The Coming Economic Depression
I know many of you think I am an alarmist. This is true.
Everyone needs to understand the gravity of this economic situation. This is not your normal boom and bust cycle, your normal "it blows up and then we start again." What tha we are witnessing are the beginnings of major stagflation(gold and commodities are all at record highs(which is the definition of inflation) and, I am sorry to say this, the early signs of a depression.
Today the market took a nose dive after trading largely in the green, as it became clear that consumer spending is starting to be hit by the mortgage turmoil in the most basic of services: cell phone, tv, and internet payments. AT&T announced it was having funding troubles because people defaulting on those payments has increased by a lot.
And there is the root of our demise: the consumer, the debt-laden consumer. With a negative savings rate, after largely being around 9 percent in the positive before Bush, the debt laden consumer is broke. Credit card defaults are up 40% over last year. Home prices are decreasing, which many people use as a credit card, with the hope that the home price increases we have seen in the last couple years would continue and they would be able to pay it off after selling their home.
The last time the consumer had a negative savings rate was 1929. Today and 1929, that's it. This is by no means a smoking gun on the depression question.
With the rise of those blaming the federal reserve and rallying around Ron Paul, it becomes clear that there is widespread dissatisfaction with the controllers and policy makers responsible for our economy, the rule-setters set no rules for too long. And the public is starting to think abolishing the federal reserve is the answer.
I saw someone on the L subway platform today handing out free DVDs. Totally free. They were real copies of "The Zeitgiest," the movie that advocates the abolishment of the federal reserve.
Tens of people were taking copies. Many were standing there amazed at the concept of free knowledge. It was the biggest crowd I have seen take interest in the subway people.
The Next Depression will not occur this year, although it could if there is a major stock market crash - which is unfortunately becoming more and more likely. 250 point drops are a lot for one day. We are by definition past the "correction" stage, as in the "correction of excesses and speculation"(its defined as a 10% drop in a short period of time).
Corrections lead to a bear market. A bear market is a decline of 20% off the highs of a twelve month period. Corrections, if they continue, lead to a bear market. A bear market is marked by widespread pessimism. Hence, people sell as they think profits will be lower.
The Fed can not stop this problem. The market rate cut is being priced in right now, but the market is falling. Traders must know that the fed is powerless to stop this downturn. A downturn that I believe will lead to a depression. Keynes thinks the same thing:
"Keynes himself, however, pointed out that when interest rates become too small – below about 2% – then people no longer have an incentive to save, preferring to hold money for what he called "transactions demands." If there are no savings, banks get no money with which to make loans, and it is this drying up of savings – and loans – that causes the regular business cycle to break down."
Remember that 1% interest rate we had after Sept 11 courtesy of Alan Greenspan? Thus, people took out loans instead of saving. We have now a depreciating home values(which has preceded every recession I might add), a negative savings rate, a war in Iraq that is putting the federal government more in debt, and a consumer that is in debt and can't pay back their loans, whether its mortgage or credit card or as of today, not even cell phones.
If this trend continues, if things fall further, it will grind the economy to a halt, no matter how low the Fed cuts rates. The fed would prefer not to cut rates right now because inflation is so bad, but the banks are reeling. Grocery stores in New York City have to order half the food they are used to ordering because food prices have doubled. Iraqi people, who rely on government hand out of foods, will be getting only one or two raw food materials,as opposed to the usual twelves because the other ones are too expensive.
Lastly, the innovations of the modern banking system are unraveling. Derivatives will be the new buzz word guys, as derivatives are what will finally be our undoing. Derivatives are what has created all the wealth out thin air. But if the instruments that underly derivatives are exploding, so will the derivatives - but the thing is the derivative is worth MORE than the asset price. Everything is multiplied. The current derivatives market is bigger than the U.S. GDP. I have included a graph below to illustrate this point.
Guys, this has the potential for a serious worldwide economic breakdown. Calls are being made by the public to rewrite our broken federal reserve through the ron paul campaign. If the Federal Reserve goes down - that is the definition of an economic collapse. The very fact that the idea has taken hold among such a large population means that it is breaking down.
If we begin to see derivatives taking large write downs, you will definitely see the Next Great Depression.
Everyone needs to understand the gravity of this economic situation. This is not your normal boom and bust cycle, your normal "it blows up and then we start again." What tha we are witnessing are the beginnings of major stagflation(gold and commodities are all at record highs(which is the definition of inflation) and, I am sorry to say this, the early signs of a depression.
Today the market took a nose dive after trading largely in the green, as it became clear that consumer spending is starting to be hit by the mortgage turmoil in the most basic of services: cell phone, tv, and internet payments. AT&T announced it was having funding troubles because people defaulting on those payments has increased by a lot.
And there is the root of our demise: the consumer, the debt-laden consumer. With a negative savings rate, after largely being around 9 percent in the positive before Bush, the debt laden consumer is broke. Credit card defaults are up 40% over last year. Home prices are decreasing, which many people use as a credit card, with the hope that the home price increases we have seen in the last couple years would continue and they would be able to pay it off after selling their home.
The last time the consumer had a negative savings rate was 1929. Today and 1929, that's it. This is by no means a smoking gun on the depression question.
With the rise of those blaming the federal reserve and rallying around Ron Paul, it becomes clear that there is widespread dissatisfaction with the controllers and policy makers responsible for our economy, the rule-setters set no rules for too long. And the public is starting to think abolishing the federal reserve is the answer.
I saw someone on the L subway platform today handing out free DVDs. Totally free. They were real copies of "The Zeitgiest," the movie that advocates the abolishment of the federal reserve.
Tens of people were taking copies. Many were standing there amazed at the concept of free knowledge. It was the biggest crowd I have seen take interest in the subway people.
The Next Depression will not occur this year, although it could if there is a major stock market crash - which is unfortunately becoming more and more likely. 250 point drops are a lot for one day. We are by definition past the "correction" stage, as in the "correction of excesses and speculation"(its defined as a 10% drop in a short period of time).
Corrections lead to a bear market. A bear market is a decline of 20% off the highs of a twelve month period. Corrections, if they continue, lead to a bear market. A bear market is marked by widespread pessimism. Hence, people sell as they think profits will be lower.
The Fed can not stop this problem. The market rate cut is being priced in right now, but the market is falling. Traders must know that the fed is powerless to stop this downturn. A downturn that I believe will lead to a depression. Keynes thinks the same thing:
"Keynes himself, however, pointed out that when interest rates become too small – below about 2% – then people no longer have an incentive to save, preferring to hold money for what he called "transactions demands." If there are no savings, banks get no money with which to make loans, and it is this drying up of savings – and loans – that causes the regular business cycle to break down."
Remember that 1% interest rate we had after Sept 11 courtesy of Alan Greenspan? Thus, people took out loans instead of saving. We have now a depreciating home values(which has preceded every recession I might add), a negative savings rate, a war in Iraq that is putting the federal government more in debt, and a consumer that is in debt and can't pay back their loans, whether its mortgage or credit card or as of today, not even cell phones.
If this trend continues, if things fall further, it will grind the economy to a halt, no matter how low the Fed cuts rates. The fed would prefer not to cut rates right now because inflation is so bad, but the banks are reeling. Grocery stores in New York City have to order half the food they are used to ordering because food prices have doubled. Iraqi people, who rely on government hand out of foods, will be getting only one or two raw food materials,as opposed to the usual twelves because the other ones are too expensive.
Lastly, the innovations of the modern banking system are unraveling. Derivatives will be the new buzz word guys, as derivatives are what will finally be our undoing. Derivatives are what has created all the wealth out thin air. But if the instruments that underly derivatives are exploding, so will the derivatives - but the thing is the derivative is worth MORE than the asset price. Everything is multiplied. The current derivatives market is bigger than the U.S. GDP. I have included a graph below to illustrate this point.
Guys, this has the potential for a serious worldwide economic breakdown. Calls are being made by the public to rewrite our broken federal reserve through the ron paul campaign. If the Federal Reserve goes down - that is the definition of an economic collapse. The very fact that the idea has taken hold among such a large population means that it is breaking down.
If we begin to see derivatives taking large write downs, you will definitely see the Next Great Depression.
posted by John Liberty at 6:17 PM
1 Comments:
Wow, you are right on.
I just saw this now, in Nov 2008. You wrote it in January--no one could really imagine the kind of chaos we've just seen. I fear it will get even worse.
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