Tuesday, February 17, 2009

America's Greatest Con: Part II

Things are starting to get interesting now.

From 2002 - 2008, the heads of our major banks bought as many American mortgages as they could get their hands on. They then packaged those loans into beautiful little bundles called CDO's. They put a AAA rating on these CDO's and then visited investors around the world to try and sell them a piece of the American dream.

The investors around the world bought them with reckless abandon. Countries, cities, and major banks loaded their books with as many American mortgages as possible.

Today those mortgages are exploding around the world like dynamite. It is like watching a fireworks display unlike anything the world has ever seen.

The mortgage losses are wreaking havoc among these economies and even forcing some countries toward total bankruptcy.

The Americans were able to con the rest of the world into buying absolute worthless debt. What's even more funny is many of those same investors are now lining back up at the gate to buy treasury bonds issued by our government and denominated by our currency, the now beloved dollar.

What is the rating given to these treasury bonds and this currency? AAA

As Mark Twain once said, "History does not repeat itself, but it does rhyme."

Of course the story will end the same as before. People buying treasuries and dollars today are purchasing ticking time bombs waiting to explode on their portfolio. The bursting of our bond bubble will be the biggest fireworks display the world has ever seen, it will be the ultimate grand finale, making the housing bubble look like a small warm up.

I guess these investors will learn their lesson in due time. Once the treasuries begin to explode, I'm not sure what America will be able to trick the rest of the world into buying. I think our government bonds will be the last con. The greatest of them all. The United States of Madoff.

At that point all we'll have left to sell is everything they sent us over the past 25 years that was purchases with I.O.U.'s. They'll come and take our televisions, our cars, our furniture, our businesses, and the most worthless asset of all: our homes. The once prized asset that the rest of the world paid for by buying the AAA mortgage securities.

The longer the rest of the world keeps our bubble economy on life support, the worse it will be for them when they finally pull the plug and let us sink into oblivion. I always get asked the question, "Why would the rest of the world buy our debt? Obviously they are smarter than you give them credit for."

Of course it is this same rest of the world that spent the past five years buying subprime mortgage loans. Anyone who questioned that process back in 2005 was considered insane.

The world is currently realigning itself for the future. It is going to be a very bumpy transition, and when its over things are going to be very different than they were before. If you can try and imagine the world after this realignment process it will help you make decisions for your future today.

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