Great Depression II (2000-201?)

There is much denial here, obviously. The worst disaster that can ever befall a culture based on capitalism is economic depression. It is such an unmitigated disaster that we have done an historically masterful job at totally denying its reality. We have passed laws against it (National Industrial Recovery Act of 1933 and the The Social Security Act of 1935). We have renamed it (severe economic downturn). We have successfully delayed it (lowering interest rates and printing up money simultaneously). We have convinced ourselves it is acceptable to borrow against it – even though that makes its ultimate effects even worse (relaxing credit and actively encouraging a refinance mania in the face of a mounting immoral deficit). And we have finally managed to jargon ourselves around it. The whole happy parade is led by Wall Street talking heads who are, in fact, nearly all paid lackeys of firms that make their money on a robust market (manufactured or not) and plenty of gullible investors that suck up their every confident word and literally bet the farm on charged and/or refinanced laptops.

Depression is inevitable because of the historic and mind-boggling debt, because of the total lack of fiscal integrity, restraint and control of the government and because everyone has lied to so many people for so long, no one knows the truth anymore and certainly no one believes anyone else, particularly about the new paradigm economy of instant gratification. Our culture is propped up on toothpicks and our in-basket is loaded down with tons and tons of debt, all of it about to be called in. In case you have not heard, there are funny popping sounds emanating from just beneath where we are all comfortably seated enjoying our lattes and cappuccinos at our favorite hi-tech computer bars.

I am fairly certain that Alan Greenspan probably knows what is ultimately coming down. Regardless of what his detractors may say about him, Greenspan is truly an economic genius and has masterfully delayed disaster and using tricks of monetary manipulation that should win him some historic prize one day, many generations from now. Unfortunately, his genius will probably end up turning against him while he lives. He has not saved us from depression, he has only staved it off and ultimately, made it worse. When the coming depression happens, it will almost certainly be pinned on him and, almost without question named after him! Why? Because the rest of the jolly liars will need a scapegoat, and it will either happen on his watch or shortly thereafter. One day sooner than later, Greenspan (if he is as smart as I believe him to be) will simply disappear, leaving them and the freezing Emperor of the economy standing out on the street all alone and fully exposed with the snow blowing up into uncomfortable places. When they finally figure it out, they are all going to be livid. And when they announce, as they will, that Alan Greenspan has left the building, get ready to hunker down.

What is next? Get ready for a triple punch soon and make your plans accordingly.

Punch one: watch for the markets to slide to new lows this summer and particularly this fall. This will cascade into four linked effects: the dollar will tumble as the Euro will mount a real challenge as the world currency of choice, convincingly displacing the dollar. Gold will soar, approaching $800 to $1000 mark within a year or two. (You heard it here first.) International confidence will begin to fail resulting in loss of significant foreign investments and our international debts could be called in at ever increasing levels. Forget the bond markets (snore). Wait till you witness the inevitable, predictable and powerful political effect of the declining economy in the November elections. The administration’s only hope for survival or even circumventing a massacre at the polls will be leveraging the Greenspan genius and delaying the inevitable market convulsion this fall.

Punch two: the government will have to begin printing money in unprecedented volume by the coming, long hot summer of 2005. A new administration, emboldened by its mandate to “fix the economy” will naively respond to the evolving crisis by reversing the Bush tax cuts and raising them even beyond previous levels. This will only exacerbate the economic dilemma, of course. Eventually, interest rates will spike considerably higher than even on Carter’s watch. Inevitably, jobs will be lost and productivity will spiral down the government’s fiscal toilet as the economy cannot possibly sustain the stress. Perot’s ‘great sucking sound’ will emanate not from our southern border, but from Wall Street itself.

Punch three: As the tax base implodes, as the debt is called in and as the deficit spikes through the stratosphere, somebody somewhere will finally declare the Emperor the pervert that he is. He will then sit on Wall Street in sackcloths and ashes, but it will be way too late. It already is.

One of my Internet heroes, Jim Puplava, has been publicly calling the Emperor a pervert for over a decade. He has mounted an interesting theory that while all this economic insanity is hanging over our heads that it is conceivable that the nation could be hit with an unpredictable event that he calls a Rouge Wave or a “ten sigma event” that would either trigger an uncontrolled economic meltdown or make an ongoing economic disaster even worse. Such an occasion could be a terrorist attack on par with or worse than 911, or an international incident of such magnitude that it would inevitably adversely affect every civilized nation’s economy. Such rogue waves, Jim writes, are totally unpredictable and play on the weaknesses already inherit in the world’s invariably linked financial systems, weakened by historic excesses and apalling debt.

So what do we do now?

Don’t worry, be happy.

Hey – everybody else is! What is going to happen has already been set into motion anyway. We are all seated comfortably and in style on the great fiscal ship Titanic. Night is falling. The air is festive. We are feeling our great and lofty positions as the band plays on and the great ship sails off into history. Why, not even God Himself could sink this greatest economic juggernaut in the history of mankind! Oh by the way, we have just been handed our latest assignment: re-arrange the deck chairs and get ready for tomorrow’s next big boom.

Until then… It’s the depression, moron. Deal with it now or deal with it later. And, oh by the way, if you thought the half-time at the Superbowl was lewd, don’t tune into Moneyline, whatever you do. The Emperor is a mainstay and they don’t just do headshots.

Dennis Chamberland

dennis@chamberland.us
 
Dumb dumb...

If the fed increases interest rates, to pay for the country debt...

The USD dollar will sky rocket as USA will have the highest call rates in the western world so other countries will buy the USA 30 yr BONDS...

So dont short the dollar for the long term....
 
BY the way the last "Depression" started with a trade war...so trade was not circling around the world, and markets retrenched. The risk for proposed current depression is a global colapse of the domestic housing market ( USA will lead, ...look at housing starts perc change VS unemployment % change) as so much people have large personal debts, that is the most likely kick off for a major slump.

The housing market may get its lead from continued jobs losses, which may get its lead from equity funds drying up for corporates ( ie the DOW going down will make many balance sheets very risky, and banks will get nervous...)


So its real easy..watch the USA a job report, and the DOW...then the housing market....

But it wont be a bad as 1930s as once there is good clean out thats when the smart money BUYS up everything, ie the DOW in 1933 rallied for 10 years after the 1931 to 1932 crash, and made new highs.

Dont follow the crowd...
 
All hope is lost when...

"Rumor has it the IRS just sent a memo to employees informing them that a large group of telephone collection people will be outsourced to India." :)
 
This is again an example of economic law and history ignorance : it is when the FED increased interest rates in 1929 that market collapsed... and the reason given for increasing interest rates was indeed to kill the bubble, they succedeed for that, as they succedeed to create the bubble with very low interest rates before...
Contrary to the myth it is not the people who became suddenly greedy and then desesperate one day without any reason, it is because the central bank created and exploited this natural behavior of the people who individually can be very intelligent (at least there are many although the number of stupid people can equal the number of intelligent people) but collectively for sure they are just as ignorant or gullible as a child. Also collectively we are helpless since we have delegated the power to a few men without any control mean. And even if there is some control left thanks to opinion manipulation through medias it is very easy to convince the people that what they do is in in the people's best interest. Once again this is just "business" at very large scale for the interest of a very few, the system holds on as long as the "riches" aren't touched, but when the big depression comes the riches are then touched like the poors only the super rich (wealth of billions) survive well and then you have the serie of suicides of entrepreneurs who can't just sustain their family, have large debts on their business because no business can run today witout being largely under the dependancy of the bankers. Crisis after crisis the transfer of wealth is passing from a large number of entrepreneurs to the corporates: this is named capitalism whereas it is collectivism and the death of individual enterprise, confiscation of wealth although done "legally" because something which was illegal has become legal by the will of the crooks who managed to make also the law. No wonder why entrepeneurs who cannot create real business any more then choose to become speculators. No real business, no real economy, no real jobs, no real growth, only debt and fake growth feeded by this debt and then logical collapse of the system which can't sustain a permanent desequilibrium.

Quote from Digs:

Dumb dumb...

If the fed increases interest rates, to pay for the country debt...

The USD dollar will sky rocket as USA will have the highest call rates in the western world so other countries will buy the USA 30 yr BONDS...

So dont short the dollar for the long term....
More...
 
I agree in general with the prior posts concerning the Great Depression. I don't know IF I'd term it depression, but I feel the US is in for either a prolonged period of stagnation or some type of collapse. The latter would require some kind of catalyst.

It's a complex matter comprised of several components. Some more directly RELATED than others.

1. To reiterate and expand on the debt level, the national debt stands at $7.2 trillion which is irrespective of addressing current budget deficits (presently at a record relative to GDP). To pay back any material part of that figure would most likely entail inflation. In other words paid back in cheaper dollars.

I don't believe any attempt will be made until if and when foreign capital begins to make an exodus OUT of Treasury issues. This could be the catalyst mentioned and would stemmed from low yields coupled with more attractive investments such as a recovering Nikkei or secular rise in gold.

Nevertheless the spending persists.


2. In contrast to the above inflationary scenario, there is also a risk of disinflation transcending to deflation which is more in line with the GREAT DEPRESSION of the 30's.

In my opinion this would stem from over-production and highly competitive pricing. This is the oppostite of too many dollars chasing too few goods. Broad brush examples would be cellular telephone production, or Wal-Mart's continued "rolling back prices" (and hence reliance upon volume rather than margins).
Ford, virtually the largest corporate debtor, cannot seem to sell its core product without incentives and GM's EPS to a large degree stems from mortgage financing.

I don't believe deflation would occur as long as tangible commodities continue their secular advance. Paper commodities (ie futures and derivatives) are another matter. One money center bank is purported to have a massive derivative posture being a 12x multiple of the bank's capital. I remember both portfolio insurance and Continental Illinois.


3. Interest rates will have to remain low. They have to. Any significant rise (to "normal" levels) will have possible devastating effects on the economy. obviously to interest-sensitve sectors such as housing, autos, and other consumer durable.

Not only is consumer saving LOW, but they have levered themselves to record levels via tapping home equity and unsecured credit card debt. Their spending has left the impression of a recovery. It's hollow.

In essence, I think Greenspan (who I might add is approaching 80) has painted himself in a corner with successive rate cuts. Nothing left to cut and detrimental impact if they're raised. His remaining tools include open market operations. M3 is robust, suggesting attempts to re-inflate (perhaps offset by over-production)


4. Crude oil is a wildcard. It appears to be on a new plateau
in the 30's. Will it break $40? Unfortunately, we are highly dependent on oil for transportation of both goods and people, and plastics (made from hydro-carbons). In addition to general dependency, we are dependent upon it from foreign sources and in and increasingly chaotic world (ie terrorism and foreign currently translation). Furthermore we are dependent upon foreign capital to buy this foreign good. This relates to #1, inflation.


5. Just like carbohydrates have replaced cholesterol as the focal point of concern, outsourcing is now the flavor of the week. The current opposition smacks of protectionism (which in my opinion was the true cause of the GREAT DEPRESSION of the 30's). Outsourcing has been going on for 30 to 40 years. You can't show me an automobile alternator (whether OEM or rebuilt) that doesn't involve Mexican labor. Protectionism and isolation is not only NOT a solution, it's not even a good remedy. Outsourcing is merely the result of cheaper labor. This relates to #2 dissimulation.

Productivity is a different matter, in effect being cost cutting and profit enhancing, and hence just as detrimental to jobs.


6. Other noteworthy matters include two thrids of the S&P have under-funded pension obligations. Basically pseudo debt. The year long rally has alleviated some of it, but it's still present. The perpetual presence of terror elements. Multi-national earnings are enhanced by the weak dollar. Consumer bankruptcies were at a record in 2003. A dubious social security (and Medicare) system with an aging population prone to both consumption and low saving.

7. The stock market is supposedly a reflection of the economy and a discounting mechanism. As such, the year long rally would imply things are rosy and getting rosier. Based upon the traditional benchmark of the P/E the stock market is over-valued. That aside, bull markets, in my opinion, don't start with P/E's (whether forward or trailing) above 20.

DISH (after a two week delay) just reported a 1 cent quarterly EPS versus a consensus of 8 cents (which is nothing to write home about) and modest shortfall in the top line. What does the "market" do? Despite a gap down, the intra-day low wasn't even the low for the week. My point is this is just one small example of purely speculation not a reflection of the economy and very loosely the prospects of the company.

Speculation isn't as rampant as 1999 but I see current examples such as TASR, FMT, and a host of others. In all honesty, I have NOT looked at margin debt. A lofty level would be another telltale sign.

In summary, how can record housing prices (and rising commodities) co-exist with low inflation and low interest rates (which essentially is the rent paid on capital).????

They can't. At least not for long. I don't feel it's a question of IF but a question of WHEN.

Something has to "give". AND not in a positive way. These are not overnight developments and can't be solved overnight. But... accidents can. A crash, a bank collapse, a death. With all the preceding factors more or less inter-mingled, an accident could provoke a period of pain. The GREAT DEPRESSION in my opinion was ended by Pearl Harbor (which was an accident) NOT politician induced fixes. In fact, one of those fixes is now succumbing to a bottleneck in demographics


(I'm sure some will find fault or error in the preceding. So I invite comments, suggestions, and criticisms either on here or direct via e-mail)
 
Excellent post, efficiency. Great points.

To me the main problem is how can an economy continue to maintain high levels of real investment when its savings rate is low?

Our savings rate is 2%, down from about 20% 30 years ago.

China has a savings rate of 40%. Their capital / investment infrastructure is far weaker than ours so they misallocate capital enormously-- but then again with such an ungodly savings rate, some of that makes its way to productive investments and thus their economy is skyrocketing. If China could combine its high savings rate with our depth in investment infrastructure (securities markets, banking system, venture capital), I believe the results would be truly astounding.

But back to the US savings rate-- that is the central question. Is it that we are saving so little that this underinvestment / high debt will catch up to us? Or is it that due to the new worldwide capital flow structures we have truly found a way to grow with strong investment even without savings?

intuitively, I think the debt situation is a real problem. I mean think at the individual level: if you are an average person and you are maxed out on credit card debt, paying more interest on debt than your food expense, is that situation sustainable?

Having more debt than you can manage is often times what causes bankruptcy at the individual level, at the corporate level, and yes at the national level.

In my opinion, (this will never pass), from a fiscal standpoint, the best thing would be to begin to penalize consumption and reward savers. You don't want to make the switch overnight as that would rock the boat too much, but say over 6 years. Specifically: switch the income + corporate tax systems to a national retail sales tax. In addition government spending-- especially entitlements, should be reformed to reduce the spending. This might mean small cuts in benefits for many people; however better that than risking an Argentina-style collapse IMO.

-Taric
 
The CPI is neutered by the QAM (Quality Adjustment Method,introduced 1967) which allows govt statisticians to say that 1/2 of a price increase in a product was due to 'improved quality' so they take that out, and they also use GME (Geometric Mean Estimator,introduced 1998, http://www.bls.gov/cpi/cpigm02.htm) to substitue a higher priced product which has had a price increase with a lower priced alternative. Here is some of the nonsense from that 1998 article:

"Substitution can take several forms corresponding to the types of item- and outlet-specific prices used to construct the basic indexes. . . . Thus, in response to an increase in the price charged by a store for a certain brand of ice cream, a consumer could respond by redistributing purchases: to another brand of ice cream whose price had not risen; to a larger package of ice cream with a smaller price per ounce; to ice cream at a different store where ice cream is on sale; to a brand of frozen yogurt."

"The consumer also could respond by postponing the ice cream purchase until a later date. Finally, the consumer could substitute from the ice cream brand to a specific alternative dessert item, such as cupcakes or apples, that is another CPI category. This latter form of substitution, although across CPI categories, would still have the effect of reducing the quantity consumed of the higher-priced ice cream brand relative to the quantities of other items within the ice cream stratum. . . . In the same way, the use of the geometric mean formula within categories does not address the issue of whether consumers can, or do, respond to a general increase in the price of ice cream products by, for example, forgoing dessert."

So, that's how the BLS keeps the CPI in check at all times. Price increases can be deemed quality improvements, as we've seen on many occasions, and they are therefore wiped away with the government's magic wand. If that doesn't work, it uses the substitution technique to banish the price increase. Obviously, the government has been doing this for a long time, and folks have not cared. They use similar methods to boost the GDP. For example, they use QAM method in reverse to say that $500 PC you bought is really considered $5000 worth of product due to quality improvement! And recently, they may be doing similar things with the PPI whose release was delayed 2 months due because the BLS computers had problems calculating it using some new
forumulas..

I really don't like to make arguments using the government statistics (CPI,GDP,etc.) because they are so distorted.. The only thing interesting is that there isn't much more juice they can squeeze out of them. CPI is already threatening 'deflation' based on their calculations.
 
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