Endgame: USA

Economic recovery! The media, economists and politicians are talking it up. The spin machines are working flat out cherry picking statistics to convince us that recovery is underway and we are entering another growth phase. It could, however, be argued that this is the least likely of all the potential outcomes from the global financial crisis. One of those potential outcomes, one rarely spoken about unless you are Barnaby Joyce, is the subject of this article.

This outcome is the collapse of the USA and the demise of the world’s largest economy and only superpower. I define collapse as a rapid reduction in the level of complexity; it does not necessarily imply a Mad Max-type scenario. The collapse I am envisioning is something along the lines of what occurred to the USSR, a collapse which very few saw coming.

By way of analogy, examining the potential collapse of the USA can be likened to building a bonfire. The fuel is being piled; all that is needed is a spark to light the fire. What should be remembered though, is that in the aftermath of fire is the opportunity for renewal. So let us have a look at the fuel, the potential fire starters and the opportunities that this bonfire could provide.

The fuel

Unemployment

According to the United States Bureau of Labor Statistics, the seasonally adjusted official (U3) unemployment rate is 10 per cent. However the U6 rate, which includes discouraged workers who have given up looking for work and those who are underemployed, is 17.2 per cent. In other words, one out of every 5.8 workers is un- or under employed. There are some commentators, such as David Rosenberg, Nouriel Roubini and Meredith Whitney suggesting that the U3 rate is likely to reach 12-13 per cent, implying that the U6 rate will also increase.

Housing

According to a Duetsche Bank report, 14 million, or 27 per cent, of all mortgage holders were underwater in 2009, a figure expected to rise to 48 per cent by 2011. Foreclosure rates are also increasing reaching a record in the third quarter. In September alone, 343,638 properties received foreclosure filings. While house prices have risen slightly in recent months, from a fall of 25 per cent from their peak in late 2005, it is likely that unemployment and foreclosures will put further downward pressure on house prices. Commercial real estate is also struggling, with one analyst suggesting that building owners will default on US$500 billion to US$750 billion of mortgage debt out of US$1.4 trillion in loans that will come due in the next four years.

Banks

According to the FDIC 124 banks have failed in 2009 thus far. But this may be the tip of the iceberg with one report suggesting that there are more than 2,000 banks in “eminent danger” requiring additional bailout funding in the vicinity of US$800 billion to US$1 trillion. If unemployment and foreclosures continue to rise and house prices fall, we can expect that many of those banks in eminent danger will fail.

States

The financial situation of the states is in many cases dire (PDF 852KB). Budget deficits across the states currently equate to US$31.5 billion, a situation that will only further deteriorate without continued Federal Government assistance. With many states cutting services and reducing staff numbers/hours, this will also feed into higher unemployment and more foreclosures.

Dear Mr President