Page 2 of 2 Recession 'shape' points down
By W Joseph Stroupe
manufacturing sector, one can appreciate how America's "new economy" model has
radically changed how it generates much of its $14 trillion of gross domestic
product each year. A very large portion of that wealth is generated by, or is
directly and considerably dependent upon, the new asset-based ventures and
operations in the Wall Street core of the financial sector.
Catastrophic flaws in the asset-based model
Because the new asset-based model relies upon serial asset bubble creation
(inflation) in order to thrive, the model simply chokes and suffocates when the
environment of the massive credit excess needed to grow such bubbles is
removed.
Hence, Washington's policies in attempting to deal with this crisis are all
centered upon recreating the massive credit excess that it
hopes will "reboot" the model and bring it back to life by re-inflating the
assets whose values have collapsed in this crisis.
Therefore, Washington and Wall Street aren't interested in, nor are they
attempting to revert to the traditional income-based model. Rather, they are
committed to sinking all their efforts and all America's wealth into rebooting
the new asset-based model. The salient question here is whether the model can
be rebooted without triggering a cascade of much greater damage than it has
already wrought.
One can easily see that the new asset-based model is an extremely dangerous
trade-off between rapid and easy wealth creation on the one hand and acutely
increased vulnerability and instability on the other hand, for the asset
bubbles grown under the model inevitably rupture, leaving mountains of toxic
rubble in their wake.
And when an economy subscribes to and adopts this new model to an excessive
degree, as both America and Britain have done, thereby investing their future
too fully in that model, then that economy invites catastrophe when all viable
assets have been "bubbled and ruptured" and there's nothing left to feed the
model to keep it breathing. That is precisely where America and Britain have
now arrived.
Asset bubbles are not new. They have existed and they have ruptured before, as
in the Great Depression. What is new about the asset-based model is that, under
the tutelage of such slipshod architects as former Federal Reserve chairman
Alan Greenspan, the perilous prospects for massive "paper" wealth generation
afforded by asset bubbles (which would be calculatedly produced) were then
consciously incorporated into a new economic/financial model actually intended
to supersede the traditional income-based model, a new model that was
deceptively and successfully hawked to the dim political leadership in
Washington and London.
Additionally, what is also new about the asset-based model is the raft of
revolutionary new financial instruments and assets it fosters that ingeniously
leverage the foundational asset bubbles in order to magnify "paper" wealth
generation many times over.
Finally, what is new is the swiftness with which new asset bubbles have been
created, their unprecedented proportions, and the sheer number of bubbles that
have been produced in such a compressed period of time - primarily in the past
10-15 years - and the severe damage that has been caused by their rupture.
Well, the architects and adoptees of the new asset-based model have gotten what
they aimed for. Their brainchild has, indeed superseded the traditional
income-based model. America and Britain are inordinately dependent upon that
new model for economic growth. Look at the severe repercussions they are
suffering as a result of the crash of the model. Neither can hope to return to
economic growth any time in the foreseeable future without the successful
rebooting of their asset-based model - a prospect whose chances are slim to
none.
Full-blown collapse of the new model
This severe recession is much less about the business cycle and much more about
the collapse of the new asset-based model, and the fact that the US and UK
cannot simply revert to the traditional income-based model to resolve their
self-made crisis. They've both become far too committed to the new model.
A reversion would take a decade or more to accomplish, even if it could be
accomplished, and in the meantime the rest of the world (where the traditional
income-based model survives and thrives) would not wait for the US and UK, but
would unquestionably overwhelm the two. (If the new model cannot soon be
rebooted to thrive again, then that is going to happen anyway).
Attempting to reboot the new model carries gargantuan risks, whether it
sputters back to life or stays dead. The colossal sums of new debt being racked
up, the hyper-inflationary forces, the inevitable era of high taxation, the
eventual severe damage to the US dollar and the British pound that is being set
firmly in place, the undermining of the creditworthiness of sovereign debt, are
just some of the risks.
As severely as America's "new economy" has been discredited in this crisis,
which has infected the entire globe, who's going to buy its collection of
severely tainted dollar-denominated financial assets even if the model does
sputter back to life? And how much would anyone be willing to pay for them?
America and Britain are in colossal trouble.
The present crisis, which is not merely a recession fueled by the boom-bust
cycle, actually signifies the asphyxiation of the asset-based model. Oh, it may
for a time keep flailing its arms about while it suffers its death throes, and
it might even sit up on the gurney once or twice to protest its own demise, but
it cannot get up and promenade again. It is on total life support and must
eventually be declared brain-dead.
There have been warning signs of this impending death, but these were largely
ignored or misinterpreted as merely part of the perpetual boom-bust cycle. One
such warning sign was the destructive rupture of the equities and dot-com
bubbles in 1999/2001, which wiped out many trillions of dollars of wealth, cast
American's pensions into an irresolvable crisis and savaged America's lead role
in the IT technology sector. Catastrophe, like what we're now witnessing, was
only avoided (temporarily) back then because the Fed and Wall Street quickly
collaborated on the swift creation of new bubbles in real estate and stocks.
Now that these are rupturing, there are no remaining virgin assets to feed to
the asset-based model. That's why efforts are underway to attempt to reflate
the old, previously ruptured asset bubbles and all the innovative financial
assets coupled to them.
The shape of this crisis, then, is a series of steps proceeding downward into
the gloom for the US and Britain. The two powers are guilty of massive
over-reach, and now they are suffering the terrible consequences. Sooner or
later, these ongoing events that were inevitable, and that should have been
foreseen before the new asset-based model was so enthusiastically and wholly
adopted, will force the two powers to make the gut-wrenching, long reversion
back to a more traditional economic model.
The longer their leaders resist this, the more profoundly painful and
destructive the adjustment will become. Obviously, this situation provides a
tremendous opportunity for the rest of the world, but especially for the
increasingly wealthy and powerful states in the East, to capitalize in various
ways. The ongoing crash of the US and UK liberal capitalistic incarnations of
the asset-based economic/financial model also, therefore, signifies the
collective rise of the Eastern managed-capitalistic (authoritarian)
incarnations of the traditional income-based model.
W Joseph Stroupe is a strategic forecasting expert and editor of Global
Events Magazine online at www.globaleventsmagazine.com
(Copyright 2009 Global Events Magazine, All Rights Reserved.)
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