The 19th century belonged to Britain, the 20th century belonged to America and in the 21st century, China will rule the business world. Whether you like it or not, this transition is already underway and it will intensify over the coming decades.

Throughout history, no empire has managed to rule forever. Instead, empires rise to power, they prosper and spread their influence. Thereafter, they over-extend themselves and then break down in some fashion. In fact, all the glorious empires of history had one thing in common – a spectacular collapse.

Now, there can be no doubt that America ruled the economic world for the better part of the previous century. However, this powerful nation has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is compelling evidence that the world’s largest economy is well past its prime.

Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America’s federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider the chart below which shows the total obligations of the US government.

Click here to read the rest of Puru Saxena’s article.

…wait until you see what’s in the cards for commercial real estate.

That’s right, the next train wreck will be in commercial real estate. Couldn’t be worse than last year’s residential market crash? That remains to be seen. But it’s coming soon, probably as early as the second quarter of next year, and there’s nothing that can prevent it. The government will intervene, trying desperately to delay the day of reckoning, and may even succeed. For a while. But make no mistake about it, that train is going off the tracks no matter what.

Every part of the sector – from multifamily apartment buildings to retail shopping centers, suburban office buildings, industrial facilities, and hotels – has accumulated a huge amount of defaulted or nonperforming paper. It’s an impossible, swaying structure that cannot long stand.

Just ask Andy Miller.

Andy is one of the most knowledgeable people around when it comes to commercial real estate. Co-founder of the Miller Fishman Group of Denver, he has spent twenty years buying and developing apartment communities, shopping centers, office buildings, and warehouses throughout the country. He’s also worked extensively – especially lately – with asset managers and special servicers (those who handle commercial mortgage-backed securities, or CMBS) from insurance companies, conduits, and the biggest banks in the U.S., advising them on default scenarios, helping them develop realistic pricing structures, and making hold or sell recommendations.

It isn’t easy. Commercial real estate sales are off a staggering 82% in 2009, compared with 2008, and last year was worse than ’07. No one is selling at depressed prices, but it hardly matters as there are no buyers, either because they’re afraid of the market or can’t meet more stringent loan requirements. Two years ago, the value of all commercial real estate in the U.S. was about $6.5 trillion. Against that was laid $3-3.5 trillion in loans. The latter figure hasn’t changed much. But the former has sunk like a bar of lead in the lake, so that now between half and two-thirds of those loans will have to be written down, Andy estimates.

“If the banks had to take that hit all at once, there wouldn’t be any banks,” he says.

And it’s actually worse than that. As even average citizens became aware during the subprime meltdown, loans in recent years were bundled into exotic financial vehicles that could be sold and resold, a class generically known as conduits. These commercial mortgage-backed securities, while less well known than their cousins built upon home loans, are nonetheless ubiquitous.

Three guesses who were among the significant buyers of CMBS. If you said banks, banks, and more banks, you got it. Thus these folks are sitting not only on their own malperforming loans, but on a whole lot of everyone else’s toxic junk, too.

This is how bad conduits are: A 3% default rate last year jumped to 6% in 2009 and is expected to double again, to 12%, in 2010. An entity that takes a 12% hit to its portfolio – and this includes countless banks, pension and annuity funds, international institutional investors, and others – is in deep, deep trouble.

The real tsunami is coming, probably in the second quarter of 2010, Andy estimates. Because that’s when banks will have to start preparing for the wave of mortgages that were written near the market top and are maturing in 2011-12. Unlike home loans, commercial loans tend to be relatively short-term in nature (average 5-7 years), because – outside of apartment building loans backed by Fannie or Freddie – there are no government programs to subsidize longer-term ones. These guys mature in bunches.

According to a recent Deutsche Bank presentation, the delinquency rate on commercial loans as of the end of 2Q09 was greater than 4%. Of these, they expect that north of 70% will not qualify for refinancing. Imagine what will happen to the estimated $2 trillion in commercial mortgages that mature between now and 2013.

And even that is not the end of it. There’s a second huge wave on the way in 2015-16.

Problem is, instead of trying to meet this inevitable challenge head on, asset managers have decided to believe in such phantoms as the tooth fairy, honesty at the Fed, and an economic turnaround powerful enough to bail them all out. De Nile is not just a river in Egypt.

To be fair, it’s difficult to envision what an intelligent, aggressive response would look like, given the breadth and depth of the crisis, and the lack of resources available to deal with it. Miller recently met with a group of asset managers from a number of different, prominent banks. They reported that they’re completely overwhelmed and can’t even begin to cope with the sheer volume of problem loans on their calendar. It’s so bad that they’re now dealing with some borrowers who haven’t paid a cent in a year and a half.

What do you do if, as Andy thinks is the case, 85-90% of the entire commercial real estate market is under water relative to its financing? What happens to a property when its value drops way below the loan, a seller can’t get enough money to get out, a buyer can’t raise enough money to get in, and the bank can’t afford to foreclose? Simple. It just sits there, carried along on the bank’s books at some inflated “mark to fantasy” price that makes the institution’s balance sheet look passable. The industry even has a catchphrase for the situation: “A rolling loan gathers no moss.”

In the case of a retail store, a bankrupt tenant walks away. Andy looked at just the part of Phoenix where his firm does business and found 90 vacant big box stores, with an aggregate floor space of 8 million square feet. If Christmas season is as lackluster as cash-strapped consumers are likely to make it, there will be many others to follow.

The hotel business is terrible. Overbuilding based upon travelers who went into debt to finance lavish vacations is taking its toll on tourist destinations. At the same time, business travel has seriously contracted. Flights into Las Vegas, which caters to both, have been slashed so much that even if every seat on every remaining flight were filled and visitors stayed for an average number of days, the hotels still couldn’t break even. In industry parlance, banks are now engaged in “extend and pretend,” i.e., giving hotels three- to six-month loan extensions in the hope that things will somehow improve in the near future.

Office space is doing okay in central business districts, but not faring well elsewhere. Some estimates tab the national office vacancy rate at over 16.5%, compared with 12.6% in January 2008. It exceeds 20% in parts of Atlanta and San Diego, and in many places in between.

Multifamily apartment buildings – and the very creaky Fannie and Freddie are carrying a load of them – may be the next to topple. As values deteriorate and landlords are faced with loans coming due, there is no incentive to fix whatever goes wrong. If, for example, you have a $10 million loan maturing in two years, and the property value has declined to $6 million, why would you spend half a million to fix leaky roofs? The question answers itself. Yet, as capital spending needs are not attended to, the apartments deteriorate. Which leads to working-class tenants replaced by meth labs. Which leads to even lower property values. And so on. In the end, when the banks are forced to take possession, they will be left with either expensive repair jobs, or the cost of demolition and a total write-off.

As the overall commercial real estate crisis escalates, the banks will do the same thing they did last year: run to the government, palms outstretched.

How will Washington respond? Good question. On the one hand, further bailouts will further infuriate the public. But on the other, the political sentiment will be that allowing the banks to fail will have even more dire consequences.

The Fed has already tried to let some of the relentlessly building pressure out of the balloon through TALF (Term Asset-Backed Securities Loan Facility). But that hasn’t worked, because TALF only backs the most senior, creditworthy bonds in a CMBS pool. Those aren’t the problem. The problem is the junior notes no one wants.

In order to increase market liquidity and get conduits moving again, the government will likely be forced to create a guarantee program similar to the FHA, Miller thinks, whereby short-term money (on the order of 5-7 years) is made available. Will that just push our problems five to seven years down the road? Quite possibly. But what is being purchased is time, the only thing left to buy. The hope, of course, is that it’s enough time – for the real estate market to stabilize, prices to return to more “normal” levels, and the world to turn all hunky dory.

Rock, meet hard place. Let all the troubled banks fail, and the consequences will range from some excruciating but short-term pain, to a plunge into full-bore depression. Prop them up with yet more newly printed fiat money, and anything from high to hyperinflation will inevitably result, along with the possibility of extending the problem well into the next decade.

Both are frightening prospects. We don’t want either, but realistically, we’re going to get one or the other. Let’s be clear, it won’t be the end of the world. However, it will be the end of the world as we know it. That makes it imperative to prepare for the new one that’s coming.

The editors of The Casey Report, supported by real estate pro Andy Miller, have been warning of the coming commercial real estate debacle since September 2008. This one’s rather easy to time – because they know when the loans will come due. And as subscribers can testify, accurately predicting big trends is the forte of Doug Casey and his expert team. To learn how you can profit from making the trend your friend, click here.

The following is an excerpt from Bill Bonner and James Davidson’s crisis report, How to Survive and Prosper in the Coming Global Depression.

To read the full report, simply enter your e-mail address below. You’ll also begin receiving critical updates to the report via e-mail.

Contrarian Profits readers are probably familiar will Bill’s commentary from his Daily Reckoning column. But here is some information about James Davidson:

Davidson is a self-made multi-millionaire, venture capitalist and best-selling author.

His books include Blood in the Streets, Financial Reckoning Day and The Sovereign Individual.

As an author and editor of private financial advisory service Strategic Investment, Davidson has made a number of bull’s-eye crisis predictions.

He is the founder and chairman of the National Tax Payers Union, the largest and oldest grassroots taxpayer organization in US.

His forecasts and his war against taxes and deficits have earned him frequent invitations on programs such as Good Morning America, The Tonight Show and MacNeil-Lehrer.

Read on…

This Is a ‘Credit Cycle’ Bust

One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge — even to ourselves — that we’ve been so credulous.

We turn here to the words of American astronomer Carl Sagan because they so aptly describe our current economic predicament.

Americans have come to believe the particular bamboozle that we can get rich by spending…that we can get something for nothing.

As Bill put it in Financial Day of Reckoning, “Americans can no more retreat from this dream than Napoleon could have brought his troops back from Germany, Italy and Spain and renounced his empire.”

And here’s where our story gets really interesting.

Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.

- John Stuart Mill

Because what becomes clear is that this is no ordinary collapse.

Let us explain…

When left to themselves, the markets are natural phenomena. There is a wonderful simplicity about them.

Failure follows success. What goes up eventually comes down. Like a tree, they cannot continue to grow forever.

We can easily illustrate this by describing the pattern of pig farmers.

When the price of pigs rises, pig farmers naturally raise new pigs to increase production. About 18 months later, these new creatures arrive on the market. This increase in supply causes prices to fall. Farmers decide to cut back, which caused prices to rise again.

This is nothing more than the cyclical boom-and-bust cycle that defined the US economy from the end of World War II to 2001.

Then something changed radically. The Fed, under eager-to-please chairman Alan Greenspan, decided it could avoid the bust part of the cycle altogether.

The result is a different beast from your garden-variety downturn. You get a “credit cycle” bust instead.

This is exactly what we are experiencing now. And it’s more like the post-bubble depression of the 1930s than the downturn of 1973 to 1974 or 1981 to 1982…

‘Catastrophic Acceleration’ of Losses

Here’s the big worry.

The severity of this kind of bust depends on the magnitude of the bubble that preceded it. And the bubble that came before this bust was the biggest ever in history.

In fact, it wasn’t really a bubble at all. It was a “hyper-bubble.”

Now this hyper-bubble has popped, and the losses are catastrophic.

Billionaire investor George Soros recently explained just how dangerous the unwinding of these kinds of bubbles can be.

The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp.

The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage — borrowing for investment purposes.

At the peak of the boom both the value of the collateral and the degree of leverage reach a peak.

When the price trend is reversed, participants are vulnerable to margin calls and, as we’ve seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.

Of course, all this was inevitable.

Bill repeatedly warned the more than half a million subscribers of his newsletter, The Daily Reckoning.

No doubt, many got tired of hearing his warnings. But all he was doing was pointing out the obvious.

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Audio Commentary from Resource Investor Rick Rule

Click to play with Media Player

Key points summary:

* The crisis is not limited to mortgages… Financial institutions are over leveraged
* There is a wipe out of shareholder equity in financial services
* Financial service companies don’t know what their derivatives are worth
* They are keeping liquidity for themselves because they don’t know value of derivatives of others banks
* The US is the leading edge of a worldwide trend of over-leveraged financial services
* An extreme example of over-leverage is Iceland

Rick Rule is chairman of Global Resource Investments. He has dedicated his life to all aspects of the natural resource industry. His contacts and knowledge of this market are unmatched.

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A Monster of Deleveraging

Instead of getting a typical bear market in 2001, we now face a monster of deleveraging as the biggest credit boom in history unwinds.

Deleveraging is simply the cutting back on the amount of money borrowed compared to equity.

In the case of this crisis, financial institutions sell off assets to recoup losses inflicted on their balance sheets by toxic mortgage-related securities.

These forced sales push down asset prices, hurting the balance sheets of other investors, forcing more asset sales and so on.

Nothing can stop this process. It’s a necessary cure for the credit bubble that Greenspan puffed up.

The problem is it is devastating the wider economy.

As The Economist magazine puts it, “What hurts finance affects the rest of the economy in spades.”

Because of leverage, a shortfall of bank capital of around $100 billion may reduce the potential supply of credit by $1 trillion.

This assumes banking system leveraging of around ten times…the geniuses running Lehman Brothers leveraged 25 times to equity.

But let’s assume that leverage of ten times to equity is about right.

So far, financial institutions have admitted to about $600 billion in credit-related losses and writedowns (net of re-capitalization via new equity issues).

This means cuts of $4 to $6 trillion to the potential supply of credit.

This, in turn, leads to higher cost and lower availability of credit to the real economy. And it forces consumers to reduce debt and consumption, most of which was based on borrowing in the first place.

This is bad enough. But it doesn’t end there…

So-called “negative feedback loops” mean the reductions in consumer spending and investment further hurt the economy. This puts further financial stress on corporations and individuals and triggers more debt defaults and more losses for the financial system. These then reduce lending capacity.

And so on…

Like a giant forest fire, the deleveraging process can’t be extinguished.

And although the government believes it can put the fire out with bonehead bailouts, at the very best all it can do is create firebreaks that limit the damage until the fire burns itself out.

Right now, the bailouts are stopping companies such AIG and Citigroup from going under. But banks are still refusing to lend to each other despite all the money the government is giving them.

The bottom line?

This massive unwinding is nowhere near finished.

Remember, Wall Street has only admitted to a small fraction of its mortgage-related losses and writedowns.

And the very, very bad news is total losses are estimated to clock in at $2.5 to $3 trillion…

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