Brief Collapse Update – September 16, 2012

Reading time: 2,700 words, 6 to 11 minutes. Ok, not so brief.

There has been much in the news this week.

U.S. QE 3 – Unlimited Bond Purchasing

As I expected, Helicopter Ben Bernanke, U.S. Fed Chairman announced another round of Quantitative Easing (QE 3) just before the U.S. elections. What is QE? It’s a euphemism for debt monetization which is a fancy way of saying legalized counterfeiting or simply printing money out of thin air for the Amerikan government to buy its own bonds (debt) so it can continue spending money like drunken sailors. My apologies to drunken sailors! They, at least, stop spending when they run out of money.

The U.S. Federal Reserve is now the world’s largest holder of government debt surpassing even China which has stopped increasing its U.S. dollar reserves. Government buying their own debt is like you and I writing billion dollar IOU’s to each other and pretending we’re rich. Try to take that to the bank.

Bernanke announced, and the ass media dutifully repeated that this third round of QE was to help create jobs. If you believe that you might as well believe in Santa Claus and the Toronto Maple Leafs winning the next Stanley Cup. The first two QE’s plus TARP, TALF, Twist and a dozen other alphabet soup counterfeiting schemes plus Cash for Clunkers, bailouts of GM and Chrysler, billions to Solyndra, states and numerous others have failed to significantly reduce unemployment. This seems to have escaped the presstitutes feeble minds which are completely unburdened by economic comprehension.

Also overlooked by media morons is the duration of the latest Fed’s QE; it’s now UNLIMITED. The fed has ‘crossed the Rubicon’ and confirmed Jim Sinclair’s “QE forever” prediction.

Fed Chairman Bernanke must have a very low opinion of Amerikan’s intelligence. He’s predicting 3% growth for 2013 and 3.8% growth for 2014. Of course, they’ve been propagandizing the same thing for four years now and they’re still wrong (nor has the ass media caught on). Then he announces another round of QE because the U.S. economy isn’t performing well. Even a six year old can tell you it can’t be both.

The only jobs it will affect are the Federal Reserve’s own spawn; the bankster clowns. Correction, it will increase real unemployment (23%) as opposed to the fudged, officially manipulated numbers (7%) and continue to decimate what’s left of the middle class by further devaluing the U.S. currency thus making imports more expensive including, of course, oil and petroleum products which are conveniently omitted from the Consumer Price Index (CPI) calculation (2%) which regular readers know is also fabricated and bears no resemblance to reality (10%).

Bernanke also announced that ZIRP (Zero Interest Rate Policy) will continue into 2015. Years of ZIRP already and another three to go is screaming a massive failure to re-animate the economy. In the words of Michael Pento, “No central bank has ever been able to restore solvency or create prosperity for any country. All they have ever served to accomplish is to wipe out the currency and middle class.”

Hint: if you’re owned by a home, you have three more years to refinance and lock in a long term, low interest mortgage.

In case you missed it in my previous commentary, here’s something else the lame scream media won’t tell you. Economic activity as measured by GDP is not, I repeat NOT inflation adjusted. Consequently the tepid economic so-called growth of 2% means the U.S. economy is actually shrinking about 8% a year (2 minus 10 equals – 8).

America’s Under Water: Debt Equals 103 Percent of GDP

According to the U.S. Bureau of Economic Analysis the Federal debt is now 103% of GDP. According to Reinhart and Rogoff who studied eight centuries of financial folly, NO country ever recovered from debt exceeding 90% of GDP. In other words, Amerika is doomed.
Notice in the chart below, debt in red has started growing again while GDP has stalled. The difference in height is the increasing deficit. Adding more debt to existing debt does not cure debt.

The ever-optimistic John Mauldin says, “Ken Rogoff and Carmen Reinhart detail over 200 instances where nations had a credit crisis. One of their main points is that nations seem to be able to borrow money right up until what they call the “Bang Moment” happens, and the bond market no longer functions. Right up until that moment, proponents of ever more debt argue that “this time is different,” but it never is.”

Former Treasury official Lawrence Goodman, in the Wall Street Journal wrote, “Last year, the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.” There is no political will to solve the problem. Politicians are like deer caught in headlights. Not that there’s anything they can do now. We are long PAST the point-of-no-return.

The system WILL collapse. It’s only a matter of time and the longer it takes the greater the damage will be. The longer it takes, the more people will fall off unemployment roles, more people will lose their job skills and more youth will be denied entry into the labor market. The longer it takes the greater will be permanent structural damage.

German High Court Bankrupts Germany

On September 12, Germany’s High Court approved the European Stability Mechanism (ESM). Unless angry Germans revolt (not likely) this clears the way for parasitic peripheral countries to suck dry Europe’s leading economic powerhouse.

On the plan by Mario Draghi, head of the European Central Bank, Global Research says it, “replicates what he tried before that failed. Repackaging failure under a new name won’t turn out better than before. It’s old wine in new bottles gone rancid.” In other words, they too are trying to buy time. For what? Can anyone tell me? The answer to the problem is there is no answer.

Resource Exporters

Canada, which many believe is a bastion of fiscal prudence, has reached 88% debt to GDP ratio and desperately slashing federal jobs. Will it be enough? Probably not if tax revenues continue to fall. With China’s economy slowing and demand for resources dropping, resource exporters like Canada, Australia and Brazil are seeing base metal mines and other resource companies putting expansion projects on hold.

Employment is also beginning to suffer. According to Sept 13 MineWeb report, “Employment in Australia’s mining industry has fallen for the first time in three years, in what could be an early sign that a major engine of jobs growth is losing steam.”

Also, Amerika’s QE 3 is devaluing the U.S. dollar. This means Canadian exporters are being hit by the rapid rise in the loonie because of a sinking U.S. dollar. This means exports for Canada (as well as Australia and Brazil) will suffer which means even less tax revenue.

Most business leaders expect a significant slowdown next year. That means less employment, less tax revenue and more government spending for unemployment insurance and social services. There’s no good news here, folks other than feel-good U.S pre-election propaganda. Don’t swallow the bullshit.

Debt, Debt, and More Debt

Debt per se isn’t bad. If it’s used for investment or building infrastructure or maintenance, debt can be a good thing. Logistics is something I am keenly aware of having recently re-entered the world of logistics after several decades (I got tired of being an unsung hero). Going into debt by issuing bonds to build the interstate highway system or improving barge traffic on the Mississippi has a positive effect of reducing transportation cost and increasing economic growth.

Most people are unaware of the impact of logistics. Logistics costs vary in different parts of the world. For example, in Europe, 10% of every dollar spent covers logistics. In the U.S. it’s 12% and in Canada it’s 15%. Obviously distance plays a role. By reducing logistics costs by just 10% adds from 1% to 1 1/2 % to economic growth which is very significant when GDP is growing at only 2%. So going into debt to build this type of infrastructure makes sense.

However, we are not building infrastructure. In most cases infrastructure is crumbling due to lack of maintenance spending. Why? Because our spending is diverted to pay interest on unproductive debt which our governments have allowed to get out of control. And, this is at low interest rates. Imagine what will happen when bond investors start demanding higher interest rates to cover for increased risk of defaults. Government will spend even more on interest.

Look at Greece, Ireland, Spain and Italy. Their interest rates are climbing well above the typical 6% mark so more and more spending is diverted to cover growing interest payments. So their governments cut spending and increase taxes (austerity) which further weakens their economies in a never-ending death spiral. What’s happing to them will eventually happen world-wide because very few countries’ debts are less than 90% of GDP.

When the ass media propaganda machine mentions government debt, they usually restrict the numbers to Federal debt and conveniently overlook state/provincial debt, corporate debt and personal debt that’s been piling up for 60 years. They also overlook ‘unfunded liabilities’ such as social security. Despite talk of austerity all government debt worldwide is still increasing, not decreasing. Piling on more debt on top of defaulted debt will NOT solve the problem. Central bankers and government bureaucrats haven’t figured that out yet. And they won’t until we hit the wall. And then it’ll be too late.

John Mauldin mentions a character in Hemingway’s “The Sun Also Rises” who was asked how one goes bankrupt. “Two ways. Gradually, then suddenly.”

Student Loan Debt

I haven’t seen numbers elsewhere but in the U.S. student loan debt now exceeds one trillion dollars. Putting this into perspective, this exceeds total credit card debt. Putting the size of student loan debt into another perspective, U.S. GDP is $15 trillion. Still another perspective is even more frightening. Although personal debt has been deleveraging (paying off) since 2008 but mybudget360 reports that student load debt has increased $303 billion since 2008.

The chart below shows student loan debt (black line) rising above credit card debt (red line).

In another article mybudget360 reports that , “Unlike credit card debt however this debt cannot be discharged even through bankruptcy. Student loan debt is insidious because it really goes against the idea of risk taking in America. For example, if you overpay for a home you are welcome to walk away from the debt. This is why banks should be cautious and also responsible for some of the bad loans they make. The same applies to credit card debt. If you really can’t afford to make payments you can have it written off in bankruptcy. Yet with student loans this is not the case. They can and will garnish your wages, tax refunds, and even Social Security payments.”

The chart below bodes poorly for the younger generation. The fast rising blue line shows the rising cost of tuition, fees and room & board. The fuchsia line shows earning of graduates who were lucky enough to find full-time jobs. The actual youth unemployment rate is more than twice the rate for older workers.

We have a two tier younger generation; one saddled with un-payable, life-long student debt and unemployed youth unable to learn basic job skills.

War with Iran

We are inching closer to war with Iran. The berserk, war-crazed USrael Prime Minister may be insane but he’s not stupid. He realizes that Muslim-loving President Obama will put the brakes on USrael’s war-mongering after Obama wins re-election (yeah, I said it – more below) so an attack must happen before the November U.S. election.

Unconfirmed reports indicate Obama, using other countries’ back channels, promised the Iranians that the U.S. would not support an USrael unilateral attack. Iranians aren’t stupid enough to believe that.

An attack on Iran would be suicide for USrael. For one thing it could only be an air attack. Ground forces would fail given Iran’s geography. It’s surrounded by mountains with only a narrow, easily defended corridor in the southwest. The center of Iran is a salt marsh that would bog down armor and foot soldiers.

An air attack would have limited success. Even bunker-buster bombs are no match for uranium enrichment facilities buried deep underground. If tactical nukes are used, the retaliatory consequences would spell the end of USrael which has already fallen out of favor with the Obama administration. Petroleum and gasoline prices would go through the roof as would gold and silver (have you bought yet?). Skyrocketing oil prices would plunge the world into a deep depression.

Iranians are not dumb Arabs. They’re Persians, the sons of Babylon; once the world’s greatest, richest and most powerful empire. They’re modern and educated unlike poor, third-world Afghanistan where the U.S. and NATO had their asses handed to them. Iranians are shrewd; they invented realpolitik and asymmetrical warfare thousands of years ago while our ancestors painted themselves blue hiding in European caves.

Iran will play chess while the U.S. cowboys play checkers. Remember when Iran captured a bunch of British marines that strayed too far into Iranian territorial water? The U.S. and its NATO stooges were on the brink of all-out nuclear war. At the very last minute, Iran released the marines as a demonstration of peaceful intent making everyone else look like complete idiots.

Russia is allied with Iran. Russia has satellite surveillance. Iran won’t be blind-sided. They’re prepared and they’ll see an attack coming and play their opponents like a fiddle. Yes, they’ll suffer massive casualties but they’ll inflict far worse on a world teetering on the brink of financial collapse. No one will win. Everyone will lose.

By the way, Canadian embassy personnel cleared out of Iran last week. Obviously, they’ve had warning. That’s thanks for protecting U.S. embassy people during the 1979 Iranian revolution.

Do you really think the murder of the U.S. Ambassador in Libya had anything to do with a sub-par, poorly acted film on Mohammed that failed to sell a single ticket in the one theatre it was shown and hardly any views on YouTube? The entire Mideast explodes simultaneously with riots and attacks on other nations’ embassies. This is an Iranian show of force to let the world know what they’re capable of and what’s in store for the future. You ain’t seen nothin’ yet!

Solution? Prepare your bicycle for winter use, continue reducing debt, buy as much gold and silver as you can and pray that cooler heads prevail to stop this madness. Unfortunately, this is as likely as the Toronto Maple Leafs winning the next Stanley Cup even if the NHL averts a strike. In other words, hope for the best but plan for the worst because hope is just a feeling, not a plan.

Obama Set to Win Re-election

The Presidential election is Obama’s to lose. Unless he screws up big time, he’s a shoe-in for re-election. Besides the Republicans are deliberately trying to lose. They do NOT want to be at the helm when U.S.S. Titanic hits the iceberg. That’s why the Republicans are running a Mormon. Romney’s taking one for the team. Who in their right mind will trust someone who believes in the Mormon’s so-called prophet Joseph Smith and his Latter Day Saints nonsense?

Also, did you notice Bill Clinton’s glowing endorsement of Obama? That’s deal-making. Bill supports Obama and, in return, Obama supports Hillary in her bid to become the first female president of what’s left of Amerika in 2016 as captain of the U.S.S Titanic to fleece the remaining middle class.

Don’t worry your little head about it. It’s all planned. Now go back to watching TV and have a nice day.

September 16, 2012

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About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I'm back in stocks. I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
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6 Responses to Brief Collapse Update – September 16, 2012

  1. Fred Allen says:

    Helicopter Ben has little choice. He understands that without inflation capitalism ceases to exist. Deflation is the giant evil, he must try to defeat it.

  2. Gerold, we are of like mind. There are solutions. My general approach is the organization of community exchange mechanisms that can provide liquidity in the face of official malfeasance and scarcity of political money in the hands of the people.
    Are you familiar with my book, End of Money and the Future of Civilization, or my blog,

    • gerold says:

      Indeed, we share a similar outlook. I applaud your blog’s insight and in depth research which deserves more attention than the cursory examination I’ve given it so far.

      “The end of money’ is inevitable. Survivors will, of necessity, rebuild. However, I fear the moneyed class will do their utmost to hang on to their privileges so the “restoration of the commons” will be painful. Anarchy arises out of chaos but not without a painful transition. And let us hope we can avoid the ‘tragedy of the commons’ to which human nature seems prone. The cynic in me despairs.

  3. matthew says:

    I feel helpless. I see articleslike this everywhere, but what is the solution to avoid a fanancial collapse at this point? How do we know that people will even honor gold or silver – or deeds to property? How come hard money proponents don’t have any allegiance with politicians that could introduce state or federal legislation that might help? Lots of “see I told you so” – very little action plan through our elected reps.

    • gerold says:

      Yeah it’s frustrating and frightening to see a train wreck approaching and there’s nothing you can do to stop it. First thing you do is get out of its way. Do that by reading alternate news and blogs like this one. Many of my previous commentaries contain helpful advice like get out of debt, buy durable stuff you’ll need in future, become more self-reliant, etc.

      Next, don’t waste your time waiting for politicians or government to fix it. They aren’t the solution. They’re the problem disguised as the solution. They aren’t going to ‘solve’ themselves are they? Nobody can help you except yourself.

      There’s no guarantees with gold, silver except they’ve been used for thousands of years. Stuff like food is even better because you can’t eat gold or silver. Property deeds are just pieces of toilet paper when courts no longer function and the law breaks down, turns against you and supports only the wealthy.

      You ask why don’t hard-money types have any allegiance with politicos that could introduce legislation to solve these problems. Two answers: 1st hard-money types understand what I just said, that politicos are the problem not the solution. 2nd the answer is beyond legislation – we already have hundreds of thousands of laws that obviously aren’t working. The answer is there are no answers.

      There’s two ways to remove a bandage: fast or slow. The faster you remove it the sooner healing can begin. The politicos who you hope to save us from themselves have chosen the slow painful way. Had they let the system collapse four years ago, we’d be well on our way to re-building & recovery. Instead we’re still on the way down and we have a long way to go.

      Collapse is inevitable. The system is broken beyond repair. Nobody can fix it. We have to let it crash and start over and avoid making the same stupid mistakes. We can rely only on ourselves. Time to start thinking independently.

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