The break-up of Lehman Brothers, the fire sale of Merrill-Lynch, and the woes of AIG are, sadly, not fundamentally symptoms of corporate malfeasance, or the sad lot of an unlucky few, but, rather, signs of a worsening storm. The storm has several fronts:
1. Inflation - rising commodity prices slowly spreading to wages and consumer goods will suppress long-run growth prospects, decrease investment and increase long-term interest rates.
2. Over-levered consumers – low savings rates, cheap credit (cards and mortgages) and a culture of profligacy has run its course. The US consumer has no more money to spend; their houses are underwater and their bank accounts are empty. All that's left are mounds of debt than will take years to pay back.
3. Over-levered companies – cheap debt used to finance LBOs and other acquisitions has left corporate America struggling to generate enough cash to operate in a declining economy while still servicing its debt.
4. Under-financed municipalities – local and state governments face sharply declining revenues from declining property taxes and years of mismanagement.
5. Wasteful federal government – deficit spending for the foreseeable future may continue to drive down the dollar and drive up long-term interest rates, while making additional fiscal stimulus risky.
6. Slowing growth overseas – Europe, the UK in particular, is suffering economically as well. China and India have to deal with issues of inflation, internal instability and other growing pains which may limit their ability to support the US in attempting to export its way out of its economic mire.
Am I being overly gloomy? Perhaps. Smart government policy could go a long ways to help things. For example, offering more H1Bs to skilled overseas workers who are willing to work in the US and invest in US real estate could help stabilize the housing market. Reducing spending on Iraq and using the funds to rebuild America's crumbling infrastructure could help create jobs and stir growth. Cut taxes on small businesses and start-ups.
All should be done. But, alas, too little, too late. I am not going to be the one to put lipstick on this pig. Batten down the hatches. We are in for the storm of a lifetime.