Home Les bulletins GEAB December 2006 – Dollar-Real Estate-Stock Markets: US consumer’s insolvency, a catalyst of the impact phase of the global systemic crisis

December 2006 – Dollar-Real Estate-Stock Markets: US consumer’s insolvency, a catalyst of the impact phase of the global systemic crisis

The American mid-term elections have now passed and, only a week later, as announced by LEAP/E2020 in GEAB N°8 of last October 15, the “euphorisation” of US voters/consumers and world financial players seems to have already passed wit them. The development process of the global systemic crisis has resumed its course, artificially stopped last July due to the upcoming mid-term elections, as shown by the recent changes in the Dollar’s value and by the latest US economy indicators. In parallel, a series of topics which had curiously disappeared from the pages of financial media these last months is reappearing, such as the end of the “carry-trade” based on the Yen, increasing fears of the risk of implosion of the market for derivatives and “hedge funds” and of course the uninterrupted fall of US real estate with its procession of negative consequences on American growth (all these developments generating from now on increasing reflection as to the health of the US banking sector, one depending more and more on unsound debt). For the team of LEAP/E2020, all these trends, which mark the beginning of the impact phase of the global systemic crisis, have a common catalyst, and that is the insolvency of the US consumer in the framework of a generalized degradation of the quality of credit to all US financial and economic operators.

For more than five years the American consumer has been the “cash-cow” of US growth, contributing more than 70% to the resulting progression of the United States economy. Stimulated by the easy money policy promoted by the US Federal Reserve in order to avoid a catastrophic recession feared after the explosion of “internet bubble”, the US consumer rushed into a frenzy of purchases of consumer goods. Encouraged by banks and the whole US financial system, he exceeded his own financing capacities and plunged since 2004 into generalized debt and into a situation not seen in the United States since the dip of the Great Depression post 1929, namely a negative saving rate.

The Federal Reserve, the Bush administration and the republican Congress, as well all the financial and banking sectors of the country then fed the fiction of a continuous and fast enrichment via the development of the “real estate bubble” which convinced the majority of the country’s middle class, including its least ‘well off’, to rush into a strategy of purchase, and often of speculation, in real estate. In parallel, the very strong growth of real-estate prices made it possible for the financial sector to offer loans for household consumption, linked with the “value” of the real estate. Because of these operations relating to more than 2,500 billion dollars since 2004, these same lenders and other banks have in same time increased considerably their results, gaining the admiration of stock markets by their extraordinary success, whereas these same assessments were potentially seen to be depending more and more on the future evolution of the real estate market…

Read more in the GEAB No 9 / 16.11.2006

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