The stock market is booming. Even GM stock is up today, on the day it announced its bankruptcy and the destruction of its common stock. How long can this irrationality last while reality shows the economy crumbling? A reality check:
1) The housing/mortgage industry will fail. Last Thursday, 30-year fixed mortgage rates went up 30% in one day, showing the the Federal Reserve cannot manipulate interest rates forever. Every person with an adjustable-rate mortgage will soon find their payments skyrocketing, and new-time home owners are going to find their payments going much more towards interest instead of capital. Housing prices are going to fall rapidly, again, now that interest rates are rising, and banks will once again find themselves in trouble as homeowners default on their loans. Remember who bought up a huge chunk of those mortgage-backed securities last time? Now they’re in trouble, too.
2) Federal Debt is becoming (even more) unbearable. Last week, the Treasury auctioned off another $100 billion in US debt. 10-year bond rates spiked to their highest level since November. Interest rates continue to rise quickly, sending Geithner to China to plea lie for their investments. The treasury still has over a trillion dollars worth of debt to auction off, and doing so may become quite expensive. The average American household has more federal debt obligation created on their behalf than they do mortgage debt, even at the peak of this mortgage crisis- now imagine the interest rate on that going up 66% from 3 to 5%. How much tax revenue is the government willing to devote purely to interest on the debt?
3) The US Dollar is losing its value quickly. It is down against the Euro more than 11% in the past three months, and it fell 1.2-1.5% against most of the world’s currencies (including the Euro) on Friday alone. Gold was up roughly 2% against the dollar with other commodities such as silver, copper, and oil going up even more. Bogus federal inflation numbers may not reflect reality, but consumers can plainly see everything in the market- from groceries to gasoline- is getting expensive quickly. This shows two things- an increase in money supply (chart) and a worldwide lack of confidence in the entire United States financial system, particularly its central bank: The Federal Reserve. They have good reason to be: the Federal Reserve is trying desperately to create inflation (devalue the currency). Historically reliable economist Marc Faber has said last week, “I am 100 percent sure that the U.S. will go into hyperinflation.“
4) AAA Rating in trouble primarily because of reasons 1, 2, and 3. Britain first, then us. Rising interest rates show that regardless of what US bonds are rated at (and yes, America’s AAA rating was just confirmed again), investors no longer seek the dollar- or US bonds- as a place to flee for stability. Bonds and the dollar both weakened last week despite North Korea’s missile testing; officially losing AAA credit status will make this situation worse. Mortgage-backed securities were AAA rated until their complete meltdown, too.
5) US Businesses are Failing. GM’s bankruptcy is the largest industrial bankruptcy in US history and it failed despite getting tens of billions of dollars in support from the government. Unconstitutionally, I might add. Our government just spent trillions propping up failed business, causing the large bond auctions and inflation concerns mentioned above. What happens when you tax the producers and reward the failures? S&P 500 corporate earnings are lower than any time in history.
6) Unemployment will continue to rise. This is inevitable given #5. Unemployment will continue to be a problem as long as failed business, who do not make money and thus cannot hire, are not given wealth taken (through taxes) from successful business and their employees, who make money and thus can hire. The government solution here seems to be inflation, which will make US labor cheaper in the worldwide market. That’s as good of a cure for unemployment as amputation is for a paper cut. Expect the types of jobs in America to shift, too- service jobs will decline while manufacturing jobs will increase, but this won’t happen until lots of dust has settled.
Posted by Steve 
