Recession on the horizon?

The Internet abounds with information about the United States of America since the US contains the largest portion of its population. Most of the news sites that I read (primarily Reddit and Digg) talk of American politics and not much else.

Over the last year or so focus has turned to the coming election and the failures of the Bush administration. Every other story is about a new Bush policy or the Iraq war or political candidates for the next term, etc. It is very frustrating to read since as a Canadian it affects me indirectly but I have no voice. We Canadians don’t have the same mind set as sub-border-eans so it is obvious how I feel about the US currently. “Stop the War”, “Impeach Bush”, “Stop the corporate bailouts”, “Separate religion and State”, etc. These issues are all easy to pick a side and yell about. The big problem is that it doesn’t really matter since their economy is about to collapse and take many countries, including our own, down with it.

I don’t want to live through a recession as bad as the Great Depression but inevitably we are heading in that direction. Our economy is so tied to that of the US that a blip across the border ripples out and affects us quite strongly. I don’t know very much about why this is but I assume it has to do with trade and our fiscal policies. We sell a lot of wood and uranium to the US and import a lot of corn based products and manufactured goods. Our banks follow the lead of those in the US pretty closely since it is practically required of us.

2008 will be a telling year in terms of our fate. The housing bubble in the US has recently popped so the markets and the government are scrambling to figure out what to do. The issue is that people who shouldn’t have been able to buy homes were given sub-prime mortgages for huge amounts of money that their income could never support. The trick was to give them low payments for the first couple years and tell them not to worry until it goes up in the future. I can imagine most people expected the American dream to kick in for them, at least doubling their income. Of course the lenders who sell these mortgages then turn around and sell the debt to the banks with the backing being the house. Banks in turn flood the markets with securities backed by sub-prime mortgages which are bought up by other banks and investment firms. All seems well until somebody realizes that the house backing the mortgage really isn’t worth $400,000 and is only priced that high because of the housing bubble. Suddenly the developers and the current “owners” who are trying to sell are stuck with houses that will never sell for the price they are asking. Housing prices, as a result, start to come back down to reality which in some markets is about 33% of their price. What usually happens now is people start defaulting on their mortgages since they can’t sell the places or afford to pay for them. Quickly the market would come back to the correct housing value and lots of people would be out lots of money especially the sub-prime lenders and the banks who bought their debt. [The Dangerous Disconnect Between Home Prices and Fundamentals]

At the moment the Bush administration is about to enact a policy that would help people who can’t afford their house to not default on their mortgage. This is not technically a corporate bailout of the lenders but is only one step removed. If money is injected so that people can pay the lenders then the lenders will not go bankrupt and are bailed out. This very policy sent Japan into a recession that has taken around ten years to recover from. [Bush Moves to Aid Lenders] On a second front the Federal Reserve bank is injecting mountains of cash into the economy to keep it liquid so it will keep on working. With all the sub-prime mortgage debt floating around the market, banks and other investors are slowing down and being very careful which in turn shrinks the economy. [Fed Injects Reserves Into System] However, injecting money isn’t the miracle that it seems to be since essentially the government is reaching into everyones pocket collectively and taking out a portion of their cash. Injecting money makes the US dollar worth less and so each dollar in your pocket can buy less goods. This is called an invisible tax since you pay it but don’t realize it and is present in all economies the world over. [Why does fiat money seemingly work ?]

All in all it is shaping up to be scary times ahead. The US dollar has already dropped to almost par with the Canadian dollar (1USD = 0.95CDN, Sept 06, 2007). Foreign countries are dropping use of the US dollar as payment (can’t find the articles for this). China is rattling the American cage with its substantial supply of US dollars; they threaten to collapse the value of the dollar. The wars continue. Domestic terror is being perpetrated on the people by their own government (too many links to choose from).

An election is on the horizon and the only candidate that I seem to hear about is Ron Paul. He seems to have the backing of the Internet and it isn’t surprising why. Check out this video of him answering questions at Google (long). It gives me hope since he addresses the issue I talk about here at around 23 minutes in. Ron Paul would have my vote and I hope who ever actually wins will hold some of the same values and can rescue the American economy from collapse.