My writing has been so negative lately, I thought I would try to be positive for a few moments and see how it feels.
Let’s assume, for the purpose of this little experiment, that bond insurers are bailed out either by Congress or the Federal Reserve. In one case it’s funded by deficit spending, in the other by inflation. But in either case, there is a short term cost to the general public and the end result is a problem solved.
The Federal government also cancels adjustable rate mortgage resets, which doesn’t solve the bankers’ problems, but it is enough to stop intentional foreclosures and spread losses more evenly over the next few years. The banks continue to write off billions of dollars every quarter, but eventually it becomes routine and people stop paying attention. The trade deficit is still extremely high and the US dollar continues to drop, but the cheaper it gets, the more Asian and Arab investors purchase equity in American financial institutions. Ultimately, hundreds of billions of dollars pour back into America and profits from other business units begin to outweigh losses from the sub prime fiasco.
Losses at American lenders will continue for a few years, likely causing a recession, but when concern over an insolvent financial industry is eliminated the reduction of fear and uncertainty ends volatility on the stock market, causing business and consumer confidence to stabilize. Expectations of an American recession cause speculation on the commodity markets to turn negative and food prices end their advance. The massive number of new dollars in circulation after the bailout will all ultimately end up being re-invested in the now tantalizingly cheap US equity market and retirement funds will begin to climb again.
American companies doing business in China threaten to re-locate their operations if the renminbi appreciates; the Chinese government decides they are willing to absorb losses in their foreign exchange reserves from a depreciated US dollar and hold a new dollar peg to prevent its citizens from becoming too wealthy and threatening the power of the state. Cheap products continue to ship abroad, providing a sufficient cushion for average American consumers to survive the recession without too much difficulty.
Real estate prices bottom out when Congress swings open the gates of immigration and millions of immigrants, who unlike Americans have been saving these past few years, race to snap up cheap properties. Tax holidays entice wealthy foreigners to snap up choice vacation homes in California and Florida, the hardest hit markets, and they begin to recover. The government stops threatening illegal immigrants and even the poorest laborers can now afford to pool their savings and buy some foreclosed properties.
With order restored, interest rates start to climb causing long term yields to soar and a resurgence of confidence in the US dollar stops its depreciation. Lenders return to the days only qualified consumers had access to credit and over time consumer debt is reduced, as savings increase. Many manufacturing jobs never return, but building a new factory abroad is no longer cost effective and the trend is frozen. As security measures relax, tourism begins to recover creating new opportunities. The massive amount of capital brought to America by millions of immigrants causes the recession to end. Unemployment is a bit higher than today, but a new technology breakthrough in batteries or solar panels creates entirely new industries and the economy begins to grow again.
So… despite the many hypotheticals and assumptions in this story, any takers?
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