"A Harvest of Financial Despair" or "The Most Calamitous Clustering of Financial Error in U.S. History"

...the common American does not understand he is being manipulated and impoverished by the Federal Reserve. When money is no longer real (i.e. fiat currency vs. gold and silver), then people may come to believe in the surreal, and a hyperreality emerges. In particular, during the reign of Alan Greenspan, money and credit – created out of thin air – rained upon Americans as if to assure us that crop failures and misfortune had been banished from U.S. soil. Hence, we came to live in a world of plenty where one may become wealthy by simply purchasing a house – with lots of borrowed money – and by "investing" in stocks for the long run. What a dream it is to become wealthy without effort. This mass delusion is only one step away from collectively believing that cotton candy is a cash crop. Alas, Americans will soon discover that housing values don’t grow to the sky and that heavy mortgage debt leads to a harvest of financial despair.

Because of the housing bubble, as engineered by the Federal Reserve, Americans are now drowning in mortgage debt while naïvely believing that living in a house is the path to wealth creation via long-term capital appreciation. Thus I am just going to come out and say it: countless American homeowners are already insolvent and simply don’t know it; and many of them continue to make ends meet by borrowing against credit cards and ever-shrinking home equity.

It is commonplace for me to see married couples with mortgage-debt-to-income ratios that are wildly askew. The hyperreality conjured by the Federal Reserve’s relentless inflation of the money supply is characterized by a populace which believes that a permanent plateau of prosperity has been attained. This is the boom phase of the trade cycle.

Let’s face it: highly leveraged Americans have little to no chance of ever paying back their enormous mortgage debts. All it will take is for a husband or a wife to lose a job, or for interest rates to go higher, in order for mortgage debt to become unmanageable. In the bust phase, mortgage defaults will become a deluge.

Earlier, I mentioned that the Federal Reserve "engineered" America’s housing bubble. To be sure, there are those who deny a housing bubble exists. Hence, such deniers argue there is no correlation between aggressive growth in M3 and the spectacular rise in housing prices across the United States – as if the Federal Reserve’s pounding down of interest rates occurred in a vacuum. To this I respond with a quote from page 1 of a September 2005 study sponsored by the Board of Governors of the Federal Reserve System titled House Prices and Monetary Policy: A Cross-Country Study [warning: PDF]. Here is the smoking-gun quote: "Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."

As surely as night follows day, a credit-induced boom is followed by a bust.

This mortgage-debt bubble, as engendered by the Federal Reserve, is leading millions of Americans to financial ruin. This may become the most calamitous clustering of financial error in U.S. history. If anything positive comes out of this economic mess, perhaps it will be the demise of the Federal Reserve itself. Regrettably, the Fed’s failure will have come at an enormous price, including the possibility of volatile social unrest.

You can read the entire article here.

Oh, and Bill Fleckenstein declares the bubble as officially popped.