The Great Paradigm Shift

John Loeffler provides a good summary of the coming paradigm shift heading at Americans at an increasing speed. For several years, Loeffler has been talking about a window from 2009 to 2012 as the critical years when all the pieces begin to fall into place to create what Jim Pulplava has dubbed, "The Perfect Financial Storm."

In his July 18 episode of his weekly "Steel on Steel" webcast, Loeffler hosts:

• James Kunstler - The Long Emergency
• Warren Brucy - The Second Great Depression
• Matt Simmons - Twilight in the Desert

As we come out of this crisis, life as we know it will be very different than it has been. The Great Consumer Economy is coming to an end.

What is a paradigm shift? A paradigm is the way people perceive the world. As people go through a paradigm shift, there first inclination is to try to get things back the way they were. This is evident right now in our political leadership. Both major political parties are promising that the good times will continue to roll, in spite of the clear warning signs the economy has given us in the last year.

As people begin to recognize that perhaps things are not going to be like they used to be, they accept the new paradigm, but they still try to play by the old rules. Loeffler gives the collapse of the Soviet Union as an example. When the Soviet Union broke apart from 1989-1991, the paradigm changed. Unfortunately, the American political and military leadership still tried to play using the old rules of the cold war. It wasn't until 9/11 that Americans began to realize that the world was very different from the one we had lived in from 1946 to 1990.

The third stage = new time, new rules, new methods. The faster you get to that stage, the better you will adapt. Right now, the world is adapting very slowly to the new paradigm that is being thrust upon  us.

Where are we now?

IndiMac Bank is the latest bank failure. The way we kept the economy afloat the last 15 years has been through inflation. Starting in the early 1990s, Alan Greenspan, then chairman of the Federal Reserve, started dumping liquidity into the markets. The result was the tech bubble of the late 1990s. By  1998 to 2000, everyone with any spare cash was investing. The news was buzzing with small investors who were suddenly millionaires (on paper). People with little, if any, investing experience were quitting their jobs to become day-traders. As this bubble began to collapse in 2000, the big investors got out in time, and a lot of little investors lost their shirts. Fortunately, for the government, 9/11 provided cover for the economic downturn and mild recession that started in early 2001 (months prior to 9/11).

Following 9/11, Alan Greenspan began to inflate the money supply again in an effort to bring the economy out of the mild recession, and the result this time was the housing bubble. Cheap, "no money down" loans flooded the market, and home buyers who were unqualified under old rules were encouraged by the government and by banks to buy into the housing market. Independent mortgage brokers began to spring up to meet the demand of buyers who were either moving into the housing market for the first time, or existing homeowners hoping to cash in their expanding equity for a bigger home plus cash to continue their consumer buying spree.

This combination of low interest rates, adjustable rate mortgages, and increasing home values provided enough stimulus to keep the economy growing until it all blew apart in August 2007. This is when the first edge of the large wave of bad loans created in late 2003 to 2004 (with three-year adjustable rates) began to readjust, and the home owners were unable to make their new mortgage payments. As a result, they defaulted.

This began a cycle that has not ended. Homeowners default, home values go down, homeowners who are unable to make their payments try to sell their home only to discover they now owe more on their home than the home is worth. This, in turn, drives more homeowners into default.

It took several months, but now we are watching the lending institutions start to collapse under the weight of these bad loans.