December 2008 Crash Update – Dec. 20, 2008

So much has happened lately that’s it’s difficult to know where to start. So much has happened lately that it’s difficult to keep up with all the news. There’s lots of news. Much of this will not be in the mainstream media. Some of it is but the media are not known for connecting the dots. My apologies for the length: I didn’t have time to make it shorter.

First, let’s review a bit of history. After all, if you don’t know where you’re coming from, how do you know where you’re going?

Experiment # 1 Central Banks. Once upon a time in a galaxy far away, supposedly wise men created Central Banks. In 1913 in the U.S. a cartel of private banks became the U.S. Federal Reserve Bank, America’s central bank. Other countries, including Canada, followed and created their own central banks. Aside from conspiracy theorist’s theories that central banks are a plot to create a one-world government and one-world currency, one of the official functions of central banks is to manage the money supply in order to a) smooth out the wild swings in the business cycle and, b) control inflation.

 

The U.S. dollar has lost about 98% of its purchasing power since 1913 due to inflation. Obviously, controlling inflation didn’t work very well, did it? And if you want to see how well they smoothed out the business cycle, look at the 200 year chart above. On the left of the center red line is the business cycle before the Federal Reserve. On the right is the business cycle after creating of the Fed.

Oops, that didn’t work either as you can see there have been much wilder swings (volatility) Post-Fed than Pre-Fed.

Some of the more active central banks like the U.S. Fed act as a lender of last resort during a financial crisis. The Fed has already expanded its balance sheet from about $800 billion to over $2 trillion and rising fast. It does this by buying toxic paper from troubled financial institutions in an attempt to get them lending again. However, the credit markets are still frozen, banks aren’t lending and businesses cannot raise capital. Obviously, that’s not working well either. It’s no wonder that some people are calling for the abolition of central banks!

Report Card for the Fed:  F = FAILURE

Experiment # 2Global fiat currency. After the creation of central banks, U.S. currency was still backed by gold. In 1971, Nixon removed the dollar from the gold standard. Other countries followed. Today, no country has gold-backed currency.

This is not the first time fiat currency has been tried by a nation (each ended in collapse) but, this is the first time in history that the entire globe is on fiat currency. Today, no currency in the world is based on any asset other than the full faith and credit of politicians and government bureaucrats. I hope you didn’t laugh when you read that because it’s not meant to be funny. We have no precedent for this. There is no play-book to cover this. This is an experiment and you are the guinea pig. Since all previous fiat currencies collapsed, is there any reason why all present fiat currencies cannot collapse?

More countries are talking about backing out of the U.S. dollar as a reserve currency. Iran and other oil producers are planning on using a basket of currencies rather than the U.S. dollar as a reserve currency. Russia is also talking about it. The last time someone actually tried to back out of the U.S. dollar was Saddam Hussein of Iraq. The U.S. invaded, captured him, executed him and stole his oil fields. Now, the U.S. military is spread too thin and there are too many countries for the U.S. to invade.

An uncomfortable number of analysts are expecting a major currency collapse perhaps as early as 2009. The outcome of such an event is unknown because we are in uncharted territory. We have no experience with global fiat currency when the reserve currency (the U.S. dollar) collapses. However, the creation of the unimaginable size of the derivative bubble may be instructive. The assumption was that derivatives virtually eliminated risk because risk was spread so wide. It turns out that was the Achilles’ heel. It spread risk so wide that the entire globe was now at risk when even a small number of derivatives defaulted thereby destroying confidence in all derivatives. We can but hope that the same principle doesn’t apply to global fiat currency. Time will tell and time is of the essence while a new Bretton Woods III agreement is created.

Bretton Woods was a monetary agreement created at the end of the second World War whereby signatory countries agreed to adopt monetary policies to maintain currency exchange rates within a narrow range of fixed values to facilitate commercial and financial relations between countries. Bretton Woods collapsed in 1971 when the U.S. suspended convertibility of its currency to gold and the U.S. dollar replaced gold as the world’s reserve currency and the world jumped on the fiat currency bandwagon. This became known as Bretton Woods II.

The recent G-20 meeting began discussions (although you’d never know it from the media) about the unwinding of the U.S. dollar and the careful preservation of central bank’s reserves. Bretton Woods II took two years of careful planning so Bretton Woods III will, no doubt, take just as long. This is assuming the U.S. dollar can hold together until then.

The U.S. dollar will lose its prominence and the American government will no longer be able to print money as it sees fit and steal purchasing power from the holders of its currency. The victims will then be just American citizens who, when importing goods, will need to exchange something of REAL value to the currency of the exporting country instead of using worthless paper. Thus, in future, there will be a big drop in American’s disposable income, higher prices for imported goods and a drop in their standard of living. (1)

Report Card for global fiat currencythis school’s not finished until next year. Stay tuned.

Experiment # 3 – Consumption-based economy. As I mentioned in a previous article, a country’s economy cannot be based on consumption without production and savings. The U.S. tried to do exactly that. Until the downturn, consumer spending accounted for 71% of the U.S. economy. Much manufacturing has been off-shored to emerging economies like China and India whose cheap goods have kept U.S. inflation in check. As well, U.S. savings are close to zero. 

The Economist magazine (2) credits American consumer spending for keeping recessions mild since the last major recession in 1981. Rising asset prices in stocks and housing provided collateral which enabled the U.S. consumer to borrow like there’s no tomorrow. This was aided by financial innovation and lax lending practices. All of this discouraged savings because houses were seen as Automatic Bank Machines and everyone assumed house prices would rise forever. Consumer and mortgage debt reached 127% of disposable income. Savings, which in 1985 were 9% have fallen close to zero.

Consumers were borrowing like there’s no tomorrow. Unfortunately, it’s now tomorrow. Stock prices and house prices are falling. Consumers’ credit cards are maxed out and they can no longer borrow against their home’s collateral. Consumption is falling. Businesses and corporations are laying-off workers. This further reduces spending causing more businesses to fail and further lay-offs. The number of unemployed grows larger every month. Last spring it was 150,000 a month. Last month it was 533,000 (recently revised to 573,000.) And, those are the government’s fudged numbers. Shadowstats.com estimates November’s job losses at over 800,000.

It’s going to get much worse. Businesses are struggling to raise capital in financial markets frozen by fear. Businesses raise capital by selling corporate bonds. As investors flee risky assets, businesses are paying ever higher interest rates on these bonds to attract investors. The interest rate spread between corporate bonds and Treasury bonds points to rapidly rising unemployment. According to Graham Turner, of consultancy GFC Economics, “current credit conditions are pointing to a doubling in the pace of layoffs, to more than a million workers a month, by spring… He added that the pace of layoffs already happening in the US ‘is indicative of panic’. During the 1970s oil crisis the panic was relatively short-lived, he says. ‘But the worry now is that this will just roll on and on.” He goes on to say, “What happens in the US tends to be repeated six to nine months later in Britain”.  I would add that what happens in the US tends to be repeated about a year later in Canada.

By the way, the latest job loss numbers in Canada are about 70,000 in November. Given the difference in population between the US and Canada, these job losses are proportionately the same. No, we are not escaping the contagion.

Report Card for consumption-based economy: F = FAILURE

Experiment # 4Globalization. Years ago, the United States embarked on the greatest experiment in history. It was a bold and radical change in traditional finance and economics. In the past, the economies of advanced countries consisted of economic elements such as agriculture, resource extraction, manufacturing, consumption, savings and finance. Factors like geography, geology, climate, culture and politics made every country unique insofar as no two countries had the same mix of elements. Unless onerous import tariffs impeded international trade, countries tended to specialize those elements that they were best suited to do. For instance, Switzerland made chocolate, watches, cuckoo clocks and secure banking. Not every country had an abundance of these economic elements. Japan, being a small island nation with a large population, had few resources to extract. It therefore imported resources and emphasized value-added manufacturing which was exported to help pay for their purchase of resources.

Globalization is a recent phenomenon. It too is new and uncharted territory. It allowed nations to radically de-emphasize certain economic elements and radically emphasize others. None was as bold as the United States which moved much of its manufacturing off-shore and, instead, emphasized consumption and finance. As explained briefly above, with Bretton Woods II, the U.S. dollar became the world’s “Reserve Currency.” That is, large amounts of U.S. dollars were held by other countries and institutions as their foreign exchange reserves to facilitate international trade. The reserve currency is also used to price commodities and gives the U.S. the benefit of borrowing money at a favorable rate.

Countries that emphasized manufacturing such as Japan and China had an incentive to hold large amounts of U.S. dollars in reserve and to lend money to the U.S. because the U.S. was their largest customer. By lending to your customer, you help them purchase your manufactured goods. This form of globalization worked well as long as some balance was maintained, the country hosting the reserve currency behaved responsibly and that the money supply was kept in check. The experiment that United States embarked upon was a radical emphasis on consumption and a radical de-emphasis on manufacturing and savings. Instead, the U.S. relied on other countries manufacturing to supply U.S. consumption and it borrowed other countries savings. 

As I mentioned above and in previous articles, the U.S. discovered that even in a world of globalization, you cannot have consumption without production and savings. For example, to compare U.S. production to consumption, consider that GM has less than a quarter million employees and Wal-Mart has over 2 million.

The U.S. did not behave responsibly and keep their money supply under control. Aided by loose monetary policy and easy credit, massive number of U.S. dollars flooded the world and created bubbles not only in the U.S. but worldwide. Unsustainable bubbles first formed in the dot.com stock market which crashed and burned 8 years ago. Since then, bubbles have formed in residential & commercial real estate, the U.S. dollar, global debt, stock markets, derivatives, commodity, Treasury bonds, etc. Those bubbles began to burst in July of 2007 and they created crises in mortgages, credit, bonds, insurance and, most devastating: in confidence.

The confidence crisis is deadly to modern finance because finance is the lifeblood of economies. When investors lose confidence, they sell their stocks and stock markets crash. When consumers lose confidence, they stop buying and companies go bankrupt and throw people out of work. When banks lose confidence, they stop lending to consumers, businesses and to each other thereby creating a credit freeze that today threatens global finance.

In addition to the deleveraging and sell off in the stock markets and commodities, and we’ve seen a drop of about $50 trillion so far, America has borrowed far more than it could hope to repay. The world is calling in its loans and the U.S. is broke. It’s printing money as fast as it can to throw at the financial system to try to get it to start lending and IT’S NOT WORKING. In addition to this, the U.S. has unfunded liabilities in pensions and Medicare in excess of $100 trillion. Compare this to U.S. GDP of $14 trillion and you can see that the U.S. government is as insolvent as its financial system.

Insolvency VS bankruptcy
           
What is insolvency? How is it different than bankruptcy? Insolvency is a condition whereby one owes more than one could ever pay back; bankruptcy is a legal procedure arising out of insolvency. Governments can become insolvent but they cannot declare bankruptcy. Instead they repudiate their debt or inflate their currency or do both. Russia melted down and reneged on its loans in 1998. Argentina is about to do it a second time. Those who made loans to these countries lost their money.

Most devastating though, is the effect on the citizens of those countries. Iceland is a recent example. It imports most of its food and finished goods. Within three days, grocery store shelves were bare and no one was willing to sell them any more. Faced with starvation, the Icelandic government scrambled to obtain new loans at onerous interest rates which will drastically lower their standard of living, a lot of people suddenly became Cod fishermen again and inflation is skyrocketing and wiping out savings and pensioners. Russia came very close to mass starvation and the standard of living of average people still hasn’t recovered. And, Argentina still hasn’t recovered from its last default, is about to do it again and is already facing a food shortage. And, Argentina is a rich agricultural nation!

As the U.S. undergoes its default, expect dramatic repercussions. For example, I expect the U.S. to give up Taiwan to China without China ever having to fire a shot. We will see more of this as the global U.S. presence diminishes.

Another downside of globalization is the disappearance of the North American middle class. Where once, high paying factory and mill jobs supported a prosperous middle class, the off-shoring of these jobs has devastated the middle class and only slightly lifted the standard of living of a small minority in emerging countries. There are no hard numbers to support this conclusion but, logically it makes sense; prices of off-shored products have decreased therefore total income of emerging countries has not matched the decrease of income in North America.

Report Card on globalization: F = FAILURE.

U.S. Impact on Canada

Why is the U.S. economic situation so important to Canada? So far, we’ve escaped the worst of the U.S. meltdown. The key is “so far.” Economically, Canada and the U.S. are joined at the hip. More than 75% of our exports go to the U.S. and the U.S. has drastically reduced buying. Canada is disproportionately exposed to the auto sector. The U.S. government bailout of the Detroit 3 automakers so they can continue building cars that few people want to buy, leaves the fate of Canada’s auto plants uncertain. American taxpayers are not going to bail out Canadian auto plants and even Canadian politicians and taxpayers are reluctant to do so. Furthermore, our slowdown began more than a year after the U.S. slowdown so we have a lot more catching up or should I say “catching down” to do.

Much of this article is about the U.S. economy. We need to know where America is going because it will have a dramatic effect on Canada. As well, because we are about a year behind, the events in the U.S. have great predictive value. Whatever happens in the U.S. eventually migrates to Canada. We can hopefully learn from their mistakes. By “we” I mean you and I. Governments, being incredibly stupid, do not learn from their mistakes. This is why they keep making the same mistakes over and over. The latest attempt by Canada’s 3 losing political parties to bully their way into power demonstrates without a doubt that craven politicians care more for themselves than they care for the well-being of the country that they are supposedly elected to serve. To call them whores would be an insult to prostitutes.

There is no doubt that things will get worse than they are now. It’s only a question of how much worse and no one can predict that. Even the now-upbeat Don Coxe says “there is light at the end of the tunnel; we just don’t know how long the tunnel is.” (3) Unemployment will increase. More commodity-related businesses will suffer and shut down. Canada is a resource based economy and the commodity bubble has burst. More mills, mines, oil wells and oil sand projects will shut down because the cost of operating exceeds the revenues from the falling price of commodities. On the plus side, Canada’s banks are capitalized better than their American counterparts, the Federal government went into the downturn with a surplus unlike the U.S. government and Canada’s housing bubble is not as large as the U.S. or the UK. Unlike the Great Depression, we have deposit insurance, unemployment insurance and welfare to cushion the blow. As I’ve said before, we are seeing a slow-motion economic train wreck: a “Stealth Depression.” Canada’s economy will suffer but it should escape the worst of the U.S. experience unless the 3 loser political parties hijack the government, scare away capital investment, spend us into insolvency and force the Conservative minority government to behave irresponsibly to hold onto power. Then, all bets are off.

Recessions are a natural and necessary part of the business cycle. It is the marketplace’s way of trying to get people to stop overspending and start saving money again because it is only through savings that investment can take place. Shear American government stupidity is trying to prevent a recession. Instead the U.S. government is creating trillions of dollars to throw at the finance system which drives foreign lenders further away and ultimately destroys the value of the U.S. dollar. As I’ve said before and will say again; the government is trying to increase liquidity but the problem is not liquidity, it is insolvency. The American financial system is broke, insolvent, bankrupt, broken beyond repair, finished, toast, kaput.  We’ll be luck if we don’t see a major U.S. currency crisis next year. No one is going to buy U.S. treasury bonds except at exorbitantly high interest rates and that will further increase the already ballooning U.S. deficit. It’s a downward spiral with no end in sight except a major U.S. default.

Recession VS Depression?

What is the difference between a recession and a depression? A recession is a period of reduced economic activity. Technically, it is two quarters of reduced Gross Domestic Product (GDP.) The U.S. has been in recession for a full year now (since December of 2007) although the government’s fudged numbers still don’t admit it. On the other hand, a depression is a prolonged recession. What we call the Great Depression occurred in the 1930’s. However, the real Great Depression occurred from 1873 to 1896 lasting 23 years. Today, you won’t hear too many people using the “D” word for our current economic problems. During the 1930’s people said they were living in “hard times.” It wasn’t until years later that it was called The Great Depression.

Since we are incapable of learning from history, few people know about the real Great Depression of the 1800’s. Nor have we learned from our mistakes during the 1930’s. Ben Bernanke thinks he learned and he’s applying the solutions that would have eased the pain of the 1930’s. Unfortunately, those solutions do not address today’s problems. According to Peter Morici: Roosevelt Administration stimulus packages—huge deficit spending—eased the pain but failed to end the Great Depression. Roosevelt’s policies did not put the U.S. economy on a sustainable growth path, because New Deal policies worsened structural problems that pulled the economy down in the first place. For example, the New Deal proliferated monopoly pricing, extended the life of undersized farms, raised structural savings rates, and created a system of home lending too dependent on federally sponsored banks… However, stimulus spending, alone, won’t fix what’s broke. It didn’t end the Great Depression. Japan has had a succession of stimulus spending over the last two decades and that has failed to restore its economic dynamism. (2) Not surprising, but Obama has already promised the U.S. a New Deal II that will be as big as the U.S. Interstate Highway project. We never learn.

Never having lived through one, most people have no idea what an economic depression is like. Our perceptions are shaped by the media which would have us believe everybody was waiting in soup kitchen lines when we weren’t standing on street corners selling pencils or riding the rails like hobos. I had one person tell me the world was black and white back then (no, dear, only the photography.) In fact, with an estimated unemployment rate of 25%, it meant that 75% of workers still had jobs albeit many people earned less and had a lower standard of living.

Pictures of dust storms are often used to evoke the Great Depression. In fact, the “dust bowl” aka “the dirty thirties” which lasted from 1930 to 1936 was caused by a combination of years of drought and decades of extensive farming without crop rotation that started long before the Depression. As well, government idiocy contributed greatly. President Roosevelt encouraged people to settle and farm dry, marginal farmland and the deep plowing of virgin topsoil contributed to the disastrous wind erosion. Another brainless New Deal program was planting trees as windbreaks. The trees died.

Another possibility: the U.S. Congress is starting to talk about confiscating people’s tax deferred retirement accounts, ostensibly to try to “protect them.” This is nothing more than a desperate government confiscating people’s money to shore up their own dwindling resources. Argentina is already in the process of doing this. It remains to be seen how the American public will react to this or if they can do anything about it other than being the target of supposedly non-lethal bullets from U.S. Army troops now training in the U.S. to use so-called nonlethal weapons designed to “subdue unruly or dangerous individuals and crowds.” This is another historic first (we’re getting a lot of historic firsts!) The 3rd Infantry Division’s 1st Brigade Combat Team is the first active unit to be given a dedicated assignment to Northern Command and “may be called upon to help with civil unrest and crowd control.” I hope the RCMP isn’t training them in the use of Tasers. 2009 will be a very unsettling year. That’s not a prediction; that’s a no-brainer.

Still another concern: world food shortages are becoming more common. Here is an excerpt from Chris Laird’s “Prudent Squirrel” newsletter: “I know for a fact that the US corn harvest is having some issue about not getting in dry enough this year, and there are propane shortages (for drying corn that is way wetter than usual from the rains this year) where they are trying to get the stuff in and stored before Winter… etc, it’s all rather chaotic. They literally cannot get the propane there because of big supply bottlenecks, which means that lots of corn is probably going to be left to rot. (4)

And, much of the US wheat crop is getting severely under fertilized because the fertilizer contracts were locked in at high prices this year, and so they are using 10% of normal fertilizer… and so on. Falling fuel prices have not worked into the next harvest costs as of yet. So we have one more harvest to go before any improvements happen, and in the mean time, they are all farming at a loss due to falling grain prices, etc.

And then, I find out that some of the biggest crop insurers are going bankrupt because of our severe winter here in the US, which means they are not paying off on crop losses, which means those farms are shutting down their production… into 09.

And, livestock producers are culling herds because the feed prices are still too high, and then add on to that the fact that people are reducing meat consumption and won’t tolerate higher prices, and so meat consumption/production is falling in chicken, pork and beef, whereas the meat producers were hoping they could get higher prices, but aren’t because the economy is imploding.”

One of the problems we have is getting our minds around the changes that are happening. On the one hand we tend to live in the past; our minds are backward-looking. It’s no surprise that we see things much more clearly in the rear-view mirror than we do looking forward to the future. On the other hand, if you pay attention to the financial world on TV, (Casey calls it CNBS) you’ll be so overwhelmed with conflicting data and brainless analysis (this is called “noise”) that you can’t make any sense of it. The media’s attention span is so short it is capable of no more than knee-jerk reactions and is utterly incapable of putting things into a larger perspective.

An easy prediction: (in case you haven’t already come to this conclusion.) Things will never be “normal” again. There is no going back. We will adopt frugality and austerity. There will be fewer nights out, less fine dining, more home-cooked meals, more gardening, more clothes-line drying, more public transit where it’s available, public libraries will be busier and we’ll do more car-pooling. You get the idea. Better get used to it. At the end of this article, I’ve compiled a list of Depression Survival Strategies collected from previous articles and I’ve added a lot of new ones.

Inflation / deflation?

There is a debate among analysts whether we are faced with deflation or hyper-inflation. Always beware of “either/or” debates. In this case it’s not one or the other; it will be both but at different times. Right now we are in a price deflation as asset and commodity prices fall. There is a massive amount of deleveraging (more detail later) but once the deleveraging is done, deflation will turn to hyper-inflation. Although governments globally have “injected” trillions of dollars into the financial system, until recently this was in the form of short-term loans that were continuously rolled over. So, these “trillions” was really a couple hundred billion continuously rolled over. In any case, it failed to solve the credit crunch because banks are still hoarding cash and still aren’t lending.

Deflation is dangerous (even stupid governments have figured this out) because of the consumer “mind-set” it creates. Why buy today if the price will be cheaper in future? That attitude creates a self-fulfilling prophecy. It reduces spending which slows the economy even more which reduces prices more which reinforces the deflationary mind-set. Consequently, the governments of America, Britain, Europe and China have all launched massive spending programs.

It’s only since September of 2008 that unimaginable amounts of cash have actually been “injected” in the form of asset purchases and monetization (more detail later) and this will likely result in massive inflation in future. Typically, it takes about 18 months for changes in the money supply to translate into a change in prices. Given the vast monetization that desperate governments have initiated (they always overdo it; they never learn) this will probably result in hyper-inflation. Gold bugs and those invested in precious metals may have to wait a while. On the other hand, it gives us a little more time to buy gold at prices that, in future, will seem ridiculously cheap.

The graph below, compliments of www.shadowstats.com shows the recent massive increase in the U.S. money supply. According to Milton Freidman and the Austrian school of economics, inflation is, and always will be, monetary. In other words, price inflation follows and is the result of monetary inflation. Stupid governments always get it wrong because they wait for price inflation to show up on the CPI index by which time inflation is inevitable and out of control.

      

Furthermore, most governments still adhere to Keynesian economics. The current financial and economic crisis is not due to a lack of money (liquidity) so pumping more money into the system won’t solve the problem. The Keynesian attitude is “when in doubt, inflate, and if that doesn’t work then inflate some more.” Never in history have Keynesian governments been able to grasp the 18 month delay between the change in money supply and price inflation. Since economies are weak, governments will hesitate to apply painful monetary brakes. As well, they’ll wait for inflation to show up on the CPI index before reacting, at which time it will be too late because by then inflation will accelerate into hyper-inflation due to the massive monetary increase as shown in the graph above. And, it’s not finished. Governments are going to keep the printing presses running until we look like Zimbabwe with it 250 million percent annual inflation.

It’s hard to believe our present problems have their roots in the John F. Kennedy era. The followers of Keynes convinced Kennedy he could lower unemployment without increasing inflation. However, inflation rose and it later became politically difficult for Nixon to bring it down and after him, Lyndon Johnson imposed price controls to no avail. Under Reagan, Fed Chairman Paul Volcker raised interest rates to painful levels and tamed inflation. The decline in interest rates and easy money that followed thanks to Fed Chairman Allan Greenspan, the Wizard of Bubbleland, created bubbles in stocks and real estate and fueled a “reach for yield” that encouraged financial institutions to create and sell dodgy financial instruments. Their undoing (deleveraging) is at the heart of the present crisis.  

Perhaps by the time we’ve recovered from the coming depression, governments will abandon the failed Keynesian economics and, instead, adopt the Austrian School of Economics but that will be more than a decade in the future. I’m not holding my breath. Abandoning Keynes will be painful for governments because Keynes advocates government meddling, manipulation, intervention and coercion whereas the Austrian School seeks to minimizes it. Governments are desperate to avoid minimizing or eliminating themselves and so they continue to be a scourge to society, individual liberty and civilization itself.

This is what Jay Taylor had to say recently:  “The sad part is no matter which of these forces prevail–deflation or inflation–the American people are going to be huge losers because poverty will be the outcome. The lesson that Austrians have always understood is that wealth is generated by producing real goods and services and by saving profits and earnings and reinvesting those profits. The big lie that we have all been taught by the self serving statists whose universities and for the most part private colleges have been bought and paid for by the elite–that wealth can be created by the opposite action–spending more than you earn–is about to be exposed for what it is.” (3) The world in general and Americans in particular are about to find out the hard way that there is no free lunch.  

For anyone interested in the Austrian School of Economics exemplified by Hayek, Mises, Rothbard and U.S. Republican Congressman, Ron Paul, you can sign up for daily newsletters from the Ludwig von Mises Institute at https://mises.org/donate.aspx . You’ll receive an education in economics far better than anything they teach in university and a lot cheaper, too.

I took economics in university. It baffled me. I kept trying to apply it to the real world. It didn’t work. Finally, someone told me that the economics taught in today’s universities cannot be understood by applying it to the real world. It can only be understood if you treat it like the rules of a game. For instance, the rules of chess have nothing to do with the real world. Granted, the ability to think several steps ahead is a useful skill but the rules themselves apply only to chess.

So what good is economic theory and principles that can’t be applied to the real world? If you think that’s just a rhetorical question, then look at the mess we’re in. And it’s getting worse, much worse. If you’ve been watching the financial news the past 3 months, you’ve seen U.S. Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson throw hundreds of billion dollars at a problem, realize it’s not working, then throw hundreds of billion at something else. They’re lurching from one crisis to another. Their economic training is worthless. They don’t know what they’re doing! They’re making it up as they go. If that doesn’t scare the shit out of you then, what will? A year and a half ago I feared for the economy. We’re still plunging and there’s still no bottom in sight. Now, I’m wondering if we’re going back to horse and buggies. If so, let’s hope there will still be some uneaten horses left.

Obama-rama:

There is an incredible amount of hope riding on the new U.S. President Barrack Obama. He will solve all the world’s problems and galvanize all the world’s countries to act in concert to slay the big bad economic-downturn dragon and the cavalry will ride to the rescue and we will all live happily ever after and spend, spend, spend.

What do you think is going to happen when everyone discovers he’s only a man, not a super-hero and he’s faced with a formidable task beyond the ability of anyone to resolve? What do you think is going to happen when everyone realizes that events are still out of control and spinning out of control faster every day? The word “accelerate” comes to mind. The downward spiral will accelerate as hopes are dashed, the public panics, investors bail out of the markets, consumers and businesses cut spending even further, foreign investment flees the U.S. and job lay-offs increase.

Let’s look at his recent appointments. Jim Sinclair points out two similarities about his appointments. First, many are from Harvard University. Second, they are intellectuals. Now, I have nothing against Harvard educated intellectuals. They have their place. However, their place is not in government. There is a saying, “In theory, there is no difference between theory and practice; In practice, there is.(5) At a time like this, we need leaders with practical experience, not eggheads.

Contrary to American mythology, one of the most disastrous U.S. Presidencies was John F. Kennedy. He was enshrined in mythology because he offered hope and visions of modern day Camelot and his life was cut short in a hail of gunfire barely half-way through his first term. Had he lived, the policies he put in place that were developed by intellectual egg-heads would have been a complete disasters. The disastrous Bay of Pigs invasion of Cuba is but one example. Of greater effect was his decision to fight in Vietnam without raising taxes based on advice from followers of Keynesian economics. This set the stage for accelerating inflation in the following decade which was finally cured with Reagan supporting Fed Chairman Paul Volker’s punishingly high interest rates and subsequent recession. The will power and discipline for such painful medicine is completely lacking in politicians nowadays. We shall all pay the price. Sad to say, the best thing Kennedy did for his image was to die young.

Heaven forbid we learn from our mistakes. Obama’s eggheads might be tolerable if times were good and we could afford a few disastrous programs. However, times are not good. Time, in fact is running out and we need painful medicine, not to solve our problems because at this point they are intractable but, to mitigate and soften the inevitable pain and to prepare for recovery.

With Obama, that’s not going to happen. He’s going to repeat all the mistakes made by Roosevelt during the Depression of the 1930’s. Obama has already announced massive public spending programs including an infrastructure rebuild program that would rival the U.S. Interstate project started in 1956. Actually, this is a positive thing amidst all the doom and gloom. There is no doubt that the infrastructure (roads, bridges, ports, etc.) need major repairs. However, this should have been an ongoing program to prevent tragedies like the collapse of the bridge in Minneapolis and politicians are to blame for starving such programs. However, if anyone thinks it will solve the economic crisis, history proves otherwise. In the 1930’s FDR’s New Deal programs provided only temporary relief before conditions deteriorated further. And, the 1956 U.S. Interstate project, according to popular mythology, was supposedly a boost to the economy. Not so. According to the first chart below, it boosted the stock market. According to the second chart it did nothing for unemployment and, in fact, increased unemployment two years later.

           

Oh, and by the way, Obama has pledged more and tighter regulations just as FDR did during the Great Depression. As a result of FDR’s anti-business administration, businessmen sat on their money and refused to invest, thus prolonging the Depression. Yes, let’s not learn from history.     

Jim Sinclair’s comments; “Therefore decisions made will be from the overeducated and lead to impractical programs and solutions following closely to a liberal manifesto… There is a tendency when you are surrounded by what boils down to the same university fraternity house to have formed a team of YES people…  When you reward non-production and punish production… the result is ALWAYS non-production.” (6)

Then too, how much impact will Obama’s $700 billion stimulus package have? He says it will create 2.5 million new jobs over 2 years. That sounds impressive until you look at how many jobs are being lost. Last month’s job losses were almost 600,000. Extrapolating from that and the latest interest rate spreads forecasts a million a month will be lost every month by this spring. In addition, low paying retail jobs, usually the employment of last resort for the newly unemployed are shedding massive numbers of jobs. Although retail accounts for 10% of U.S. jobs, because of consumer cut-backs, retail has accounted for almost a quarter of all jobs lost this past year. Over 6,000 stores, ranging in size from Mom & Pop to major department stores have closed this year and over 14,000 more are expected to close in 2009.

George bush is handing Obama a shit sandwich. Not only is Obama inheriting an economy that is melting down, a financial system that is insolvent and a frozen credit market but late last week Bush promised the Detroit auto-makers a $17 billion bailout to tide them over to the New Year when Obama takes over the presidency. Bush insists that the auto-makers develop a “comprehensive restructuring plan” (can you spell bullshit?) that does NOT involve any real change in the partnership between management, suppliers and the union and their extravagant health care benefits. It’ll be interesting to see how Obama eats a shit sandwich while juggling this ticking time-bomb.

Obama is a Democrat, in other words a liberal. He admits that he know nothing about economics. His advisers are followers of Keynesian economics which is what got us into this mess in the first place by creating enormous imbalances that are in the painful process of being liquidated. Liquidation of what the Austrian economists call “malinvestments” is precisely what is required right now. Instead, the Keynesians are calling it deflation and are doing everything they can to stop it. 

Time doesn’t permit a lengthy discussion of the differences between Keynesian monetary theory and the Austrian School. Suffice to say that the Keynesians believe that inflation won’t be a problem until the economy recovers and that today’s price deflation is the major problem. Both Milton Friedman and the Austrians believe that inflation is a monetary phenomenon, not a price issue. In other words, how can there be deflation when the money supply is exploding? The Austrians warn that Keynesian economics will give us both inflation and massive unemployment. It’s called “stagflation.” I call it a slow-motion economic train wreck; a Stealth Depression. Unfortunately, in future, you’ll see first-hand.

The authorities believe the inflation they’re creating will be balanced by deflation and the liquidation of assets. The authorities have get everything else wrong so far; are you going to bank on them being right on this?  

Beware SPIN:

The worse things get, the more bullshit you’ll see and hear. The government’s job is to prevent panic and try to pretend our way out of this mess. If you believe the spin then you will be handing your money over to those who create the spin. You’ll buy into a temporary stock market rally when the smart money is bailing out and you’ve just helped them do that. “Thank you very much, Sucker.”

For example, existing home sales numbers (as opposed to new home sales) can be misleading. A foreclosed home is reported as a sale back to the bank. When it’s resold, it is then again counted as a sale. As more homes are foreclosed and more foreclosed homes are sold, every one is counted twice which makes the numbers look good. It ignores the people who have lost their homes, it ignores the fall in house prices and it ignores the loss taken by the lender.

Also, any slight improvement is comparatively overstated. For example, a $100 stock drops to $10. This is a 90% loss. When that $10 stock doubles to $20 it is a 100% increase. A 100% increase seems bigger than a 90% loss. Tell that to the person whose $100 stock is now worth only $20.

Beware double counting. As Ed Steer reports in Casey’s Resource Plus of December 16, both the U.S. Treasury and the Federal Reserve claim as assets the gold held in Fort Knox. In the first place, this is double counting. In the second place, the government has resisted all demands for an independent audit of the gold supposedly stored there. There hasn’t been an audit since the 1950’s and it’s a well know fact that much of the gold has been sold or leased since then. Even if it’s there and isn’t gold plated bricks, how much of it actually still belongs to the U.S. government?

Rule of thumb: don’t believe anything the government tells you.   

We live in a “dumbed-down” world.

If you don’t believe that then reflect for a moment how little value we put on logic and rationality. They are almost dirty words; the realm of nerds, the anal, the un-cool. Dumb is now cool. Just watch TV and you’ll see. This is frightening because our modern dumbed-down generations are going to select our nursing homes and look after us, not to mention flying passenger aircraft, repairing hydro lines and generally keeping our complex civilization functioning.

 A recent article in Macleans magazine (7) reported on the “digital generation.” By the time today’s youngsters are 20, they will have been on the internet 20,000 hours and played 10,000 hours of video games. Learning specialists are seeing an increase in learning difficulties in about 50% of their cases among the digital generation in two areas.

The first problem area is the executive function of the brain; the thinking, problem-solving and task completion. Today’s digitized youngsters require constant stimulation, external guidance and, as a result, are capable of only “continuous partial attention” which looks much like attention-deficit disorder. Watch a student studying with the TV on, the iPod playing, talking on the cell phone while surfing the internet and you get the idea. They have difficulty staying task-oriented and, once interrupted, they have difficulty getting re-oriented to the task. Microsoft did a study on its young staff and found it took an average of 15 minutes to get task re-oriented after being interrupted by an email or Instant Message. If they had as many emails in a work day as I do, I don’t see how they’d ever get anything done.

Sure, they are computer-savvy and adept at finding and communicating (i.e. copying) information. However, information is not knowledge. They can’t synthesize (let alone spell it!) Synthesizing is connecting the dots; creating a larger picture out of diverse parts. Intelligence is more than regurgitating facts; it involves analysis, synthesis, hypothesis (interpretation and supposition,) classification (systematic categorization,) making inferences (the conclusion of a process,) summarizing and applying that knowledge. Most of them can’t even spell without Spell-Check nor do simple arithmetic without a calculator. Universities complain that about half their freshmen operate at a Grade 6 level.

The second problem area is non-verbal thinking skills. Today’s digital generation has very little. The major part of verbal communication is not words but non-verbal facial expression, body language and tone of voice. All of these are limited on the internet and video games. Greater cell phone use does include tone of voice albeit with very limited fidelity but again no body language or facial expression. Lack of non-verbal communication skills is hampering their ability to date, socialize, find new friends, maintain relationships and get along with co-workers.

Their need for constant praise and stimulation, their deep self-obsession, desire for self-actualization, neediness, naked ambition, impatience, lack of discipline and disrespect for authority (quite a list!) doesn’t sound too much different than the boomer generation except for one major difference. The boomers knew and were constantly told they had to adapt, to a large degree, to the prevailing culture. You showed up at the office in a business suit, not a tie-dyed shirt. In fact you showed up, period. You had to because the Post-War Baby Boom created a population explosion such that there was a lot of competition for scarce jobs which meant you had to FIFO (Fit In or F— Off.)

Today’s young generation, show up at work if they want. Or, not. If they have other matters to attend to, they don’t show up and think nothing of it. They expect to combine work and play. They get away with it because there are so few of them and so many jobs being vacated by the boomers who are retiring or dying in harness that they can pretty much write their own ticket. Employers are putting up with it because “good help is hard to find” and if you discipline them and hurt their little feelings they are apt to find a job elsewhere. So, the culture is bending over backwards, not to train them but to accommodate them and make them feel good by blowing icing-sugar up their little bung holes. “Dumbed-down” has now become the prevailing culture.

Our only hope of turning this around and, I admit the cure is worse than the disease, and, as perverse as it sounds, is a deep Depression that makes available jobs more scarce than the number of youngsters in which case they will have to compete with each other for jobs, show up more often, learn to fit in and submit to training. Otherwise, the future looks bleak. You’re on your own. If you don’t learn to be independent, then who are you going to depend on? When the hydro lines go down and the electricity goes off, they may (or not) show up to do the repairs while you sit in the dark freezing your ass off.

Dumbed-Down Leadership:

It is one thing for a dumbed-down hydro line-man. It’s altogether more dangerous when our political and economic leaders are also dumbed-down.

It is difficult for the average person to distinguish between correlation and causality. In fact, it’s not easy for the average person to distinguish between cause and effect. In colloquial, non-statistical terms, a correlation is simply a relationship between things that does not involve cause and effect. On the other hand, causality is the relationship between one thing (the cause) and another thing (the effect) which is the direct consequence of the first. If you cannot distinguish between a correlation and causality or identify cause and effect, how do you know you’re solving the problem and not the symptom? You cannot solve symptoms. You can identify a symptom, mask it, cover it up or ignore it but you cannot solve a symptom.

Suppose you have a disease (the cause) that gives you a headache (the effect or symptom.) You take an aspirin. It relieves your headache. It masks the symptom but has not cured the underlying disease. Until you address the cause (the disease) you will keep getting headaches (the symptom.) It’s amazing how many people don’t understand that.  

In the 6 Sigma DMAIC improvement process, the first step in solving a problem is defining it. The letter D in DMAIC = Define. The process works well if you follow the recipe step by step. If you skip the first step, you are likely not solving the problem but trying to solve a symptom. And, as I said, that simply doesn’t work.

One would hope our leaders are smart enough to know these things. They aren’t. They too, are dumbed-down. And, on their shoulders rest the fate of nations and western civilization itself. If you look at all the money the government has thrown at the financial crisis and the economic melt-down, you will see that they are trying to solve symptoms. They have not defined the problem. Therefore, they CANNOT SOLVE THE PROBLEM. How can you solve a problem if you don’t know what it is?

John Tamny, in a Forbes article (8) asks Just what is the purpose of the Troubled Asset Relief Program (TARP) and all this federal spending?” That’s a very good question because no one has yet defined the problem. We hear a lot about the symptoms: house prices are falling as is consumption, stocks, confidence, employment, etc. However, those aren’t the cause of our economic problems; they are symptoms and you cannot solve symptoms.

He says that markets rejoiced when the Fed announced they were purchasing mortgages (9) and thus putting a bottom on the housing market. Question: what does housing have to do with economic strength? Other than providing shelter (as does a rented apartment or a tent,) housing does not make our economy more efficient or more productive. Housing does not directly CAUSE economic growth. It is the consumptive EFFECT (result) of economic growth. For instance, the growth of Silicon Valley was NOT the result of a booming housing market. It was the result of innovative technology and finance. The booming housing market in Northern California was its EFFECT. In trying to save the housing market, the government is putting the cart before the horse because those brainless dimwits understand neither economics nor causality. What do you expect; they haven’t even defined the problem.

Another example is the assumption that unemployment is the result of a lack of demand for labour. In fact, unemployment is a failure of labour to lower their wages to the prevailing economic conditions. Try and tell that to a union that would rather lose jobs than lower their wages. Worse still, there is a move afoot to extend unemployment benefits. At first this seems charitable and appealing (especially if you’re recently unemployed.) In fact, the unintended consequence is that it extends the time that workers can withhold their labour from the economy which further reduces productivity and increases government spending and debt.

We have been brainwashed for so long by so much government stupidity that we have become used to it. It has become the norm. Tell a lie often enough and long enough and people start to believe it. I admit, Tamny’s analysis seems both harsh and mind-boggling. But wait, there’s more to boggle the mind. U.S. Treasury Secretary Paulson wants the banks to issue more credit cards to “strengthen” the consumer. Spend, spend, spend and go deeper into debt. Paulson assumes there is a lack of demand. There isn’t. There’s a lack of disposable income as a result of too much debt and not enough savings. Sad to say, Paulson doesn’t understand that demand is the flip side of supply. Production stimulates consumption. You can’t buy what’s not on the store shelf no matter how much you want it.

There is something perverse about the word “consumer.” I can understand economists using the word amongst themselves but, calling me a consumer is an insult. A market surveyor once called me a consumer. I told him I was a human being and if he called me a consumer again he could stick his survey up his ass. I don’t exist to consume. I consume in order to make my quality of life better but consumption is not my sole purpose in life. When our governments see us as consumers (I don’t like being called a “voter” either) then their priorities are all wrong. They’ve put the cart before the horse. The issue isn’t that they have insulted me (I can get over it) but they have demonstrated their stupidity and lack of understanding of cause & effect. 

Efforts to stimulate consumption are bass-ackwards. Anyone with a basic understanding of classical economics knows that tax cuts and savings aren’t intended to stimulate consumption but to encourage capital formation and investment which creates businesses which increases production and finally, the end result is consumption. The bozos in Washington don’t get it. They haven’t defined the problem. They’re trying to solve the symptom (the effect.) Give Canadian Prime Minister Stephen Harper credit for withholding the massive spending programs demanded by the “Coalition” of loser parties until we know if and where it is required and if it will do any good (it won’t; history proves it.) You cannot spend your way to prosperity unless you’re an idiot socialist who wants to spend other people’s money in the hopes of scamming some of it for yourself. The only difference between a socialist and a communist is the degree of disengagement from reality.

Communist radio interview

Which reminds me of a radio interview I once heard; the reporter was interviewing a self-avowed communist in Winnipeg. The conversation went like this. You can figure out for yourself who the reporter is and who the communist is:

            “So you believe in share and share alike?”

            “Yes, I do.”

            “So, if you had more than one house, you’d give them away and keep just one for yourself?”

            “Yes, I would.”

            “And, if you had more than one car, you’d give them away and keep just one for yourself?”

            “Yes, I would.”

            “And, if you had more than one shirt…”

            “Whoa, wait a minute…I’ve got more than one shirt.”

Given the speed at which the U.S. is nationalizing its banks, financial institutions, insurance companies and eventually the auto manufacturers, there seem to be an inordinate number of brain-dead socialists in the U.S. government. And, Obama hasn’t even been sworn in yet.

John Tamny raises a few more questions. If the banks’ problems are of their own making then how do we explain providing them with liquidity to keep doing the same things that degraded their balance sheets in the first place? And, is it coincidence that the stock prices of the TARP beneficiaries continue to underperform those financial institutions that refused the Federal hand-out? Some would say that the economy would be in worse shape without all this taxpayer money being thrown around. Yet, the evidence for this is conspicuous by it absence.

Stock markets are the canary in the coal mine. They are an excellent indicator and barometer of the future. North American stock markets are down more than 40% in spite of trillions of dollars having been spent to “stimulate” the economy. It’s obvious that investors don’t believe the Nanny State will solve the problems. With its endless spending, the U.S. government has bankrupted countless future generations who will be saddled with an enormous bill.

The Canadian government, until now has had annual surpluses. To assuage and prevent the treasonous “Coalition” of loser parties from bullying their way into power, Stephen Harper will embark on a similar pointless spending spree. If he doesn’t and the Coalition gains power, they’ll spend, spend, spend. In fact, yesterday, the Canadian Press reported that the Harper government plans to run a $30 billion deficit next year. Wheee! Here we go!  

The Stock Market:

For some perspective on the current stock market correction, Chart of the Day provides the graph below, illustrating all major stock market corrections (15% loss or greater) of the Dow Jones Industrial Index over the last 108 years. “You are here” may not look so bad but don’t forget, we haven’t hit bottom yet.

Each dot on the chart represents a major correction as measured by the Dow. For example, the bear market that began in 1973 lasted 481 trading days and ended after the Dow declined by 45%.

“Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.2 years. As it stands right now, the current stock market correction (October 2007 peak to most recent low which occurred yesterday) would measure slightly below average in duration but above average in magnitude,” according to the study.

“In fact, of the 26 major stock market correction since 1900, the current stock market correction currently ranks as the fourth largest in magnitude (only the corrections beginning in 1906, 1929, and 1937 were greater) and is the most severe stock market correction of the post-World War II era.” (10)

Matt Blackman says, “The rampant manipulation taking place by the Fed and government has thrown a major monkey-wrench into how markets should work, acting as effective bear repellent. We saw that in market action again this week, which is even more bullish for next week.” (11) Matt admits that the U.S. government is manipulating the stock markets but he sees it as a positive thing. I wish I could agree. The government is manipulating stock indexes by buying them when they’re crashing and thus driving up their price to “make them look good.”

Most investors know the government does this like clockwork Friday afternoons so investors can go home for the weekend feeling warm and fuzzy. But it begs the question, why is it necessary for the government to do this? Answer: because the stock market is worth less than it’s present value i.e. the Dow is worth about 6,000 not 8,000 (and that’s down from a bloated 14,000) and, since markets tend to over-correct, don’t be surprised to see it hit 4,000. However, try as we might, we cannot pretend our way to prosperity. That only works in fairy tales.

A rule of thumb for stock market P/E ratio (Price to Earnings) is 15. During “normal” times, a stock with a P/E of more than 15 is considered expensive, less than 15 is considered cheap. During the dot-com bubble in 2000 the P/E was 44 (way over-priced.) During the 1930’s the stock market’s P/E ratio was about 6. Today it is 13 (not far off a normal 15). As we sink further into depression, for the P/E to reach depression levels, the price of stocks would need to sink by about half from today’s levels.

Several analysts I’ve read suggest that since the there is so much government intervention in the markets that the only thing an investor could do is “think like the government” and try to anticipate the next government foolishness. Unfortunately, the government is like the great and powerful Wizard of Oz until one day Dorothy discovers he’s just a powerless little old man hiding behind a curtain, manipulating levers. People expect too much from governments. For the most part they are as powerless as the Wizard of Oz. Unfortunately, the governments greatest ability is in screwing things up which is how we got to where we are now. (12)

A scary thought for soon-to-be retirees who are considering switching their RRSP or 401(k) to annuities, Annuities? Nobody at CNBC or CNN dares ask this question. But what happens when people figure out that the companies selling these things don’t have anything remotely resembling enough underlying investments to meet even the minimum guaranteed returns?” (13)

 

Gold Backwardation:

You may hear about gold “backwardation”. Most markets, particularly commodity futures, usually are in “contango.” This means the future price is higher than today’s (spot) price. There are several reasons for this: uncertainty, increased risk, storage fees, etc. Backwardation is the opposite: today’s prices are higher than future prices. This is not unusual in currency markets when investors feel a currency is dropping in value. It is less common in commodity futures markets and has never happened in gold for any length of time.

Anyway, we seem to be breaking all kinds of records lately (not a good thing) so why not gold also? Gold has gone into backwardation for more than a week now. The current (spot) price is higher than future prices. Gold bugs think this heralds an imminent breakout in the price of gold and gold will be going sky-high.

Not to rain on anyone’s parade but, don’t bet the farm just yet. Granted gold is a good thing to buy. I recommend at most 25% of your assets in gold (if you can afford it.) This is much higher than the traditional “diversified” portfolio of 5%. Tradition, however, is now a thing of the past. Also, if you know what you’re doing then forget diversification because diversification is for investors who don’t know what they’re doing; it’s basically a scatter-gun approach. Aim at enough targets and some will hit. I recommend buying gold at $1,000 or less as a way to preserve wealth. Gold is not an investment. It is a form of preserving your cash from the ravages of inflation.

However, gold backwardation is a sign of great demand and low supply. Anyone who has gold is not selling it. Coin dealers are low on gold (and silver) and there’s more demand than the mints can (or are willing) to produce. It does not necessarily mean that precious metal prices are suddenly going to go to the moon, however. There are several reasons for that. First, funds are still trying to raise cash for client redemptions; they will sell as gold goes up in price which puts a cap on the price. Second, governments are manipulating the markets, especially gold on the commodity exchanges. They need to keep gold from increasing in price because gold is seen as a barometer of the health of paper currency. If gold shoots up in price, people will bail out of cash and cash equivalents (Treasury bonds, corporate bonds, savings, etc.) and pile into gold. Governments will do their best to prevent that. Eventually, as the economy and the financial system continue their inexorable deterioration, governments will lose control of the gold market and gold, like a coiled spring, will take off.

 Baltic Dry Index:

In case you think the world economy will recover soon, and that we are not actually going into a real depression, and only a recession, take a look at this chart of the Baltic Dry Index which tracks shipping containers and dry cargo bookings world-wide. The BDI is not subject to government fudging and manipulation and is therefore a significant leading economic indicator. This, too, is a barometer of our economic future.

In other words, world shipping has fallen off a cliff. In July, the BDI was over 11,000 and now it is less than 800. A Panamax size ship that once rented for $233,000 a day can’t get $2,300 today. That’s less than 1%. They can’t operate ships for so little revenue. Why has demand for shipping for shipping dropped so drastically? One word: China. See below.

China won’t save the world:

There was hope that the Chinese as well as India and other emerging economies had “decoupled” from the U.S. and that their economies would keep humming along and make up for the American downturn. However, it’s not happening. The American contagion has spread to the rest of the world. China’s economy is rapidly softening. Manufacturing has diminished, hundreds of thousands (yes, 100,000’s) of factories have closed. Global demand for Chinese products is plunging and goods are piling up in containers dock-side and aboard ships anchored in harbours.

The Chinese have slashed interest rates and announced a $600 billion bailout package to try to stimulate their economy (sound familiar?) In fact, they’ve had four interest rates cuts in 10 weeks. November 25, the World Bank predicted Chinese growth next year at 7.5%. This sounds healthy until you consider it was 16% two years ago, 12 % last year and 9% (and falling) this year. Furthermore, the Chinese need at least 7% just to keep even with inflation, millions of university graduates looking for jobs and hundreds of millions of peasants migrating to cities to look for work. The number of riots by disgruntled workers across southern and central China has increased to 70,000 this year, primarily by peasants complaining about local government corruption. In December, China’s growth next year is forecast as 6%. The forecasts keep falling. This is becoming dangerous for Chinese stability.

Michael Pettis, a professor at Beijing University “recalls the role played by the US in the 1920s, a parallel fraught with danger. In the 1930s the US foolishly tried to dump capacity abroad, but the furious reaction of trading partners caused the strategy to misfire.”  (14)

U.S. Treasury Secretary, Hank Paulson, a long-time friend of China has been warning the Chinese not to devalue their currency. Countries with current account deficits like the U.S. the UK and Turkey can devalue without global ill-effect but, China has the world’s largest trade surplus. The Professor says it is “very worrying that a pro-devalulation bloc seemed to be gaining the upper hand in the Communist Party. I really do believe that we are on the brink of a very ugly period for trade relations.” (14) The danger, as occurred during the Great Depression, is a global trade war which prolongs the downturn and delays recovery.

Despite the attention China received from the 2008 Olympics, which China stage-managed very carefully, the world knows little about its internal affairs. 70,000 riots a year sounds like a lot, yet 50,000 are about average. We think that the communist government has central control over the country yet, they have been unable to control the notoriously corrupt local governments. Most of the benefits of its economic expansion have accrued to only about 200 million Chinese, leaving more than a billion just as poor as they ever were.

The economic slowdown has already impacted 130 million rural Chinese who have moved to the cities for work, are now being laid off, living under bridges and trashing abandoned factories. The Chinese military owns many large enterprises so with that conflict of interest they are not above arresting protesters and shipping them off to slave labour camps to work these enterprises.

Another brewing problem is the lack of transparency of more than $1 trillion in bad bank loans from financing empty skyscrapers and bridges to nowhere. A severe recession in China bodes poorly for social stability. Revolutions are not uncommon in China and would jeopardize China’s ability to continue funding western governments rising debts.

The Real Great Depression of 1873 to 1896: 

Poor Ben Bernanke; he studied the wrong depression; the 1930’s. Poor us, because Ben Bernanke studied the wrong depression; he’s trying to apply the wrong medicine for the wrong depression which explains why nothing that he’s doing seems to work.

The 1930’s recession turned into a Great Depression for several reasons. Although it was triggered by the stock market crash of 1929, that alone was not enough to cause a major depression. Consumer over-indebtedness (like today) caused deflation (like today) but it was bad monetary policy that made a bad situation worse. Hoover increased interest rates (unlike today) and cut back on the money supply (unlike today) which reduced consumer lending, weakened manufacturing and reduced demand. There were large inventories (unlike today) and Germany’s inability to pay war reparations (unlike today) put to a strain on British gold reserves (unlike today.) This spread world-wide and was exacerbated by trade wars (unlike today.) Bernanke’s solution is to flood the system with money which is what Hoover should have done to prevent the depression of the early 1930’s before he was replaced by Roosevelt. However, as you can see, most of the factors that caused the depression of the 1930 are not the same as today.

The Great Depression of 1873 to 1896 was much more similar to what we are going through. It was caused by real estate over-indebtedness (just like today) with mortgages based on fancy new forms of financing (just like today) and the public participated in easy-credit asset speculation (just like today’s home mortgages.) When the real estate market crashed (like today) it took down banks (like today) and created a credit freeze (just like today.) Businesses were hit hard (like today) and unemployment increased (like today) and the downturn spread world-wide (like today.) Every one of these factors is similar to today’s.

Here are some of the main lessons to be learned from the Great Depression of 1873 to 1896 (that’s 23 years long by the way.) When Wall Street banks fall; the rubble lands on Main Street (the economy) for a very long time. The reconstruction of the banks (which Meredith Whitney expects will start late next year) caused widespread unemployment. Fundamentalist religions sprang up and immigrants were made scapegoats. Industries with substantial cash reserves survived and merged with weaker businesses (the Detroit 3 might become the Big 1 and with our luck it’ll be Ford.) The financial center of gravity shifted from central Europe to the United States. Today it’ll shift elsewhere, perhaps to China or India or Dubai or who knows? The July failure of the WTO talks that began in Doha 7 years ago suggests a new brand of protectionism may arise which will further delay economic recovery. Oh, and by the way, the Depression of 1873 to 1896 was much worse than the 1930’s. In the ‘30’s they pinched pennies; in the 1800’s they starved to death. And, our recession will be worse yet because our stupid governments are all FIGHTING THE WRONG DEPRESSION. (15)

Quantitative Easing:          

In the news, you’re going to hear more and more about “quantitative easing.” This is also known as turning on the money printing presses. It’s the last arrow in the Fed’s quiver before they resort to desperate measures. They tried loosening credit by reducing interest rates but they’re already close to zero. Didn’t work. Now they’re going to drop massive amounts of money “directly into non-financial business enterprises for the public to pick up and spend.” How dropping money into businesses will end up in the public’s hands is another desperate, hare-brained scheme that won’t work either. Stay tuned.

James Turk, of GoldMoney.com said, “When the realization hits home that the federal government has made too many promises and is over-committed, we will have reached the tipping point. In other words, the dollar has collapsed up to now largely because foreigners no longer want to hold dollars. When Americans start exiting the dollar too for safer alternatives, its collapse will accelerate. History shows that it takes about six months from the moment the tipping point is reached for a currency to totally collapse.”

Andrew Coyne of Macleans magazine said “It is a poignant irony that, just as Bob Rae is being urged on all sides to admit his past mistakes, everyone else is about to repeat them. Rae nearly bankrupted the Ontario economy in the last decade trying to spend his way out of a recession.”  All over the world, countries are preparing massive “fiscal stimulus” (printing presses on steroids) to spend their way out of the mess that they created in the first place. Coyne says, “Just add spending and stir.” (16) Except it doesn’t work. There is a brief temporary relief followed by much long-term pain. It didn’t work for Bob Rae in 1991, nor the Japanese in 1990, nor Finance Minister, Marc Lalonde in 1982, nor the French in the 1980’s, nor the British in the 1970’s, nor the Americans in the 1960’s, nor Roosevelt during the Great Depression of the 1930’s (it was the war that ended it.)

Current quantitative easing by the Fed may not be any more successful than it was in Japan since the global financial system is in a classic liquidity trap, as in the 1930s when bankers were defined as people who wanted to lend to those who didn’t need to borrow and didn’t want to lend to those who did. Today, banks don’t want to lend to anyone but to the U.S. Treasury.” There is no free lunch. Public sector spending crowds out private investment. Governments are not the economy; they are the leaches that suck the life-blood out of the economy. Governments have no money other than the taxes they rob you of which was created by private investment. If you think otherwise then you are a hopeless socialist and you’re wasting your time reading this.

I’ve said it before and I’ll keep saying it; insanity is doing the same thing over and over and expecting a different result. Our lords and masters are stupid, incompetent and INSANE. You are going to have to look after yourself because otherwise the government will kill you with kindness.   

Recent analyst’s summaries:

I won’t take any pot-shots at the perennial optimist, John Mauldin because John is finally coming around to realizing a) we’re in big trouble, and b) it’ll be a long time coming out of it. Instead, I’ll focus on BMO Global Financial Strategist, Don Coxe, whose weekly podcast has long been a source of information and insight. A couple of weeks ago, he let slip that he’s under a lot of pressure to be less negative (source not identified but I expect they sign his paycheck) and he’s been suspiciously upbeat ever since. His facts are still good but his analysis requires more careful reading between the lines.

Since stock markets tend to turn upwards before recessions end, they often signal the end of a recession. Coxe says, unless this is the longest recession since the Great Depression then we should be coming out of this recession soon. Sorry, Don, but this recession can’t be measured with the same ruler as other recessions. And, he gives no evidence, other than hope, that this isn’t the longest recession since the Depression. The average recession is 11.4 months. The U.S. is now officially into month 12 of this recession and the contraction, by even the most optimistic forecasts, is expected to continue through 2009. This is not turning into your average recession. Furthermore, because of government statistical fudging, you cannot analyze markets based in dollars. Gold holds its value far better than fiat currencies so looking at stock markets priced in gold really shows that stock markets have been declining since the dot-bomb bubble burst. Take a look at the chart below. It measures the Dow priced in gold and goes back 30 years. So far, the Dow has been declining since 2001.

He says that we don’t know what the real problems of the banking system are but we’ll find out as the recession goes on (Don, they’re insolvent. The entire U.S. financial system is broke. –Gerold.)  He goes on to say that we don’t really know if the global crisis can be solved but he is optimistic. He “ASSUMES” that we have some idea of the extent of the damage and the collective resources of the world’s central banks will offset the deception, deceit and stupidity of the banks. None of this leaves me with a warm and fuzzy feeling. Few analysts have their minds around the size of today’s problems and their mindsets are still geared to a regular recession or a bull market correction after which everything will be wonderful and we’ll all live happily ever after. The few whose outlook does embrace the immensity of the problem feel that if the government simply throws enough money at the problem, it’s bound to have some effect. (However, history tells us the effect will be temporary. Even the tiny minority of die-hard “doom and gloomers” are reluctant to see more than a year ahead.- Gerold)

He even blames the media. He says the bad news will continue because the media does not report good news. Again, there’s a twisted grain of truth to this. However, if there were no really BIG BAD news, the media would report the LITTLE bad news like Mrs. Grady’s cat stuck in the tree (sensationalized of course, details at 11:00.) And, the media is not reporting a cat stuck in a tree simply because there’s so much more big, bad news.

The last several of his podcasts were conspicuous by their forced positive spin. I’ve noticed the same transition to “up-beat” from many other media analysts. Obviously, word has come down from upon high that we need to try to pretend our way out of this recession.

Of interest, however is his prediction of the next bubble. First we had dot-bombs, then stocks, then housing and now the commodity bubble is bursting. He says Bernanke is engineering a bubble in Treasury bonds and cash. The next surprise will be Treasury bonds bursting, causing investors to flee back into stocks and corporate bonds which will lift the stock market and help capitalize corporations. Note to Ben Bernanke: I don’t think investors will have any money left by then. Furthermore, if Bernanke can engineer something like this then why couldn’t he have saved investment banks from bankruptcy, $20 trillion loss in the housing market, the $30 trillion stock market crash, more than a million jobs, etc. etc.

Don Coxe may well be right about Treasuries and cash bubbling and crashing but that has more to do with the incredible ineptitude of government lurching from one crisis to another. Remember the chart above showing the increased volatility after the creation of the Fed compared to before. As Peter Schiff says, the government is like a schoolboy blindly mixing ingredients from his chemistry set hoping to luck onto the right combination before he blows everything up. Not a few analysts have stated that if governments keep throwing money at the problem (over $8 trillion to date in the U.S.) some of it is bound to have an effect. Indeed it will; future inflation, indebted generations to come, more bubbles and the destruction of the dollar, to name a few.

Meredith Whitney is the Oppenheimer analyst who blew the whistle on the financial crisis as far back as 2006. She hasn’t been wrong yet. She says the next shoe to drop won’t be credit card defaults although that will happen eventually. She says credit card “lines will be pulled.” That’s insider talk for a reduction in credit available on credit cards. This is not yet priced into the markets. This will come at a time when people are losing their jobs and won’t be able to pay down existing credit card debt. Also, because there has been so much consolidation in U.S. banks, 5 large lenders control 2/3 of mortgages and most credit cards. When they “pull” lines, everyone will feel the pain. Furthermore, a new bill has been approved by regulatory agencies. It has good intentions of reducing unfair and deceptive lending practices by lengthening repayment times and reducing teaser rates i.e. starting with low rates and then jacking them up. However, the unintended consequences is it “reduces the lenders’ ability to re-price unsecured credit cards loans” (something I don’t understand) and will “pull” trillions more dollars from the credit card system. This will hurt consumers and reduce consumption further. 

She was asked what it would take for her to turn positive. When liquidity returns (not happening) and when banks start lending (also not happening.)Asked which bank will fail next (specifically, which one to sell) she said Wells Fargo.

Note: she did not mention it but “pulling lines” could likely result in “calling in” loans when the credit card companies get desperate. They could demand large lump payments from card-holders for part or all the outstanding amount. It’s legal. Read the fine print of a credit card agreement.

Looking ahead, she said, ”I think the overall economy will be worse than people expect. The biggest issue will be consumer spending. If 2008 was characterized by the market impacting the economy, then 2009 will be about the economy impacting the market. It’s already started.” (18) 

 

I’ve heard and read several analysts deny similarities to the Great Depression. Invariably, the authors conclude that our present situation is not as bad as the Great Depression. However, they omit the very important word: “YET.” The Great Depression is over. Our present Stealth Depression is not. It’s just beginning. Of course, some things are different. History is never exactly the same. “History does not repeat but it rhymes.” Minor details are “noise.” It’s the big picture that’s important.

Shiller, another analyst, provides some frightening comparisons to the Great Depression of the 1930’s (he too never studied the 1800’s):

1) Inflation of confidence – the bubbles that began from the late 1990’s and now correcting are similar to the bubbles formed during the 1920’s.

2) The standard deviation of daily stock market moves today was previously seen only during the stock market crash of 1987 and 1929.

3) Consumer confidence levels reached record lows in October. Although records go back only to 1969, economic observations suggest that confidence hasn’t been this low since the Depression.

4) Recently, interest rates went slightly negative as they did between 1938–41. A recent newspaper article explained how it happened. The same article was printed in 1938.

5) U.S. house price collapse is actually more dramatic than during the Depression (see, it is different!) and the UK is fast catching up. (Actually, the UK has a lot further to fall. Their housing buuble is proportionately larger than the U. S. and their banks are much more leveraged by an average of 30:1- some as high as 60:1 VS the U.S. banks10:1 – Gerold  )

Shiller’s perception is interesting. He said the problem is not economic but sociologic i.e. cultural. We are mired in “bubble-thinking.” Twenty years ago, a real estate agent told me that homes were no longer an investment but a “life-style choice.” Homes haven’t been an investment since our parent’s generation. If anything, home ownership is a form of “forced savings.” However, we still think of homes as investments. Because of bubble-thinking, price increases generate excitement which pushes prices higher which generates even more excitement. On the way up, cheap capital encourages more buying. On the way down, lower prices generate panic which encourages selling which generates lower prices which creates more panic. On the way down, capital is hard to get which encourages even more selling. Shiller says it may take more than a generation and a severe downturn to shake us out of this bubble-thinking.

Demographics:

Reading David K. Foot’s “Boom, Bust and Echo,” makes it plain that demographics is a much neglected and misunderstood subject. Demographics (and demography) cover population characteristics and its structure, processes and changing dynamics. Ignoring demographics can be disastrous. We have ignored demographics and the chickens are coming home to roost.

According to David Rosenberg, Merrill Lunch’s Chief Economist, the boomers have spoiled us in the post WW II era because the provided us with a “cushion of spending” that softened the impact of even significant recessions like 1972-74 and 1981-82. Had we looked at demographics, we’d see that the boomers now retiring are no longer the spending force they once were. Because boomers were spending, not saving, recessions were generally dominated by inventory cycles. However, except for housing, today’s recession is a balance-sheet recession. No industry in the world is as large as the U.S. household (consumer) with its $70 trillion balance sheet which is in the process of deleveraging in three ways: 1) debt repayment, 2) asset liquidation, and 3) rising personal savings.

Also, the U.S. at a 68% home-ownership rate is already the highest in the world. Together with a large population moving out of houses and into Nursing Homes, there is no pent-up demand to relieve the growing inventory of residential real estate. As well, we are seeing a secular trend change in attitude to big-ticket purchases of houses, cars and furniture. The big-ticket-buying boomers are retiring and the rest of the consumers are tapped out. Our fearless leaders still don’t have a grasp of demographics which is why the outdated economic and fiscal tools they are using aren’t working to resuscitate the economy.

The UK is also suffering from ignoring their demographics. According to Don Coxe, each generation is 60% of the size of its preceding generation. House prices were expected to keep rising but they now find that they cannot be bailed out by the next cycle, so house prices have topped out and their real estate bubble is bursting. Coxe says this is the first global recession caused by the demographic collapse of the First World. Personally, I’d be surprised if our fearless leaders can even spell demographics let alone know what it is and how it is affecting us.  

          

Broken financial system:

Trillions of dollars poured into the financial system has not solved the problem. The problem is the financial system is insolvent; broken beyond repair; a bottomless black hole that has sucked up all the money thrown at it and made it disappear. Meanwhile, the economy (of which the financial system is its lifeblood) is also spiraling downwards and there’s no bottom in sight. Remember, the crash started in July of 2007. The finance system is still frozen and economy is still unwinding and there’s still no bottom in sight. The downward spiral is now feeding on itself and, just as a black hole sucks up matter and grows in mass and strength to suck up even more matter, so the downward spiraling economy is feeding on itself. More layoffs means more consumer fear means less consumer spending means less business activity means more losses means more layoffs. Rinse. Repeat. In July, 2007 we were told things were “well contained” and would improve in 3 months. 3 months later we were told things would improve in 6 months. Then it was a year. Now, it’s 2010, maybe 2011. Do you notice a trend here?

September 15 of this year will go down in history as another historic first. That is the day the global financial system went into cardiac arrest. The contagion has spread from the U.S. to the rest of the globe. That is the day all confidence in our financial systems was irrevocably lost. That is the day financial markets froze all over the world. Funny how you probably didn’t hear about this but I guess there was more important celebrity news to report (another reason I threw my TV away exactly 20 years ago this month.) That was the day neither individuals nor companies could get even routine financing. This weakens the global economy and drives asset and commodity prices lower. And lower commodity prices means more mines and mills shut down, throwing more people out of work. The world is slowly shutting down.   

If you think only the U.S. is in trouble, then consider that there are foreign financial institutions whose balance sheets VS their country’s GDP are even larger than the U.S. financial institutions. Some of these balance sheets are larger than their country’s entire GDP. If U.S. financial institutions whose balance sheets are smaller in comparison are in major trouble, then how much deeper are the problems of the foreigners? The UK’s housing bubble as a percentage of their economy is greater than the U.S. and Southern Europe isn’t far behind. The International Monetary Fund isn’t big enough to bail out the whole world. Poor Obama! Everyone is hoping he can somehow galvanize all the world’s countries to come to the rescue. Pardon me, but haven’t they been trying to do just that for more than a year?

Home foreclosures:

Previous articles mentioned that sub-prime mortgages were just the tip of the iceberg. In the U.S. many Alt-A and Option ARM (adjustable rate) mortgages are now re-setting from their low “teaser” rates which, in many cases, mean almost double the monthly payments. Sub-prime was a $1 trillion problem but Alt-A and Option Arm combined are 1 ½ times as large. What 60 Minutes called a “predictable time-bomb” will play out over the next 3 to 5 years. Investment fund manager, Whitney Tilson, says there is still a lot of pain to come from the write-downs and losses that have yet to be recognized. Based on current default rates before re-sets, he estimates foreclosures will be between 50% and 70%.

Sean Egon, who Fortune Magazine called one of six Wall Street pros who predicted the fall of the financial giants, now predicts as many as 8 million Americans will lose their homes. The economy which depends on home ownership won’t turn around until this massive overhang of housing inventory has been worked through. Three years ago there were 2.2 million houses for sale. There are now 4.5 million and the number is expected to grow. The national Association of Realtors says the median price for homes plunged 11.3% from a year earlier, the larges decline yet on their records. Even after the residential meltdown, Egon expects the hits to the economy to continue. Commercial real estate has just started to crumble and yet to come are major defaults on credit cards, and auto, small business and student loans. He says we are barely half way through the residential mortgage mess and only in the 3rd inning for the rest of the asset bubbles that are bursting. And, I recall the derivative expert, Satyajit Das, saying that the game is destined for over-time.  

In fact, home foreclosures in the U.S. have reached a new stage. It’s no longer limited to sub-prime, Alt-A or Option ARM. It’s now homeowners with regular mortgages who HAVE been making mortgage payments up to now and have recently lost their jobs. There are 600,000 more foreclosures now than last year. 12 million households owe more than their homes are worth and one in 10 is either in foreclosure or in arrears more than 90 days.

See chart below. The trend is hard to miss. House prices must stop falling and then stabilize and then start rising before the economy BEGINS to START the long recovery process. Do you see any sign that the decline has even stopped let alone stabilized? Most analysts are calling for another 15% drop next year. No one is predicting beyond 2009. Based on past performance, analysts have consistently underestimated the decline so expect the downside to be deeper yet.

 
 

 

Confidence Crisis: 

In the article I wrote last year, one of the major crises I mentioned was the Confidence Crisis. It’s not just a matter of disbelieving the government’s fudged statistics. It’s bad enough that people have lost confidence that they’ll still have a job tomorrow and this, in part, contributes to a reduction in spending. Who’s going to buy a major ticket item if you think you won’t have a job for very long? What’s more worrisome is people are losing confidence in so many of the pillars of modern society; business, currency, banks, governments all rely on confidence and confidence is something that takes a long time to build, a short time to lose and a much longer time to regain. Ultimately, all our financial systems are a con game. They’re based on our confidence in pieces of paper or electronic digits. They’re based on faith that contracts will be fulfilled and faith that the courts will provide recourse if not fulfilled and faith that the free market will eliminate dumb companies and reward smart ones. Once the music stops, the game is over.

Stupidity also destroys confidence. Witness the auto executives flying to Washington, each in his own private corporate jet and then pleading for a bailout because they’re on the brink of catastrophic financial collapse. When questioned about the extravagance of private jets they defended it as non-negotiable corporate policy. Hey, stupid, when you go begging, make an exception. So, next time they rode in hybrids but if you think they learned anything then look at last month’s high-profile Paris car show. While everyone else was highlighting their next small, fuel-efficient hybrids and techno-marvels, Detroit auto-makers showed Hummers, Cadillac Escalades and a Camaro. Dumb, dumber and dumbest. No wonder the Big Three are in trouble! Even if they are bailed out they’re doomed by their own monumental stupidity.

Another winner of the “Dumb Award” is AIG – American Insurance Group. After begging for an $85 billion bailout, in September its sales force embarked on a $440,000 junket including $150,000 in food, $23,000 in spa charges and $7,000 for golf. They were taken to task by the media. Did they learn their lesson? Apparently, not because, after sucking another $37.8 billion from the taxpayers in November, AIG paid $86,000 for an English hunt and another lavish $343,000 seminar, completely unaware of the optics this showed the public. Is it any wonder the public is losing confidence in business and the politicians wasting the public’s taxes?

And, the runner-up for the award are the investment banks who, after being bailed out, were told not to spend it on bonuses. Oh, heavens no, they’re going to segregate the money so bonuses are paid out of income and the bailout will be used to save the companies. Say, what?? Goldman Sachs was the only one to reduce their bonuses to “only” $4.5 million. They must think the taxpayers are dumber than they are. These are not just cases of insensitivity. They are an embarrassing display of corporate incompetence. As Dan Gerstein of Gotham Ghostwriters said; “They show how out of touch much of America’s business elite is, not just from the lives of many of their customers and investors but also from the demands of running a public company under intense public scrutiny in a constantly wired, totally integrated, collapsing economy… The recent epidemic of stupidity in the marketplace is not happening in a vacuum. It’s coming on top of revelation after revelation of shortsightedness and recklessness—often fueled by extravagant, at times unimaginable, avarice.”

The chart below gives an eye-opening account of the amount of money that the U.S. government has thrown at the problem. Start from the bottom of the chart and work your way up. Every “injection” gets larger and larger. The notes say “… and the money extended might not be lost.” Historically, the best recovery has been 18%, the worst zero. The authorities tell us this is not inflationary. Don’t believe it. For a technical explanation, see Jim Sinclair’s analysis in the reference section at the end of this article. (5)

In late November, US three-month Treasury Bills (chart below) are trading at less than 1% (a minuscule 0.071%,) indicating that liquidity is still being hoarded and banks still aren’t lending and the government is still throwing good money after bad. In December, Treasury Bonds were at zero percent. Panic-driven fear has funds parking money in “safe” government paper on the assumption it’s better to earn zero than lose money. That’s conservative thinking but it deprives the financial system of the capital it needs to start lending again. The Fed’s objective is to drive rates as low as possible to entice investors into switching from zero yield money market funds into bank Certificates of Deposits, savings, etc. to help banks with much-needed re-capitalization. 

Another indicator worth keeping an eye on is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. A declining ratio indicates that investors are demanding a higher premium in yield for increased risk, showing waning confidence in the economy.

The 2009 year will be one of titanic shocks and changes to the global order of a scale perhaps not experienced in the past five centuries. This is why we should speak of the end of the American Century and its Dollar System. – F. William Engdahl, 26 November 2008

As Ty Andros said, “Never before in history has more been borrowed and printed to rescue global banking and corporate elites from their hubris and stupidity.” He goes on to say, “Almost no one is reporting the UNFOLDING debacle in pension funds and insurance companies that purchased assets at the top of the bubble from the same fraudsters at the banks and brokerages who are failing now, and then BORROWED money to enhance returns. Now they are TOAST. An anecdote has surfaced from a friend in the Virgin Islands. He lives in a well-to-do part of the islands. His neighbor has property insurance from Lloyd’s of London. The recent hurricane damaged his neighbor’s house to the tune of approximately $1,000,000. The adjuster visited the house and verified the claim and eligibility. He then mentioned that he would submit the claim, but that the homeowner may not be paid for up to three years as Lloyd’s is a little short of dough these days. What an off handed comment…$1,000,000 should be chicken feed for one of the biggest casualty and property insurers in the world. I guess they need to wait for the markets to recover.” (They may wait a long time. – Gerold)

 Regarding the $8 trillion the U.S. government is spending on the crisis, Andros says:

To put this amount of spending into perspective, let’s examine a recent missive from James Bianco at Bianco Research in Chicago:

“Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion

• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion

• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion

• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion

• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion

• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)

• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion

• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion

• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion (data courtesy of Bianco Research)

The only single American event in history that even comes close to matching the cost of the credit crisis is World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion

THESE NUMBERS DO NOT INCLUDE THE REST OF THE G7 and they are in as much or more trouble than the United States. The reality of this has just BEGUN to be felt. It has happened so fast that the ALTERED REALITY we will endure is only in its infancy!!! (3)

Deleveraging: This is a euphemism the media use to describe the banks ridding themselves of bad debt i.e. derivatives. And, “derivatives” is a word one doesn’t hear much anymore. I would venture to guess that word came down from upon high to the media to spin stories more positively. BMO Global Strategist, Don Coxe admitted to being under pressure. Watching videos of other analysts, you can see them straining to avoid anything negative and painfully stretching to put a positive spin on things. In any case, central banks are pouring vast amounts of money into the financial system to try to unfreeze frozen credit markets. It’s not working because commercial banks which once were required to maintain 10% on reserve are now aiming for 15% and higher. They are hoarding money, not lending it. They are increasing reserves to cover up their high levels of derivative debt. The world still has more than $1,000 trillion in toxic derivatives. The U.S. is the happy owner of about $600 trillion or 42 times GDP. How’s that for lots of leverage left to deleverage. Just because the media doesn’t talk about derivatives any more, doesn’t mean it’s gone bye-bye.

Law of Unintended Consequences

Central banks reduction of interest rates, designed to “stimulate the economy” (I’m starting to gag every time I hear that brainless phrase) also lowers savings interest rates. As mentioned above, savings, not consumption is needed for economic recovery. Consumers are deeply in debt and paying down that debt. Given a choice between paying down a high interest load or credit card, or saving in a near-zero saving account, consumers will pay down debt. Until high levels of debt are paid down there will not be a significant amount of savings. This will delay economic recovery.

Plunging oil prices are reducing gas prices at the pump; a boon to drivers. Note however, that pump prices are not being reduced the same proportion as the price of crude because pump prices did not increase by as much as crude; 700%.

The table below shows oil producing countries’ budgets. Lower gas prices increase demand and encourage more driving. Oil producers, however, are having difficulty reducing output in spite of OPEC’s attempts at reduction because they need increased volume to make up for plunging revenues in order to balance their budgets. An article in Dec. 16 Financial Times of London indicates that up to 50 million barrels of oil are being stored in supertankers.

Deutsche Bank and a private consulting firm called PFC, based in Washington, have determined that Venezuela needs the price of oil to average $97 a barrel to balance its accounts, while in 2000 that South American country only required the price to be $34. Look at this chart from Dennis Gartman. It shows the price of oil that various countries need to balance their budgets.

Russia will need $70 oil. These countries are going to need to produce and sell what they can, which is in conflict with the need to control production and move prices higher.

As well, oil exploration is reduced because there is a supply glut and uneconomic wells and fields are capped resulting in long-term supply reduction. There will be some unintended consequences:

  1) research and development of alternative energy sources is reduced.

  2) greater amount of limited oil supply is being used, hastening the day of “Peak Oil.”

  3) as oil demand increases during an economic recovery, the reduced supply (from capping and reduced exploration) will drive prices unnaturally high thus delaying economic recovery.  

Liquidity Trap:

In addition to traditional monetary tools (not working) countries have begun “quantitative easing” (more desperate measures) like setting up liquidity facilities, purchasing assets, guaranteeing deposits and loans as well as stimulus packages, all to prevent deflation from getting out of control and to compensate for the credit freeze. We now face the danger of a “liquidity trap” where interest rates are so low that investors park their assets in short term bank cash accounts, Treasury bonds or hoard cash instead of making long term investments. Not only does this make a recession more severe, it can backfire into more deflation. The unintended consequences are piling up.

This chart below from November, shows how much money the U.S. has thrown at the problem. The chart from a month ago is still below $5 trillion. It is now over $8, trillion and climbing. On the right you can see the alphabet soup of futile government programs. Wall Street has hijacked the U.S. government. Congress is still arguing over the last half of the $800 billion bailout which is chicken feed in comparison to the real number which is ten times larger.

Worse yet, is the specter of hyper-inflation. As mentioned above and in previous articles, governments wait for the CPI (Consumer Price Index) to start rising before they start raising interest rates to combat inflation. They will probably fail for two reasons:

1) Governments are economic Keynesians, whereas Milton and the Austrian School know that inflation is a monetary phenomenon not a reflection of price. By the time the CPI shows inflation, it’s already out of control

2) We will still be in dire economic straits and governments will be reluctant to apply painful interest rate hikes to combat inflation because interest rate hikes will hurt the economy. Again, by the time they do it, it’ll be too late and inflation will be out of control.

Monetization means Inflation:

This is how the U.S. will cure the problem. They are going to inflate their way out of debt by using depreciated money. Those stupid morons are so desperate they actually think they can control inflation (see above.) If they can’t control inflation, and so far they haven’t been able to control anything – because everything is rapidly spinning out of their control and they are lurching from one crisis to another – then the result is hyper-inflation. We are going to make Zimbabwe’s 250 million percent inflation, look like a walk in the park. It is no accident that hyper-inflation is usually preceded by deflation. The CPI tumbled 1.7% last month.

The chart below shows how deflation preceded hyper-inflation in Weimar Germany in the 1920’s. Notice how it accelerates. The first few dates are January or September of 1919 to 1923 but the bottom third of the chart with its accelerating inflation covers less than two months.   

John Train, 50 year veteran of Wall Street said, ’Keynes observed that pragmatic businessmen often could not imagine that they were the slaves of defunct economists, but ironically, never is this more true than today of Keynes himself. So we run a huge deficit to postpone the worst. That means inflation.” (19) 

Bailing out the Detroit 3:

Both Canada and the U.S. are considering bailing out the “Big 3” which aren’t so big anymore, so now they’re called the Detroit 3. For every auto assembly job at stake there are at least 7 supplier jobs on the line. The chart below paints a grim picture of the declining demand for autos.

Casey’s David Galland has this to say, “As is the case with so many of the economic variables rolling off the press these days, the severity of the collapse in auto sales is largely unprecedented—with a year-over-year fall-off of 47% at Chrysler in November alone. GM wasn’t far behind, with a drop of 41% in that same month. And even the previously unstoppable Toyota was stopped cold, with November sales off by 33% — this isn’t just a U.S. thing.  (20)

If the government continues to insist on propping up the automobile zombies, versus letting the fire of the free market quickly cleanse the ground, this could drag out for years. In other words, expect it to drag out for years.”

Originally, the Detroit 3 were asking the U.S. Government for a bailout of $25 billion. This increased to $34 billion. Now we’re told it could be between $75 and $125 billion. The auto industry is asking Ottawa for $25 billion for Canadian auto plants. Does anyone think it’ll stop there?

Once upon a time before the auto age there was the horse and buggy industry. There were also buggy whip suppliers, harness suppliers, wagon wheel suppliers, etc.  As demand for their products diminished, they either went out of business or began producing products for which there was a demand. Studebaker, a now defunct auto manufacturer, started life as a manufacturer of wagons and wheel-barrows before they began producing cutting-edge autos. They were rolled into American Motors which was rolled into Chrysler and now we think we should prop up Chrysler and the other two losers? Why? Studebaker and American Motors are gone but the economy survived. That’s called capitalism. Now we have socialism and we’re all going to pay the price for our bleeding-heart silliness for a very long time.

One of the reasons the Southern U.S. Republicans resist bailing out the Detroit 3 is wages. Non-Detroit auto workers in the southern states, who have jobs, make less then unemployed Detroit 3 auto workers and the unions for those who are working refuse to grant any wage concessions. Don Coxe calls this unsustainable. I think insanity might be a better description.   

Fed lowers rates to zero:

This is it, Boys and Girls! Another historic first! On Tuesday, December 16, the U.S Fed lowered its benchmark interest to near zero. Actually, it was a face-saving move to “anywhere from zero to 1/4 %.” The market is already at zero so the Fed is simply leading from behind.  This is what Japan did after its real estate bubble crashed in 1990. It didn’t help. And, that was at a time the global economy was booming whereas today the global economy is rapidly weakening. For 18 years, Japan’s economy was flat-lined. Today it too is going into the toilet.

The Globe and Mail called it the monetary policy equivalent of a “Hail Mary” pass – in football terms, an act of desperation. They quoted Ian Shepherdson of High Frequency Economics, “It is a reflection of an utterly desolate economic picture… This is a terrible chastening day.” John Silvia of Wachovia says “There is simply no easy out for the financial markets, the economy or policy makers… We may in fact witness a long period of easy monetary policy that may generate more problems down the road and yet provide little quick relief for the economy.” (21) Now, that is an understatement! Easy monetary policy got us into this mess by encouraging unqualified home ownership, maxed-out credit cards and massive bursting asset bubbles and our brainless and desperate leaders are going to solve this with more easy monetary policy. You can’t cure a disease by applying more of the disease and you can’t put out a fire by adding more fuel. However, that won’t stop them from trying. More insanity!

Glove and Mail’s Brian Milner states, “There is no evidence that such an important symbolic move would breathe life into the moribund credit markets and get banks to stop hoarding capital or worried businesses or consumers to start borrowing again.” He goes on to quote veteran Wall Street economist Ed Yardeni “Zero is almost a sign of complete and total failure.”(22) As expected, the markets reacted favorably to the rate cut. Give them couple days to realize what the message means. It means we are in even deeper trouble than the government is willing to admit. It means we are now in a Liquidity Trap as explained earlier. Gold will rise as investors flee the dollar into tangible assets and the stock market will continue its inexorable downhill slide.

Below is a link to a 1934 propaganda video extolling the virtues of inflation. That didn’t work either, so duh, let’s try it again. Don’t forget that the definition of insanity is doing the same thing over and over and expecting a different result. Our government leaders are not only desperate and incompetent, they are insane. Don’t expect the government to rescue you. You will have to look after yourself and your loved ones and protect them from the government’s insanity.

Several Tidbits:

“Millions of Americans,” says the U.S. Treasury secretary, were being denied credit or facing rising credit card rates, “making it more expensive for families to finance everyday purchases”. The notion that families should finance everyday purchases on credit suggests Washington still does NOT HAVE A CLUE about what brought us to this crisis in the first place.

Following is an interesting perspective – a reader’s comment to one of Ambrose Evans-Pritchard’s articles:  “The world will fail, the worldy ways will fail even in America. I’ll clue you in, when America went through the first depression we were strong folk, good work ethics and the like. Now the world is full of cry babies, weak minded, lazy pieces of crap. The world has very little backbone so do not look for your friends, neighbor or government to save you.”  

It’s getting worse very quickly…It’s like an avalanche in that it gains momentum. And that’s what we’re in right now, so it’s a real crisis. Arnold Schwarzenegger, Governor of California, December 1, 2008

“These are truly terrifying numbers. We have never seen anything as dramatic in German orders,” said strategists at Danske Bank. “[It] points not only to a rapidly deepening recession in Europe’s biggest economy, but also to a serious slump in the other Euroland countries… according to Adam Sieminski, of Deutsche Bank in Washington, He added, “We should be thankful for lower [oil] prices for a limited amount of time, [as] these are not sustainable levels. Capital expenditures are starting to be cut.”(23)

…(Bloomberg) “Mortgage delinquencies, foreclosures rise to record as one in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter.” Now Britain is considering direct cash infusions into their economy…money out of thin air. This is one day after the president of the ECB, Jean-Claude Trichet, said the same thing. Then this Bloomberg article from California…”California, the world’s eighth largest economy, may pay vendors with IOUs for only the second time since the Great Depression,” State Finance Director Mike Genest said.  (24)

Record number of Americans using food stamps: report
Wed Dec 3, 2008 6:22pm EST
By Roberta Rampton

WASHINGTON (Reuters) – Food stamps, the main U.S. anti-hunger program which helps the needy buy food, set a record in September as more than 31.5 million Americans used the program — up 17 percent from a year ago, according to government data.

The number of people using food stamps in September surpassed the previous peak of 29.85 million seen in November 2005 when victims of hurricanes Katrina, Rita and Wilma received emergency benefits, said Jean Daniel of the USDA’s Food and Nutrition Service.

Christmas Shoppers Publicly Warned
 The warning was given not to rob Christmas presents for their children in this difficult business condition.
 To assume that present day workers will quietly go to soup kitchens or live as hobos is madness.
 Soon stealing a loaf of bread for your family will be a capital crime. (25)

41 US States Face Bankruptcy In 2009
A recent study by The Center on Budget and Policy Priorities revealed that 41 states are facing severe budget shortfalls for 2009. Some states are worse off than others, with California ($31.7 billion) and Florida ($5.1 billion) leading the deficit pack. In all, the 41 states are currently facing a $71.9 billion budget shortfall. The key word here is “currently,” since a similar study was conducted by the same group only three months earlier, at which time “only” 29 states were predicted to face shortfalls of a “mere” $48 billion. As the recession deepens, so will the state’s budget problems, turning this “budget crisis” into a humanitarian disaster. Projections have already been made for a $200 billion shortfall by 2010.

These deficits have already transcended the computer screen of the statistician into real suffering of the most vulnerable sections of society. In dozens of states across the country, vital services are being cut to the elderly, disabled, the poor, and recently unemployed. Teachers are being cut from schools and tuitions are rising. Workers from state construction sites are being laid off, while social service employees suffer a similar fate. Non profits are closing their doors
. (26)

Daryl Robert Schoon calls itA DEPRESSION PLUS

We are about to experience a depression in extremis. Although similar to the Great Depression, what is about to happen has never happened before; we are about to experience something new, a depression in combination with a currency collapse, une Grande Dépression à la papier-monnaie.

A depression is now beginning. The last depression, i.e. the Great Depression, lasted approximately ten years. While it is not possible to know how long this depression will last, we do know this depression will be much worse than the 1930s. It will be a depression in extremis, a depression in combination with a currency collapse. (27)

Gold & silver coins:

If you don’t have them now, you probably won’t get them soon. Most banks and coin dealers are sold out and have about a 2 month backorder. Demand exceeds supply and the government mints have either stopped minting them or drastically reduced their production. Also, the premium you pay can be anywhere from 25% to 100% over the “spot” price as established by the commodity market. There are still some 100 oz. gold bars left but who can afford them?

As I have said repeatedly, paper money will become worthless. 2009 will be the year that shows the world that paper money isn’t worth the paper it’s printed on. Within a couple years, perhaps sooner we will have a currency crash. The only thing of value will be “things.” A paid-off mortgage is a good thing. One “thing” you can count on is precious metal coins or bars – gold and silver. If you have money that you want to preserve, gold and silver can’t be beat. Money in GIC’s (or U.S. CD’s) is safe ONLY until hyper-inflation kicks in and kills the value of paper money. If you have GIC’s coming due shortly, I would bail out of them and put in orders for gold and silver. You won’t make money in physical precious metal. You will preserve your money. You will lose money in GIC’s or anything based on paper currency as inflation kicks in.

U.S. Dollar Strength:

The USD has been unnaturally propped up by American investors fleeing overseas investments and repatriating their money (purchasing USD i.e. increased demand drives up its price) as well as a “flight to safety” to the world reserve currency because of the global credit crisis. The long term trend in the USD is still down. As repatriation nears its end and as investors realize the U.S. debt has reached unsustainable levels, the USD will turn around and head down. The USD will crash and it may happen soon.

In fact, Peter Brimelow of Market Watch reported that the Dow Theory Letter’s charts give two warnings. 1) the U.S. dollar index future shows a “head & shoulders” technical patter indicating the dollar is about to drop, and 2) the Dollar Index dropped below its support level and below it’s 50 day moving average. Both signify that the U.S. dollar is about to turn and continue its long decline.

He also added an eye-opening prediction about the fallout of the Bernard Madoff  fund scandal – what may be the largest financial scandal in history – up to $50 billion. He says, “On a subjective note, those who have not been living in the Manhattan financial swamp these many years may not appreciate what a big deal the Bernard Madoff scandal is. A lot of powerful and influential people are going to be very shaken. Not all of them need to keep their (remaining) assets in U.S. dollars. Some of them may opt to bail.” (28) In other words, this couldn’t have happened at a worse time. Many banks world-wide invested in this fund and will suffer further losses. Also, beleaguered Hedge Funds, even those who weren’t invested in Madoff’s fund, are bracing for more client withdrawals which means they’ll have to sell assets and stocks to raise cash which puts further downward pressure on assets and stock markets. Pundits had been hoping that, after year-end fund liquidation, available cash would drive up equities and juice up flailing stock markets. Madoff’s scandal has just been the kiss of death. 

End of the U.S. Empire:

As I’ve stated before, the 17th century belonged to Spain with its New World gold and silver mines. The 18th century belonged to Holland with its wind and water power, the 19th century belonged to Great Britain with its overseas colonies and the 20th century belonged to America with it economic and military might. It’s too soon to tell who the 21st century will belong to however, you’ll notice the trend in modern history is that no power lasts much longer than a century and once an empire is lost it’s never re-gained. Those countries don’t disappear. Spain, Holland and Great Britain still exist but they are a pale shadow of their former selves. The same is happening to the USA. America won’t disappear but, its economy and military power will be greatly diminished and the decline is never easy

America’s enemies will cause trouble as Uncle Sam weakens. Various interest groups within the U.S. will clash as everyone wants a bigger slice of a shrinking pie. Freedom and liberty, already diminished by the “war on terror” will suffer even more as America goes into lock-down. Canada has long relied on the U.S. military “umbrella” to defend it. More American overseas bases will be abandoned as American troops return home to circle the wagons. Canada had better learn to defend itself because the U.S. will not long be in a position to do so. In fact, as conditions deteriorate, America will be eyeing Canadian energy and fresh water and Canada may have to defend itself against an ally. Remember, nations have interests, not friends. 

            This is a video of the recent G-20 summit of world leaders. Notice how President Bush is ignored. A picture is worth a thousand words.  http://www.youtube.com/watch?v=k6Y_ncOVlDw

            On Monday, Dec 15. an Iraqi threw his shoes at Bush as he visited Iraq. Hitting someone with a shoe is a deep insult in that part of the world as it signifies the person is as low as the dirt beneath the sole of a shoe. The assailant also called Bush a dog which is an especially harsh insult among Arabs who consider dogs unclean. Such insults are significant not only because Bush represents America but they run counter to deeply held Iraqi traditions of hospitality toward a guest, even if he is an enemy.

Out of the Blue – January 20 – 21.

In a recent TV interview, Colin Powell let slip that some major event will happen January 20 or 21. He provided no details and I certainly have no idea what it could be. However, if something does happen it gives further credence to the theory that the U.S. government “allowed” 9-11 to happen to justify the invasion of Iraq just as they helped to engineer the Japanese bombing of Pearl Harbor to bring America into WW II. I’m not expecting an American military action because Bush will be out of power and Obama is a peace-loving Democrat. However, he may need to “prove” himself if there is a major attack on America and many are expecting America’s enemies to “test” Obama shortly after he gains office. That may be what Colin Powell is talking about.

Consequences of Denial:

For thousands of years, in our continuing quest to prove mankind’s superiority, philosophers have debated what separates mankind from the rest of the animal kingdom. Personally, I sometimes wonder what separates some people from vegetables but that’s another story.

Opposable thumbs were once thought to be uniquely human until chimps and apes were discovered. Social organization was thought to be uniquely human until we examined the life of bees. Then communication was put forward until we found animals quite capable of communicating amongst themselves. Then language was thought to differentiate humans until apes were taught hundreds of words and could express themselves in ASL – American Sign Language.

I am convinced that the only characteristic separating mankind from the rest of the animal kingdom is self-deception. A monkey might try to fool another monkey but no monkey would try to fool itself. Self-deception is a uniquely human trait. It may have had evolutionary benefits for the individual but for society, denial of obvious facts to support erroneous beliefs can be self-destructive. That can then hurt individuals who persist in denial (I use the words denial and self-deception interchangeably.)

It has been obvious to anyone with eyes to see that the U.S. has been in recession for a long time. I can understand government officials spinning it otherwise; it’s their job to try to lie and deceive, ostensibly to avoid panic; usually to cover their asses especially since they are largely to blame for getting us into this mess in the first place. The National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts recently announced that the U.S. has been in recession since December of 2007; a full year now. Still, many people are oblivious to the deteriorating economy unless they have been directly impacted by job loss or home foreclosure. I hope you aren’t one of them. Desperate actions by the government are merely delaying, not preventing, the slide. As indicated above, their actions will delay the recovery as well.

We are in for a long and painful Depression. Doug Casey calls it the Greater Depression. I call it a Stealth Depression because it is such a slow, downward grind. Its slowness makes it dangerous. Humans dislike rapid change but we are quite adept at accommodating, even ignoring, slow change. There has been a lot of bad news for 1 ½ years since the first stock market crash in recent times and it will continue. We run the risk of “gloom fatigue” where we become inured to the news and, instead of preparing ourselves, just let the doom & gloom wash over us.  

Don’t be fooled. Prepare yourself. If you wait too long, it’ll be too late to prepare. A member of the NBER committee that finally declared the U.S. in recession, and a professor at Harvard University, said in an interview. “We would be lucky to get done with it in the middle of next year.” No, you fool. We’ll be lucky to get done with it at the end of the next decade. You will hear a lot of such “positive” nonsense but, you need to put it into perspective. In one of his last podcasts, Don Coxe said we are nowhere near the depths of the Great Depression with its – 40% GDP because ours is only – 5% to – 6%. Of course, he omitted the word “yet.” He said we won’t go into a depression provided that dynamic economies (China & India) don’t go into recession. Stay tuned. And, anyone who thinks we’ll ever return to normal has just demonstrated his “superiority” to the rest of the animal kingdom. One thing is certain. Life will never be the same.

We’re in a perfect storm of bubbles and crises unlike anything I’ve seen in more than 30 years of investing and following the economy. Jim Sinclair said the same thing with more than 50 years experience. Never before in history have we had so many bubbles and crises (listed below) all at the same time. Do you think we can escape unscathed or that we’ll ever go back to anything even remotely resembling “normal?”

Bubbles – real estate, U.S. dollar, global debt, stock market and derivatives.

Crises – mortgage, credit, bond insurance, rogue weather, confidence and foreign wars.

Still to come – credit lines “pulled,” currency collapse, defaults in commercial real estate, credit cards, car loans, student loans, state, municipal & foreign governments and who knows what other Black Swan (unforeseeable) events.

I don’t know where it’s going to end. No one does. Nor do I know when it’s going to end. We’re still in freefall. The United States of America, the world’s most powerful nation, is committing economic suicide. The vultures are circling. America’s enemies won’t hesitate to kick Uncle Sam when he’s down. And, as Canadians, we live right next door. It’s been said that when the U.S. sneezes, we catch the flu. What happens to us when the U.S. catches pneumonia?

I’ve long enjoyed James Howard Kunstler’s way with words. Here’s his perspective: “The crucial element in the transformation underway will be emotion. The American experience for a few generations has produced an adult population with very childish instincts, increasingly worse each decade. For instance, the desperate power fantasies among the younger tattooed lumpenproles — those with next-to-zero real economic power — suggest a certain unappetizing playing-out of resource competition when the supply of Cheez Doodles and Pepsi starts to dwindle. But even the heretofore gainfully employed middle classes are pretty lost in fantasies at least of comfort and convenience. For years now, I have wondered how their sense of grievance and resentment will be expressed when the supermarket shelves run bare and the cardboard signs get taped over the local gas pump and the cable TV gets cut off for non-payment. You wonder, to put it bluntly, how far gone we really are. (29)

If you think all the above is over-the-top scaremongering, I assure you that I AM pulling a lot of my punches. Things aren’t as bad as I outlined, actually they’re worse and getting worse every day. I can barely keep up with the flood of bad news. I wasn’t kidding when I said that I hope there are still some horses left to eat. The only positive thing I can say is if we resort to eating horses then our American cousins will be cannibalizing each other. That’s small comfort.

There is an insider saying among stock brokers, “If I’m bearish and right, people will hate me. If I’m bearish and wrong, people will laugh at me. Either way I lose.” I don’t really care if anyone hates me. If you do, it’s because you haven’t listened and prepared in which case you have no one to blame but yourself. If it makes you feel better by shooting the messenger, go ahead, knock yourself out. I hope you’ll be able to laugh at me but the chances of that grow slimmer every day. For a real taste of doom and gloom, keep reading.

Below is from LiveLeak.com

Food Riots, Tax Rebellions By 2012…Trend forecaster, renowned for being accurate in the past, says

The man who predicted the 1987 stock market crash and the fall of the Soviet Union is now forecasting revolution in America, food riots and tax rebellions – all within four years, while cautioning that putting food on the table will be a more pressing concern than buying Christmas gifts by 2012.(30)            I Googled Celente for criticism. Most of his critics fall into three categories:

Gerald Celente, the CEO of Trends Research Institute, is renowned for his accuracy in predicting fut More..ure world and economic events, which will send a chill down your spine considering what he told Fox News this week.

Celente says that by 2012 America will become an undeveloped nation, that there will be a revolution marked by food riots, squatter rebellions, tax revolts and job marches, and that holidays will be more about obtaining food, not gifts.

“We’re going to see the end of the retail Christmas….we’re going to see a fundamental shift take place….putting food on the table is going to be more important that putting gifts under the Christmas tree,” said Celente, adding that the situation would be “worse than the great depression”.

“America’s going to go through a transition the likes of which no one is prepared for,” said Celente, noting that people’s refusal to acknowledge that America was even in a recession highlights how big a problem denial is in being ready for the true scale of the crisis.

Celente, who successfully predicted the 1997 Asian Currency Crisis, the subprime mortgage collapse and the massive devaluation of the U.S. dollar, told UPI in November last year that the following year would be known as “The Panic of 2008,” adding that “giants (would) tumble to their deaths,” which is exactly what we have witnessed with the collapse of Lehman Brothers, Bear Stearns and others. He also said that the dollar would eventually be devalued by as much as 90 per cent.

The consequence of what we have seen unfold this year would lead to a lowering in living standards, Celente predicted a year ago, which is also being borne out by plummeting retail sales figures.

The prospect of revolution was a concept echoed by a British Ministry of Defence report last year, which predicted that within 30 years, the growing gap between the super rich and the middle class, along with an urban underclass threatening social order would mean, “The world’s middle classes might unite, using access to knowledge, resources and skills to shape transnational processes in their own class interest,” and that, “The middle classes could become a revolutionary class.”

In a separate recent interview, Celente went further on the subject of revolution in America.

“There will be a revolution in this country,” he said. “It’s not going to come yet, but it’s going to come down the line and we’re going to see a third party and this was the catalyst for it: the takeover of Washington, D. C., in broad daylight by Wall Street in this bloodless coup. And it will happen as conditions continue to worsen.”

“The first thing to do is organize with tax revolts. That’s going to be the big one because people can’t afford to pay more school tax, property tax, any kind of tax. You’re going to start seeing those kinds of protests start to develop.”

“It’s going to be very bleak. Very sad. And there is going to be a lot of homeless, the likes of which we have never seen before. Tent cities are already sprouting up around the country and we’re going to see many more.”

“We’re going to start seeing huge areas of vacant real estate and squatters living in them as well. It’s going to be a picture the likes of which Americans are not going to be used to. It’s going to come as a shock and with it, there’s going to be a lot of crime. And the crime is going to be a lot worse than it was before because in the last 1929 Depression, people’s minds weren’t wrecked on all these modern drugs – over-the-counter drugs, or crystal meth or whatever it might be. So, you have a huge underclass of very desperate people with their minds chemically blown beyond anybody’s comprehension.”

1) There’s lots of things he didn’t predict like the iPod. (Yeah, so what’s your point? Celente does a 40,000 foot view and doesn’t claim to be omniscient. – Gerold)  

2) He’s a generalist which gives him wiggle room (See #1)   

3) He extrapolates from current trends so misses anything that doesn’t show up on data charts (Granted, but does that prove his “extrapolations” are wrong? He’s a trend spotter, not a prophet – Gerold)            

          He is a media darling, he is a self-promoting ham but he does have a good track record. My only criticism is you can extrapolate from a trend only so far into the future. But, as I said, he does have a good track record.

Below are Depression survival tools, items and ideas

If you haven’t started a food storage program, why not? It’s not just for economic turmoil. Emergency and health authorities recommend it. Having several weeks or, better, several months of food stored will see you through power-outages, storms, ice-storms, terrorist attacks, government stupidity, civil unrest, strikes, earthquakes and epidemics – we’re long overdue for another Spanish Flu epidemic, we barely escaped SARS and bird flu is just around the corner. It’s not coincidence that the 1918 Spanish flu epidemic that killed millions of people world-wide occurred at the end of World War One when food supplies were low and people were undernourished and susceptible to disease.

Get ready for the inevitable epidemic by buying face masks (disposable particulate respirators) now while they are available (they’ll be sold out in a crisis.) Plan on using them for 3 months until the health authorities give the “all clear.” Kept dry, one can last several days. Stay out of public as much as possible.

Grocery stores keep only about 3 days of food in inventory. A panic situation will empty store shelves in hours. You don’t need one of the expensive food storage program sold by survivalist stores. Dried beans, peas and other lentils last indefinitely as does salt and sugar. Pasta lasts a lot longer than its “best-before” date. Buy canned goods when they’re on sale. Note the best-before date (canned lasts 2 – 3 years) and rotate them to keep them fresh. There’s lots of info available on the internet.

I spent 11 years in logistics management. Most people have no clue how fragile our transportation and distribution networks are, how easy it is for them to be disrupted and how vulnerable they are to weather, infrastructure breakdown, terrorists and epidemics (who’s going to drive the trucks when everyone is ordered to stay home during a major outbreak?) Remember, there are only 3 days of groceries on store shelves for NORMAL times. In a panic, stores will be emptied in hours.

Few people have a lot of extra cash but, we have a window of opportunity coming up for reasonable prices to buy long term storage and survival items. Deflation over the next year or so will provide many bargains. Buy when items are on sale. There’ll also be yard sales, bankruptcy sales and bargain prices on eBay. Even if you don’t need them for survival reasons consider the money you’ll save buying items you will need in future. For example, if you use tin foil and it goes on sale, don’t buy one; buy 3 or 4 or more. They last indefinitely and you’ll use them eventually. The “opportunity cost” (putting the money in a savings account instead) is low because interest rates are near zero. The biggest problem is storage. By buying multiples of items on sale that you’ll use in future you’ll avoid inflated prices in future. And, if the situation gets really bad they’ll make good items for barter.

However, do NOT buy something just because it’s on sale. Buy ONLY what you know you’ll need. Buy only things that you will use. This is a time to reduce debt, not increase it. Learn restraint or circumstances will teach you the hard way.

Within a year or two, inflation will kick in with a vengeance. All the money that governments are throwing at intractable problems is guaranteed to produce inflation. The authorities admit it but things are so bad they need to “do something; anything” and they’ll worry about inflation later. They’ve screwed up everything else so don’t expect them to prevent inflation. Also, once the going-out-of-business sales are over and excess inventories are reduced then you can bet prices will start to rise.

Is there a bright side to any of this? Of course there is! In future, we’ll do less driving and more walking, biking and hiking and be healthier and live longer and feel better. We’ll have fewer gadgets but more time to get to know each other. Less affordable meat in the future means we’ll eat healthier too. More local farms and farmer’s markets will spring up so we’ll buy and eat local products which are fresher, tastier and healthier than the cardboard-tasting crap that’s picked before it’s ripe and shipped from half-way around the world (say goodbye to kiwi fruit, though.) We’ll see more cops walking the beat and getting to know the neighborhood instead of driving around in cruisers. There’ll be fewer dandelions because we’ll be picking them for salads and wine. Air travel, when we can afford it, will once again be a luxury with people wearing their finest instead of rubbing shoulders with the great unwashed in ball caps and dirty jeans. There’ll be fewer noisy jets and less traffic on the roads and fewer trucks on the highways as railroads handle more freight. Companies will institute 4 day work weeks (10 hours a day) which will save everyone 20% in fuel cost and give us 3 day weekends which we’ll need to hunt, fish and work the garden.

One of the most important things I learned taking several wilderness survival and winter survival courses is the 3 most important things to survival are 1) Attitude, 2) Attitude, 3) Attitude!  If you have the right attitude you can move mountains. The wrong attitude will kill you no matter how much money, food, weapons, ammo or gear you have. Life is short; we only go around once so let’s make the best of it.

Another bright side, Canada is a great country to be in especially in times of trouble. We’re a lot more stable, civilized and less violent than many countries. There will be tremendous bargains to be had. Stocks will be cheap, eBay will have more bargains, bankruptcies will create liquidations and thus, great buying opportunities (again, you’ll need cash to take advantage) and bicycling and gardening will become more than just a hobby. Life will be simpler, somewhat harder but a lot less stressful.

However, don’t think you have all the time in the world, either. Too many unexpected events could derail this timeline. There are many ticking time-bombs from civil unrest to Pakistan blowing up to China imploding and “black swan” events (Google it) that we haven’t even considered.

Below is a list of everyday items that are ideal for stockpiling. Most are durable and will last a long time. Some big ticket items may be too expensive (generators and portable toilets) and may not be needed unless you live in a rural area but most of these items are things you need anyway. Get them when they’re on sale. If you wait too long, you won’t get them at all.

100’s of Items to Disappear First & Fast

1. Generators (Good ones cost dearly. Gas storage, risky. Noisy…target of thieves; maintenance etc.)
2. Water Filters/Purifiers (Katadyne is the best but expensive at + $300. But, how long can you live without clean water?)
3. Portable Toilets
4. Seasoned Firewood. Wood takes about 6 – 12 months to become dried, for home uses.
5. Lamp Oil, Wicks, Lamps, (first choice: buy CLEAR oil. If scarce, stockpile ANY!)
6. Coleman Fuel. Impossible to stockpile too much.
7. Guns, Ammunition, Pepper Spray, Knives, Clubs, Bats & Slingshots.
8. Hand-can openers, & hand egg beaters, whisks.
9. Honey (lasts forever & is antiseptic)/Syrups/white, brown sugar
10. Brown rice, multi-grain & whole-wheat pasta, dried beans, peas, lentils – wheat
11. Vegetable Oil (for cooking) Without it food burns/must be boiled etc.,)
12. Charcoal, Lighter Fluid (Will become scarce suddenly)
13. Water Containers (Urgent Item to obtain.) Any size. Small, food-grade if for drinking.
16. Propane Cylinders (Urgent: Definite shortages will occur.)
17. Survival Guide Books.
18. Mantles: Aladdin, Coleman, etc. (Without this item, longer-term lighting is difficult.)
19. Baby Supplies: Diapers/formula. ointments/aspirin, etc.
20. Washboards, Mop Bucket w/wringer (for Laundry)
21. Cookstoves (Propane, Coleman & Kerosene)
22. Vitamins (watch best-before dates)
23. Propane Cylinder Handle-Holder (Urgent: Small canister use is dangerous without this item)
24. Feminine Hygiene/Haircare/Shampoo/ Men’s Hygiene, razor blades, nail clippers, etc.
25. Thermal underwear (Tops & Bottoms) wool socks
26. Bow saws, axes and hatchets, Wedges (also, honing oil)
27. Aluminum Foil regular & Heavy Duty (great cooking/barter item, lasts forever)
28. Gasoline Containers (Plastic & Metal)
29. Garbage Bags (impossible to have too many).
30. Toilet Paper, Kleenex, Paper Towels (Toilet paper is a MUST.)
31. Milk – Powdered (keep in freezer to extend life) & Condensed (shake liquid every 3 to 4 months)
32. Garden Seeds (Non-Hybrid) (A MUST)
33. Clothes pins/line/hangers (A MUST)
34. Coleman’s Pump Repair Kit
35. Canned sardines, herring, tuna fish  
36. Fire Extinguishers (or..large box of Baking Soda in every room)
37. First Aid kits, First Aid books
38. Batteries (all sizes…buy furthest-out for expiration dates & store in fridge to extend life)
39. Garlic, spices, vinegar, soy sauce, bay leaves, baking supplies, pepper-corns (last a long time) & grinder, bullion
40. Big Dogs (and plenty of dog food)
41. Flour, both all-propose white & whole-wheat (turn every 3 months), yeast & salt
42. Matches. (“Strike Anywhere” preferred.) Boxed, wooden matches will go first
43. Writing paper/pads/pencils, solar calculators
44. Insulated ice chests (good for keeping items from freezing or keep frozen in Wintertime.)
45. Workboots, belts, jeans & durable shirts & hats
46. Flashlights/LIGHTSTICKS & torches, “No. 76 Dietz” Lanterns
47. Journals, Diaries & Scrapbooks (jot down ideas, feelings, experience; Historic Times)
48. Garbage cans, plastic (great for storage, water, transporting – if with wheels)
49. Hand lotion, lip balm, Vaseline petroleum jelly (great for skin in dry cold winters)
50. Cast iron cookware (sturdy, efficient)
51. Fishing supplies/tools
52. Mosquito coils/repellent, sprays/creams
53. Duct tape, aluminum tape
54. Tarps/stakes/twine/nails/rope/spikes/copper & braided wire
55. Candles & holders
56. Bath soap, dish soap, laundry detergent, cleansers
57. Backpacks, Duffel Bags (both good for “bug-out bag” for travelling with small essentials)
58. Garden tools & supplies
59. Scissors, fabrics & sewing supplies
60. Canned Fruits, Veggies, Soups, stews, etc. (watch best-before dates)
61. Bleach (plain, NOT scented: 4 to 6% sodium hypochlorite)
62. Canning supplies, (Jars/lids/wax)
63. Knives & Sharpening tools: files, stones, steel
64. Bicycles…Tires/tubes/pumps/chains, etc
65. Sleeping Bags & blankets/pillows/mats
66. Carbon Monoxide Alarm (battery powered)
67. Board Games, Cards, Dice for when the power goes off
68. Rat poison, MOUSE PRUFE II, Roach Killer
69. Mousetraps, Ant traps & cockroach magnets
70. Paper plates/cups/utensils (stock up, they last forever)
71. Baby wipes, oils, waterless & antibacterial soap (saves a lot of water)
72. Rain gear, rubber boots, etc.
73. Shaving supplies (razors & creams, talc, after shave)
74. Hand pumps & siphons (for water and for fuels)
75. Reading material, books, novels, manuals
76. Reading glasses
77. Chocolate/Cocoa/Tang/Punch (water enhancers)
78. Vehicle tow rope, jumper cables, flares, 12 V trouble light (at least while gas for vehicles is available)
79. Woolen clothing, scarves/toques/mitts
80. Boy Scout Handbook, / also Leaders Catalog
81. Roll-on Window Insulation Kit 
82. Graham crackers, saltines, pretzels, Trail mix, Jerky
83. Popcorn, Peanut Butter, Nuts
84. Socks, Underwear, T-shirts, etc. (extras)
85. Lumber (all types)
86. Wagons & carts in summer, toboggans in winter (for transport)
87. Cots & Inflatable mattress’s
88. Gloves: Work/warming/gardening, etc.
89. Lantern Hangers
90. Screen Patches, glue, nails, screws,, nuts & bolts, twist-ties, tie wraps
91. Zip-Lock bags, various sizes (you can never have enough)
92. Coffee, Tea
93. Cigarettes (great for barter & bribes)
94. Wine/Liquors (for bribes, medicinal, etc,)
95. Paraffin wax
96. Glue, nails, nuts, bolts, screws, etc.
97. Chewing gum/hard candy
98. Atomizers (for cooling/bathing)
99. Hats & cotton neckerchiefs
100. Pellet (air) pistol/rifle & lots of pellets–teach yourself & kids marksmanship, also good for small game
101. Particle/surgical masks
102. Antiseptics, iodine, hydrogen peroxide, rubbing alcohol
103. Toothpaste, tooth brushes, floss, mouthwash, dental supplies
104. Onion flakes, cheese powder, bay leaves
105. Allergy medicine, asthma inhalers
106. Light bulbs, fluorescent bulbs, extension cords (while electricity lasts)
107. Deodorants, antiperspirants (no need to smell uncivilized)
108. hand-cranked lanterns, lights, radio
109. Ketchup, HP sauce, mustard
110. Tomato sauce (jars or cans) worth its weight in gold to spice up pasta & bland food
111. Sunscreen
112. Granola bars
113. Dried soup mix, gravy mix
114. Dirt shovels, snow shovels (pile snow on side of house for insulation)
115. Solar panel, accessories & battery charger
116. Learn how to use a gun safely and effectively. With luck this is a skill you may never have to use.
117. Don’t tell anyone about your stock pile. Neighbours can become enemies & governments prosecute “hoarders.”
118. Learn how to secure your home, motion detector lights, identify and bar windows hidden from sight
119. Don’t antagonize friends, relatives, neighbours. Your life may depend on them & you may have to live with them.
117. Attitude, attitude & attitude (the 3 most important survival traits)
118. Goats/chickens (funny)

From a Sarajevo War Survivor:

Experiencing horrible things that can happen in a war – death of parents and friends, hunger and malnutrition, endless freezing cold, fear, sniper attacks.

1. Stockpiling helps. but you never no how long trouble will last, so locate near renewable food sources.

2. Living near a well with a manual pump is like being in Eden.

3. After awhile, even gold can lose its luster. But there is no luxury in war quite like toilet paper. Its surplus value is greater than gold’s.

4. If you had to go without one utility, lose electricity – it’s the easiest to do without (if you’re in a very nice climate with no need for heat.)

5. Canned foods are awesome, especially if their contents are tasty without heating. One of the best things to stockpile is canned gravy – it makes a lot of the dry unappetizing things you find to eat in war somewhat edible. Only needs enough heat to “warm”, not to cook. It’s cheap too, especially if you buy it in bulk.

6. Bring some books – escapist ones like romance or mysteries become more valuable as the war continues. Sure, it’s great to have a lot of survival guides, but you’ll figure most of that out on your own anyway – trust me, you’ll have a lot of time on your hands.

7. The feeling that you’re human can fade pretty fast. I can’t tell you how many people I knew who would have traded a much needed meal for just a little bit of toothpaste, rouge, soap or cologne. Not much point in fighting if you have to lose your humanity. These things are morale-builders like nothing else.

8. Slow burning candles and matches, matches, matches

Tips for long term meat freezing

Fresh meat is cheap right now because high feed cost is forcing producers to bring animals to market. Once inventory is depleted, meat prices will go up.

Freezer “burn” is caused by dehydration. In addition to freezing wrapped or bagged meat (make sure to remove as much air as possible to avoid freezer burn,) you can use a vacuum sealer for long term freezing or you can freeze in ice for extremely long periods of time. 

Water molecules migrate off solids into the air (that’s the “snow” that forms on frozen products in your freezer.) This is a process Physicists call sublimation just as water molecules migrate off liquids (evaporation.) Water molecules remain active until Absolute Zero (minus 273 C) but nobody’s freezer gets that cold. By freezing meat in ice, water molecules then migrate both ways – from the meat to the ice and vice versa, so there is no freezer burn unless the ice cracks and exposes the meat to air.

1. Meat frozen in a sufficient quantity of ice can last an indefinite period of time. Wooly Mammoths have been found encased in ice and, once thawed, are still edible and quite tasty, too. They’re more than 10,000 years old.

2. If you’re going to trim fat before cooking then trim it before freezing. It uses less energy (less water to freeze) and takes up less space.

3. Rinse meat in cold clear water before freezing. This is mostly for sake of appearance but murky water/ice doesn’t look appetizing and meat is easier to see in clear ice if you’re trying to see size, thickness, boned, etc.

4. Use an appropriate size container. In the old days, people froze fish in waxed milk cartons filled with water. However, when they thawed, ALL the fish in the carton thawed. Remember to freeze an appropriate amount of meat. No sense putting 6 pieces of meat in one container for a family of four unless you plan on eating all 6 portions. Single people, or for greater flexibility in meal preparation, consider freezing single portions. Single portions freeze faster. For instance, Ziplock freezer bags or their equivalent (I swear by ‘em) come in small, medium and large. Do not use sandwich bags even if you double them because freezing will crack them. For individual servings I put small pork chops in small bags and steaks in medium size bags. The bags can be washed for re-use.

5. Squeeze air out of the bag before sealing. If meat is boned like pork loin chops, put the bone at the bottom of the bag to make it easier to squeeze air out of the top. I’ve never done this without spilling a lot of water and making a mess so I do it on a thick towel and ring out the towel as necessary.

6. If necessary fold the top and/or sides of the bag to avoid too much water. Better yet, use an appropriate size bag or container. Make sure to leave enough room so the meat doesn’t touch the sides of the bag. You want at least 1 CM or slightly more than ¼ inch of water/ice around the meat. If in doubt, a bit too much water is better than too little for long term storage.

7. Use only food-grade containers. Do not re-use #7 plastic containers (cottage cheese tubs, sour cream, etc.) If placing individual food-grade bags in a larger container, the larger container does not have to be food grade.

8. Consider putting small portion bags into one larger bag or container AFTER individual bags are frozen. Don’t forget to mark it.

9. If you freeze on top of small thin pieces of plywood or planks or cardboard, the bags will be flatter and will take up less room if you plan on placing them in larger containers. Also, less chance of meat contacting the side of the bag. Also, less chance of the water partially thawing the frozen food they are placed upon. If you do this, the top will freeze first, so after the meat is partially frozen (partly gelled), flip it over to speed up freezing the other side. This will help to “center” the meat in the container so all sides are surrounded by ice. It will also speed up the freezing process.

10. Smaller portions freeze faster. The faster the freeze – the tastier the food.

11. Before freezing, mark the container with both a description and date. Use the oldest first. It’s a good idea to keep a chart or list of what’s in your freezer to prevent the freezer becoming impenetrable. Marking prevents “mystery meat.”

12. Periodically check to ensure the ice has not cracked. Meat exposed to air will suffer freezer burn so use meat in cracked ice first.

Gerold
December 20, 2010

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

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.

References:

(1) TedBits® by Ty Andros – tedbits@TraderView.com Nov 14, 08

(2) “The end of the affair,” The Economist Nov 22, 2008

(3) Don Coxe, BMO Global Financial Strategist, Dec 12, 08

(4) Prudent Squirrel newsletter alert, Dec 8, 2008

(5) Chuck Reid  

(6) Jim Sinclair JSMineset.com 12-14-08

(7) “Dumbed Down” Macleans Nov 17, 2008

(8. Forbes.com – “What Exactly Is The Rescue Plan Achieving? Political Economy, Dec 8, 2008

(9) Not quite accurate. The Fed will buy mortgage-backed securities i.e. more toxic garbage from their cronies but the Fed emphasizes the word “mortgage” (motherhood & apple pie) and our dumbed-down, attention deficit-challenged reporters stop thinking after the first word. No matter. For the purpose of this argument let us pretend they are actually buying mortgages. In a round-about way they would if the Fed’s purchase of these dodgy financial instruments actually un-thawed the frozen credit markets, which they won’t.

(10) Prieur du Plessis’s international investment blog Investment Postcards from Cape Town 11-22-08

(11) Matt Blackman, Trading System Guru TSG Stock Market Letter 12-14-08

(12) The government got us into this mess in several ways. By leaving interest rates too low for too long, it created “easy money” which encouraged too much borrowing and the creation of bubbles. By pressuring mortgage companies to help more Americans achieve the “American Dream” of owning a home through lax lending practices that put people into mortgages that they couldn’t afford. And so on and so forth.

(13) MoneyMorning.com 11-29-08

(14) “1930s beggar-thy-neighbour fears as China devalues” by Ambrose Evans-Pritchard, International Business Editor, 04 Dec 2008

(15) “The Real Great Depression: The depression of 1929 is the wrong model for the current economic crisis” iTulip Newsletter by Scott Reynolds Nelson

(16) “Those who don’t learn from Bob Rae’s mistakes…” Macleans Dec 8 

(17) Semi-Annual U.S. Economic Outlook: Collapsing On Schedule (excerpted from the December 2008 edition of A. Gary Shilling’s INSIGHT)

(18) 8 really, really scary predictions

(19)  ibid..

(20)  David Galland, managing editor of Casey’s – Our Room 12-12-08

(21) Globe and Mail Dec 17, ‘08

(22) The risk of zero: What’s next? Globe and Mail Dec 4, ‘08

(23)  Casey Daily Resource Plus 12-06-08

(24) Ed Steer,  Casey Daily Resource Plus 12-06-08

(25) Jim Sinclair JSMineset.com 12-06-08

(26) ibid.

(27) Darryl Robert Schoon – The Bomb in the Christmas Stocking

(28) Peter Brimelow of Market Watch on Dec. 16, ‘08

(29) – James Howard Kunstler – Change you won’t believe, Clusterfuck Nation Dec 08

(30) Chris Laird – The Prudent Squirrel, Edition 157

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 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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