 million job seekers GIVING UP and falling off the long term rolls.
REAL Unemployment is around 17% nationally, in some parts of the rust belt and Florida, its 25%.
The consumer has nowhere to turn and will continue to pull back further, causing what is left of service and hospitality to crater.
Laundering toxic assets by shuffling paper, changing accounting rules and printing money will do no good. These debts HAVE to come out in the economic "wash".
Greece was just the tip of the iceberg for Europe. Their and our public and private debt rollover will occur with nervous investor's charging higher risk premiums.
Debt service will rise along with an onslaught of public, private and governmental defaults and write downs.
The bond market will be the last shoe to drop as its massive bubble pops.
Thats not a light at the end of the tunnel, that's a train heading straight for a full speed wreck.
Excerpts from The Atlantic Full Text
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