The U.S Financial System, the Debt Bubble and the Cancer of Excessive Deregulation

“It’s…poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end.”

Warren Buffett, American investor

 “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

John Maynard Keynes (1883-1946) 

“New money that enters the economy does not affect all economic actors equally nor does new money influence all economic actors at the same time. Newly created money must enter into the economy at a specific point. Generally this monetary injection comes via credit expansion through the banking sector. Those who receive this new money first benefit at the expense of those who receive the money only after it has snaked through the economy and prices have had a chance to adjust.”

Friedrich A. Hayek (1899-1992), Austrian economist

When Fed Chairman Ben Bernanke says the economic situation is worsening, you’d better believe him. In fact, the U.S. credit markets are collapsing under our very eyes, and there is no end in sight as to when this will stop, let alone reverse itself. 1- Leading economic indicators for the U.S. economy are falling; 2- Consumer confidence sentiment is falling as mortgage equity withdrawals are drying up; 3-employment numbers are falling; 4- the January 2008 report on the U.S. service economy indicates that it contracted early in the year for the first time in 58 months; 5- the number of new jobless claims is still dangerously high; 6- The housing crisis is getting up steam; banks have to place larger and larger subprime losses on their balance sheets, thus undermining their capital bases and bringing many of them to the brink of insolvency; 7- the credit-ratings agencies are under siege; 8- bond guarantee insurance companies are in the process of loosing their triple-A ratings and some are on the brink of bankruptcy; 9- the $2.6 trillion municipal bond market is about to take a nose dive, if and when the bond insurers do not pull it through; 10- the leveraged corporate loan market is in disarray; 11- the more than a trillion dollar market for mortgage- and debt-backed securities could collapse completely if the largest American mortgage insurers continue to suffer crippling losses; 12- large hedge funds are losing money on a high scale and they are suffering from a run on their assets; 13- in the U.S., total debt as a percentage of GDP is at more than 300 percent, a record level (N.B.: in 1980, it was 125 percent!); 14- and, finally, the worldwide hundreds-of- trillion dollar derivatives market could implode anytime, if too many financial institutions go under during the coming months, as most of these transactions are inter-institution trades.

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