Pick Your Poison

Joel S. Hirschhorn

One of the hardest truths to accept is that for most sources of pain hitting humans there seems to be nothing effective for government to do. Nowadays, those of us who do not gobble various distractions but work to stay connected to reality see two dreadful conditions. Nature seems mad as hell. People are dying or suffering from earthquakes, tsunamis, floods, tornadoes, wildfires, hurricanes, extreme heat, huge snow storms and more. While some idiots keep trying to deny the reality of global climate change, those of us who have lived a long time see firsthand that killer weather events are more prevalent than ever.

While you may be fighting your paranoia about being victimized by foul weather the other ugly reality already devastating the lives of so many people is a dismal set of economic conditions. Contrary to all the usual lies by politicians about the economic recovery, a mountain of data shows non-delusional people that only the wealthy have escaped economic pain.

According to a recent Pew Charitable Trusts poll, 55 percent of Americans still rate the national economy as poor, and just 47 percent believe their kids will have a higher standard of living than they enjoy. If more people paid closer attention to the facts, those percentages should be more like 80 or 90 percent.

The US has recovered just 1.8 million of the nearly 9 million jobs lost in the downturn versus an average 5.3 million job gains in the same period of the 1970s and 1980s recoveries. The number of people with jobs has barely changed since June 2009 – up just 0.4 percent. Many economists say the turnaround shows no signs of generating the 300,000 to 400,000 monthly payroll additions needed to rapidly lower the unemployment rate. There are probably about 50 million Americans who are unemployed, underemployed or no longer trying to get decent jobs, or who are close relatives of them. The rise of the official unemployment rate in May, 2011 (the real level is twice as high) and a paltry new number of jobs just rubbed salt in the wound. There simply is no basis for believing that many millions of new, good jobs will be created for many years.

Add the latest news that the housing market has turned even worse again, leading to the distressful conclusion that a double-dip recession has hit housing, which portends even wider economic pain. Single family home prices dropped in March, 2011 to their lowest level since April 2009. Millions of home foreclosures will be followed by even more. Of all homes with mortgages 23 percent are worth less than what is owed.

And don’t forget that there are enormous numbers of Americans fighting hunger even though 68 percent of Americans are obese or overweight. Forty four million Americans are getting food stamps.

Meanwhile higher prices for key necessities show that inflation is eating away at quality of life and living standards. Gas prices climbed 52 percent over the past two years, according to the Department of Energy, and are only now decreasing a little as many Americans have cut back on their driving. Food costs are also rising just like health care.

Nothing the government has done worked for ordinary Americans. Many billions of dollars spent on reviving the economy have mainly helped the business sector and the rich. Congress and President Obama have shown themselves to be utterly useless. They mostly serve corporate interests.

Both the economic and climate futures look bleak, because they are bleak.

Pick your poison. We are living in a time when natural and economic conditions are out of control and frightening. But wait, there is some good news!

According to a new report by Boston Consulting Group, the number of millionaire households in the world grew by 12.2 percent in 2010, to 12.5 million. Here is how millionaires are defined: Those with $1 million or more in investible assets, excluding homes, luxury goods and ownership in one’s own company. Can you relate? Even better news: The US still leads the world in millionaires, with 5.2 million millionaire households.

An even bigger truth is this: The world’s millionaires represent just 0.9 percent of the global population but control 39 percent of the world’s wealth, up from 37 percent in 2009. Even more truth about economic inequality: Those with $5 million or more, who represent only 0.1 percent of the population, control 22 percent of the world’s wealth, up from 20 percent in 2009. The rich are really getting richer.

If you face reality, remember that Obama promised back in February 2009 that his $830 billion stimulus plan would unleash “a new wave of innovation, activity and construction” and “ignite spending by businesses and consumers.” Did not happen.

And in June 2010, Obama announced that the recovery was “well under way” and that it “is getting stronger by the day.” More poisonous propaganda.

A couple months later, Treasury Secretary Timothy Geithner wrote a New York Times op-ed headlined “Welcome to the Recovery.” More self-serving garbage.

In reality, two years after the recession officially ended there are few places beyond the stock market and corporate profits that have shown improvement, but even now the stock market is hurting. The rich and powerful have not suffered. But over the past decade, real private-sector wage growth has been a terrible 4 percent, just below the 5 percent increase from 1929 to 1939 during the Great Depression.

The Republicans who grabbed so much power in the last midterm elections show no capacity whatsoever to fix anything. That Sarah Palin just as Donald Trump can grab so much media attention demonstrates how decrepit our nation is.

What is to be learned? No member of Congress or the President deserves to be reelected. Neither does any other Republican or Democrat. Like extreme weather calamities, economic evils will continue to poison our lives. Those who deny climate change and economic injustice are either stupid or delusional. Waiting for divine intervention makes as much sense as anything, except that all the awful stuff happening, if God’s will, suggests such hope is folly. Pass the poison. Or wait for a tornado, home loss, or financial ruin to hit. More bad news is coming. But have you ever seen pictures of tornadoes destroying McMansions?

What I have been afraid to blog about: The ESF and Its History_Part 1

Financial Repression: A Sheep Shearing Instruction Manual

Daniel Amerman

Overview

“Financial Repression” is currently a hot buzzword in the global economic community, and its effects are even worse than it sounds. Like other recent economic buzzwords such as “monetary sterilization” and “quantitative easing”, the average person will never understand the meaning, if they hear the phrase at all. That is too bad, because governments around the world deliberately and methodically stripping wealth (and therefore security and retirement lifestyle) from hundreds of millions of people is the quite explicit objective of Financial Repression.

As published in a recent working paper on the IMF website, Financial Repression is what the US and the rest of the advanced economies used to pay down enormous government debts the last time around, with a reduction in the government debt to GDP ratio of roughly 70% between 1945 and 1980. Financial Repression offers a third way out – as it allows governments to pay down huge debt burdens without either 1) default or 2) hyperinflation. If you are a senior government official of a nation that has a huge “sovereign debt” problem – like the United States and almost all of Europe, and you want to stay in power – this proven method is a topic of keen interest.

To understand this miraculous debt cure for governments, you need to understand the source of the funding. As we will explore in this article, the essence of Financial Repression is using a combination of inflation and government control of interest rates in an environment of capital controls to confiscate the value of the savings of the world’s savers. Rephrased in less academic terms – the government deliberately destroys the value of money over time, and uses regulations to force a negative rate of return onto investors in inflation-adjusted terms, so that the real wealth of savers shrinks by an average of 3-4% per year (in the postwar historical example), and it uses an assortment of carrots and sticks to make sure investors have no choice but to accept having the purchasing power of their investments shrink each year.

What the IMF-distributed paper really constitutes is a Sheep Shearing Instruction Manual. The “way out” for governments is effectively to put the world’s savers and investors in pens, hold them down, and shear them over and over again, year after year. Uninformed and helpless victims is what makes Financial Repression work, and it worked very well indeed for 35 years. On the other hand, if you understand what is truly going on, then you do have the ability to turn this to your substantial personal financial advantage. With a genuinely out of the box approach to long-term investment, the more heavy handed the repression – the more reliable the wealth compounding for those who reject flock thinking.

Understanding Financial Repression

Pimco (Pacific Investment Management Co.), one of the largest investment managers in the world, released their three to five year outlook last month, and their CEO predicted that increasing debt problems would lead to higher inflation and a return to “financial repression” in the United States.

Earlier in May, the Economist magazine had published an article on Financial Repression that included the following summary:

“… political leaders may have a strong incentive to pursue it (Financial Repression). Rapid growth seems out of the question for many struggling advanced economies, austerity and high inflation are extremely unpopular, and leaders are clearly reluctant to talk about major defaults. It would be very interesting if debt (rather than financial crisis or growing inequality) was the force that led to the return of the more managed economic world of the postwar period.”

The phrase “Financial Repression” was first coined by Shaw and McKinnon in works published in 1973, and it described the dominant financial model used by the world’s advanced economies between 1945 and around 1980. While academic works have continued to be published over the years, the phrase fell into obscurity as financial systems liberalized on a global basis, and former comprehensive sets of national financial controls receded into history.

However, since the financial crisis hit hard in 2008, there has been a resurgence of interest in how governments have paid down massive debt burdens in the past, and a fascinating study of Financial Repression, “The Liquidation of Government Debt”, authored by Carmen Reinhart and M. Belen Sbrancia, was published by the National Bureau of Economic Research in March, 2011 (link below).

http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf

The paper is being circulated through the International Monetary Fund, and to understand why it is catching the full attention of global investment firms and governmental policymakers, take a look at the graph below:

The advanced Western economies of the world emerged from the desperate struggle for survival that was World War II, with a total stated debt burden relative to their economies that was roughly equal to that seen today. The governments didn’t default on those staggering debts, nor did they resort to hyperinflation, but they did nonetheless drop their debt burdens relative to GDP by about 70% over the next three decades – and the very deliberate, calculated use of Financial Repression was how it was done.

The Mechanics Of Financial Repression

The specifics of financial repression took somewhat different forms in each of the advanced economies, but they shared four characteristics: 1) inflation; 2) governmental control of interest rates to guarantee negative real rates of return; 3) compulsory funding of government debt by financial institutions; and 4) capital controls.

1) Inflation. First and foremost, a government that owes too much money destroys the value of those debts through destroying the value of the national currency itself. It doesn’t get any more traditional than that from a long-term, historical perspective. Without inflation, Financial Repression just doesn’t work. Historically, the rate does not have to be high so long as the government is patient, but the higher the rate of inflation, the more effective financial repression is at quickly reducing a nation’s debt problem.

For example, per the Reinhart and Sbrancia paper, the US and UK used the combination of inflation and Financial Repression to reduce their debts by an average of 3-4% of GDP per year, while Australia and Italy used higher inflation rates in combination with Financial Repression to more swiftly drop their outstanding debt by about 5% per year in GDP terms. As the crisis is much worse this time around, a substantially higher rate of inflation than that experienced in the 1945 to 1980 period is going to be necessary.

2) Negative Real Interest Rates. In a theoretical world, some would say that governments can’t inflate away debts because the free market would demand interest rates that compensate them for the higher rate of inflation. Sadly, this theoretical world has little to do with the past or present real world.

In the past (and all too likely in the future), there were formal government regulations that determined the maximum interest rates that could be paid. As an example, Regulation Q was used in the United States to prevent the payment of interest on checking accounts, and to put a cap on the payment of interest on savings accounts.

Regulation Q is long gone, but government control of short term interest rates has been near absolute over the last decade in the United States. As described in detail in my article linked below, “Cheating Investors As Official Government Policy”, the Federal Reserve has been openly using its powers to massively manipulate interest rates in the US, keeping costs low for the government while cheating tens of millions of investors.

http://www.safehaven.com/article/20089/cheating-investors-as-official-government-policy

So long as the Federal Reserve keeps control, there is no need for explicit interest rate controls. However, should the Fed begin to lose control, there is a strong possibility that interest rate controls will return to the US financial landscape, with similar regulatory controls being re-imposed in other nations.

3) Involuntary Funding. With this popular component of Financial Repression, the government establishes reserve or “quality” requirements for financial institutions that make holding substantial amounts of government debt mandatory – or at least establish overwhelming incentives for financial institutions such as banks, savings and loans, credit unions and insurance companies to do so. Of course, this is publicly phrased as “mandating financial safety”, instead of the more accurate description of mandating the making of investments at below market interest rates to help overextended governments recover from financial difficulties.

This involuntary funding is sometimes described as a hidden tax on financial institutions, but let me suggest that this perspective misses the important part for you and me. Because all financial institutions operating within a country are required to effectively subsidize this liquidation of government debt by accepting less than the rate of inflation on interest rates, the gross revenues of all financial institutions are depressed, and therefore less money can be offered to depositors and policyholders. Because financial institutions make their money not on gross revenues, but on the spread between what they pay out and take in, then arguably, financial institution profits are not necessarily reduced, rather the guaranteed annual loss in purchasing power is passed straight through to depositors and policyholders, i.e. you and me.

As an example, if a fair inflation-adjusted return were 8%, and the spread kept by the financial institution was 2%, then we as investors would get 6%. If financial institutions, through involuntary funding, are uniformly forced to accept a 3% return on the government debt that must constitute a big portion of their portfolios, then they still keep 2%, but only pass through 1%. So the financial institution keeps 2% either way, and we as savers are the ones who ultimately pay this “hidden tax” in full, by getting a repressed 1% instead of a fair market 6% return.

4) Capital Controls. In addition to ongoing inflation that destroys the value of everyone’s savings and thereby the value of the government’s debts, while simultaneously making sure that interest rate levels lock in inflation-adjusted investor losses on a reliable basis, there is another necessary ingredient to Financial Repression: participation must be mandatory. Or as Reinhart and Sbrancia phrase it in their description / recipe for Financial Repression, it requires the “creation and maintenance of a captive domestic audience” (underline mine).

The government has to make sure that it has controls in place that will keep the savers in place while the purchasing power of their savings is systematically and deliberately destroyed. This can take the form of explicit capital and exchange controls, but there are numerous other, more subtle methods that can be used to essentially achieve the same results, particularly when used in combination. This can be achieved through a combined structure of tax and regulatory incentives for institutions and individuals to keep their investments “domestic” and in the proper categories for manipulation, as well as punitive tax and regulatory treatment of those attempting to escape the repression. A carrot and stick approach in other words, to make sure behavior is controlled.

A Sheep Shearing Instruction Manual

Only a tiny fraction of 1% of the world’s population will ever read the original paper on the IMF website, or detailed analyses thereof. This is dry and boring stuff when compared to dancing or singing with the stars! Of course, there are many millions of investors who do read daily or weekly about what is going on in the financial world – but they and the journalists and bloggers who inform them usually just follow the ever changing surface of the markets. Again, the academic papers involved are so dry, boring and fundamental as to seem to have little relevance for the practical matter of what actions to take today or this month.

That said, let me suggest that few things are more important for your financial future than understanding and taking to heart Financial Repression. Because understanding Financial Repression means pulling the curtain aside and looking into the inner core of financial reality. It means understanding that much of what you have read and been taught about investment markets and long term investments over the last several decades has effectively been a sham.

Investor returns are not – and arguably never have been – fully about people compounding wealth in free markets, with the collective wisdom of the markets guaranteeing returns that are based upon rational assessments of the risk. Rather, investments, investment markets, investor returns and investor behavior have always been matters of governmental policy; what has varied over the years has been the form of government policy and how overt the control is.

To fully understand Financial Repression, you need to understand that the Reinhart and Sbrancia paper is effectively a sheep shearing manual. You and I, along with the rest of the savers and investors of the world are the sheep, and the goal of Financial Repression is to shear as much savings from us as the governments can, year after year, without triggering excessive unrest, and while keeping us producing the resources that can be politically redistributed.

The governments of the world are in trouble, and they would prefer to avoid overt global defaults, hyperinflation, or comprehensive austerity coupled with massive tax hikes. Each of those routes is highly unpopular, and could lead to political turmoil that would remove the decision makers and the special interests who support them from power. A more overt “managed economy” sounds much more attractive if you are in power, particularly since it has worked before over a period of decades, with an almost boring lack of political turmoil.

To get out of trouble, the governments have to wipe out most of the value of their debts, without raising taxes to the degree needed to pay the debts off at fair value. In other words, they need to cheat the investors. There is nothing accidental going on here, all that is in question are the particulars of the strategies for cheating the investors, meaning the collective savers of the world. Again, the time-honored and traditional form that governments who incur too much debt use in cheating the investors is to devalue the currency. Create enough inflation, and tax collections will rise with inflation but the debts won’t, and the savers of the world will be paid back in full with currency that is worth much less than what was lent to the governments in the first place.

Except that there is the technicality that in theory, interest rates will rise above the rate of inflation, so that the value of savings is not eroded. From the governmental perspective, this is demonstrably a rather absurd theory. The core point of the Reinhart and Sbrancia paper is that the advanced economies of the world quite effectively squeezed an average of 3-4% annually of the value of government debt out of investor real net worth for a period of 35 years, using a wide assortment of overt and less overt controls over interest rates and investor behavior. Today the mechanism is different in that the central banks are using massive monetary creation in combination with their regulatory powers over major banks to control interest rates. However, the bottom line is that interest rates are absurdly low compared to the inflation and default risks, and this is because of near complete government control.

One potential sheep shearing problem is that only a minority of us “sheep” directly own government debt. For maximum sheep shearing efficiency, all of us who lead productive lives and produce more than we consume (meaning we generate savings) need to be sheared – and sheared often – whether we buy government bonds or not. This next step is one of the hardest parts for non-financial professionals to understand, but through manipulations of capital requirements and the creation of regulatory incentives and disincentives (that never make the nonfinancial media) governments can effectively control the investment behavior of financial institutions, and force the institutions to take on investments that pay less than the rate of inflation. From which the institutions still take their cut, and then pass through a still lower real return to their depositors and policyholders. So wherever we put our money, in whatever financial institution – we get absurdly low rates of return that help the governments reduce the real value of their debts.

So we’re getting sheared, we’ve got no choice about it, the government explicitly plans to keep on shearing us for every remaining year of our lives, and wherever we go in the meadow, we still get sheared. This leads to the more savvy of us sheep trying to escape the meadow, and again, this is anticipated in the Financial Repression structure right from the beginning, with the construction of capital control fences. Many of the controls on savings leaving the country have been loosened since 1980. However, these controls have been returning since 2008, and are just likely to grow stronger as the return to full-on Financial Repression likely grows more overt.

Leaving The Flock

There is a way to beat Financial Repression. How? Succinctly phrased: the first step is to stop thinking like a sheep and start thinking like a shepherd. Stop acting like a sheep, and change your financial profile so that it aligns with the objectives of the “shepherds”, the governments of the world.

Instead of fighting the governments of the world – position yourself so that the higher the rate of inflation and the greater the destruction of the value of money – the greater your real wealth grows, in inflation-adjusted terms.

The fundamentals of Financial Repression are for governments to pin down their citizens, force them to take interest rates that are below the government-induced rate of inflation, and make it almost impossible for an older investor with a conventional financial profile to escape. This is a time to fight the good fight politically – but not with your savings or your future standard of living.

Instead, align your financial interests with your government and the governments of the world. So that the more outrageous the government actions become in squeezing the value of investor savings from their populations – the more reliable the compounding of your wealth becomes for you, and the greater the growth in your financial security.

So how does one stop thinking and acting like a sheep? This can be amazingly simple, or it can be impossibly difficult. It is you and the way your mind works that will determine whether thinking like a shepherd will become simple or be impossible. How open are you – truly – to changing the way you view investments and financial security? Can you change the personal paradigm that may have shaped your worldview for decades?

View the investment world in the way in which we have all been programmed, and maintaining wealth over the coming years of inflation and Financial Repression is going to be extraordinarily difficult, particularly in after-tax and after-inflation terms. Because everything around you really is set up for sheep shearing. That’s not a conspiracy theory – that is how the world really worked between 1945 and 1980, and policymakers around the world likely see variants of this proven debt reduction methodology as their only way out.

The Great Sheep Shearing of the early 21st century is already in process (we’re just using some different names and methods this time around), and it will likely succeed with the overwhelming majority of investors – much like it did before, only on a more thorough basis, because the problems are far larger this time around. Whether Financial Repression will successfully prevent a meltdown is a different question, but regardless, the attempt is still likely to dominate markets as well as government regulations and policy.

Your alternative is to accept the world as it is, take personal responsibility for your own outcome, and educate yourself. You can seek to fundamentally change your paradigm, turn it upside down – and personally turn that same world of high inflation and Financial Repression into a target-rich environment of wealth building opportunities.

It is all up to you.

This Is No Double Dip

Vox Day

“The Great Depression 2.0 is what is presently developing, although due to a reactive wave of positive social mood, statistical obfuscation, and understandable denial, it will take about a year for the consensus opinion to cycle through the various scenarios in descending order of optimism before the grim reality finally becomes apparent to even the casual observer.”

– “The Return of the Great Depression,” Oct. 29, 2009

One reason I prefer economics to finance is that timing has never been my strongpoint. I thought the tech bubble was going to pop in 1998. I wrote a column in 2002 that commented on the expansion of the housing bubble and noted that this was likely to have a negative effect on the global financial system, but never imagined that the bubble could go on as long as it did or that real-estate prices would rise to such elevated levels. So, given this track record of prematurity, it should be no surprise that it has taken longer for the economic consensus to recognize that the global economy is caught up in a very large economic contraction than I anticipated.

But it is coming, nevertheless. Consider the following two headlines from last week:

“‘WE ARE ON THE VERGE OF A GREAT, GREAT DEPRESSION'”

– Drudge Report, June 1, 2011

“U.S. house price fall ‘beats Great Depression slide'”

– The Independent, June 1, 2011

Slowly, but surely, the appropriate terminology is creeping into a credulous media that previously bought into the economic recovery story that the Federal Reserve, the Bureau of Economic Analysis and Wall Street have been tirelessly attempting to sell the American public since the spring of 2009. The problem is that the map is not the territory, and the morass of economic statistics is designed to provide a mathematical abstraction of an economic reality that is readily observable by those who are daily participants in the American economy.

While it is possible to make use of statistical shenanigans and keep the U3 unemployment rate below 10 percent by redefining and artificially constricting the size of the “labor force,” such actions are not going to fool anyone who isn’t working and can’t find a job. Nor are they going to fool his family and friends who don’t care if he is formally classified as being in or out of the labor force by the statisticians at the Bureau of Labor Statistics. All they know is that he is out of work. While “unemployment” is presently reported at a high, but not disastrous, level of 9.1 percent, the observant economist will note that the employment-population ratio has declined to 58.4 percent, significantly down from its historical peak of 64.4 percent in 2000.

This six percent decline may not look particularly dramatic, but to put things in perspective, it is rapidly approaching the equivalent of women collectively leaving the workforce, as the Employment-population ratio was 56.6 percent in 1948. (Of course, the idea that women first “entered” the workforce after World War II is a feminist myth. Working-class women were always a part of the labor force as the women who entered the post-World War II workforce en masse were from the middle classes.)

What has disguised the ongoing depression that has engulfed the United States, Europe and Asia is the enormous amount of government borrowing and spending that has been substituted for economic activity in the private sector. The true extent of this is not revealed in the most-reported macroeconomic figures. According to the BEA, state, local and federal spending still only accounts for 18.9 percent of the economy, compared to 18.8 percent in 2000. The component of GDP known as “G” may have increased by $500 billion, but has only done so in line with the overall growth of the economy over the last 10 years. But the false nature of these figures is easily seen when one compares the change in the amount of government debt to private debt. In 2000, the federal government accounted for 12.5 percent of all outstanding U.S. debt. It now accounts for 17.8 percent of it, half of which was borrowed after 2005. Yet somehow, all that additional money being borrowed and spent by the federal government isn’t showing up in the GDP figures.

The inherent unreliability of GDP shows that it is foolish to attempt to attempt to ascertain the state of the economy by looking at the official figures. It doesn’t matter that the BEA reported 1.8 percent growth in the first quarter last week, just as it wouldn’t have mattered if the BEA had reported 18 percent growth. The former figure is as incredible as the latter. The economy is not growing. It is contracting, and the governments of the world are losing their ability to conceal that fact from their citizens.

The truth is that the economic recovery is not faltering. The truth is that the economic recovery never existed in the first place. There is no double-dip recession, only a single large-scale economic contraction that is already, by some measures, bigger than the Great Depression of the 1930s.

10 Tipping Points Which Could Potentially Plunge The World Into A Horrific Economic Nightmare

The Economic Collapse
June 7, 2011

The global economy has become so incredibly unstable at this point that it is not going to take much to plunge the world into a horrific economic nightmare.  The foundations of the world economic system are so decayed and so corrupted that even a stiff breeze could potentially topple the entire structure over.  Over the past couple of months a constant parade of bad economic news has come streaming in from Europe, Asia and the United States.  Signs of an impending economic slowdown are everywhere.  So what “tipping point” will trigger the next global economic downturn?  Nobody knows for sure, but potential tipping points are all around us.

Today, the global economic system is even more vulnerable than it was back in 2008.  Virtually none of the systemic problems that contributed to the 2008 collapse have been fixed.

Mark Mobius, the head of the emerging markets desk at Templeton Asset Management, was recently was quoted in Forbes as saying the following….

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis.”

The “financial reform” law that Barack Obama and the Congress passed a while back was a complete and total joke.  They might as well have written the law on toilet paper for all the good that it is doing.

We did not learn from our mistakes and our future economic lessons are going to be even more painful.

The world is drowning in a mountain of debt, the global financial system is packed to the gills with toxic derivatives, everyone is leveraged to the hilt and the dominoes could start falling at any time.

I am not the only one that is warning that another financial collapse is coming.  In fact, a whole lot of people have been warning about the next financial collapse lately.

So what will the tipping point for the next collapse be?

The following are some potential nominees….

Tipping Point #1: Syria

Syria is a situation to watch very, very closely.  The Syrian government is in a lot of trouble right now.  Sadly, the instability inside Syria probably makes war with Israel even more likely.

Make no mistake – a war between Israel and Syria has been brewing for a long, long time and at some point it will happen.  When it happens, the entire Middle East may erupt in warfare.

 

Just the other day, a very troubling incident happened in the area around the Golan Heights.  The following is an excerpt from a report by The Daily Mailabout the incident….

“About 20 pro-Palestinian demonstrators were killed and 325 injured yesterday when Israeli forces opened fire on them as they crossed the border from Syria into occupied territories, according to reports.”

At this point, the Syrian government is probably glad that the attention has been taken off of them at least for a while.  The Syrian government has been getting a lot of bad press lately.  The following is an excerpt from a recent report by Human Rights Watch about the treatment of protesters inside Syria….

“The methods of torture included prolonged beatings with sticks, twisted wires, and other devices; electric shocks administered with Tasers and electric batons; use of improvised metal and wooden ‘racks’; and, in at least one case documented by Human Rights Watch, the rape of a male detainee with a baton.

“Interrogators and guards also subjected detainees to various forms of humiliating treatment, such as urinating on the detainees, stepping on their faces, and making them kiss the officers’ shoes. Several detainees said they were repeatedly threatened with imminent execution.”

 

So in light of the “precedent” that we recently set in Libya, does this mean that we will be “forced” to conduct a “humanitarian mission” inside Syria as well?

Syria is one tipping point that we all need to keep a close eye on.

Tipping Point #2: Iran

The Iranian nuclear program is in the news again. A new report by RAND Corporation researcher Gregory S. Jones claims that Iran could have a nuclear weapon within 2 months.  His report is based on recent findings by the International Atomic Energy Agency.  According to Jones, airstrikes alone would be incapable of stopping Iran’s nuclear weapons program at this point.  Instead, Jones says that a “military occupation” would be required.

It is a minor miracle that a war with Iran has not erupted yet.  It seems almost inevitable that at some point either the United States or Israel will use military force to try to stop Iran’s nuclear program.

When that happens, it is going to cause a major shock to the global economy.

Tipping Point #3: Libya

NATO has made it abundantly clear that Moammar Gadhafi will no longer be tolerated.  In fact, NATO apparently plans to reduce Tripoli to a heap of smoking ruins if that is what it takes to bring about the fall of Gadhafi.

What a “humanitarian mission” we have going in Libya, eh?  It turns out that NATO believes that the United Nations gave it permission to bomb television stations and to make attack runs with helicopters.

Russian Deputy Prime Minister Sergei Ivanov recently said that by using attack helicopters, NATO has moved dangerously close to turning the Libya operation into a ground invasion….

“Using attack helicopters, in my view, is the last but one step before the land operation.”

So why is Libya a potential tipping point?

It isn’t because Gadhafi is a threat.  He is toast.

It is because the rest of the world is watching what is happening in Libya, and that is raising global tensions.

Even if Gadhafi falls, the Libyan operation will still be a failure because it has brought us all significantly closer to World War III.

Tipping Point #4: More Revolutions In The Middle East

The revolutions throughout the Middle East earlier this year sent oil prices absolutely skyrocketing and they have remained at elevated levels.

And in case you haven’t noticed, revolutions continue to sweep the Middle East.

Have you seen what has been happening in Yemen lately?

Yemeni President Ali Abdullah Saleh has burns over 40% of his body and he has suffered a collapsed lung as a result of a recent attack.

If violence and protests throughout the Middle East become even more intense as the weather warms up this summer that could have a very significant impact on world financial markets.

Tipping Point #5: Fukushima

The mainstream news has gotten a bit tired of covering it, but the situation at Fukushima is still a complete and total disaster.

Japan’s Nuclear Emergency Response Headquarters admitted on Monday that three reactors experienced “full meltdowns” in the aftermath of the earthquake and tsunami in March.

Did it really take them nearly three months to figure this out, or were they lying to the rest of the world all of this time?

The truth is that the nuclear disaster at Fukushima is far worse than the mainstream media has been telling us.  If you doubt this, just check out this excellent article or this article by Natural News: “Land around Fukushima now radioactive dead zone; resembles target struck by atomic bomb“.

The economic impact of the Fukushima disaster is going to continue to unfold over an extended period of time.  It turns out that Japan is now officially in a recession.  Their economy contracted at a 3.7 percent annualized rate during the first quarter.

Look for more bad economic numbers to come out of Japan for the rest of the year.  Considering the fact that the Japanese economy is the third largest economy in the world, the fact that they are struggling so badly right now is not a good sign for the rest of us.

Tipping Point #6: Oil Prices

The price of oil is going to continue to be one of the biggest economic stories for the rest of this year and for 2012 as well.

The last time U.S. energy expenditures were over 9 percent of GDP was in 2008 and we quickly plunged into the deepest economic downturn since the Great Depression.

Well, we have reached the significant 9 percent figure once again in 2011, and many fear that once again high oil prices will cause another major economic decline.

Tipping Point #7: Government Austerity

In the United States, it is not just the federal government that is drowning in debt.

All over America, there are state and local governments that are financial basket cases.

I don’t always agree with the time frames that Meredith Whitney puts out there, but she is absolutely correct that we are going to see a massive municipal bond crisis. The following is an excerpt from a recent report about Whitney’s predictions on CNN….

“Meredith Whitney is issuing a fresh warning to mutual funds, banks, and politicians: The state of state finances is far worse than what you think, or at least than what you’ve been willing to tell the investors and taxpayers who will eventually carry the burden.”

Many state and local governments are attempting to get their budgets balanced by making huge budget cuts.  But most of the time these austerity programs also include the elimination of a lot of government jobs.

UBS Investment Research is projecting that state and local governments will combine to slash a whopping 450,000 jobs by the end of next year.

So where will the half a million good jobs come from to replace all of those lost jobs?

Tipping Point #8: The European Sovereign Debt Crisis

Greece is just the tip of the iceberg in Europe.

Moody’s downgraded Greek debt again last Wednesday.  This time Moody’s downgraded Greek debt by three levels all the way down to Caa1.  At this point, the yield on 10-year Greek bonds is over 15 percent.

The EU has been going crazy trying to deal with the Greek debt crisis.  The truth is that a default by the Greek government would be absolutely catastrophic. If you do not understand the kind of chaos a Greek default would set off on world financial markets, just read this editorial.

But Greece is not the only major European nation with a massive debt problem.

The government of Ireland is already indicating that they may need another bailout.

Portugal, Spain and Italy are also on the verge of collapse.

So will the EU bail all of these nations out for years and years to come?

At some point will the whole house of cards come crashing down?

Everyone needs to keep watching what is going on in Europe.  The status quo is not sustainable and it cannot go on forever.

Tipping Point #9: The Dying U.S. Dollar

The euro is not the only major currency that is in trouble.

The U.S. dollar is also slowly dying.

On April 18th, Standard & Poor’s altered its outlook on U.S. government debt from “stable” to “negative” and warned that the U.S. could soon lose its prized AAA rating.

The sad truth is that faith in the U.S. dollar and in U.S. Treasuries is rapidly declining.  The mainstream news is not reporting on it much, but right now the Chinese are rapidly dumping U.S. government debt.

As the dollar declines, so will the purchasing power of average Americans.  We are already seeing a tremendous amount of inflation in 2011.

But this is just the beginning.

A lot worse is going to be coming down the road.

Tipping Point #10: Drought

A lot of people that read my articles doubt that we will ever see a major global food crisis.

But one is coming.

It is just a matter of time.

Even now, many areas of the world are experiencing very serious droughts.  The following is from a recent  Bloomberg article….

Parts of China, the biggest grower, had the least rain in a century, some European regions are the driest in 50 years and almost half the winter-wheat crop in the U.S., the largest exporter, is rated poor or worse. Inventory is dropping 8.8 percent, the most in five years, Rabobank International says. Prices will advance 20 percent to as high as $9.25 a bushel by Dec. 31, a Bloomberg survey of 14 analysts and traders shows.

Are you concerned yet?

You should be.

But if you prefer some mindless pablum that will make you feel better, we have some of that for you too.

Larry Summers, the former director of the National Economic Council under Barack Obama, recently told CNBC the following….

“We definitely hit a slower patch, but I think the basic fact that the terrible financial strains we had are abating, remains in place, and I expect this recovery to continue for a substantial period of time.”

Does that make you feel better?

Larry Summers says that everything is going to be okay.

It would be great if Summers was actually right, but sadly he is not.

In fact, the worst economic times that America has ever seen are ahead.

The following is a brief excerpt from a recent interview with Dmitry Orlov about the coming economic collapse that was posted on shtfplan.com….

First you have financial collapse, which is basically the volume of debt that has to be taken on in order for the economy to continue functioning, cannot continue. We’re seeing that right now in Greece, we’re probably going to see that in Japan, we’re definitely at a point now in the United States where even if you raised the income tax to 100 percent, there’s absolutely no way of covering the liabilities of the U.S. federal government. So, we’re at that point now but the workout of the financial collapse is not all quite there. We don’t quite have a worthless currency but that’s in the works.

That, of course, is followed by commercial collapseespecially in a country like the United States that imports two thirds of its oil. A lot of that is on credit and if a little bit of that oil goes missing then the economy starts to fall apart because nothing moves unless you burn oil in the United States and, of course, a lot of goods that are sold everywhere are imported again, on credit.

When the U.S. dollar dies and our financial system collapses we are not going to be able to get all of the things that we need from the rest of the world so cheaply any longer.

That is going to cause fundamental changes inside the United States.

Right now, the economic news just seems to get worse and worse, but this is just the beginning.

What is eventually going to happen in this country is going to be so nightmarish that most Americans could not even imagine it right now.

So are our leaders doing anything to prepare for the coming economic crisis?

No, they are too busy with other things.

The big political news of the day was U.S. Representative Anthony Weiner finally admitting that he sent out lewd photos of himself over Twitter to women that he was not married to.

We have become the laughingstock of the world and the economic collapse has not even happened yet.

Big time trouble dead ahead thanks to the Federal Reserve

Free market Economics

The paper money dollar experiment of the last 40 years has reached an unsolvable impasse.

Since 1971, when Nixon defaulted on the dollars convertibility into gold there has been no restraint whatsoever on the Federal Reserve’s ability to finance the U.S. government’s boondoggle spending programs both foreign and domestic.

The government doesn’t have to rely on tax receipts any more. It simply issues bonds to borrow the money. The Federal Reserve ensures those bonds are always bought, buying them itself if necessary as it has done with QE1 and QE2.

Here is a chart of the national debt since the dollar was taken off the gold standard:

 

 

 

That is the macro 40 year picture. During that time there have been recessions. These have been a direct result of the Fed policy of lowering of the interest rates below their natural free market rate during market downturns.

Austrian business cycle theory explains this predictable boom bust cycle:

 

 

1. The Fed lowers interest rates below what they would be on a free market.
2. Businesses borrow money for long term projects that previously hadn’t seemed profitable.
3. People and money flow into the sectors most influenced by the apparent boom.
4. The Fed begins a process of incrementally increasing interest rates at regular intervals.
5. Prices rise, often ending in a mania phase (examples: dot-com bubble, housing bubble)
6. A realization occurs that there is not sufficient actual savings to make all the projects profitable in those sectors affected by the boom. The bust occurs as the market tries to reallocate resources to industries that better reflect true supply and demand.

Prices fall. Unemployment rises. The Fed repeats the cycle

1. The Fed again lowers interest rates below what they would be on a free market.
2. As before when rates were lowered below the free market rate, long-term business projects are evaluated based on the artificially low rates.
3. Resources and workers are encouraged to remain in the unprofitable post boom industries. Money losing businesses that should fail are kept alive. Servicing large debt loads becomes widespread, again made possible by the Fed’s artificially low interest rates..

The cycle repeats in progressive cycles with each bust getting progressively worse. Debt loads constantly increase and the malinvestments, never having a chance to liquidate, continuously drag on the economy more and more until we reach the dreaded point of no return.

At some point the low interest rate policy of the Federal Reserve fails to kick start the boom bust cycle. The debt burden is just too large to overcome. We are at this point now.

Below is a graph of the Fed funds rate for the last 10 years. You can see the Fed furiously lowered rates after the nasdaq dot com crash. Instead of a much needed recession to realign resources with profitable investments, the Fed prevented the recession from liquidating the malinvestments. The artificially low rates instead ignited the housing bubble and its related derivative securitization bubbles. The bubble popped in 2008.

 

Predictably the Fed again lowered rates. This time it has taken them all the way to zero. The difference now is that this time it is not working. The Fed cannot ignite another bubble.

The burden of the massive debt overhang is too much to overcome. There will be massive defaults at all levels of society including individuals, corporations, municipalities, states and finally the Federal government itself. They all have too much debt to pay back and it will be defaulted on.

There are two ways they can default.

They can default by not paying the loans back and we get a viscious but not endless period of deflationary debt collapse where all the bad decisions of the past Fed induced business cycles are finally accounted for.

Alternatively, the U.S. Government can bail out everyone by borrowing tens of trillions more and turn to the Federal Reserve to magically print up the necessary dollars to finance it all. This would eviscerate the dollar on the foreign exchange market and send prices soaring to the moon in a hyperinflationary depression.

There is no solution to the crisis, merely a choice of which of two roads to choose, a deflationary debt collapse, or a hyperinflationary dollar collapse. Pick your poison thanks to our masters at the Federal Reserve.

One thing is certain, when the dust clears we need to point our fingers at the Fed as the real culprits enabling a welfare, warfare state where the majority of the populace is on the dole. Free market capitalism will allow us to return to prosperity after the crash if we let it.

We need to listen to those who saw what was happening and warned about it. There are free market economists who understand the need for a sound commodity based money and can help ensure the special interest groups never again take control of our economy and our country.

One such man is Congressman Ron Paul of Texas. He first ran for congress shortly after Nixon took us off the gold standard all those years ago when he saw the writing on the wall for our current day crisis. Dr. Paul is running for president and is the only one running who understands our current crisis and what to do about it to return us on the road to prosperity.

Private Property

Don Stott

One of the most important facets of freedom, and a free people, is private property. Our Fifth Amendment states that, “No state shall…deprive any person of life, liberty, or property without due process of law..” Even Jesus said, at Matthew 20: 15, “Is it not lawful for me to do what I want with my own things?” John Locke, in 1690 wrote, “The reason why men enter into society is the preservation of their property.” James Fenimore Cooper, in 1838, in his ‘The American Democrat’ wrote, “Property is desirable as the ground work of moral independence, as a means of improving the faculties, and of doing good to others, and as the agent in all that distinguishes the civilized man from the savage.” Without the ability to own something, be it yourself, a home, farm, auto, business, or for that matter, any tangible thing, civilization would decay and crumble. To that end, Karl Marx, in his Communist Manifesto wrote in 1848, “You reproach us with planning to do away with your property. Precisely, that it just what we propose.”

Look at those who do not own property, and see what it brings. Public housing is classic. Those who live in government housing, care virtually nothing for it. They urinate down elevator shafts, steal everything not bolted down, and deface and destroy everything. Twenty years is about the life of public housing, before it must be demolished. Rentals of apartments or cars? Ask any landlord or car rental agency, if you wish to hear tales of woe. If a person doesn’t own a thing, they will not care for it, other than in rare exceptions. Property ownership is of paramount importance, if we are to be free.

Bureaucracy and government seem to currently believe it is their job to deprive us of our property rights, denying us the use of them with zoning, building codes, safety issues, materials issues, or hundreds of rules and regulations, supposedly to protect the body politic, but millions of examples of sheer abuse of power by government appointed ‘protectors,’ and ‘administrators,’ paint shameful pictures of government gone awry, with the abuses growing daily.

I recently was sent video tape of multiple arrests and Park Police brutality at the Jefferson Memorial in Washington D.C. Citizens who the cops thought should not move their bodies in a way they considered ‘dancing,’ although no law or regulation was being violated. Handcuffs and a night in jail were given to totally innocent citizens. The personal property of their bodies was taken from them.

When the means of production and productive property is confiscated by government, inefficiency, high cost, and low variety are the result. When government took over GM and Chrysler, bureaucrats decided that many dealerships should be closed, even though they were profitable and individually owned. Disaster resulted, and it cost $18 billion, not counting the un-resolved lawsuits, lost businesses and jobs. Currently, the Silver Eagle, made by the U.S. Government Mint at West Point New York, is $4.00 over spot, and a beautiful silver round made by a private mint in Idaho, is 85 cents over spot. Both contain exactly one ounce of .999 pure silver. The U.S. made, one ounce Gold Eagle, is about $60 over spot, whereas a one ounce gold bar made by a private bank in Switzerland, is but $19 over spot. Both contain one ounce of pure gold, and the one ounce Credit Suisse bar even has serial numbers.

Government steals out private property with myriad taxes and the Federal Reserve. Government idiocy caused the Great Depression, as well as the one we are currently in, and is making the same mistakes over and over again…stealing our private property… with our money, safety, will, desires, and abilities.

Thousands of examples of huge government waste can be dredged up from any newspaper morgue, and daily examples of government waste and excesses abound with little effort of discovery by a person with but minimal skills of reading and examination. American government, especially since the Presidency of Franklin Delano Roosevelt and his Democrat Congress, has systematically removed private property rights from citizens, by regulations, laws, and processes, which thwart the basic right to do as Jesus said, ‘to do what I want with my own things.’

In addition, the basic private property of the mental capacity of citizens has been stolen by means of handouts, Social Security, Medicare, food stamps, endless subsidies, public schools, public housing, and government provided things too numerous to mention. Private property minds have been dulled with government propaganda and lies. Privately owned businesses, transport systems, theatres, and whole neighborhoods have been destroyed by government provided housing etc, which has created an underclass, bent on destroying everything in its grasp. Examples? I watched West Philadelphia destroyed by government created vandals; and any city has similar atrocities which can be easily documented. All the privately owned West Philly homes and business were torpedoed by government handouts and housing, causing huge losses to their former owners, who were pushed out to save their very lives.

Government has stolen our private property money, by endlessly debasing it with continual printing of un-backed dollars. Government has hocked us with devices such as the Federal Reserve, United Nations, International Money Fund, and World Bank, all of which siphon dollars, and provide nothing for the citizenry in return. Government has taken our private property rights by drafting and bribing young men into their armed forces, and taking them overseas to fight absurd wars.

Government has stolen our private property bodies and our ability to do, eat, and drink what we choose. Prohibition actually made Americans drink more than they did before prohibition, but created the FBI, plus millions of lawbreakers. The drug war (no, I have never taken any) has made millions go to jail, and the drug wars have savaged nations south of the border, with cartels bringing drugs into America. The private property of choice has been seized. Two other nations have legalized drugs with no increase in consumption and a lot less crime. Government rules, laws and bureaucracy, prevent farmers from growing what they want, the amount they choose, regulate prices they may receive, and prohibit certain farm products from production, under penalty of imprisonment, thus taking their private property rights.

When government owns or captures the means of production, we have a totalitarian system, such as now exists in Venezuela, where all means of production have been seized from their owners and nationalized. What happened? Graft, corruption, waste, and naturally, shortages of everything government took, be it oil, gasoline, food, or housing. It is a story as old as history itself. Will this continual theft of private property by government, turn America to a totalitarian state? Will our rights to own and use private property be continually taken from us? The next election will seal the book, but many think we have already passed the point of no return.

As a word to the choir, please note that gold and silver need no government backing or support for their value. They are self valued, and immune from government meddling and theft.

More Catalysts for the Impending Crisis

Addison Wiggin

Somewhere in the sad tale of Raymond Zack lies a warning about the future – the new financial crisis the catalysts for which we were searching yesterday and the day before.

Zack, depressed and on disability, walked into San Francisco Bay on Monday…and allowed the tide to wash him away to his death. He was 52.

The windsurfers and joggers at Crown Memorial State Beach stood and watched. One called 911. Alameda police and firefighters showed up. They too stood and watched.

And that’s all they did.

Funding for the fire department’s water-rescue training program dried up in 2009. That meant firefighters had to use overtime hours to train… and OT has been cut back recently. So no one had the proper certification. “Without it, the city would be open to liability,” reports KGO-TV.

Two hours later, an off duty nurse swam out 50 yards to retrieve Zack’s body. Liability was no longer an issue.

“It’s like you are living in a different country,” a witness told the San Jose Mercury News.

Indeed it is. The country is broke. And the impact of its bankruptcy is beginning to show from the bottom up. Libraries are closing in Charlotte, N.C. Garbage pickup is being cut back in Columbus, Ga. Camden, New Jersey’s police force has been cut in half.

As early as January 21, 2010 the Atlanta Journal Constitution was beginning to report on the seeds of the new crisis: “About 80 percent of stimulus money has gone directly to state governments,” the paper observed. “Instead of being used to create new jobs, the bulk of the money has been used to save existing state government jobs – teachers, law enforcement and others – and for shoring up sagging state budgets.”

In a new documentary, we’ve tentatively titled “Risk!”, we’ve been chronicling the challenge of entrepreneurs in the post-Panic environment to create and sustain new jobs. The policy mix that has come along with the effort to save government budgets has been anathema, in our opinion, to an environment that encourages entrepreneurship.

Unless the politics change, and people begin to realize that government, even at the local level, cannot be the guarantor of American prosperity, the economy will continue to be hollowed out from the inside. Capital, in large quantities, is being misallocated to saving unproductive government assets… and crowding out investment in job creating entrepreneurial efforts.

Worst of all, it’s not like the government is using its savings to fund their spending sprees. As you know, the US government has no savings. Instead policymakers have chosen to swipe Uncle Sam’s credit card and…poof, everything has been magically “paid” for.

We can’t help but sit back and wonder what the world looks like when that credit card is eventually cut off. Or when it becomes much more expensive for the Federal government to borrow money.

As we pointed out in our first film, I.O.U.S.A., the States can’t print money. They have to cut spending. They have to cut services like policeman, firefighters and trash collection. For most Americans, those cuts won’t be popular. As we’ve seen all across the country, people get angry they things they’ve been “promised” are cut.

But unlike the States, when the Federal government’s credit card it cut off they don’t have to cut back. They can continue to spend. Continue to promise. And continue to run the printing presses day and night to pay for political whims. But for how long?

The Sky Is Falling, It Is Time To Panic And The U.S. Economy Has Fallen And It Can’t Get Up

The Economic Collapse
June 3, 2011

So many economists and financial pundits seem absolutely shocked that the U.S. economy is slowing down again.  It is as if this latest wave of bad economic data has caught them completely by surprise.  Now, in the mainstream media we are seeing all kinds of headlines declaring that the U.S. economy is headed for disaster.  But anyone with half a brain could have seen this coming.  This year alone, we have seen the worst tsunami in Japanese history, the worst U.S. tornado season in recent memory and the worst Mississippi River flooding in decades.  In addition, chaos in the Middle East has pushed the price of oil up to very high levels.  Of course all of those things were going to have an effect on the economy.  In addition, all of the long-term trends that have been destroying the U.S. economy for decades have not been taken a breather.  In fact, the truth is that all of our long-term economic problems have been accelerating.  So yes, the sky is falling, it is time to panic and the U.S. economy really has fallen and it really can’t get up.  It is just that everyone in the mainstream media seems to have believed that Ben Bernanke and Barack Obama would just sprinkle a bunch of fairy dust on the economy and everything would just magically get better.  Well, in the real world things simply do not work that way.

Despite an unprecedented debt binge by the federal government and nightmarish money printing by the Federal Reserve, the economic downturn continues to drag on.  Andrew Barber, a strategist at Waverly Advisors in Corning, New York recently told CNN the following….

“People are starting to see that this sort of malaise is not just going to go away no matter what you do.”

And “malaise” is a really good word for what we have been experiencing.  For those that remember the late 1970s, what we are going through today is similar in a lot of ways.

But what is perhaps even more frightening is that 2011 is starting to look a lot like 2008 all over again.

In particular, we are starting to see some real signs of instability in the financial markets.

When Moody’s downgraded Greek debt again on Wednesday all the way downto Caa1, I was only moderately alarmed.  The truth is that everyone knows Greece is a basket case so a debt downgrade wasn’t really all that surprising.

When Moody’s announced that it plans to review the U.S. government’s AAA debt rating “if there is no progress on increasing the statutory debt limit in coming weeks” that got the attention of a lot of people around the world, but it was not totally unexpected. Moody’s is telling Congress that they better raise the debt ceiling or else.  A lot more pressure will be applied to Congress before this is over.

When Moody’s warned that it may downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo, that really set off alarm bells for me.

Do you all remember what set off the financial panic in 2008?

Do the names “Bear Stearns” and “Lehman Brothers” ring a bell?

Well, right now there are some frightening indications that we may see more trouble at some “too big to fail” institutions.

But will there be any willingness to do more bailouts this time?

 

Right now the financial markets are closely mirroring their performance just prior to the financial collapse of 2008.  One great example of this is these charts which were recently posted by the Financial Armageddon blog.  It looks like bank stocks may once again be leading the way down.

Hopefully the financial system can hold together and we won’t have a repeat of 2008 right now, because if it happens it is going to be really messy.

But even without a “financial collapse” we already have all of the economic problems that we can handle.

Robert Brusca, the chief economist at FAO Economics, is being quoted by CNNas saying the following….

“We’ve had a poor economic recovery to begin with, and now it appears to be segueing into an end.”

At this point, U.S. consumer confidence is already lower than it was back in September 2008 when Lehman Brothers collapsed.  U.S. consumers are holding on to their money more tightly these days and that is not a good sign for an economy that is so highly dependent on consumer spending.

The latest manufacturing numbers have also been very distressing.  Measures of manufacturing activity all over the world are indicating that we have now entered an economic slowdown.  This is also similar to what we saw a few years ago.

We should all feel really bad for anyone that is entering the workforce right now.  We are in the midst of graduation season, and the only thing that our new graduates have to look forward to is an economic crisis that never seems to end.

On a recent article entitled “Global Financial Markets Tremble As Bad Economic News Continues To Pour In” a reader named Esta left the following comment….

I feel sad for yet another year of graduates entering a horrible job market. I recently read, and I think it was in the mainstream media, that only half the 2010 college grads have found jobs of any kind, only half of those have found jobs requiring a college education, and that 85 percent of all grads moved right back in with their parents. The job growth rate is so low that we keep employing fewer and fewer people as a percentage of our adult population. Why isn’t that still a recession?

What a future our college graduates have to look forward to, eh?  Moving back in with your parents, a crappy job (if you can find one) and a pile of student loan debt that will crush you financially for decades.

We are always told that “more education” is the answer, but even many of our most highly educated young people can’t find jobs.  In fact, it turns out that a third of last year’s law school graduates aren’t even practicing law….

The law school class of 2010 is making news for all the wrong reasons. The budding legal minds who managed to find employment last year have set a new record–only 68.4 percent of them are in jobs that require them to pass the bar exam, the lowest share since the Association for Legal Professionals began collecting data.

Now it looks like the economy is going to starting heading downhill once again.

What is that going to do to the job market?

Last year, only 45.4% of Americans had jobs.  That was the lowest figure since 1983.

In some states it was even worse than that.  In states like California, Arizona and Mississippi only about 37 percent of people had a job last year.

The economic news just seems to get worse and worse and worse.  The American people have been relatively calm over the past several years as they have waited for the promised “economic recovery”, but what do you think is going to happen if we have another major economic downturn and unemployment spikes back up by several more percentage points?

And what in the world can our “leaders” really do to “help” the economy if we do have a repeat of 2008?

We are already running trillion dollar deficits.

The Federal Reserve is already printing money like it is going out of style.

So what would their next moves be?

Most Americans have no idea how fragile our financial system and our economy really are.

Let us hope and pray that things can hold together for as long as possible, because when the next wave of the economic collapse happens it is going to be really, really messy.

 

After the Dollar: What Comes Next?

Peter Schiff

My readers are familiar with my forecast that the US dollar is in terminal decline. America is tragically bankrupt, unable to pay its lenders without printing the dollars to do so, and enmeshed in an economic depression. The clock is ticking until the dollar faces a crisis of confidence like every other bubble before it. The key difference between this collapse and, say, the bursting of the housing bubble is that the US dollar is the backbone of the global economy. Its conflagration will leave a vacuum that needs to be filled.

Mainstream commentators often discuss three main contenders for the role: the euro, the yen, or China’s RMB (known colloquially as the “yuan”). These other currencies, however, each suffer from a critical flaw that makes them unready to carry the reserve currency role in time for the dollar’s collapse. When it comes to fiat alternatives, it appears the world would be going out of the frying pan and into the fire.

EURO: FRAYING AT THE EDGES

The euro is a ten-year-old experiment in uniting divergent political, economic, and cultural interests under one monolithic fiat currency held in the hands of one very powerful central bank.

If managed correctly, such a currency could serve to keep its member-governments honest – but that is not the world in which we live. Instead, the fiscally irresponsible members are discussing ditching the currency at the first sign of trouble. That is, they’d rather have their own national currencies to inflate in order to cover over their burdensome public debts. So, in order to keep the euro together, creditor states have been strong-armed into bailouts of the debtors – even though such measures violate the compact that created the common currency.

The question becomes: how long do Germans – still wrought with the memory of Weimar hyperinflation and the rise of the Third Reich – want to keep printing euros to pay the debts of the spendthrift Greeks? How many German politicians will ride to electoral victory on promises of unending bailouts and higher prices across Europe? This is the fundamental flaw of the euro.

And, of course, Greece isn’t the only problem. Ireland and Portugal are vying for second-worst debt crisis in Europe. Spain, representing over 12% of eurozone GDP, saw sovereign yields jump from 4.1% at the beginning of 2010 to 6.6% by the end of the year. Yields on most other eurozone countries have been rising as well – a clear indication that the eurozone is an increasingly risky bet.

While a euro secession by the PIGS could actually leave a stronger currency region at the end, it would be a traumatic event. That prospect is undermining confidence in the euro at just the time when the world is considering where to go next.

Perhaps a mature currency that didn’t falter so easily amidst the recent global financial crisis would be a good contender for the world’s reserve. The euro, by contrast, is both young and in serious trouble. If less than two-dozen nations are too immense a burden for the euro to shoulder, should we expect better results when it’s stretched across two hundred?

YUAN: CAPITALIST COUNTRY, COMMUNIST CURRENCY

The investment community is slowly coming around to my long-held excitement about the miraculous growth of China. This is no frenzy. In fact, if anything, I think many are still too skittish when it comes to this market. Yet, those that are jumping on the bandwagon are now proclaiming the Chinese yuan as the logical successor to the dying dollar. But while China is becoming an immense economic force, the yuan itself is hobbled by the country’s communist past.

Foremost, China enforces stern capital controls on the yuan. A reserve currency must be freely and easily exchangeable with other currencies. Even within China’s borders, one cannot exchange large amounts of yuan for dollars or any other currency.

China is slowly undertaking reforms to relieve these controls, but remember they were not put there arbitrarily. The controls allow China to suppress the value of the yuan, thereby maintaining artificially high exports, among other consequences. If China allowed the yuan to trade freely, it would lose the power it maintains over its money – and by extension, its people.

Let’s remember that all fiat currencies are routinely manipulated and inflated. The People’s Bank of China has reported M2 growth of over 140% in the past five years – almost entirely to maintain a stable exchange rate with a depreciating dollar. Given rampant inflation, combined with exchange restrictions and a serious lack of transparency, the yuan is simply not ready for primetime.

YEN: BLACK HOLE OF DEBT

The Japanese yen is the third amigo at the international fiat fiesta. While it doesn’t suffer the structural risks of the euro, the yen is subsisting in an environment of massive sovereign debt. Japan’s debt-to-GDP ratio is the highest of any developed country at 225%, meaning there is a perpetual impetus to print more yen to pay it back. The yen must endure this debt-noose, making it a poor alternative to the USD, which suffers the very same problem.

While I believe Japan is in a much better position because it generally maintains a net trade surplus and because most of their debt is held domestically, it’s still not a stable unit with which to conduct world trade.

Perhaps more importantly, with a world seeking yen reserves, the price of yen would increase drastically. This is politically unpalatable in Japan, where the export lobby is constantly trying to push the yen down to boost their sales overseas.

These two factors combine in such a way as to make the yen a plainly infeasible reserve currency. The appreciation in yen value would simultaneously make Japan’s debt problems worse and cause its export industry to suffer greatly, meaning that Japan probably doesn’t want this role any more than we want her to have it.

As an aside, if you type “yen as reserve currency” into Google, it will ask, “Did you mean: yuan as reserve currency?” I guess even the world’s smartest search engine doubts the yen could fill that role.

THE SIMPLEST ANSWER IS OFTEN THE BEST

As J.P. Morgan famously said to Congress in 1913, “gold is money and nothing else.” Morgan meant that gold was unmatched in its effectiveness as a store of value and medium of exchange.

Given that his namesake bank started accepting physical gold bullion this past February as counterparty collateral, why should the trend of a widespread return to gold be considered only a remote possibility? On the contrary, it should be expected – if for no other reason than every other currency is fundamentally dismal.

Markets are powerful things, and require a reliable medium of exchange. The call for sound money is not just philosophical; it is derived from the market itself. Throughout human history, merchants have always turned to pure gold and silver over every pretender. This is not the first experiment in a paper money system, nor is it the first widespread debasement of money. In fact, the lessons of history were impressed upon our well-read Founding Fathers to the point that they included the following clear language in the Constitution: “No state shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.”

While it has always been possible that another fiat currency would rise up to take the dollar’s place, and thereby keep this irrational experiment in valueless money going awhile longer, the particular circumstances that abound today make it seem less and less likely to me. Instead, I’m seeing signs that the world is moving back to gold at a breakneck speed.

This is a return to normal and has many positive implications for the global economy. It’s certainly a trend we can all welcome, and profit from.