Collapse Update – Oct. 18, 2009

            We are being told that no one could see this economic downturn coming and that it was a “Black Swan” event . However, we are told many lies. That is just one of many.

            “This crisis is not a black swan event; it was utterly predictable in its eventual outcome. Yes, not many people could time when the bubble would burst, I thought we would have a mini depression after the dot-com bubble but our fiscal masters kept inflating and the lemmings kept borrowing” (1)

            In fact, a handful of people did forecast this downturn. The problem is; few people were listening. Do I know what that feels like! Here, in alphabetical order, is a list of “Casandras” that I’ve been listening to and can vouch for:

–       Austrian economists in general

–       Bill Bonner and his gang at the Daily Reckoning

–       David Walker (former U.S. Comptroller General who resigned because no one was listening)

–       Doug Casey and his gang at Casey Research

–       Jim Rogers

–       Kurt Rickenbacker

–       Peter Schiff

             Another one is Howard Ruff who has been sounding the alarm since the 1970’s. He is usually dismissed as “Even a broken watch is right twice a day.” I began reading Ruff in the early 80’s when Fed chairman Paul Volker raised interest rates to painful double digits to fight runaway inflation. It was then that I realized that, since 1971 when world governments went off the Gold Standard and the entire globe shifted to un-backed fiat currency, it was only a matter of when, not if, the house of cards would start to collapse. That collapse is now under way.

            There are several other trustworthy financial analysts I discovered after the beginning of this “downturn” (such a lovely euphemism for what is becoming the Greatest Depression in history.) They are

–       Gerald Celente

–       Paul van Eeden

–       Mark Faber

–       Rick Santelli

–       Jim Sinclair

–       Meredith Whitney 

            Google any of them and judge for yourself. I mention these characters because of their track records. That’s why I listen to what they say. On the other hand, the people who are telling us the “recession is over” are the ones who failed to forecast the downturn, who were continually surprised by the extent and then the severity of it, and, consequently are not qualified to forecast a recovery. It’s been more than two years since I released my first “Collapse” article “The Crash of 2007” in September of that year prior to the U.S. entering recession in December and the bottom falling out of the economy in 2008. For two years our lords & masters have told us the sub-prime problem is contained, that the contagion won’t spread and that recovery is just around the corner. Earlier this year we were told we would bottom in the 3rd quarter and recover in the 4th quarter of 2009. We’re now in the 4th quarter. There is no recovery. Now we’re told to expect a recovery in 2010. First it was recovery in 3 months, then 6, then 9. Now it’s next year. Do you see a pattern here? I didn’t believe them two years ago. I’m amazed anyone can still believe them now! Prepare for the long haul because there will be no recovery in the short or medium term. 

            The following essay is by Bill Bonner from the Daily Reckoning gang who DID forecast the downturn. Being a bit of a student of ancient history, I can attest to his comparison of the decline of the Roman empire. I’ve long marveled at the similarities between the power and brutality of the Roman empire and the American one. 

            At the end of his essay, I make a few observations about where we are and where we are going. Be warned because  “To hell in a hand basket” pretty much sums it up. 

The Lint Age
When Ben Bernanke gave his speech to the London School of Economics on Tuesday, our reporter was on the scene. Terry Easton put a tough question to America’s central banker: aren’t your interventions just making the situation worse, he wanted to know.

Amid the blah…blah…blah…of Bernanke’s response was this:

“The tendency of financial systems to boom and bust…is a very long-standing problem…but I think it’s very important for us to try to put out the fire…then you think about the fire code.”

In his 1988 book, The Collapse of Complex Societies, Joseph Tainter argued that all societies — like all organisms — are doomed. Tainter studied ancient Rome as well as the Mayan civilization. He noticed that problems always blaze up. Each one — whether climatic, political or economic — rings the firehall bell. And each solution — and readers may substitute the word “bailout” for solution — brings more challenges and takes more resources. Finally, the available resources are worn out.

Tainter observes that when the costs become high enough, people seem to give up. By the end of Roman era, for example, the burdens of empire were so heavy that people sold themselves into slavery to get free of them. So many people did so at one point that the authorities had to come up with another solution; they outlawed the practice. Henceforth, Roman citizens were required by law to remain free!

Another philosopher, Giambattista Vico, writing in the 18th century, put the beginning of the decline of Rome roughly at the time of the Great Fire during Nero’s reign. Nero, partly to pay for his post-fire reforms and reconstruction, began taking the gold and silver out of the coins. All civilizations go through three stages, Vico said — divine, heroic, and human. The divine period is ruled by the gods. The heroic period is adorned with victories and statues. Then, comes the human era. (Here, we permit ourselves to add a footnote to Vico’s oeuvre: the coin of the realm in early periods is the gods’ money — gold. Later, people switch to money of their own invention — the kind of money you make from trees.) This last stage, says Vico, is when popular democracy arises, along with rational thinking and what Vico delightfully calls the “barbarie della reflessione” [the barbarism of reflection]. In earlier eras, people do what their gods and leaders ask of them. In the final era, they ask, “what’s in it for me?”

Even as late as the early ‘ 60s, John F. Kennedy could still appeal to heroic urge without drawing a laugh. “Ask not what your country can do for you,” he said in his inaugural address, “ask what you can do for your country.”

But 11 years later, Richard Nixon, like Nero before him, began the process of debasing the country’s money. That was a solution too; the United States had spent too much. Nixon could worry about the fire code later. First he opened up with the fire hose; he defaulted on America’s promise to exchange dollars for gold at the statutory rate.

Barack Obama tried a Kennedyesque appeal to civic high-mindedness. We need to “insist that the first question each of us asks isn’t ‘what’s good for me’ but ‘what’s good for the country my children will inherit,’” said the president. But now, like Doric columns in a trailer park, the words are ornamental, not structural. They are the homage that one age pays to a better one.

We are in the 21st century now. Barbarous reflections rise up like swamp gas. The whole place stinks of them. Bernanke and Obama offer solutions. But their plans to save the world from a correction are little more than a swindle. They offer to bail out the mistakes of one generation with trillions of dollars’ worth of debt laid onto the next.

“Regarding the current financial meltdown,” writes Rony Teitelbaum, “it is very clear that two main factors underlie the political reactions to the crisis, the first being pressure originating from ties between the financial and the political elect, manifested by taxpayer bailouts of large institutions that continue to deliver bonuses to the executives and donate to political campaigns. For those of us who are not blind, these are clear signs of political corruption which would have made the worst Roman emperor blush. The second factor is political pressure originating from the mass public. The kind of solutions offered so far, and I may add which were received with very warm enthusiasm, were tax rebates and gasoline tax holidays. These are actions aimed at a public who “impatiently expected quick and obvious results,” to quote Cary’s description of Roman society in AD 300. (A History of Rome).”

Circa 2009, there is hardly a soul in the entire world who has not been corrupted by the barbarie della reflessione of the late imperial period. Both patricians and plebes are for bailouts. Both business and labor back stimulus programs. The taxpayers and the politicians who rule them are of one mind. Liberal, conservative, rich, poor, Republican, Democrat all speak with a single voice: ‘Screw the next generation!”

The golden age is over, in other words. In the space of 40 years it passed from gold, to silver, to paper…and is now somewhere between plastic and navel lint. (2)

Obama wins the Nobel Peace Prize

             Although I majored in Political Science, I don’t usually stoop to political commentary in these articles. One does not discuss politics and religion in polite company since they both rely, to a large degree, on belief which does not lend itself to rational discourse. However, I readily admit that my economic commentary proudly displays my Libertarian/Anarchist bias (“the best government is the least government.”) And, unlike the right-wing Rush Limbaugh, who almost had a heart attack when it was announced that U.S. President Obama has been awarded the Nobel Peace Prize, I am not about to begrudge the President his award.

             I’m not outraged at the irony of someone who campaigned for president in a platform to end an ongoing war, was elected, then increased the scope of that war, and then was awarded a Nobel Peace Prize. Being an aficionado of propaganda, I will tip my hat when the American Commander in Chief of the largest military force on planet earth is presented as a global peace-maker. It takes propaganda to heights undreamed of by the Nazi Minister of Propaganda, Goebbels.

             I am not even going to bewail the Nobel committee, who last year displayed how utterly stupid and obviously left-wing biased they are in awarding the Nobel Economics Prize to Paul Krugman, an empty-headed N Y Times correspondent who gives new meaning to “ass media” with his misguided Keynesian leanings. However, I suspect the late Alfred Nobel, the inventor of dynamite, is turning in his grave after giving the world such a useful invention as can be attested by anyone who has ever tried to break rock by hand. I speak from experience, having “mined” my way through university (“close-call” stories must await another day.)

             I am not even going to question whether Obama “deserved” the prize. I quote the Financial Times of London who are usually straightforward and unbiased unlike partisan American media. They said “US President Barack Obama won the Nobel Peace Prize on Friday for his calls to reduce the world’s stockpile of nuclear weapons and working for world peace” and “…Obama has called for disarmament and worked to restart the stalled Middle East peace process since taking office in January.”

           Examine the phrases used by the Financial Times: “…for his calls”, “working for”, “has called for” and “worked to…”  In other words, besides a lot of talk, Obama HAS NOT actually accomplished anything peaceful. Granted, the President is a moving orator and he’s certainly given more speeches than I have in the last six months but is that the extent of the world’s peace-making? Is this the best we can do? We have two wars going on in Iraq and Afghanistan and the Nobel Peace Prize is awarded for ALL TALK AND NO ACTION. Is there no one who is actually striving for peace? Is there no one taking steps toward peace who is eligible for the Nobel Peace Prize? Apparently not!

             Why is this important? I’m glad I asked. When you examine the historical record of the last two Great Depressions they were followed by two major World Wars. The depression of 1873 to 96 set the stage for the Panic of 1907 which was followed by the First World War 1914–18. The depression of the 1930’s immediately set the stage for the Second World War 1939–45.

             Is this a coincidence? You know how little I believe in coincidences. What causes wars? I’m glad I asked that, too. We are led to believe that wars are caused by “bad people” who invariably are the “other guys” although it’s ironic that both sides always have God on their side. We are told we go to war for freedom and liberty and national security and motherhood and apple pie and all those wonderful things. Well, sorry boys and girls but that’s all bullshit. We go to war for resources. Let me repeat; RESOURCES. We go to war to grab someone else’s resources like land, oil, minerals, water, etc. or to stop someone from grabbing our resources or to stop someone from grabbing someone else’s resources and thereby upsetting the balance of power. Most wars include all three reasons. 

            WARNING: the next couple of paragraphs will seriously burst your bubble. 

            The Second World War is a perfect example. Germany was devastated by the depression which was exacerbated by hyper-inflation caused by repressive war reparations resulting from the First World War (Bad Germany!). After over-running most of Europe in the Second World War (the easy part), the main German objective was to capture the Russian near east (the hard part) in order to control Russia’s resources. Why? Because the largest, most undeveloped country in the world is Russia. Why is Russia the largest, most undeveloped country in the world (even to this day?) Because Russia is inhabited by lazy, incompetent, drunken peasants often led by incompetent, drunken Bolsheviks (you probably noticed by now that I am unencumbered by political correctness.) 

            Now imagine, if you will, what would happen to the English-speaking world’s economic, military and political dominance if sober, industrious and well-disciplined Germans controlled the largest, undeveloped country in the world (Russia) and exploited and developed its huge resources. In no time at all, Germany would have become the world’s economic, military and political super-power, far surpassing the U.S. and the UK (with all its colonies, Canada included.) This would seriously have upset the global balance of power. This could not have been allowed to happen. 

            Of course, both sides were told they were going to war for freedom and liberty and national security and motherhood, etc. etc. Can you imagine some American farm boy willingly going to war and risking his life for “American economic hegemony?” He wouldn’t have a clue what it is, let alone how to spell it and he certainly wouldn’t risk his life to support the ultra-rich American elite in the lavish lifestyle to which they had become accustomed. Apple pie is easier to swallow than the truth.

            So why am I bursting all your dreams and myths? I’m glad I asked. This meager economic “recovery” we are now supposedly experiencing is not a real and sustainable recovery. It is, in fact, supported almost entirely by government spending. And, what you are probably NOT going to hear from the ass media is that much of this government spending, particularly in the U.S.A. is MILITARY spending. See below.

“Military vs. Non-Military Durable Goods in Pictures”  

“Sometimes a chart is nearly all you need to understand the story. This is one of those times.”

“With that stunning graphic out of the way, please consider some interesting factoids from Why a Recovery May Still Feel Like a Recession.”

“Durable goods shipments fell by more than 20 percent during this recession, and would have declined further were it not for increased production of weapons.”

“In no previous downturn since 1958, when the figures began being recorded, had the decline been as much as 14 percent.”

“The drop is all the more remarkable because such shipments rose at a relatively restrained rate in the preceding period of economic growth, particularly when military sales were excluded.”

“In June, seasonally adjusted shipments for civilian purposes were 19 percent below the average monthly figure for 2000. Shipments of military items were running 123 percent above the 2000 average.”

“Those figures are in nominal dollars, not adjusted for inflation. That fact may [undervalue] the trend, since prices of some durable goods, like computers, have fallen over the years.”

“Given the amount of durable goods that go into homes (washers, dryers, microwaves, stoves, refrigerators, etc), and given the enormous boom in housing from 2003-2007 that chart is a stunning description of the state of [the U.S] economy.” (3)

            In other words, President Obama pulled the wool over the eyes of the Nobel committee. As with most of his magnificent speeches, he “talks the talk’ but he doesn’t “walk the walk.” So should we be upset because we’ve been lied to again? Hardly! We’re big boys and girls. We’ve been disappointed before.

            However, we do need to be aware that, given the historical record, we are probably in for another major World War. When? That’s difficult to predict. The average length of the two preceding Great Depressions was 19.6 years. We are one year into this depression. Although the First World War was 18 years after the first depression it was 7 years after the Panic of 1907 so that makes an ambiguous timeline. The Second World War was 9 years after the start of the second depression. Although it’s difficult to extrapolate from only two events it seems that great wars will happen much sooner after the beginning of a depression.

            Also, much changes from one war to the next. The tactics changed from trench warfare and mustard gas in the First World War to Blitzkrieg and carpet bombing of cities in the Second. The technology changes from .303 Lee Enfield rifles to Atomic bombs. For all we know, we may already be in the beginning of the next great war. The wars in Iraq and Afghanistan may be the opening salvos as the “war on terror” morphs into the “forever war without borders.” Judging from the propaganda, this could very well be it. When Obama is awarded the Nobel Peace Prize, when the military agenda is reported as a humanitarian endeavor, when civilian deaths are “collateral damage”, when those who resist U.S./NATO invasions of their countries are called “insurgents and terrorists”, when those who question our military role are regarded as unpatriotic heretics, when they can trace one MAD cow among herds of millions but supposedly can’t find Bin Laden in a few caves (originally constructed by the Americans to help the Taliban fight the Russians), when aerial bombardment of villages in Pakistan’s northern tribal area is supposed to combat Al Qaeda, when war becomes peace, ignorance is strength and lies become the truth then, judging by the shear volume of propaganda, we may already be at the beginning of the next Great World War.  

            There are two caveats to this. In the first place, America relies on the U.S. dollar as the world’s reserve currency to give it leverage to finance its military adventures. Russia, Brazil, China and others have expressed they are becoming increasingly unwillingly to finance America’s wars and there is much talk about developing a new reserve currency. However this happens, it won’t happen overnight and, although the official timetable is 2018, any unexpected currency crisis could hasten this change. Jim Sinclair is predicting a major currency event after the first week of November. Also, Russia is supporting Iran with nuclear technology and China is building petroleum refineries in Iran (surprisingly, Iran has oil production but limited refinery capacity.) Both Russia and China are therefore fighting an indirect war with the U.S. using Iran as their proxy and both would love to see Israel attack Iran. This would start a major Mideast conflagration that would not only draw the U.S. deeper into the Mideast (Obama may be too naïve to see this) and it would close the Straits of Hormuz to oil tanker traffic which supplies more than ¼ of America’s oil needs. Russia, a major oil producer, would benefit from higher oil prices and China would sit on the sidelines with trillions of dollars in reserves to scavenge U.S. assets as the American economy goes further into the tank.

            In the second place we have the “wounded animal” scenario – the most dangerous animal is a wounded animal. Nations are no different. There’s no telling how America would lash out and inflame the situation especially with a naïve Obama at the helm, lacking foreign policy experience and made all the more dangerous with his probable Narcissistic Personality Disorder . We do live in interesting times.

            Now, before you dig up another old myth, allow me to burst another bubble. The Second World War is often cited as dragging the world out of the Great Depression. In fact, all the idiot Keynesian economists, Ben Bernanke included, roll out this old chestnut to support increased government spending. As usual, they’re full of shit. A common myth is “Wars are good for the economy” (the U.S. has two wars at the moment so ask yourself how their economy is doing?) The last Great Depression did not end until 1947 but the war ended in 1945. If government spending were responsible for ending the depression it would have happened long before the end of the war.

            So what happened in 1947 to end the depression? I thought I’d never ask. In one word, the answer is “SPENDING.” All during the war, rationing of goods and services forced an increase in savings because there was little to buy except war bonds. When the war ended, production was switched from war materials to consumer goods and all that money that had been saved flooded into the economy, stimulating more production, more jobs, more paychecks and thus more spending. The consumer economy was born. It was a REAL economy based on production and savings unlike the artificial economy we’ve had for the last couple of decades that was based on borrowing, debt and spending. Any good Austrian economist will tell you that an economy weakens without production and savings. This is the painful lesson we are learning now. One can only hope we learn from it.

Two Years on and No Solutions

            Although covered in previous articles, let’s briefly examine what caused the financial and economic melt-down and the bursting of an historic number of bubbles. Leverage (too much debt) and derivatives are the two major factors largely to blame for our current predicament.

Leverage –  This is a fancy word for debt. Since cutting our currencies off from the gold standard, we have created a financial system based on credit and debt (flip sides of the same coin) that relies on a constant rate of inflation to sustain economic growth, preserve the illusion of stability which works as long as inflation is about 2% and provide a shadow tax resulting from the of loss of purchasing power. There’s more than a textbook in that last sentence but I said I’d keep it brief. This nefarious system can sustain itself as long as it is kept within bounds. Alas, the printing presses ran too fast but our fiscal masters didn’t complain as it allowed them to bribe us with our own money. Credit became too easy but we didn’t complain as it allowed us to buy lots of unnecessary things with money we didn’t have. This abundance of cheap money bid up the price of assets such as real estate, commodities, stocks and bonds into bubble territory. Bubbles eventually burst. And, burst they did!

Derivatives – These exotic financial instruments have already been detailed ad nauseum in previous articles. We are still uncovering their implications. Instead of foreign investors lending money for mortgages, they instead purchased these mortgage-securitized credit products which they thought were as safe as U.S. government bonds. They weren’t. Oops! These derivatives were great for the financial institutions that created them and sold them for hefty commissions but many of them inadvertently drank their own Kool-Aid, fell down and died. The Bank of International Settlements (BIS) stopped reporting the total amount of derivatives about a year ago (they now report only a small segment.) Some have been written-off or off-set but they are still being created so at a guess there’s still somewhere between 10 to 20 times global GDP of this toxic alphabet soup sloshing around the world’s balance sheets. All financial institutions have some (a little or a lot) of this toxic garbage masquerading as assets. Accounting standards were weakened last March so American banks could pretend their toxic assets were actually worth book value – the increase in assets enabled more exorbitant CEO bonuses – and everyone is now playing a Pollyanna game of “let’s pretend.”

            So, two years on, what has changed? Short answer: NOTHING. A longer answer follows. Governments are trying to solve the leverage problem. How? By creating more leverage. How well do you think that’s going to work? It’s not. They want us to borrow more so we can spend, spend, spend and kick start the consumer economy back to the good old days. The trouble is that people don’t want to borrow more because they’ve already borrowed too much and are having trouble making payments because they either lost their jobs, or they’re worried about losing their jobs or they still have jobs but are working fewer hours or the value of their homes has fallen below their outstanding mortgages (known as “underwater”) and the mortgage companies won’t renew unless homeowners come up with the difference, etc.

            Furthermore, even if consumers did want to borrow, banks don’t want to lend because they’re hoarding their cash and finding it safer to borrow almost free money from Central Banks and the Fed who are injecting liquidity (i.e. lending) in a desperate attempt to prop up a financial system two years after it went Kablooey and all fell down and the banks take this almost free money and park it BACK at the Central Banks and the Fed for interest rates HIGHER than they borrowed it at (the difference being funded by those generous taxpayers) and all without the risks associated with making consumer and commercial loans (see NOTES for a more detailed explanation.) Meanwhile, everyone hopes they can do this long enough so the banks can make some profit in order to write-off some of these gargantuan amounts of derivatives and bad loans. Not surprisingly, loans are going bad faster than the banks can write them off and they’re creating new derivatives as fast as they’re getting rid of old ones so be prepared for more Kablooey and more falling down.

Note: “Kablooey” is a technical term for FUBAR (Fucked Up Beyond All Recognition) which pretty much describes the entire global financial and economic system today, tomorrow and for a long time to come. If it weren’t for government spending money that it didn’t have, there would be little spending otherwise. Notice how you no longer hear about the “green shoots of recovery.” Even the ass media has figured it out.

            How long is “a long time to come?” I’m glad I asked. There are four possible alternatives.

1) Friendly aliens land and make everything wonderful again.

2) This recession ends and the global economy begins to recover shortly.

3) Major global depression lasting about as long as the last two i.e. another 18 to 20 years.

4) Complete collapse of global economic, financial, political, military, social and cultural systems.

            What are the chances?

            #1 – aliens – is what I’m hoping for but I’m not holding my breath.

            #2 – recovery – is what we’ve been promised but that promise is fading quickly. Even mainstream analysts are throwing in the towel and calling for a long downturn. For instance, John Mauldin who has been flogging the concept of the “Muddle Through Economy” for years is now calling it a “New Muddle Through Economy” similar to the “lost decade” of Japan whose economy has been flat-lined for the past 19 years now. Japan’s saving grace is that its depression occurred while the rest of the globe was healthy. Now that the whole world is in a downturn, Japan’s economy with its government debt at more than 300% of GDP is sinking fast.

            #3 –depression – is getting more likely every day. Governments are making the same mistakes they made during the last Great Depression. Indebtedness got us into this downturn and the government’s solution is even more debt. Stimulus spending didn’t work during the last Great Depression (it was rationing induced savings that did the trick after WW II.) FDR’s anti-business Congress stifled business investment just as Obama’s Democratic Congress is doing today. Coming up will be Obama’s tax increases and Canadian HST just like FDR during the last big one. So this answers the question “how long?” Caveat: the more governments meddle the longer it will last. Even the Beatles’ Ringo Star, not exactly an expert on economics & politics, said, “Everything the government touches, turns to crap.”

            #4 – collapse – is a possibility I hope does NOT happen because, frankly, I’m too old for that kind of Mad Max, end-of-the-world shit. It would be the end of civilization as we know it and the survivors would be mostly farm hands or slaves.

            So, that doesn’t leave much except #3 The Stealth Depression which continues to sneak up on us. In case you haven’t noticed, people are getting discouraged, short-tempered, grumpy and depressed (didja ever think maybe that’s why it’s called a “depression?”) The summer we did NOT have may contribute to this foul mood but a lot has to do with the economy and uncertainty. If you don’t understand what’s happening then it’s easy to let dire circumstances affect you in a negative way. On the other hand, a greater understanding may not change the situation but it goes a long way to changing your attitude, arming you against discouragement and proving that the downturn IS NOT YOUR FAULT. Try to remember that when the shit continues to hit the fan for many years to come.

The China Syndrome

            Much has been written and said about China lately and there is much hope that China will somehow save us. However, China’s exports have fallen 36%, almost as much as Japan’s 40%.

         Chinese economic statistics are calculated differently than the West. In China, production numbers are used to calculate GDP whereas in the West it is sales. The recent Chinese stimulus program has led to building more factories at a time when more than 100,000 factories are already shut down and much of the increase in lending has been for increased production. In other words, producing goods and then shipping them to sit in a warehouse is NOT a long term solution to reduced exports. Granted the Chinese middle class has been growing but not nearly enough to make up for a 36% reduction in exports.

Global Trade Already in Collapse … 

Global trade has fallen off a cliff. And economies cannot afford to let the situation worsen.

The chart below shows the current fall in global trade (the red line) relative to the drop during the Great Depression (the blue line).

As you can see, despite the improvements in economies and the vast improvements in sentiment, global trade remains on a sharper sloping decline than it did in the Great Depression. (4)

            This does NOT look good for Canada’s economy. Canada is a resource based economy. Resources are fungible. This means one pound of Canadian copper is much the same as one pound of Russian copper or one pound of Australian copper. Our biggest customer, the U.S. is on the ropes, much of China’s recent surge in commodity imports was ordered to fill its stockpiles and feed its recent production. However, such a drastic decline in exports means that even China’s demand for resources has its limits. Once the China bubble bursts, who is Canada going to sell to?

The Canadian Scene – news tidbits

            Canadian Railroad shipments are a barometer of Canadian economic health as it measures bulk commodity as well as finished goods import and export shipments. “Canadian railroads reported volume of 69,342 cars for the week, down 15.1 percent from last year, and 44,838 trailers or containers, down 13.8 percent. For the first 38 weeks of 2009, Canadian railroads reported cumulative volume of 2,304,419 carloads, down 22.6 percent from last year, and 1,545,090 trailers or containers, down 16.3 percent.” (5)

            Canada’s Garth Turner reports. “The higher Canadian dollar is the last thing bankers need, since the housing bubble now has ‘em in a sweat and all juiced to raise interest rates. But the moment they do, the loonie will be headed for $1.10 US and you can kiss the rest of our factories goodbye. And the hotels. And the exports south. And the economy. (6)

            In another story, Garth Turner reports, “Every one cent increase in the Canadian currency costs at least $2 billion in lost sales to our manufacturers and exporters. Each penny gained is also believed to wipe out 25,000 jobs. And as the American dollar sinks (which the Obama administration wants since it makes US exports cheap), we could see the loonie substantially above $1 US for months, or maybe years. There are two words for that: structural unemployment.” (7) 

            Macleans magazine reports, “A real, sustainable [American] recovery is still five or 10 years away. Which means we should be preparing for America’s lost decade. What that means for Canada is painfully clear. We may have avoided the worst of the crisis—our banks are sound, unemployment is lower here and the housing market more stable—but Canada remains inextricably linked to the U.S. economy, and continued pain there threatens to drag this country’s economy down further.” (8)

            No good news to see here folks; let’s just move along and see how Canada’s customers are doing.

Unintended Consequences, Death Spirals, Beyond the Point of No Return, Hail Mary Passes and the Unexpected

            The American foreclosure modification program to assist mortgage-holders to renew at more favorable terms apparently isn’t working very well. Once a homeowner is unable to pay or simply decides he is not going to pay his mortgage because it is deeply “underwater”, the loan may be irrecoverable no matter what incentives the lender later offers. If the lender offers more favorable terms, then EVERYONE will want more favorable terms. Either way, the lender loses. This is known as “Morton’s Fork” because the lender is caught between a rock and a hard place.

            Because so many derivatives are based on mortgages and because so much of the consumer economy is based on home ownership, consumer-based economies will not recover until real estate prices stop falling, level out and begin climbing. At the moment, they are still falling and many pundits forecast there will be no real estate recovery until 2013-14 at the earliest. The U. S. and the UK are in the worst shape. Spain is not far behind. Canada’s housing bubble is not as great but it’s about a year behind the U.S. and there are still signs if insipient stupidity in Canada. Recently a tiny bungalow in Kitsilano, a suburb of Vancouver sold for $1.14 million, more than $180,000 over the asking price. A real estate spokesperson said it was a result of low supply and it may be several months yet before such demand has been fulfilled which is a nice way of saying there are still a few idiots with more bucks than brains but they’re disappearing fast. Some people still haven’t remembered the old rule-of-thumb; a house price should be about three times gross annual income.   

            There are several factors contributing to the American real estate “Shadow Inventory” which is exacerbating a housing recovery.

1) Lenders are reluctant to foreclose even if the homeowner stopped making payments. At least the homeowner is paying taxes & heating/air conditioning bills, doing maintenance (which the lender would pay if they foreclosed), keeping squatters out and preventing the houses from getting trashed. This shadow inventory will put a damper on recovery as these units come on the market once prices begin to improve.

2) Foreclosed homes are not being listed for sale because the lender will have to declare the loss and, by putting the houses on the market, it will increase supply, further driving prices down and putting more mortgage-owners underwater in this never-ending downward spiral. This shadow inventory will also put a damper on recovery as these units come on the market once prices begin to improve.

3) Homeowners who are unwilling to sell at a loss are, instead, renting their homes. This shadow inventory will again put a damper on recovery as these units come on the market once prices begin to improve.

4) The largest generation in recent history, the Baby Boomers are retiring and many had hoped their home would supplement their pensions. Those with bum knees want to get out of multi-story homes. Others are looking to downsize to accommodate reduced incomes. Their homes will also put a damper on any nascent recovery. 

            Still, another problem is Alt-A and Option ARM (adjustable rate mortgages.) Although the sub-prime mortgage issue has diminished, we are at the beginning of several years of Alt–A and Option ARM and “interest only” mortgages resetting at monthly rates 100% to 200% higher than previous rates. These are mortgages take out by people who thought rising real estate prices would provide them with equity to pay the higher rates. Even Prime mortgages are beginning to suffer a high failure rate as a result of increased unemployment. And, on top of all this, commercial real estate loans are starting to go bad. 

            All this results in a TWIN downward spiral. First, as homeowners fall further behind in their mortgage payments this increases foreclosures, which puts more houses on the market, which lowers house prices, which puts more mortgages underwater, which makes it more difficult for mortgage-holders to renew which further increases foreclosures. And second, rising unemployment puts homeowners behind on their mortgage payments which increase foreclosures resulting in greater losses for lenders which go out of business which means more job losses and rising unemployment. Those forecasts for a real estate recovery in 2013-14 may be overly optimistic. This is how recessions become depressions.     

            Banks are also beyond the point of no return and in a death spiral. Laden with toxic derivatives and bad loans, they need to “raise capital ratios” to increase their loan loss provisions. However, to do that in the middle of a downturn would tighten lending standards further, reduce loans that are badly needed by businesses and drive the economy further into recession. This past August we see that Germany‘s economics ministry is drawing up a raft of special measures with the Bundesbank to head off a fresh financial crisis, fearing that a loan squeeze by struggling banks will set off a serious credit crunch early next year“The most difficult phase for financing is going to be in the first and second quarter of 2010,” said Hartmut Schauerte, the economic state secretary.” (9)

Unfortunately, his solution is to raise capital ratios which, as indicated above, would be the death knell for the economy. Another “Morton’s Fork” – caught between a rock and a hard place. The condition was reiterated Oct 15, “Germany‘s leading institutes have warned that the pace of economic recovery is “unsustainable” and that the country’s banks may face a fresh crisis over the next year as bad debts surface in earnest.” (10)  

            Another unintended consequence of this downturn affects young people. The young have twice the unemployment rate of the overall population which means they are not getting that first job or, if they do, they aren’t keeping it long enough to get much experience. Business Week magazine is calling it “The Lost Generation.” Furthermore, as the Boomers, the largest segment of the population delay retirement because their pension programs have taken a big hit during the downturn, this further reduces job openings for the young. This sets young people back not only in terms of experience and work habits but long term earning power suffers as well. This means reduced tax revenue and, in the U.S. with an unfunded pension plan, there will be fewer people supporting the Boomer’s government pensions which increases deficits and the need to raise taxes at the worst possible time.

            Still another well intentioned program that is backfiring on the Americans is raising minimum wages. This is similar to wage controls enacted during the last Great Depression. It only made things worse by pricing labor out of the market and increasing unemployment. We never learn.

            Not all Boomers are delaying retirement. Many still are retiring and many, because of job losses are retiring early. This creates another demographic time-bomb. Those retiring early will have reduced pensions and therefore will be spending less for the rest of their lives. And those who are retiring on full pensions will be gradually reducing their savings at a time when the weakened economy requires MORE savings for lending and investment purposes. The greatest portion of our population is retiring at precisely the worst possible time and will do so for the next 17 years which, not coincidentally, will probably be the length of this depression.

            Another conundrum is addressing government deficits in a weakening economy. There are several ways this can be done:

1) Export more

2) Reduce imports

3) Raise taxes

            This solution works if only one country is in a downturn. However, this is a global downturn affecting all countries to one degree or another. How can everyone export more if everyone is trying to import less? That’s impossible. And, raising taxes during a downturn makes the downturn worse at a time when lower taxes are needed to stimulate the economy. Every time we turn around, we run into another brick wall.

Beware Government Statistics

            What do you do with government statistics? Do you make decisions based on them? Do you know anyone who does? We’ve been reading and hearing about government statistics for so long we take it for granted that it’s a valid function of government. The most important statistics are feeble attempts to measure the immeasurable. Even if the numbers were correct, and most are not because they are fudged and misleading, what function do they serve? Of course, the ass media and economists take the numbers at face value.

            Put it this way, if they were useful and in demand, don’t you think some private enterprise would charge money to gather and calculate statistics? There would be a profit-based incentive to provide accurate and meaningful statistics at the lowest possible cost.

            So why does the government do it? Very simple; to control the information. As Steve Saville puts it, “government departments charged with calculating and reporting economic statistics are really just ministries of propaganda.” (11) 


            Things are not all negative. Remember, the Chinese symbol for crisis is the same for opportunity. Opportunities will arise but you’ll need cash to take advantage of them as well as patience. There are things you can do to mitigate the worst. Many of these things have already been discussed in previous articles; reduce debt, get out of debt, stay out of debt, reduce discretionary spending, build up savings, invest in “things” not financial paper, stockpile food, plant a garden, maintain your health, if you’re thinking of selling your house in Canada; do it now before the bubble bursts, if you’re thinking of buying; rent until house prices bottom out, etc. etc.

            The best investment you can make is in yourself and your loved ones. Financial investments can be lost or confiscated but no one can steal your knowledge, experience and attitude. Learn how to garden now before it becomes a necessity. Enroll your kids in cubs or scouts or camps where they learn to build a campfire, use a compass and get along with others. Take a course in wilderness survival or winter camping. Learn how to shoot a gun and hope the only target you ever use is paper. Everything you do adds to your knowledge. The more skills and knowledge you have, the greater is your ability to weather this downturn and capitalize on the opportunities that arise.

            Get to know your neighbours because they are a great security resource. You don’t have to love them but get to know them on a first name basis so that, as crime escalates, you can be each others’ eyes and ears. However, be careful what you tell them and what they learn about you. Keep your stockpile a secret, train your kids to be discrete and don’t tell anyone about your cash stash and gold & silver coins.

            Start shopping at local farmers markets to know where they are and who they are, what’s available, learn food preparation and support the local farmers and merchants because the “thousand mile salad” will become a thing of the past. California lettuce and Guatemala strawberries will soon be a thing of the past. Take the family berry picking. Learn the best spots, make a cheap family outing out of it but watch for bears. Wash berries thoroughly, freeze them or learn how to preserve them. Buy preserving equipment now before future demand makes them hard to find and drives up the price.

            One idea for food stockpiling is the attached photo.

I bought bookcases on sale (Canadian Tire $34.00 each) and lined the shelves with MacTac so cans don’t scratch the finish and use these for food storage. The 3rd bookcase is actually books that, if necessary, can be boxed to expand the food pantry. Such a “pantry” has several advantages to cramming everything into kitchen cupboards or stored in boxes. It’s easier to identify because of visibility, easy to see what needs to be replenished, easier to access without having to reach deep into a loaded cupboard and easier to rotate (newest at the back, oldest at the front.) If there’s no “best before” date, I mark them with the purchase date.

            Consider adopting the European “quality attitude” by buying good quality instead of cheap Chinese-made crap. It will last longer, work better, look better and in the long run be cheaper when you consider cost per year. Quality isn’t easy to find but it is available. Consider companies like Tilley Endurables, Egli’s in Dryden and other local merchants, quality catalog shopping and the internet. You won’t find much quality at the big box stores. Consider upgrading. Mark’s Work Wearhouse has durable Chinese made denim shirts. Unfortunately the Chinese can’t make good fasteners (zippers, clasps, hooks, buttons, etc.) so occasionally I re-sew denim shirt buttons using canvas thread or heavy-duty thread so they don’t fall off.

            I’m always amazed how many people don’t take care of their footwear. Never, ever wear the same shoes or boots two days in a row. They need time to dry out in order to last longer. Spring and Fall I shampoo my footwear, dry them and then spray them with silicone. It helps them repel water and dirt, makes them look like new and last longer. I still have the same Cougar boots I had when my Godson had his at age six and that’s 25 years ago. Forget fashion. Those boots have been in and out of fashion several times. I clean jackets and parkas at least once a year and more often if soiled. Sweat kills boots and clothes. Clean them regularly and they look better and last longer.

            Again, the most important thing you have is attitude. As times get tough you need to inure yourself against the negative attitude of others. Forget that “optimistic attitude” crap; that’s high-powered bullshit for dummies. Optimists are fools without experience. Pessimists are fools without hope. You need to be a realist to see things the way they really are, not the way you wish they were (learn to disregard government propaganda) because ultimately it’s reality you have to deal with.

            Also, you have a lot more influence on others than you realize and you’d be surprised how many people look up to you. Don’t let shit get you down because you drag others down with you. When someone says “How are you?” it’s not an invitation for a long list of miseries. I say “I’m great” regardless how crappy I may feel. All my life I listened to old people recite long litanies of medical ailments so, a long time ago, I vowed to keep my medical issues to myself. Don’t bore me with yours and I won’t bore you with mine. My dear, sweet mother often says, “You always say you’re great.” That’s right Mom; when I’m not, you’ll read about it in the obituaries and not have to worry about it beforehand. Tough love works both ways.

            Stay tuned. You ain’t seen nothin’ yet.


Oct. 18, 2009



            Why would banks rather park their money at central banks (like the Fed) rather than lend it to consumers and businesses? Because of fractional reserve banking, banks keep only a fraction of their deposits on hand, typically about 10% while simultaneously maintaining the illusion they can redeem all their deposits on demand. This is why “bank runs” can cause a bank, several banks or entire banking system to collapse; if more than 10% of depositors demand redemption, the banks need to call in loans to secure additional funds or quickly borrow money from  a central bank.

            Central banks are currently lending at close to zero cost (the interest rate is the “cost” of money.) Say central banks are lending to banks at 0.5% interest (i.e. half a percent.) Banks borrow this money and buy Treasury bonds that pay 2% for a net gain of 1.5%. Because banks are leveraged 10 to 1 because of fractional reserve banking, they can borrow 10 times the amount of money they have on deposit giving them a “return on equity” of 1.5% X 10 = 15%. Not only that, but this 15% annual profit is very low risk – Treasury bonds are Triple AAA rated which is a lot less risky than lending to individuals or businesses and making only 5% to 9% interest and putting up with the hassle of dealing with actual people.

            The government likes this arrangement because selling Treasury bonds is how the government finances its spending when it spends more than it receives in tax revenue. In the past, foreigners bought the government’s debt (Treasury bonds) but foreigners are becoming more reluctant to keep supporting government debt.

            Wait a minute, you say (or should say.) Isn’t this 15% coming out of thin air? Yes, but don’t worry about it. Future generations of taxpayers will have to pay for it. Aren’t they generous?

Your comments are WELCOME! Lengthy comments may time-out before you’re finished so consider doing them in a word doc first then copy and paste to “Leave a Reply” below.


(1) Reader’s comment – Steve Z. Apr. 13, 2009

(2) Bill Bonner, October 9, 2009

(3) Mish Shedlock from Larry Levins’s Nightly Newsletter & Trading Signals Aug 3, 2009

(4) Protectionism: Enemy of Recovery by Bryan Rich Money and Markets Sept 21, 2009

(5) Urban Survival, Oct 2, 2009

(6) Garth Turner – When Beavers Go Bad, Oct 8, 2009

(7) Garth Turner – Whoops, Oct 13, 2009

(8) Macleans “Why the recession is here to stay” Oct 2, 2009

(9) Ambrose Evans-Pritchard “Germany Braces for Second wave of Credit Crunch” Aug 18, 2009.

(10) Ambrose Evans-Pritchard “German Wise Men Fear Credit Crunch in 2010” Oct 15, 2009

(11) Speculative Investor, Interim Update 14th October 2009


Disclaimer: I’m not an investment advisor and these articles are for commentary only. For specific advice you should consult your own investment professional.

About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I'm back in stocks. I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
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