This is a powerful article by a long-time financial commentator (Allan Sloan) who is not known for hyperbole or literary excess.
Here are a couple of snippets from the article. But, if I were you, I’d immediately click over and read the whole thing.
(Fortune Magazine) — What in the world is going on here? Why is
Washington spending billions to bail out Wall Street titans while
leaving struggling homeowners to fend for themselves? Why are the
Federal Reserve and the Treasury acting as if they’re afraid the world
may come to an end, while the stock market seems much less concerned?
And finally, what does all this mean to those of us who aren’t
financial professionals?
Okay, take a few breaths, pour yourself a beverage of your choice,
and I’ll tell you what’s happening – and what I think is going to
happen. Although I expect these problems will resolve themselves
without a catastrophic meltdown, I’ll also tell you why I’m more
nervous about the world financial system now than I’ve ever been in my
40 years of covering business and markets.
Below are Allan’s closing remarks, which I think are excellent, as far
as they go. However, I think they do not go far enough, because they
are written as if this crisis exists all by itself, without connection
to other problems or concerns.
Sooner or later, all this money being thrown at the debt markets will stabilize things.
But the costs will be steep. Those of us who have been prudent,
lived within our means, and didn’t overborrow are paying a huge price
for this. Income on our Treasury bills, money market funds, and CDs has
dropped sharply, thanks to the Fed’s rate cuts, and our wealth has
eroded relative to foreign currencies and commodities.
As an indirect result of the Fed cutting short-term rates, we’ve
already seen a loss of faith in the dollar by our foreign creditors.
That’s helped run up the price of commodities that are priced in
dollars, and may well be stirring up inflation even as the Fed lowers
retirees’ incomes.
It’s going to get harder and harder to finance our country’s trade
and federal budget deficits, with our seemingly ever-falling dollar
carrying such low interest rates. The dollar has been the world’s
preeminent reserve currency – but I think those days are drawing to a
close. Don’t be surprised if in the not distant future the U.S. is
forced by its lenders to borrow in currencies other than its own. It
could get really ugly.
Our financial institutions will emerge from this episode weakened,
compared with those in the rest of the world. It’s going to take years
to work out our country’s excess borrowings, with lenders and borrowers
– and quite likely American taxpayers – all bearing the cost.
My concern has always been that we will be entering the "twenty-teens"
in the weakened state that Allan Sloan summarizes above, yet we’ll be
needing vast funding for other purposes at precisely the same time:
- Massive reinvestment for an energy infrastructure that is woefully out of alignment with the reality of Peak Oil.
- Insolvent federal entitlement programs that would require more than $50 trillion, in cash, today, in order to be solvent.
- Trillions and trillons of dollars of underfunding for corporate and state pensions.
- Boomers funding their retiring by selling their assets (to whom, exactly?) at the same time.
- A national infrastructure of roads, bridges, and treatment plants that needs trillions of reinvestment, also at the same time.
How will we fund all of these very real and very significant
needs at the essentially the same moment in time? I’m not sure. But I
am sure that the current crisis is more than simply one of a few bad
debts on the books of a few big banks. That is the recognition
that we’re lacking in our national discourse, although I am pleased to
finally be seeing articles in our mainstream press like the one being
discussed here.