(Part ")

Well, all seems just fine... right?

Between the first part of this article and this second one, the United States has fallen "officially" into recession. This brings terrible thoughts to my head; are our leaders that stupid? And if so, why are they our leaders?

The housing bubble ended being the most dangerous economic threat that the world has faced in the past half century. As I pointed before, I was with the pessimist souls that were at Davos this last February. The rest –the optimist- look not just foolish, they look ignorant.

Alan Greenspan still denies any blame for this uncontrollable mess. George talks as he does not know how deep this crisis is and the rest of the world watches helpless as the dollar falls to its lowest level ever.

This translates into a disgrace line of bad policies that are leading to the worst nightmare that a country could face -that is when no one wants to trade with you.

I thought at a certain point that the United States -lead by Bernanke- could skip this mess with the right monetary policy. It turns out that Bernanke was just another piece in the long list of incompetent managers. His improvising has lead to record prices of the futures of oil, gold and other “save” goods.

The Fed is driving the United States to the worst case scenario, one that could destroy the entire economy. Let’s see which two policies are turning the United States economy into a shred of worthless green papers that are losing the only thing that they hold, value.

The first irresponsible policy is this; lowering the interest rates without accounting the inflation factor, and not only that, lowering interest rates bringing the value of the dollar against other currencies to an all time low.

The second irresponsible policy is this; sending billions of dollars into the economy, on one hand by lending that money at a low interest to the banks, on the other by giving back billions in government checks to the American people as tax credits. This is setting the fiscal deficit further into red ink, while overheating certain segments of the economy while the rest is falling down.

Of these two disastrous policies the first one is the worst. Bernanke could lead to the end of the American prosperity by taking out the only thing that sustains the American economy, trust. How is this done?

When the Fed lower the interest rates that it charges to banks -so money is injected into the economy- what the Fed is doing is? a- pushing the “worth” of the green buck down, b- making more money available, c- making people spend that money, d- all of the above.

Those measures are done so the influx of billions of dollar in the economy helps increase the acquisition power and therefore moving the economy out of recession. The possible side effects are bad though, first you get cheap money that no one wants to keep, you rather spend that money than saving it. Since interest rates are lower people don’t have any incentives to keep their long term savings. But since the economy is weak, after the effect of sending everybody on a shopping haunt, certain parts of it will get overheated. Some business will find themselves into the weird unbalance of selling things in exchange of less money. This is what leads to inflation.

Once inflation is on the market it could tear the economy apart. The industries that are big enough to send their merchandise overseas will do that, because the exchange rate will benefit their profits, bringing further dearth of goods in the market. But the worst problem is the devastating toll on the value of the dollar.

Once the dollar loses its value the world will run in a stampede to sell them as fast as they can. Why having a currency that is not easily exchangeable when I can have some hard money as the euro in my hands? Why buying treasury bonds when I can buy gold or silver? Why exporting to the United States when I can sell to Europe where my products will be sold at a better price?

What we are seeing right now is the worst case scenario ever. The dollar is not longer wanted in the world, not even in America, and when a currency loses its value in such rapid way, the only solution is changing the currency.

Now let’s put our hands up for Greenspan and Bernanke. Good job boys!

When I first looked at this problem I thought of a simple solution. Letting the market fix itself, but as time runs out, if it has not done so already, I had a change of heart. My first impressions were, looking at the past and assuming that another bubble will be created, that as long as people believe in the economy some will think of a way of creating wealth out of nothing. And that other bubble could fix, at least on a temporary basis, the problems that the economy faces.

I have to admit that I cannot think of the magical bubble that will come and save the economy. Thanks to George´s lame duck policies, all that will be left is going to be memories of a better past. What lies in the future are dark days, not only because when most people get $300 they will spend them at Wal-Mart buying groceries or paying old debts, but because until that happens many major employers will be sending dozens of thousands out of work.

Think about the chain reaction that is happening right now. If people don’t buy things, businesses don’t sell things, they don’t hire people but instead they fire them, people out of work don’t pay taxes, the government collects less taxes, spend less money and finally, fire more people. In the end what you have is an economy filled with unemployment, lack of investment and a worthless currency.

But problems don’t end here, there is a credit card problem that is waiting to exploit and as sometimes happens, it will give the last blow to the economy. Credit cards lend too much money to people that could not afford to pay it back, and as it happened to Bear Stearns –who was sold for $2 a share to JP Morgan- individual debtors could end up giving their belongings to banks who will take them for almost nothing.

So credit card lending won’t be the next bubble to be created. However, it could be the last one to burst, then again we face a tough question. What bubble could save the economy? Oil?

What could happen in the near future is that the dollar will slip further against the euro, foreign investors will rather hold stock in European markets and will rather detach their financial ties with the United States. The final result may drive China to stop looking at the United States as a destiny market leaving the US government with no buyer for the billions that it need to fill the hole in their fiscal debt sheet.

Even when I tried to find an exit to this huge problem, no easy way is in the horizon. The only bubble that could be created is in the stock market (not likely) and on the credit card lending (too late).

What will actually bring the United States back on track will be the opportunity that countries like Saudi Arabia, Japan, China, India and others, see in the falling US market, they could go on a shopping day looking for plethora of opportunities in the poor housing, stock and private markets.

No other bubble will save the economy, no easy way out is on the near future; sure the exchange rate could soon stabilize the trade imbalance between the United States and its partners, bringing other economies into recession. This 2008 will be a nasty year for everybody, particularly for the optimist leaders such as George. As America´s leaders live in denial about the health of the economy, smart pessimist are betting on high risk businesses that will lead them to make billions once the crisis is over. They will create the next bubble –that I don’t know yet what would be- but I am looking closely to how the economy handles low interest, an overflow of “cheap” money and the write offs of hundreds of billions related to the housing market.

Good luck to the US consumers… while they shop at Wal-Mart.