Over the past six months I have been warning of "part 2" of the housing market collapse. There were three major kinds of toxic loans made over the past 5 years, and the first one has become a household name; subprime. The other two are called Alt-A loans and Option Arms. These are time bombs waiting to reset, and thus explode, all throughout 2009 and 2010.
While I have talked about these in depth in recent discussions, the mainstream media for the most part has not paid attention to this oncoming train. The news was broken to millions last night on a 60 minutes special: (video included with link)
These loans defaulting will cause massive losses in the banking sector, which is now run by the US government. This means the losses will be paid for with tax increases, borrowed dollars from foreigners, or the printing press. All three either take money from the American public directly or do it stealthily with a loss of purchasing power.
Tomorrow our Federal Reserve meets to decide on interest rates. It is widely believed they will cut 50 basis points down to a record low .5%. I would expect to see 0% during the first quarter of next year.
Interest rates have become an after thought for the markets, however. The true question is, what will they do once interest rates reach zero? Their only weapon at that point is the printing press, and it will be locked and loaded heading into 2009.
It appears central banks around the world are all in a race to 0%. The Federal Reserve will be the first one to arrive, and they will provide the most additional "stimulus" after they get there. This will cause the dollar to lose ground against other currencies around the world, but they will all lose value when priced in gold.