Do you hear that sound?  It is the sound of Europe being hit with a cold dose of financial reality.  The air has been let out of the balloon, and investors all over the world are realizing that absolutely nothing has been solved in Europe.  The solutions being proposed by the politicians in Europe are just going to make things worse.  You don't solve a sovereign debt crisis by shredding confidence in sovereign debt.  But that is exactly what the "voluntary 50% haircut" has done.  You don't solve a sovereign debt crisis by pumping up your "bailout fund" with borrowed money from China, Russia and Brazil.  More debt is just going to make things even worse down the road.  You don't solve a sovereign debt crisis by causing a massive credit crunch.  By giving European banks only until June 2012 to dramatically improve their credit ratios, it is going to force many of them to seriously cut back on lending.  A massive credit crunch would significantly slow down economic activity in Europe and that is about the last thing that the Europeans need right now.  If the deal that was reached last week was the "best shot" that Europe has got, then we are all in for a world of hurt. (Read More....)

New home sales in the United States are on pace to set a brand new all-time record low in 2011.  This will be the third year in a row that new home sales have set a new record low.  Sadly, this is yet another sign that the U.S. economy continues to grow weaker.  Back in 2005, more than four times as many new homes were being sold as are being sold today.  The home building industry is one of the central pillars of the U.S. economy, and the fact that we are going to set another new record low for home sales in 2011 is a really bad sign for those hoping for an economic recovery.  Unlike most of those that work in the financial industry, those that build new homes produce something of lasting value for American families.  In addition, millions of Americans have traditionally made a solid living by building and selling new homes.  But today the market for new homes has totally dried up and large numbers of those jobs are disappearing.  Some of the reasons for this include high unemployment, a glut of foreclosures on the market and the tightening of lending standards on home loans.  In order for the U.S. to have anything resembling a healthy economy again, we are going to need a revival in the sale of new homes. (Read More....)

Unless you have been asleep or hiding under a rock for the past five years, you already know that we are experiencing the worst real estate crisis that the U.S. has ever seen.  Home prices in the United States have fallen 33 percent from the peak of the housing bubble, which is more than they fell during the Great Depression.  Those that decided to buy a house in 2005 or 2006 are really hurting right now.  Just think about it.  Could you imagine paying off a $400,000 mortgage on a home that is now only worth $250,000?  Millions of Americans are now living through that kind of financial hell.  Sadly, most analysts expect U.S. home prices to go down even further.  Despite the "best efforts" of those running our economy, unemployment is still rampant.  The number of middle class jobs continues to decline year after year, but it takes at least a middle class income to buy a decent home.  In addition, financial institutions have really tightened up lending standards and have made it much more difficult to get home loans.  Back during the wild days of the housing bubble, the family cat could get a zero-down mortgage, but today the pendulum has swung very far in the other direction and now it is really, really tough to get a home loan.  Meanwhile, the number of foreclosures and distressed properties continues to soar.  So with a ton of homes on the market and not a lot of buyers the power is firmly in the hands of those looking to buy a house. (Read More....)

Is the U.S. government on the verge of a massive debt problem?  For years, the U.S. government has been able to borrow all the money that it has wanted to at extremely low interest rates.  But now many of the lending sources that the U.S. government has been depending on are drying up.  Even before this recent crisis in Japan, a number of big players were moving away from U.S. Treasuries and the U.S. Federal Reserve was having to step in to pick up the slack.  But now this debt crunch is about to get a whole lot worse.  For years, many had feared that it would be China that would start dumping U.S. government debt, but now it turns out that Japan is going to be the real problem.  Right now, Japan is the second largest foreign holder of U.S. government debt.  Japan currently holds about $882 billion in U.S. Treasury bonds and they are likely going to have to liquidate much of that in order to fund the rebuilding of their nation.  So needless to say they won't be accumulating any more U.S. government debt.  But the U.S. government still needs to borrow a trillion and a half dollars from someone every single year.  So where in the world are they going to get it? (Read More....)

Most Americans who closely follow economics understand that all money in the United States comes into existence as debt.  Either the Federal Reserve creates it when the U.S. government borrows money, or private banks create it when they use fractional reserve banking to make loans to customers.  If lending increases, it is going to create new money and increase the money supply.  But if lending declines, it is going to take money out of the system and will decrease the money supply.  So why is this important?  It is important because without sufficient lending, the U.S. economy will seize up and grind to a standstill.  Unfortunately, we have created an economic system that is fueled by credit, and without enough credit businesses can't expand or hire more workers, individuals can't buy homes and cars and there will not be any hope that the U.S. economy will function at previous levels. (Read More....)