This is going to be a rant, I feel the "need" to articulate my view of what is happening in one post. Break out a beer and some peanuts, this will be an entertaining read. It's my blog, and heck, I can decide to do such things. :)
First, lets established how the world got here in basic terms. The US created "cheap" money in the form of low interest rates after 9/11, and sustained these low rates. This was combined with "deregulation" of banks to eliminate safeguards put in from the last Great Depression. And finally "computer model debt" rather than mark to market debt, called CDO's, where created. This created a cocktail of drunken spending, mis-labeled debt (AAA when its junk), and financial companies to take on unprecedented risk. This eventually blew up once the computer models ran into a wall called "reality", and the bogus CDO ratings was uncovered. This problem would be over already IF the government immediately forced all companies to revalue debt back to "mark to market" and restored company balance sheets to international accounting standards to eliminate doubt of everyone's credit worthiness. Sure tons of companies would fail, but the bad debt would be purged, good companies buy the parts of bad companies that are good, and we could then proceed to rebuild.
Since it seems the US will avoid reality at all costs, and continue to hide truth of corporate solvency and debt valuation lets go over the course decided:
The US Economy has many severe issues that impede it's success in the near term. First and foremost is it's own historical strength: Consumer based economy. The US greatest selling point to the world is we buy lots of crap. And I mean LOTS! We drive the world by spending.
This accomplishment has lead the world to being blackmailed into sustaining the US spending problem by lending the USA , more and more money. The US is now debt spending in the TRILLIONS per year. Lets break that down, if USA spends 2 Trillion (direct tax spending and bailout spending), the US must issue $63,419 a SECOND in debt notes (US Treasuries). The idea being if we just spend lots 0 money, we can pretend it's 2007 again and resume where the US left off, like 2008 never happened.
What this does is unfortunately create a situation where the government MUST find someone to buy the debt, or interest rates rise to "find" buyers of debt.
This unfortunately creates a situation where the US Treasuries must "take" investment money from the world pool of cash out of private investment pools. Example: If the world has 10 Trillion dollars to invest in 2009, if the US sells 2 trillion of US debt, that 2 trillion can't be spent buying stocks or starting a new company.
Since the US government believes it is the savior of the world, through direct debt spending (social programs), and guaranteeing private companies (welfare for companies), it will press the world to support its spending. Unfortunately, when trying to sell 2 trillion dollars of debt, the world wants more than 1% interest over 30 years for that debt. After a while, the act of selling debt saturates the market demand for low interest debt notes.
To get people to buy, interest rates rise, as Mr. Ben Bernanke is witnessing. The government doesn't like paying higher interest, just like you don't, but the government gets to make it's own rules and tries manipulation of interest rates by having one arm of the government print debt (US Treasury), and a semi-private arm buy the debt (Federal Reserve) in an attempt to suppress rising interest rates for long term US debt.
The world population, which may have 1/2 of a percent who sees this as outright manipulation doesn't fall for it and accelerates interest rates rising demanding for the US to pay more for its $63,419 per second debt habit.
This then drives interest rates higher for US debt, causing the US government to need MORE money, since it needs additional money to cover the interest it pays for its spending, making the debt requirement not 2 trillion, but 2.2 trillion. Also, higher interest rates causes companies to fail in greater numbers since the extra cost puts the corporations under water. Further housing rates soar causing more people to walk away as ARMS reset. This causes more banks to fail, more unemployment, and the US Government to want to spend MORE money to "stimulate" the economy. This pulls MORE money out of private investment, more into government debt, and the cycle spirals out of control.
Where does this land? Here are the options as I see it.
1) Fire Ben Bernanke, give direction to the Fed to protect solvency of the US government and US Dollar. Stop the manipulation, as it won't work. Immediately cut US government spending, which lowers taxes and allows the government to not "compete" for investment dollars. This allows interest rates to fall. Force proper corporate valuations to regain trust and lending will resume normally.
2) Continue on current path, wait for interest rates to soar and collapse the US economy. Once an inflection point hits, the US government defaults on all debt, we have a global economic "Reset". Physical wealth rules over paper wealth.
3) Tank the stock market, interest rates fall, continue on same path until rates rise too far, repeat tank the market to keep rates down. Once DOW 2K is achieved, see option 2 or option 1. If option 1, the US lost a lot more money than it should have to prove Mr. Benanke's college thesis was wrong.
4) The world pays for unlimited US debt, for low interest rates. The US economy takes off, since debt/money is free. US spending spree which did not work in 2002-2007, works in 2009-2050 Once the US economy recovers in 2010, the US then voluntarily cuts back on spending because its the right thing to do in a recovery, pays down it's debt, and thanks everyone for the crisis support. Another 10+ year bull market begins and US living standards further increase as compared to China/India. China/India complies nicely by mandating it's citizens to not increase their living standards, to ensure the US citizens can maintain theirs, by not raising costs of natural resources by adding 2.3 billion more people who want "stuff". America has 300 million who need stuff cheap.
As you can tell from my sarcastic writing, I don't think #4 is in the cards, but it seems like Mr. Ben Bernanke and Obama thinks it is. Lets hope #2 does not happen, and there is option 5, which is almost equally great for the US as #4, but achievable.
In my opinion, we repeat option 3 until Dow 2k-4k, then jump to option 1. Option 2 I don't want to consider as possible. And I hope for option 4!