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RECAP NEWSLETTER - 12/3/7 Issue 53
informedchristians.com
Daniel Valles, editor
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THE ECONOMIC REPORT: NOVEMBER 30th
Proverbs 22:3 “A prudent man foreseeth the evil, and hideth himself:
but the simple pass on, and are punished.”
“Never spend your money before you have it.” – Thomas Jefferson
“’Tis against some Men’s Principle to pay Interest, and seems against
other’s Interest to pay the Principal.” Benjamin Franklin, Poor Richard’s
Haggai 1:6-7 “Ye have sown much, and bring in little; ye eat, but ye
have not enough; ye drink, but ye are not filled with drink; ye clothe
you, but there is none warm; and he that earneth wages earneth wages to
put it into a bag with holes. Thus saith the LORD of hosts; Consider your
ways.”
State Of Our Union
Much has happened with our nation and world’s economy in just the few
short years of this new century. Within this short time span, gold has
gone from $260 an ounce, to now hitting over $820. Oil is now almost to
$100 per barrel. Foreign currencies, such as the euro, pound, and the
Canadian dollar are now worth more than the American dollar.
Almost daily we are now hearing about the various fallouts and ripple
affects of the credit crises. In just the past year, we have seen the
subprime crises arise to our greater attention. Our economy rides upon the
housing industry; yet, it is failing. New home prices are declining by
double digit percentages, and many home builders are having to cancel or
scale back their plans. This year, D.R. Horton, the largest U.S. home
builder, had their orders down thirty-seven percent. Home sales are
experiencing their worst drop in over eighteen years, as more and more
unsold homes are flooding the market.
Our nation no longer relies on industry to prop up the job market and
economy. Almost 100 percent of US job growth is created in the service
sector. These at the same time that minimum wage increases are occurring.
Economic history shows that when a minimum wage increase occurs, hiring
decisions are often delayed or canceled, hurting employment. Various
ripple effects and factors are tightening down on spending and savings for
individuals. Besides the fact that saving money is unheard of by most
Americans, increases in prices for food and necessities further depletes
our bank accounts, or increases our being in the red. Many of the price
increases are not solely from the costs passed on to the consumers because
of higher fuel prices. Most of the products and services bought have not
changed in quality or quantity. The reason their prices are going up
(seemingly) is because it is taking more of our depreciating dollars to
buy them. Staples such as milk and eggs are already rising 15-22% in
price. Meats and corn-based products are rising in price because of the
increased biofuel (ethanol) demands, coupled with the concurrent droughts
affecting crop harvests. With the price of gas topping $3 a gallon on top
of all of this, something has to give.
America is approaching a point in our economy where the tensions built up
will slip and give way to an economic earthquake. In 1979 and 1980, during
the oil crisis, prices rose quickly because of the events; but they fell
again as the events changed. Today, we are not looking at one (two, or
even three) singular historic events that are causing the rise in prices.
What we are seeing is the gradual rise in prices, and the gradual decline
of the dollar. This is not because of events, per se, but because of
fundamentals and circumstances entrenched in our nation’s economy.
Anyone who pretends to be interested in the news at least knows about the
subprime debacle that is hitting our nation. Basically, loans were made to
people to whom probably shouldn’t have been made (for numerous reasons).
Now (surprise, surprise), the majority of those people cannot pay back
those loans, or are defaulting on the payments. What is of concern and
alarm is that these risky loans make up twenty percent of all mortgage
loans in the U.S. Our nation is just starting to taste the whiplash from
the looming defaults. Banks and financial companies have tried to scale
back their mortagage loan products from this risky segment (scaling back
35% of what they would have offered previously), but the damage is done.
There are over two million subprime adjustable rate mortagees that will be
resetting to higher interest rates in the upcoming months – rates that
will make their monthly payments climb by thirty-five percent or more.
Unfortunately, the crisis is not limited to subprime mortgage loans. Even
some of those with good credit are defaulting, as more and more Americans
are struggling paycheck to paycheck.
The loan defaults has an incredible impact on the banking world and
economy. The US banking system is predicted to lose $400 billion dollars
over the course of this madness. There are many people who, to this point,
see little connection to them in their personal lives, or why they should
be concerned at all. The reason you should be very concerned, is that this
economic fallout will affect you and your family, as well as our nation
and world. Let us examine the fallout.
The Fallout
The American banking system can typically leverage lending of $10 to every
$1 capital that they actually have. If ABC Bank has, say, one million
dollars, they can write loans for ten million dollars. Why? Well, they
expect that their loan customers were qualified in some jurisprudent way
to where they may expect few defaults. Their capital that they do have can
cover those losses, while they will make it back from those who don’t
default.
Now, let us also say that the ABC bank that wrote ten million dollars
worth of loans, decided to play the markets to make even more money. So,
they used the ten million dollars worth of debt as collateral to buy
securities. Remember, in the business mindset, that ten million dollars is
supposedly going to be paid back by the debtors, it will just take a while
– so it is as good as money in the bank, right? Well, that is what they
thought. Let us then see the investors that took the loan collateral bait.
They are betting that they can make a good deal of money – howbeit a risky
bet.
Well, what happens when there is little jurisprudence and examination of
ABC Bank’s potential customers, and a large portion of them default? ABC
Bank does not have enough capital to cover those losses. That means that
(A) they have a large loss of capital, and thus cannot leverage new loans,
or (B) do not actually have enough capital to cover those losses, and so
they have to borrow money to make up the loss, and also so they can
continue to lend money. At this point, the central banks (Federal Reserve)
increase liquidity (the money and ability to leverage new loans) by giving
out emergency loans. And investors who invested in those mortgage-backed
securities and derivatives are now at a large loss. To further compound
the problem, let us also say that the Federal Reserve is increasing
liquidity by buying those questionable debts from those banks and firms –
those securities have such shaky assets as collateral now that the banks
cannot sell them to anyone else.
Within a few months you see those banks and firms announcing large losses
(and we are just getting started on the losses). Those losses hit their
capital reserves and assets, which drastically reduces their lending
power. Well, if they need more capital, they can just borrow some, right?
Er, well, if they are lucky. With other firms and banks also taking large
losses, the number of people that can loan the amount of money that they
need is growing shorter and shorter. Very quickly you will see banks and
firms borrowing from overseas banks, making short-term loans with high
interest, or both. You will also see these ripple effects in foreign banks
that also dealt with the mortgage loan collaterals. Just recently,
Europe’s ECB issued $130 billion worth of loans to increase liquidity over
there – what is scary is that forty-nine banks lined up needing the
support. Over here, we are just starting to see the tip of the iceberg
that may sink our ship. Already, losses are starting to emerge in “Alt-A”
mortgages (the next-riskiest), and in other credit markets such as
‘subprime’ credit card and subprime auto loan asset-backed securities.
With the Federal Reserve buying up this shaky collateral in exchange for
loans to increase liquidity, is it any wonder that other nations are
distancing themselves from the dollar?! They are not the ones devaluing
the dollar – we are! Treasuries bought back in 2002 have gone down 30% as
our dollar is depreciated. As someone recently said, it is akin to using
your credit card to make a payment to avoid foreclosure – you are so deep,
you have no chance of getting out.
Already, many of the major nations are switching away from having the
dollar be a large part of their reserves. Kuwait announced they are
gradually reducing the dollar in their basket of currencies. Iran, the
major oil player, has now almost completely eliminated the dollar from
their reserves, and is now conducting oil transactions in the euro and
other currencies. They have also asked Japan to pay yen for oil. Russia,
whose economy is growing stronger, is also shifting away from the dollar.
It appears that Japan (the second-largest dollar reserves after China)
wants to also, but is concerned that it would trigger a slide of the
dollar’s value. At a recent OPEC meeting, it was slipped that if the OPEC
members publicly stated with dumping of the dollar collectively, it would
cause the dollar to collapse. The International Monetary Fund (IMF)
recently reported that the U.S. economy was growing by only 2.2% percent
when compared to the 5% global overall growth. How can we expect to grow
and thrive when we are in massive debt, incredible credit losses, and
increasing self-devaluation?
America is borrowing $2 billion dollars a day from foreign nations to
maintain the status quo. On top of that, with our increasing trade
deficits (NAFTA, WTO), our real wages and property values decreasing and
goods and services increasing, we have the increasing burden of foreign
entanglements constantly rising in ‘unexpected’ and prolonged costs.
The massive foreclosures are just the beginning. With those foreclosures
comes a loss to state revenues and tax dollars, which will put a severe
crimp on local municipalities. Their tax bases will be drying up – that
affects schools, parks, services, etc. Another dangerous facet of this
iceberg (that is also starting to show) is the double-whammy from the
filed bankruptcies on top of the foreclosures. That translates into
incredibly large losses for our economy. The families and individuals that
lose their homes and assets through foreclosures and bankruptcies will not
have anything significant to contribute to the economy – all of their
money will be for the basics of survival. That ripple effect affects
retails - which affects the service sector – which is the last leg for our
economy.
Friends and brethren, the days are getting darker. II Timothy 3:1 warns,
“This know also, that in the last days perilous times shall come.”
We know that these last days are filled with the concurrence of
earthquakes, wars, famine, etc. – the perilous times is not just something
that is viewed from afar on the nightly news – it will affect our daily
lives. In the days ahead you will see major banks declared insolvent,
massive lay offs, and retail sales plummet. Right now most people are
paying with plastic in the holiday shopping frenzy. Buying China-mart
trinkets with debt will hide the economic pain for another month perhaps,
but we will have to pay the fiddler soon.
Conclusion
What about you Christian? I do not know the details
of what will happen; but, like the prudent man, we can see down the road
and see that rough times are almost upon us. Will we be part of the crowd
that closes its eyes and spends themselves to their own destruction? Or
will we be prudent and frugal, being proper stewards of the resources,
abilities, and opportunities that God has provided us with? I strongly
urge you to cry out to God for wisdom as to what steps you and your family
should take. Social unrest will be a symptom displayed of economic
hardship for a weak and mindless lot that Americans have stooped to. Get
your financial affairs in order. We are just strangers and pilgrims on
this earth – live in light of it. Do not pursue the mindless, wanton
destruction of this time of year that feeds the lust of the flesh.
I Timothy 6:7-12 reminds us, “For we brought nothing into this world,
and it is certain we can carry nothing out. And having food and raiment
let us be therewith content. But they that will be rich fall into
temptation and a snare, and into many foolish and hurtful lusts, which
drown men in destruction and perdition. For the love of money is the root
of all evil: which while some coveted after, they have erred from the
faith, and pierced themselves through with many sorrows. But thou, O man
of God, flee these things; and follow after righteousness, godliness,
faith, love, patience, meekness. Fight the good fight of faith, lay hold
on eternal life, whereunto thou art also called, and hast professed a good
profession before many witnesses.”
Related Articles (by Daniel Valles) for the Prudent…
Calamities and the Poor
God’s Provision
Evil Tidings
Are you Ready For Things To Get Worse?
Why Should I Prepare?
RECAP Newsletter – 11/10/6 – Wealth and War
May God richly bless,
Maranatha!
Daniel Valles
Psalm 94:17
editor@informedchristians.com
P.O. Box 403, Shelby, AL 35143
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