Deflationary depression, austerity, and zero interest rate policies

In a recent post, I introduced the problem of the Money Illusion.  Aside from a focus on currency type and GDP measures (which I analyzed in that post), one of the major problems resulting from the Money Illusion is our complete misunderstanding of savings. 

In reality, savings don't exist.  You can't "save" the output of your current labor for future usage.  After completing it, your current labor is gone, probably consumed by someone else.

In truth, what we think of as "savings" is just a claim on the value of someone else's production at a future time. This brings up a number of problems.

--If your "savings" is contractual, it can disappear instantaneously if that particular social contract breaks down.   An example of contract-based savings is a pension, Social Security, or paper currency.

--If your "savings" is physical (such as gold, land, cars, bullets, whatever), its value depends on the market conditions of the future.  [But, hey, at least it can't totally disappear, like contract-based "savings"!]

But in either case, the real value of your "savings" depends on the overall state of the economy in the future, when you cash in your savings.  Seeing through the Money Illusion, we know that we cannot live off the wealth we created in the past ("savings"), only on the wealth created by others in the future.

The Inevitability of Austerity

 In a contracting wealth base, the value of all savings plummets.  With a smaller wealth base, there is less overall productivity going around, so "what you get out" (savings consumed) is going to be less than "what you put in".

Due to the demographic collapse caused by the retiring/dying Baby Boom generation, which is a worldwide problem, we face the inevitability of a contracting wealth base.   Baby Boomers are switching from being a massively productive part of the wealth base to being a massively draining subtraction from the wealth base (due to retirement from work and the health care costs of old age). 

This demographic problem is exacerbated by socio-cultural factors.  One of which is crime, drugs, and an overall culture of slothfulness/non-productivity among young people (well, people of all ages really).   Another is our preference for governmental regulation.

Those are clear examples of where the Money Illusion bites us in the ass.  GDP numbers actually rise as dollars change hands in an economy of entertainment, police/security, health care, and regulators. The problem is, those "jobs" do little to increase our wealth base.   In other words, we are getting poorer.

How Austerity Manifests - 0% interest rates, FOREVER

As previously stated, savings have no value outside the condition of the current economy, and the real value of savings is falling in a shrinking wealth base.  Two economic/price adjustments will happen under these conditions, which we are already seeing.

One is a sustained attack on currency/contractual savings in the form of ZERO INTEREST RATE policy.   Perusing contemporary economic analysis articles, you will see numerous jeremiads concerning the catastrophic effects awaiting us when interest rates rise.   The fact is, interest rates will not rise, any  time in the foreseeable future, I am thinking, 20+ years at the minimum, maybe until "the end of this age".

By running a low but steady inflation rate, combined with a zero percent interest rate, currency-based savings are being crushed.  This is happening right now, and we cannot expect this to change.  The retired people of today are not living in the social wealth base of a generation ago, i.e., their savings are not worth as much today as they were back then.

Seeing through the money illusion, we know that retirees are NOT living off the wealth they created in the past; they are living on the wealth created by others now.  The problem is, wealth is not growing, wealth is shrinking, and our total standard of living is going down.  The crushing of savings by inflation merely reflects that fact.

All contract-based savings will be forced to be revised downward.  When they are currency-based, like pension funds, they are simply crushed via the inflation effect.  When they are purely contract-based, like Social Security,  they will be legally modified to pay out less and pay out later (pensions can also be modified this way).

The Reality of Deflation

Physical-based savings cannot be inflated away or contractually-canceled, so they are clearly the preferred form of savings in times of austerity.  However, these assets will be assaulted by the problem of deflation.  In a contracting wealth-base, everything goes down in value.  There is no magic bullet (such as gold) to get around this.

Under the zero-interest rate, high-debt regime, all assets will be deflated, especially those dependent upon speculative value (such as gold).   There will be no hyperinflation, just a long, slow grind of liquidation and austerity, as "savings" and asset prices are crushed.    

The ultimate "wealth play" in a contracting economy is productive capital.  In short, the ability to produce something.    This will become especially clear when the US dollar loses its status as reserve currency, which will cause price inflation on the domestic economy on all imported goods.  Under conditions of peace, this shift could take years, but it could happen quickly if given a system shock like war.

Decoding Interest Rates - What does bonds at 0% mean?

We see today in Germany what we saw in the US starting a couple years ago: big investors throwing their money in 0% (zero percent) bonds.  The press calls it a "flight to safety", but this is really bad news for the economy.   It doesn't just scream deflationary depression like the real-time price indicators I mentioned a couple articles ago, it is tangle proof of deflationary depression. 

After all, why would anyone invest in a zero percent bond?    It is a reflection of the fact that everything else is falling in value.   When EVERYTHING else is deflating, just holding even at zero percent looks pretty good.   Conversely, if there is anything worth investing in, no one will take a zero percent bond. 

In short, big money going into zero percent bonds is proof of monetary deflation and economic depression.   More generally, low interest rates are a sign of low demand for money, which prevails in poor economic conditions. 

This is a chronic condition among economies mired in debt.  High debt loads turn an economic contraction into a deep depression.  This effect is due to the mechanics of widening circles of forced liquidations/fire sales, to pay off old loans while asset values are falling, as well as widening circles of bad credit, credit destruction, and credit risk. 

This is the exact time when central banks should be intervening with cash infusions to short circuit the deflationary spiral, but oddly enough, the Fed Reserve is not talking about it publicly.   I guess that is mainly because it is a European problem right now.  The ECB should be doing something, but all talk is on austerity and currency breakup instead. 

Of course the best solution would be to cancel the debts outright, totally breaking the back of the debt-deflation process and allowing the economies to reset. 

Economy Still Grinding Down

The US press continues its black-out on reality. Our media handlers clearly view us as cattle. Hell, hard to blame them. Unfortunately, reality proceeds regardless. The debt deflation continues to wipe out business activity, while, as I noted in the last post, the global stimulus money drives up basic prices.

Thanks to AEP, and the British free press, for some unbiased reporting:

For guidance on where we are in this long-drawn saga, I look to Berkeley's Barry Eichengreen, author of the Great Depression classic Golden Fetters – which avoids the error of viewing the 1930s through a US prism. He has crunched the latest data with Trinity College Dublin's Kevin O'Rourke for VoxEU, concluding that the global rupture over the last nine months has been more violent than in the early slump. This is logical. Global debt leverage is much greater this time.
The fall in industrial output has been roughly equal to the 1929-1930 stage for Germany and the Anglo-Saxons, but worse for Japan, France, Italy, and Eastern Europe. The collapse in world trade has been swifter: the global equity crash has been twice as bad. "It's a depression alright. The good news is that the policy response is very different. The question now is whether that response will work," they said.

The elastic was bound to snap back, just as it did in the bear rally of early 1931. Whether the underlying economy has begun to heal is another matter. World Bank chief economist Justin Yifu Lin said capacity utilization is running at an historic low of 50pc-60pc. Companies will have to fire a lot of workers. This is where the danger lies, and why he fears that deflation is creeping up on us.
Trade data from Asia are flashing warning signals again. Korea's exports were down 28.3pc in May, reversing the April rebound. Malaysia has slipped to -26pc, and India has touched a new low of -33pc.

US freight data is getting worse, not better. The Association of American Railroads said traffic was down 22pc in the third week of May from a year earlier. Canadian freight was down 34pc. The American Trucking Association (ATA) said it saw fresh drops of 4.5pc in March and a further 2.2pc in April. Tonnage is down 13pc over 12 months. Bob Costello, the ATA's chief economist, said companies have not cut inventories fast enough to keep pace with declining sales. The contraction in truck volume has "accelerated".

Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low.
Stephen Roach, Morgan Stanley's Far East chief, fears an "Asian Relapse", saying the region is prisoner to its fatal dependency on exports to the West. The export share of GDP has risen from 36pc to 47pc across developing Asia over the last decade.

"China's incipient rebound relies on a time-worn stimulus formula: upping the ante on infrastructure spending in anticipation of an eventual rebound of global demand," he said. The strategy cannot work this time because Americans have exhausted their credit, and their desire to borrow. Consumption will fall from its peak of 72pc of GDP to the "pre-bubble norm" of 67pc, if not more.

David Rosenberg from Gluskins Sheff expects Americans to retrench ferociously as 78m baby boomers face the looming threat of penury in old age. "The big story is that the personal savings rate hit a 15-year high of 5.7pc in April. I believe it could test the post-War peak of 15pc. Too many pundits are still living in the old paradigm of Americans shopping till they drop," he said.

The list of countries in deflation is growing every month: Ireland (-3.5), Thailand (-3.3), China (-1.5), Switzerland (-1), Spain (-0.8), the US (-0.7), Singapore (-0.7), Taiwan (-0.5), Belgium (-0.4), Japan (-0.1), Sweden (-0.1), Germany (0).

Yet markets seem to think otherwise, and this has its own awful consequences. Inflation fears have driven 10-year US Treasury yields to 3.86pc, a full point above levels in March when the Fed intervened to force rates down. US mortgage rates have jumped to 5.29pc. Gilts have reached 3.92pc, and French 10-year bonds are at 4.05pc.

This bond revolt is enough to bring any global recovery to a shuddering halt. The irony is that those fretting loudest about inflation may themselves tip us into outright deflation, with all the perils of a debt compound trap.


http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5461562/Merkels-inflationary-fretting-may-wake-the-bears-from-hibernation.html

Our Parallel is 1873, not 1929

Comparisons to the Great Depression have become widespread. What is lost on most is that our best parallel is actually the worldwide panic of 1873. Nobody knows much about that, so here is a great intro article.



The Real Great Depression - the depression of 1929 is the wrong model for the current economic crisis
By SCOTT REYNOLDS NELSON, October 17, 2008

As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.

When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.

In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.

The problems had emerged around 1870, starting in Europe....

cont. http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18

Preparing for Hyperinflation

Reading the economic commentary, it is clear that the idea of a debt deflation is now reaching general consciousness. But few people have begun thinking about the next phase of the game: bad inflation. So, in my usually position ahead of the curve, I shall begin examining this phenomenon, what it is, why it is, its larger effects, and how to prepare for it.

One of the best things to do in the face of a looming inflation is to get leveraged to the hilt. Take on as much debt as possible. The inflation will make it easier to pay off in the future, but you can use the cash to position yourself now.
If you have the money, becoming a producer/manufacturer would be a good move. As the price of everything, especially everything imported, skyrockets in the inflation, producers/manufacturers will be able to benefit, or at least keep up with, the inflation. In today's asset-deflation, there are many bargains available when looking to purchase plant and capital for a production business.

The worst place to be in an inflation is in a fixed-income position, such as your average white-collar salaried worker. As prices rapidly rise, if your salary is fixed, you are screwed. Your only option if you stay in white collar work will be to continually job-hop, trying to ride the wave of expanding salaries.

Better if you can switch to an independent service business, where you can pass on rising costs to your customers. If you have an independent service, you can also join a barter club, which can maintain services even in cash-uncertain times.

One coping mechanism for the common person is to pick up a trade, especially a repair trade. For one, a skilled trade can be used as a service in a barter economy. For two, skilled repair trades will be more common in the future as the price of goods rises. Cheap foreign goods have wiped out the repair industry in the last 10 years, but when the price of goods rises again, people will once again find it economically useful to repair their old items rather than purchase new ones.

Obviously, get your money out of dollars. It is great time, in our asset deflation, to pick up cheap assets. Timing is difficult here because we have not hit the bottom, and as long as asset prices are still falling, cash is king. I personally think we are much closer to the bottom than to the top, and inflation can already be seen, so buy now.

Any hard asset with consistent long-term value will do the trick. Many recommend gold, and it is hard to argue with the principle, but becoming a trader in actual gold has lots of costs and the market is out of reach for most people. For the common person, you can easily get involved in hoarding more easily/cheaply marketable assets, like guns, ammo, tools, equipment, etc.

As a consumer, you can shield yourself from some of the effects of inflation by joining a barter network or local alternative currency group. These are evolving concerns at this point, so you'll have to do your research.

Some have recommended getting into food production. Prices there are falling, but it stands to reason they will eventually rise in an inflation. Farming, like all capital heavy industries, probably sees some good bargains right now. For the common person, start your own garden to insulate yourself from food shocks. Buying solar panels might be a good idea now too, picking them up on the cheap in the face of rising energy costs.

Next follows a description of a hyperinflation. Enjoy! One of the most surprising/counter-intuitive things I gather from the article is the need to be in cash, early in the hyperinflation, because of the shortage of physical dollars. Very interesting. This certainly jibes with some recent observations about getting deposits out of the banks, because of the rising probability of bank closures.

Hyperinflationary Great Depression

In the United States, the printing presses have not been revved up heavily, yet, but the commitments are in place, as seen in the annual GAAP-based deficit running on average more $4.0 trillion per year. That amount is far beyond the ability of the government to tax or the political willingness of the government to cut entitlement spending. While the inevitable inflationary collapse, based solely on these funding needs, could be pushed well into the next decade, actions already taken likely have set the stage for a much earlier crisis.

The current systemic bailout being worked at all costs by the Federal Reserve and the U.S. government, as well as earlier efforts by the Fed to buy time, have made the circumstance worse. Pushing recent Treasury funding needs on foreign investors — stuck with excess dollars from the ever-expanding U.S. trade deficit — has created a huge dollar overhang in the markets that already has started to crumble. The more the crisis has been pushed into the future, the greater the potential for pending calamity has become.

Milton Friedman and Anna Jacobson Schwartz noted in their classic A Monetary History of the United States that the early stages of the Weimar Republic hyperinflation were accompanied by a huge influx of foreign capital, much as had happened during the U.S. Civil War. The speculative influx of capital into the U.S. at the time of the Civil War inflation helped to stabilize the system, as the recent foreign capital influx to the United States has helped stabilize the equity and credit markets of recent years. Following the Civil War, however, the underlying economy had significant untapped potential and was able to generate strong, real economic activity that covered the spending excesses of the war.

Post-World War I Germany was a different matter, where the country was financially and economically depleted as a penalty for losing the war. Here, after initial benefit, the influx of foreign capital helped to destabilize the system. "As the mark depreciated, foreigners at first were persuaded that it would subsequently appreciate and so bought a large volume of mark assets …" Such boosted the foreign exchange value of the German mark and the value of German assets. "As the German inflation went on, expectations were reversed, the inflow of capital was replaced by an outflow, and the mark depreciated more rapidly … (Friedman p. 76)."

The Weimar circumstance is closer to the current U.S. circumstance, although, in certain aspects, the current situation is worse. Unlike the untapped economic potential of the United States 140 years ago, today’s U.S. economy is languishing in the structural problems of the loss of its manufacturing base and a shift of domestic wealth offshore.

In the early 1920s, foreign investors were not propping up the world’s reserve currency in an effort to prevent a global financial collapse, knowing in advance that they were doomed to take a large hit on their investments in Germany. In today’s environment, both central bank and major private investors know that the dollar is going to be a losing proposition. They either expect and/or hope that they can get out of the dollar in time to lock in their profits, or, primarily in the case of the central banks, that they can forestall the ultimate global economic crisis.

It is this environment that leaves the U.S. dollar open to potentially such a rapid and massive decline, and dumping of U.S. Treasuries, that the Federal Reserve would be forced to monetize significant sums of Treasury debt, triggering the early phases of a monetary inflation. In this environment annual multi-trillion dollar deficits rapidly would feed into a vicious, self-feeding cycle of currency debasement and hyperinflation.


Lack of Physical Cash. The United States in a hyperinflation would experience the quick disappearance of cash as we know it. Shy of the rapid introduction of a new currency and/or the highly problematic adaptation of the current electronic commerce system to new pricing realities, a barter system is the most likely circumstance to evolve for regular commerce. Such would make much of the current electronic commerce system useless and add to what would become an ongoing economic implosion.


Therein lies an early problem for a system headed into hyperinflation: adequate currency. Where the Fed may hold roughly $210 billion in currency (sharply increased in the last year) outside of $50 billion in commercial bank vault cash, the bulk of roughly $780 billion in currency outside the banks is not in the United States. Back in 2000, the Fed estimated that 50% to 70% of U.S. dollar cash was outside the system. That number probably is higher today, with perhaps as little as $200 billion in physical cash in circulation in the United States, or roughly 1.5% of M3.

The rest of the dollars are used elsewhere in the world as a store of wealth, or as an alternate currency free of the woes of unstable domestic financial conditions. In Zimbabwe, for example, where something akin to hyperinflation is underway, U.S. dollars are used to maintain some semblance of economic activity, where wages and salaries seriously lag inflation, and goods often are available only on the black market.

Given the extremely rapid debasement of the larger denomination notes, with limited physical cash in the system, existing currency would disappear quickly as a hyperinflation broke.

For the system to continuing functioning in anything close to a normal manner, the government would have to produce rapidly an extraordinary amount of new cash, and electronic commerce would have to be able to adjust to rapidly changing prices.

In terms of cash, new bills of much higher denominations would be needed, but production lead time is a problem. Conspiracy theories of recent years have suggested the U.S. Government already has printed a new currency of red-colored bills, intended for some dual internal and external U.S. dollar system. If such indeed were the case, then there might be a store of "new dollars" that could be released at a 1-to-1,000,000 ratio, or whatever ratio was needed to make the new currency meaningful, but such would not resolve any long-term problems, unless it were part of an overall restructuring of the domestic and global financial and currency systems.

From a practical standpoint, however, currency would disappear, at least for a period of time in the early period of a hyperinflation.

While I have been advised that a number of businesses have accounting software that can handle any number of digits, I also noted on a recent cross-country trip that a large number of gas stations have older pumps that cannot register more than two digits’ worth of dollars in their totals or more than $9.99 per gallon of gas.

From a practical standpoint, the electronic quasi-cashless society of today also would shut down early in a hyperinflation. Unfortunately, this circumstance rapidly would exacerbate an ongoing economic collapse.

While I have been advised that a number of businesses have accounting software that can handle any number of digits, I also noted on a recent cross-country trip that a large number of gas stations have older pumps that cannot register more than two digits’ worth of dollars in their totals or more than $9.99 per gallon of gas.

From a practical standpoint, the electronic quasi-cashless society of today also would shut down early in a hyperinflation. Unfortunately, this circumstance rapidly would exacerbate an ongoing economic collapse.

Barter System. With standard currency and electronic payment systems non-functional, commerce quickly would devolve into black markets for goods and services and a barter system.

Unlike Zimbabwe, the United States does not have widely available, for circulation, a back-up reserve currency for use in place of a highly-inflated domestic currency. The alternative here is in the traditional monetary precious metals. Gold and silver both are likely to retain real value and would be exchangeable for goods and services. Silver would help provide smaller change for less costly transactions.

Other items that would be highly barterable would include bottles of a good scotch or wine, or canned goods, for example. Similar items that have a long shelf life can be stocked in advance of the problem, and otherwise would be consumable if the terrible inflation never came. Separately, individuals, such as doctors and carpenters, who provide broadly useable services, would have a service to barter.

A note of caution was raised once by one of my old economics professors, who had spent part of his childhood living in a barter economy. He told a story of how his father had traded a shirt for a can of sardines. The father decided to open the can and eat the sardines, but he found the sardines had gone bad. Nonetheless, the canned sardines had taken on a monetary value.

Other Issues. A hyperinflationary depression would be extremely disruptive to the lives, businesses and economic welfare of most individuals. Such severe economic pain could lead to extreme political change and/or civil unrest. What has been discussed here still has not been a comprehensive overview of all possible issues, but rather at least has raised some questions and touched upon some likely consequences. No one can figure out better than you the peculiarities of this circumstance and how you and/or your business might be affected. Using common sense is about the best advice I can give.


http://www.shadowstats.com/article/292

Out of Control, Prepare for the Worst

An increasing number of forward thinkers have projected our current trends to their obvious conclusions, and come to some very sobering conclusions:

http://jsmineset.com/index.php/2009/02/15/officially-out-of-control/

This communication is to inform you as of 2/13/09, "It is totally out of control." There is no longer any means of reversal of the beginning of the final phase of the downward spiral now solidly set in motion.

For your sake, protect yourselves immediately.

Be prepared for disruptions in distribution common to hyperinflation.

1. You should have already distanced yourself from your financial agents. If you haven’t you are headed for significant displeasure and strain.
2. Make sure you stay three months ahead on necessary items that could experience distribution delays such as prescribed medicine and preferred foods.
3. Even though real estate is far from a buy, if you can afford a second home outside of major cities it would serve a good purpose.
4. Own gold.
5. Consider that good gold shares of non-US companies incorporated in a non-US country operating in third country, traded on multiple exchanges are a means of money expatriation legally and in broad daylight if required.
6. For currencies, all you can do is own a spread held by a true custodial ship wherever that might be.

Simply said, as of Friday February 13th, 2009 the situation is in confirmed "Out of Control" mode as this well engineered downward spiral enters into a terminal phase.

The motive was profit and degree of the disintegration caused in the pursuit of this goal was not anticipated.

The key event was when Lehman was flushed - all hell broke loose. The hell cannot be contained in any practical manner.

I seek nothing of you, but the protection of yourselves.

Respectfully yours,
Jim

Snap Shot of World Economy Going Over a Cliff

Why is the foreign media so much more open about squarely confronting the severity of our problem? Another insightful article by Evans-Pritchard detailing exactly how bad it has become. Who can deny this is a Depression?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4560901/Bond-market-calls-Feds-bluff-as-world-falls-apart.html

The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down. This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.

The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money. Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.

Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.

Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.

The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.

As they dither, the world is falling apart. Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc. "Falling exports are triggering a downward spiral of production, incomes and spending. It is important to prepare for swift policy steps, including those usually regarded as unusual," said the Bank of Japan's Atsushi Mizuno. The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.

This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.

The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.

Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.

Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.

The ECB's obduracy has nothing to do with economics. It fears zero rates as a vampire fears daylight, because that brings the purchase of eurozone bonds ever closer into play. Any such action would usher in an EMU "debt union" by the back door, leaving Germany's taxpayers on the hook for Club Med liabilties. This is Europe's taboo.

Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia's GDP contracted at a 29pc annual rate in the fourth quarter. Polish homeowners have had the shock from Hell. Some 60pc of mortgages are in Swiss francs. The zloty has halved against the franc since July.

Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.

Welcome to 2009 - The Depression has officially begun

This article puts it quite plainly and clearly. The recession began in 4Q 2007, but the Depression began in 4Q 2008. The facts are facts, and they do the best job speaking for themselves. Many are still in denial, or have not looked to see, but when we see 20+% unemployment by the end of 2009, it will be obvious to all. God help us.

http://www.sprott.com/pdf/marketsataglance/01_2009.pdf

For as bad as 2008 was, 2009 promises to be a whole lot worse. The problem isn’t just the banking system anymore. The problem is the banking system and everything else. This year, the financial crisis of yesteryear is morphing into an altogether different animal. It’s morphing into a financial crisis that has an economic crisis layered on top of it. In fact, to call the current environment an economic crisis is likely understating the situation. What we really have is a global economic catastrophe. One where weakness only begets more weakness, causing a vicious circle that is proving nigh impossible to reverse in spite of all the world’s financial, economic, and political brain trust throwing everything they have, including the kitchen sink, at the problem.

We mentioned how auto sales in the US were down almost 40%. How housing starts were down almost 50%. How industrial production is falling off a cliff, with each month worse than the last. How jobless claims are at multi-decade highs. How consumer confidence is at multi-decade lows. How the company surveys we follow are showing dramatic declines across the board in economic activity. We challenged the idea that this is a run-of-the-mill, minus-low-singledigit recession and we characterized this Depression (there is no other way to describe it) as “global, pervasive, and deep”.

In the month since we wrote that article, the data points have only gotten worse, and they will likely have gotten worse still by the time you read this article. US housing starts fell a further 15.5% in December to 550,000, the lowest on record. US industrial production fell a further 2.2% in December, to a 7.8% year-over-year decline. If you think that’s shocking try this on for size: European industrial orders (a leading indicator of industrial production) are down 26% year-over-year, the largest decline on record. Or how about Japanese exports plunging 35% in December – shocking, isn’t it? Global steel production was reported to be down 24% in December. All over the world, dramatic rates of decline in economic activity are being reported. The most disturbing developments have been in employment, which took a marked turn for the worse thus far this year. US jobless claims are now running almost 600,000 per week. You don’t want to annualize that number, but you may have to. It wouldn’t be too much of a stretch to say that nobody’s hiring, and everybody’s firing.

The world is experiencing a global economic catastrophe, where weakness becomes self-feeding, begetting even more weakness. As more and more people lose their jobs, their contributions to the economy will decline. There will be more and more home foreclosures and credit card defaults, and even more problems in the banking sector, leading to further wealth destruction. There will be even fewer people buying cars, or buying anything for that matter. As consumer spending declines, so will corporate sales, leading to further layoffs, resulting in fewer customers and even weaker sales, etc. It’s a vicious circle.

Why isn’t all this stimulus working? It doesn’t take a Masters degree in Mathematics to understand why none of this has made an iota of difference so far. All it takes is a back-of-the-envelope calculation of how much wealth has been destroyed over the past couple of years. Let’s begin with the stock markets. At their peak, global stock markets had a market capitalization of approximately $60 trillion. Since then they’ve dropped by half, resulting in $30 trillion of lost wealth. That’s just stocks! The other major source of wealth for people is houses. Taking the US as an example, the latest Case-Shiller readings show that housing prices are down almost 25% from their peak. There are over 100 million homes in the US, and they once had an average price of just over $300,000. Multiplying the three numbers together we get $7.5 trillion of lost wealth in the US from the fall in housing prices. Since the housing bubble was by no means confined to the US (where, it was in fact quite tame compared to other markets), let’s multiply that number by four (the inverse of the US share of global GDP) to get a conservative estimate for the global fall in home values. That, coincidentally, equates to another $30 trillion, for a total of $60 trillion in lost wealth, give or take, just from stocks and houses. This doesn’t even include the losses from other asset classes that have been decimated, such as corporate bonds, commodities, and commercial real estate. But let’s just stop there. This crude but simple analysis already shows the magnitude of the problem that needs to be overcome. The global wealth destruction that has taken place dwarfs anything that has been spent on stimulus and bailouts. This is why it has failed to stem the tide. A trillion or two or three (or even ten for that matter) just isn’t going to cut it. As desperate and as generous as government solutions may seem, they are but drops in the bucket compared to what’s already been lost.

The end result: too much debt and an economy that, at its foundation, became dependent on people spending beyond their means. Those days are likely gone, never to return. There’s been a paradigm shift – a permanent change. People will save rather than spend more than they make. The implications for the economy are enormous. Just envision a world where 25% of all shopping malls close down and try calling that a recession.

So here we are today with governments the world over taking an increasing role in the functioning of the economy and the financial markets. But are they trying to solve the main problem; namely, too much debt? Quite the contrary, every single solution they’ve adopted has been trying to get the good ol’ days back. Cutting interest rates to zero. Throwing money at the banking system so it can lend again. All these solutions have one goal: to bring back debt. They are ignoring, at least for the time being, the paradigm shift. But the markets aren’t buying it… literally. Debts continue to implode. Every bailout is being followed by an even more massive bailout down the road.

Instead of individuals living beyond their means, we now have governments living beyond their means. Substitute taxpayers for governments and you will quickly realize how the whole thing is a farce. Take no solace in the fact that the government is the buyer of last resort. It is really you who are the buyer of last resort. In the end, people will be even more indebted than they were before, setting the stage for the next crisis: a currency crisis. This is why governments aren’t, and cannot be, the solution.

The Paradox of Thrift: 11% GPD Contraction

The following projection is based on solid numbers, but the problem in real life is over-correction. The market never falls directly to the level of fundamental support. We are going through a forced liquidation, that is, from a macro view, irrational. The social chaos engendered by this massive contraction will also be problematic.



...what we had is a society that rewarded those in finance and real estate the most and these folks went out and bought luxury cars, goods, and homes. Thus it was an incestuous cycle. So now, the insanity of it all is that with our negative savings rate, the only way we have to go is back up. Yet you can see the Catch-22 in that we need people consuming to keep demand up. Now let us assume we go back to the historical 62% GDP being consumption. This will suck out of the economy:

$14 trillion x 62% = $8.68 trillion

$10.22 trillion - $8.68 trillion = $1.54 trillion

This is what is meant by the paradox of thrift. If Americans simply revert back to historical savings rates, we are going to eliminate $1.54 trillion from our GDP! That is, GDP will fall by 11%!


http://www.doctorhousingbubble.com/credit-crisis-and-debt-and-managing-the-paradox-of-thrift/

Job Losses worst in 60 Years

The world economy is tanking faster and harder than anyone had expected. In China, they are already talking about riots and other civil unrest because of the mass unemployment. Instead of talking about debt cancelation, the only thing that can get us out of this mess, our President is talking about the running trillion dollar deficits as long as he can foresee. Aside from being horrible policy, it can't possibly happen even if he wanted it too. Our leaders are in la-la land, but then, so is most everyone. No one seems to be prepared to cope, either mentally or emotionally, with what is going on.

WASHINGTON (AFP) – The US private sector lost 693,000 jobs in December, according to a survey Wednesday highlighting a deepening recession in the world's biggest economy. The December job decline in non farm private employment, revealed in the ADP National Employment Report, was far bigger than 493,000 job cuts expected by analysts in the last month of 2008. Some 476,000 job losses were reported in November, said the ADP report, pointing to deterioration in jobs in small and medium-sized firms with losses at big firms increasing as well.

"Sharply falling employment at medium- and small-size businesses clearly indicates that the recession has now spread well beyond manufacturing and housing-related activities," ADP said. Employment in the service-providing sector fell by 473,000 in December and by 220,000 in the goods-producing sector, the 23rd consecutive monthly decline, according to the report. Some 120,000 jobs were shed in the manufacturing sector, marking its 27th decline over the last 28 months, it said.

The ADP employment report is "shockingly awful," said Ian Shepherdson, chief US economist of High Frequency Economics. The report came ahead of Friday's official US payrolls report, which some said could be even bleaker.

"If the recent relationship between the ADP numbers (after their recent revisions) and the official payroll data holds, then we should expect a number of about (minus) 700,000 on Friday, the biggest drop in 59 years," Shepherdson said. "Even the best case here, though,implies a payroll number of (minus) 568,000," he said. Retrenchment had cut 533,000 jobs from US payrolls in November, official data showed. The US jobless rate has risen to 6.7 percent, the highest since October 1993, with 2.7 million people having joined the jobless ranks since the recession began a year ago.

More "Worse than Expected" in US and EU

Economic indicators continue to plunge worldwide. Stock markets, which have already priced in the current dire state of affairs, are actually up a bit on possibilities of stimulus packages.

NEW YORK/LONDON (Reuters) - Dire economic data from the United States and Europe showed the world's two largest economies remain mired in recession. As a further indication of how the crisis that began with bad housing loans in the U.S. has reached all parts of the world, a state-run Chinese magazine warned that rising social unrest would follow rising unemployment.

U.S. data showed new factory orders plunged 4.6 percent in November, far steeper than the 2.5 percent decline analysts predicted. That was further bad news for the manufacturing sector that recorded a 28-year low on a widely watched gauge of activity in December. U.S. durable goods orders also tumbled 1.5 percent in November, according to new data, worse than economists had predicted.

In Europe, a sharper-than-expected fall in euro zone inflation to a 26-month low of 1.6 percent in December knocked back the euro and further supported expectations for a European Central Bank (ECB) rate cut next week. ECB rate-cut expectations were also boosted by data showing the euro zone private sector services economy shrank sharply in December and firms cut more jobs than expected, pointing to a deep recession lasting well into 2009. The Markit Eurozone Purchasing Managers' Index of about 2,000 services companies, from banks to retailers, fell to 42.1 in December from 42.5 a month ago, a new low in the survey's 10-year history. "Sharply contracting new orders, backlogs of work and employment reinforce belief that the euro zone faces an xtremely difficult start to 2009," said Howard Archer, an economist at IHS Global Insight.

A services sector survey for Britain also showed an eighth month of contraction, with the employment component dropping to a record low, while UK retailers warned that rising job losses and plunging house prices would blight trading for months. Adding to Europe's economic woes, a gas pricing dispute between Moscow and Kiev threatened supplies to the continent as Russian gas via Ukraine to southeast Europe and Turkey was halted, pushing British gas market prices up more than 10 percent. Flows were cut to Bulgaria, Turkey, Macedonia, Greece and Croatia, while Italy, Austria and the Czech Republic reported sharp falls. European energy companies receive about a fifth of their gas via pipelines through Ukraine.

Toyota Motor Corp said it would halt all production in Japan in response to plunging demand. With the global downturn hitting automakers particularly hard, Toyota, the world's biggest, said it would shut all its factories in Japan for 11 days in February and March.

But global stock markets rose, with European and Asian shares posting gains for the sixth- and seventh-straight sessions, respectively. The dollar climbed as investors anticipated an economic stimulus package of up to 50 billion euros ($67.4 billion) in Germany and an expected $775 billion proposal from U.S. President-elect Barack Obama. The U.S. Dow Jones Industrial average edged up 0.5 percent.

Bernanke's One Big Idea

Bernanke's one big idea: All-Powerful Central Banks can Prevent Economic Downturns. It's all a banker's world, in Bernanke's mind, with deflation and a banking collapse the worst possible scenarios. No reference to fundamentals of economics (like shoring up home values instead of bailing out banks), nor to the role of Fed-created inflation and debt in creating the destructive bubbles in the first place.

The most important lesson here: Bernanke admits that the Fed Reserve caused the Great Depression. We need to take him at his word, and get rid of this destructive monstrosity, which has now caused two Great Depressions. Stable money, balanced budgets, increased savings, and banks that operate for the public good, are all that it would take to prevent these bank-caused bubble-bust cycles. Banks are the problem, not the solution.


from an article Sept. 2000 (http://www.foreignpolicy.com/story/cms.php?story_id=3272)

A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily. Consider three famous episodes: the U.S. stock market crash of 1929, Japan’s crash of 1990-1991, and the U.S. crash of 1987. The 1929 U.S. crash and the sharp decline in Japanese stock prices were both followed by decade-long economic slumps in each country. (The Japanese depression, despite much whistling in the dark by the country’s policymakers, still lingers.) By contrast, the macroeconomic fallout from the 1987 tumble on Wall Street was minimal. Why the difference?

A closer look reveals that the economic repercussions of a stock market crash depend less on the severity of the crash itself than on the response of economic policymakers, particularly central bankers. After the 1929 crash, the Federal Reserve mistakenly focused its policies on preserving the gold value of the dollar rather than on stabilizing the domestic economy. By raising interest rates to protect the dollar, policymakers contributed to soaring unemployment and severe price deflation. The U.S. central bank only compounded its mistake by failing to counter the collapse of the country’s banking system in the early 1930s; bank failures both intensified the monetary squeeze (since bank deposits were liquidated) and sparked a credit crunch that hurt consumers and small firms in particular. Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity.

The downturn following the collapse of Japan’s so-called bubble economy of the 1980s was not as severe as the Great Depression. However, in some crucial aspects, Japan in the 1990s was a slow-motion replay of the U.S. experience 60 years earlier. After effectively precipitating the crash in stock and real estate prices through sharp increases in interest rates (in much the same way that the Fed triggered the crash of 1929), the Bank of Japan seemed in no hurry to ease monetary policy and did not cut rates significantly until 1994. As a result, prices in Japan have fallen about 1 percent annually since 1992. And much like U.S. officials during the 1930s, Japanese policymakers were unconscionably slow in tackling the severe banking crisis that impaired the economy’s ability to function normally.

Central bankers got it right in the United States in 1987 when they avoided deflationary pressures as well as serious trouble in the banking system. In the days immediately following the October 19th crash, Federal Reserve Chairman Alan Greenspan—in office a mere two months—focused his efforts on maintaining financial stability. For instance, he persuaded banks to extend credit to struggling brokerage houses, thus ensuring that the stock exchanges and futures markets would continue operating normally. (U.S. banks, which unlike their Japanese counterparts do not own stock, were never in any serious danger from the crash.) Subsequently, the Fed’s attention shifted from financial to macroeconomic stability, with the central bank cutting interest rates to offset any deflationary effects of declining stock prices. Reassured by policymakers’ determination to protect the economy, the markets calmed and economic growth resumed with barely a blip.

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

2008 - Review of the Worst Year in Modern History

This article details what people like Peter Schiff did not foresee: the U.S. collapse was indeed inevitable, but the rest of the world is coming down with it. He was incorrect about non-domestic investments, but he was correct about gold. A new world economic order will result eventually, but it will be quite different than what we see today. China and Japan will be forced to retrench their economies, as will the U.S., once the world gets off the dollar as the reserve currency.

Anyone who predicts a turnaround in 2009, demand specifics. So far, in reality, there are absolutely zero signals that a turnaround is near. In fact, all signals are still pointing downward. People saying a turnaround is near, are engaged in purely wishful thinking, or trying to mislead you for their own gain.

My advice: powdered milk is at an all time low, buy now and stock up. You'll need it during the upcoming food riots.



After a catastrophic year for global markets, dazed investors are emerging from their shelters to ask if 2009 will be any better. The consensus among professionals? Do not expect the big rebound that usually follows a sharp downturn. Stocks lost 42 percent of their value in 2008, as calculated by the MSCI world index, erasing more than $29 trillion in value and all of the gains made since 2003. Just about the only assets to prosper were government bonds of developed countries and gold, where prices rose as investors ran for cover. Nouriel Roubini, an economist who call the 2008 market disaster correctly, argued in a recent commentary that in 2009, global recession “will morph into a stag-deflation, a deadly combination of economic stagnation/recession and deflation.”

Philippe Gijsels, senior equity strategist at Fortis Global Markets in Brussels, predicted that 2009 would be “the year of the big shakeout, a year of financial Darwinism, where the weak get weaker and the strong get stronger.” Many retailers, banks, commodity producers and pharmaceuticals companies ended 2008 barely hanging on, Mr. Gijsels said, making them ripe for acquisition. “The people with the cash and the balance sheet strength will be able to do what they want,” he said. In the long run, consolidation will help to create the conditions for the next bull market, he said, because it will mean that capital is being redirected to its most efficient uses.

Mr. Gijsels said it was possible that the market could begin to stabilize by late 2009 if there was clear evidence that the financial crisis was ending and there were signs that the United States housing market crash was nearing an end. [Yes, it all begins and ends with the housing collapse, yet our government continues to overlook it. Amazing.]

The year began with a shock, but only a previously lonely group of bears predicted the disaster to come. Many economists held out hope through the first half of the year that because of the rise of China and India and the growing might of the European Union, the rest of the world would escape the fallout of the American subprime mortgage crisis. That hope — ultimately dashed — was never reflected in the markets. Even as economic data from Brussels and Beijing looked better than that from Washington, stocks in Europe and Asia were falling faster than their counterparts in the United States, partly because panicked dollar-based investors were repatriating their overseas investments. By the end of the year, the global economic picture was almost uniformly bad. The Dow Jones Euro Stoxx 600 index, a measure of the broad European market, finished the year down 46 percent. The MSCI Asia-Pacific index fell 43 percent. United States stocks were not much better, with the Dow Jones industrial average falling 33.8 percent, its worst year since 1931, while the broader Standard & Poor’s 500-stock index fell 38.5 percent. The last four months of 2008 stand out as truly terrible. Bank lending all but halted, and markets went into a tailspin that ended only when governments agreed to spend trillions of dollars bailing out the global financial system. If the news from the developed world sounded bad, it was even worse for many emerging markets. The Shanghai composite index fell 65.4 percent, the Russian RTS index fell 72 percent and the Sensex 30 in Mumbai fell 52.4 percent. Looking for someplace comparatively safe? You would have needed the foresight to put your money into Bangladesh, where the main Dhaka stock index lost only 7.4 percent last year, or Venezuela, down the same amount. With credit markets thawing a bit but still operating far from normally, economies around the world are still deteriorating.

Where will the first signs of growth emerge? Some analysts predict that the United States economy, which fell into recession in December 2007 and is poised to receive a stimulus package from Washington of as much as $1 trillion over the next two years, might actually start to lead the world out of the downturn in the second half of the year. But the continuing deterioration in the United States housing market, the struggles of the auto industry and layoffs almost everywhere serve as a reminder that the outlook for 2009 remains grim.

The International Monetary Fund forecasts that developed economies will contract slightly in 2009, while overall world output will grow only 2.2 percent. The fund defines a global recession as growth below 3 percent, because that is far too weak to keep up with the demands of a growing population in emerging markets for jobs. At the same time, deleveraging — the winnowing down of banks’ troubled balance sheets — continues to crimp lending. Consumer confidence in the United States and Europe has fallen to record lows. A shrinking economic pie is bad for stocks because corporate profits tend to fall, making equities appear more expensive. Analysts say corporate profit forecasts are probably still too high to accurately reflect the dimming economic prospects of 2009.

Still, Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management in London, said that investors were sitting on unusually large cash reserves, “so if the news is bad, but not devastatingly bad, then you might well see a rally.” Unfortunately, he added, any rally will likely turn out to be a “false dawn” until the economic picture begins to clear up. “The real bottom in most bear markets is when you go from capitulation” — when most investors simply give up hope — “to disinterest,” he said. “We haven’t quite gotten there yet.”

IMF Admits Great Depression 2 Coming

The IMF (International Monetary Fund) sees the Great Depression 2 coming, but continues the widespread error in recommending government spending as a solution. Debt spending and inflation got us into this problem, and more of the same will only drag it out and make it worse. The only solution at this point is the cancellation of all debt.

GD2 is being caused because we financed a massive oversupply of production with massive debt spending and inflation. In order for economic activity to proceed again, we need to liquidate the oversupply and the debt. By cancelling debt outright, right now, we would unattach the productive economy from the financial crisis caused by deflation and debt. If we let things take their natural course, the economy will continue to grind into a Great Depression, as debt is liquidated piecemeal in a deflationary environment. The Fed has foreseen this, and resolved to lead the world on course of hyper-inflation instead, which will kick in with a vengeance after our productive economy has been ground down to minimum productivity.

We can prevent this all quite simply: cancel our debt!


WASHINGTON (AFP) – The US economy shrank in the third quarter, official data confirmed Tuesday, as the IMF's top economist warned of a second Great Depression offering no respite from relentless gloom ahead of Christmas. The abrupt 0.5-percent contraction of gross domestic product (GDP) in the world's largest economy was seen as marking the start of a steep downturn for the United States after GPD growth of 2.8 percent in the second quarter. "This report is largely old news," said John Ryding at RDQ Economics, who forecast fourth-quarter data out next month would be far bleaker. "Given signs that the recession has deepened in the current quarter, we look for around a 6.0 percent drop in real GDP," he said.

Britain's economy also shrank by 0.6 percent in the three months to September compared to the previous quarter, against a previous estimate of 0.5-percent contraction, the Office for National Statistics said. The IMF's top economist, Olivier Blanchard, maintained that governments around the world should boost domestic demand in order to avoid another Great Depression similar to the global downturn that shook the world in the 1930s. "Consumer and business confidence indexes have never fallen so far since they began. The coming months will be very bad," Blanchard said in an interview with the French newspaper Le Monde. "It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression," he added.

ECONOMIC COLLAPSE SPREADS IN EUROPE
Retail sales in Italy went down 0.3 percent in October, Denmark's economy contracted 0.4 percent in the third quarter and the Dutch economy had zero growth, official data showed. Finland's unemployment rate rose to 6.0 percent in November from 5.8 percent in October and the Polish central bank cut its key lending rate by 75 basis points to 5.00 percent in a bid to fend off a recession. In Ukraine, thousands of people took to the streets for a union-led protest to demand higher wages and more social protection in the former Soviet republic, which has been hit hard by the global economic crisis. News of weakening growth also sent the British pound sliding under 1.0550 euros, nearing a record low of 1.0463 reached last week, as dealers bet on more interest rate cuts from the Bank of England and forecast parity with the euro.The dollar exchange rate also drifted lower against the euro and the yen.

Save Our Economy: Cancel Our Debt

Our whole economy is jammed up because we have fictional debts that are tied to assets that are no longer worth their book values. In reality, we are as wealthy as we were last month, last summer, or last year, but our economy is no longer functioning because of accounting rules that declare the debts greater than the assets, and thereby prevent banks from fulfilling their function of lending money. The still-collapsing housing prices continue to wreak havoc on the financial industry, by introducing a general deflation into the economy. This deflation is sending everyone's balance sheets further upside-down, since those balance sheets are based on debt that is tied to an inflated asset price.

Everyone sees that we are in a short circuit, an ever-widening crash, but no one can grasp how to break the cycle. The original idea of the bailout was to use government money to buy distressed assets. Then the idea has morphed to wholesale cash injections into troubled companies and industries. Now the Fed is buying and backing debt securities, basically saying to the banks, yes, we know the debt is bad, but we'll cover all your losses. Congress and the new President are floating new rounds of economic stimulus packages, cash gifts to the population, based on government IOUs.

But none of these measures can work. We have already crossed over the event horizon into a deflation, and that deflation is still picking up steam. There is no going back to the artificial boosts of inflationary spending. Extra money put into the system now is unable to bridge the gap between deflated asset value and the debt book value. The banks themselves are unable to release the extra money, because their asset levels are continually falling and they need the extra money to shore up their reserve requirements. Extra money given to consumers in an economic downturn only gets hoarded, not spent, thus preventing any stimulus from happening. Further, because most of our productive economy is based overseas, it is not clear how much the American economy would benefit much from the increased spending, as the stimulus would mainly benefit some foreign country's productive output. And, as we have seen, government redistribution does not increase real wealth anyway, so how does that help? If not redistributing wealth, the government has to rely on more debt spending, which is the source of the problem to begin with!

There is only one way to end the financial short circuit, to get us out of the destructive black-hole void of debt. The solution to our current crisis is quite simple really: cancel the debt itself. All debt, credit cards, car notes, mortgages, the national debt, all of it. Hit the reset button on the financial system. We have reached the blue screen of death, the system is totally locked up. The negative effects of the financial melt down are now negatively affecting the real productive economy. We have already entered a worldwide recession, this is getting really serious.

By releasing all debt, people will get a fresh slate, and can start saving again. Banks, whose only assets are completely fiction -- they call debt an asset -- would take a big hit, but so what? Banks don't contribute to national wealth anyway. Their only utility is to enable real productivity, and in that basic function, they have completely failed, and are in fact, counter-productive right now.

Despite having most of their assets (our debts) completely liquidated, the banking system would quickly recover anyway, because we could use our incomes to start saving again. The productive economy would be truly stimulated and bank accounts would fill up quickly, because all the money we currently use to pay off debt would go into savings, investment, and consumption. Imagine not having to pay all that money every month to your mortgage or car payment. All that money is going to go somewhere, either spent or saved. Given that financing life through credit would no longer be an option, people would begin saving in earnest again.

In short, everyone is given clear title to all their assets that banks currently have liens on. Instead of having to spend thousands of dollars on their mortgages and car payment and credit cards every month, the families of America would be able to save and spend that money. The people who lost their jobs in the financial industry would be able to find new employment quickly in the productive economy.

The American economy resets, the banks reset, we start from scratch, with all of our wealth freed from the fictional burden of debt. From this point forward, people, businesses, and governments are forced to spend only out of their savings, leading to the always-rising standard of living that America experienced for its first 150 years.

Today's problem solved, Great Depression 2 averted.

Spread this idea to everyone you know. Talk about it with your family until you can understand it and explain it. Take it to your Representative and Senator and begin introducing them to the idea, because they are going to have to be the ones who pass the law to make it happen.

Let's get it done now, before it is too late.

Delusions of Recovery

Yesterday it was revealed that America has been in a recession for almost a full year. People interviewed today about how long the recession would last, and they were saying maybe a couple more quarters or so, based on historical precedent. Because most recessions only last 12-18 months or so.

Yeah. Right. These people are delusional, refusing to face basic facts.

Such as the fact that the engine driving this whole collapse is still going strong: the housing collapse. In fact, the housing collapse is still accelerating. We have not even reached its peak yet, let alone being anywhere near its recovery. The deflation driven by the housing collapse is still picking up steam. Oil now below $50, everything on super-sale, businesses collapsing daily, banks still refusing to lend money in the deflationary environment, the stock market collapsing by the day, evaporating over half of our nation's investment and savings, manufacturing activity at an all time low, unemployment and food stamp claims spiking.

And people are talking recovery as if it just around the corner?

If we cancel all debt right now, we would have an instantaneous recovery. Canceling all debt is the only way to end the negative effects of deflation and unhinge our productive economy from our fiscal death spiral. But until we face economic and fiscal realities, we are in for a long slow bleeding death.

There is a very real possibility of social chaos and breakdown when a critical mass of people realize how bad things are going to get.

Watch carefully for the signs: Like ripples spreading out from the less advanced nations, our world order is breaking down. Africa will collapse first, in massive famine, disease, and death. This is beginning now, and will reach critical mass in the next year. Widespread wars will breakout in the Middle East and South Asia, within 2-3 years. Starvation and riots in China as well, within 3 years. At that point, be on red alert for full chaos conditions to arise in America. Weeks, probably months of increasing violence will spiral up, until martial law is declared. Martial law will settle down the mass street violence and chaos, but the violence of small, personal crime will remain at unbearable levels.

Why this Depression Will be Worse, Much Worse

A Depression occurs when a recession is combined with a deflation. The economy cycles downward out of control in a black hole of dying economic activity leading to lower and lower prices and levels of employment. The bottom of the Depression is reached when all unproductive jobs, bad loans, and excess inventories are liquidated. A Depression economy also sheds itself of all extraneous activities, stripping itself down to the production of bare essentials for living, the demand for which cannot fall any further (except through mass death or something that actually decreases population levels). Prices and wages fall to that floor, then can get rebuilt, as new loans become safe and new production can resume.

We are facing a number of factors that today will prevent this cycle from functioning properly. Our society is burdened with so many artificial constraints, barriers, weaknesses, and institutional problems, that it lacks the organic flexibility to respond to these Depression conditions in functional way.

For one, we are now burdened by poor governmental policy, like minimum wage laws, regulations, and government bail-outs. In a deflationary environment, profits for producers are falling because of falling prices. In order to survive, the producer must decrease costs to adjust to lower revenues. But minimum wage laws will prevent producers from decreasing costs past a certain level. When revenue falls below the minimum fixed cost of labor, economic activity simply dies. Our governmental policy is now far more active also, throwing bail-out after bail-out of mass cash injections into the economy in order to prevent the downturn. Our leaders seek to battle the deflation with the weapon of debt-based inflation, which is exactly what got us into this situation. The leaders in the 1930s, while keeping the money supply too tight, at least had the good sense to let the bankruptcy cycle proceed, which is like an economic circle-of-life, allowing bad assets and debt to be eliminated and recycled.

A second factor facing our current economy is our high debt level. A deflation is a death sentence for business in an environment of high debt. Deflation lowers revenue, which makes it difficult if not impossible to pay off the high debts accrued before the inflation. This effect is visible to all in the housing meltdown going on now. Housing prices are deflating, putting people upside-down on their mortgage loans, resulting in mass defaults, which feeds further housing deflation. Banks are devastated by the mass defaults and have to curtail operations, not only because they have less money to loan out, but also because new loans are likely to get sucked up by the deflation. Making loans in a deflation is a formula for guaranteed failure, because future prices will not support current loans, a fact which of course leads banks to stop loan activity. Their failure to offer loans then stifles real business activity, leading to more unemployment and a decrease in real wealth, feeding the deflation and Depression. The more loans outstanding at the beginning of the deflation, the greater the economic catastrophe. With our country leveraged to astronomical heights at all levels of society -- personal, commercial, and governmental -- the financial and economic conflagration will be total.

The third factor that will exacerbate the coming Depression is the productive basis of our current economy. During the Great Depression of the 1930s, America was an agricultural, industrial, and manufacturing nation. Almost half of the country still lived on rural farms. City dwellers were engaged in productive wealth-creating business, all domestically based, such as oil, mining, steel, manufacturing, and skilled trades. Thus, the fall to bare-essentials level was not catastrophic, since we could absorb a 25% unemployment level on the back of our wealth-producing activities and vast agricultural lands, which could absorb lots of marginal labor. Our domestic industries had to scale back and downsize, but they were still there, they still existed to support our population.

Today's situation is vastly different. We are no longer an industrial economy. Agriculture supports only a tiny fraction of our population, and it is largely mechanized, not able to absorb marginal laborers. The vast majority of our population lives in cities now, engaged in jobs that do not create real wealth. Most employment today is in activities that will be shed in the dive to an "essentials only" economic floor of a Depression. Nonessential services -- like entertainment, sports, restaurants, and retail -- these aspects of our economy are already being devastated and will continue to shrivel as the Depression deepens in cycles of layoffs and deflation. Education, health-care, criminal justice, government, paper-pushing knowledge work of all kind -- these are all not wealth producing activities. Only those support services that are closely related to the core wealth-creating activities will survive. Unfortunately, we have few core wealth-creating industries available to support our population, thanks to a generation of outsourcing and offshoring, a forced globalization based on free trade ideology.

The fourth, and ultimately the worst factor that will exacerbate our coming Depression, probably launching it into a full-scale social collapse, is the quality of our human capital. Ever see those pictures of the Great Depression, of the men lined up around the block, in their suits and hats? Those days are long gone. Our current population is spoiled, lazy, fat, and dependent. They are lacking respect for themselves or for authority, even though a high percentage of them are dependent on government support for their survival. Our social fabric has been torn by a generation of culture wars, and few people even know their neighbors, let alone feel a sense of community with them. Racial animosity and resentment are at an all time high, along with the populations of minorities who feel that resentment, not getting along with each other or with the dwindling white majority . The family has been disintegrating for a couple generations, as stable marriages and parental guidance has become a thing of the past for the majority. We also face a huge population and economic contraction based on the aging of the massive Baby Boom generation, as they retire from their jobs, drawing down their wealth in leisure, and bankrupting the nation with their health care costs.

Sounds pretty bleak, doesn't it? It is emotionally difficult to even contemplate the depths of the negative possibilities inherent in our current breakdown.

It is not too late to prevent the coming Depression. With a Jubilee Year, the radical wiping away of all American debt, our economy could be reborn. If that does not happen, and it probably won't, prepare for the worst. The run on guns is a rational response, and it would be wise to begin preparation to store food, although not necessary to stockpile yet. If you can switch to a wealth-producing industry, that would be good. And if you are unemployed, seek employment only in those industries. What to do with your money? There really is no good place for it, but only in no-risk bonds if you must put it anywhere. You may want to consider using your money to acquire survival tools now, like solar panels. generators, and the gardening supplies necessary to grow your own food, if needs be. Get on the largest piece of real property you can.

Most importantly, network. Make emergency plans with family and trusted friends. Make new friends with people who are also preparing for the worst. If we had adequate human capital, even an economic collapse would not lead to catastrophe, and enriching yourself with a high-capital network will be invaluable in the coming crisis. Get involved in your local block watch and formulate plans of action in the event of breakdown of civil authority. Prepare, prepare, prepare, and you will be more ready to deal with the process of social upheaval that we will undergo. Your network of sane, clear-headed, and well-prepared citizens will also form the nucleus of the new social and governmental order that will emerge from the chaos.

Always remember, united we stand, divided we fall. Get your own spiritual foundation strengthened,and you will have the strength to be a healer, uniter, and peace-maker. As we have been promised, it is the meek who shall inherit the earth.