Archive for the ‘depression’ tag
The news that frequent CNBC guest Peter Yastrow of Yastrow Origer (and formerly with DT Trading) told CNBC that “We’re on the verge of a great, great depression. The [Federal Reserve] knows it” is going viral today.
But this is not news to anyone who has been paying attention.
As I pointed out Tuesday, billion dollar fund managers agree: the government never fixed the underlying economic problems, so we’ll have another crash.
I provided details last month:
As I noted in January, the housing slump is worse than during the Great Depression. [Confirmed here]
As CNN Money points out today:
Wal-Mart’s core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.
“We’re seeing core consumers under a lot of pressure,” Duke said at an event in New York. “There’s no doubt that rising fuel prices are having an impact.”
Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in.
Lately, they’re “running out of money” at a faster clip, he said.
“Purchases are really dropping off by the end of the month even more than last year,” Duke said. “This end-of-month [purchases] cycle is growing to be a concern.
And – in case you still think that the 29% of Americans who think we’re in a depression are unduly pessimistic – take a look at what I wrote last December:
The following experts have – at some point during the last 2 years – said that the economic crisis could be worse than the Great Depression:
- Fed Chairman Ben Bernanke
- Former Fed Chairman Paul Volcker
- Economics scholar and former Federal Reserve Governor Frederic Mishkin
- The head of the Bank of England Mervyn King
- Nobel prize winning economist Joseph Stiglitz
- Nobel prize winning economist Paul Krugman
- Former Goldman Sachs chairman John Whitehead
- Investment advisor, risk expert and “Black Swan” author Nassim Nicholas Taleb
- Well-known PhD economist Marc Faber
- Morgan Stanley’s UK equity strategist Graham Secker
- Former chief credit officer at Fannie Mae Edward J. Pinto
- Billionaire investor George Soros
- Senior British minister Ed Balls
States and Cities In Worst Shape Since the Great Depression
States and cities are in dire financial straits, and many may default in 2011.
California is issuing IOUs for only the second time since the Great Depression.
Things haven’t been this bad for state and local governments since the 30s.
Loan Loss Rate Higher than During the Great Depression
In October 2009, I reported:
In May, analyst Mike Mayo predicted that the bank loan loss rate would be higher than during the Great Depression.
In a new report, Moody’s has just confirmed (as summarized by Zero Hedge):
The most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.
And see this.
Here’s a chart summarizing the findings:
(click here for full chart).
Indeed, top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out that while banks faced a liquidity crisis during the Great Depression, today they are wholly insolvent. See this, this, this and this. Insolvency is much more severe than a shortage of liquidity.
Unemployment at or Near Depression Levels
USA Today reports today:
So many Americans have been jobless for so long that the government is changing how it records long-term unemployment.
Citing what it calls “an unprecedented rise” in long-term unemployment, the federal Bureau of Labor Statistics (BLS), beginning Saturday, will raise from two years to five years the upper limit on how long someone can be listed as having been jobless.
The change is a sign that bureau officials “are afraid that a cap of two years may be ‘understating the true average duration’ — but they won’t know by how much until they raise the upper limit,” says Linda Barrington, an economist who directs the Institute for Compensation Studies at Cornell University’s School of Industrial and Labor Relations.
“The BLS doesn’t make such changes lightly,” Barrington says. Stacey Standish, a bureau assistant press officer, says the two-year limit has been used for 33 years.
Although “this feels like something we’ve not experienced” since the Great Depression, she says, economists need more information to be sure.
The following chart from Calculated Risk shows that this is not a normal spike in unemployment:
As does this chart from Clusterstock:
As I noted in October:
It is difficult to compare current unemployment with that during the Great Depression. In the Depression, unemployment numbers weren’t tracked very consistently, and the U-3 and U-6 statistics we use today weren’t used back then. And statistical “adjustments” such as the “birth-death model” are being used today that weren’t used in the 1930s.
But let’s discuss the facts we do know.
The Wall Street Journal noted in July 2009:
The average length of unemployment is higher than it’s been since government began tracking the data in 1948.
The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.
The Christian Science Monitor wrote an article in June entitled, “Length of unemployment reaches Great Depression levels“.
60 Minutes – in a must-watch segment – notes that our current situation tops the Great Depression in one respect: never have we had a recession this deep with a recovery this flat. 60 Minutes points out that unemployment has been at 9.5% or above for 14 months:
Pulitzer Prize-winning historian David M. Kennedy notes in Freedom From Fear: The American People in Depression and War, 1929-1945 (Oxford, 1999) that – during Herbert Hoover’s presidency, more than 13 million Americans lost their jobs. Of those, 62% found themselves out of work for longer than a year; 44% longer than two years; 24% longer than three years; and 11% longer than four years.
Blytic calculates that the current average duration of unemployment is some 32 weeks, the median duration is around 20 weeks, and there are approximately 6 million people unemployed for 27 weeks or longer.
Moreover, employers are discriminating against job applicants who are currently unemployed, which will almost certainly prolong the duration of joblessness.
As I noted in January 2009:
In 1930, there were 123 million Americans.
At the height of the Depression in 1933, 24.9% of the total work force or 11,385,000 people, were unemployed.
Will unemployment reach 25% during this current crisis?
I don’t know. But the number of people unemployed will be higher than during the Depression.
Unemployment is expected to exceed 10% by many economists, and Obama “has warned that the unemployment rate will explode to at least 10% in 2009″.
10 percent of 154 million is 15 million people out of work – more than during the Great Depression.
But it is important to look at some details.
For example, official Bureau of Labor Statistics numbers put U-6 above 20% in several states:
- California: 21.9
- Nevada: 21.5
- Michigan 21.6
- Oregon 20.1
In the past year, unemployment has grown the fastest in the mountain West.
And certain races and age groups have gotten hit hard.
According to Congress’ Joint Economic Committee:
By February 2010, the U-6 rate for African Americans rose to 24.9 percent.
Unemployment rates for less-educated and younger workers:
- As of the third quarter of 2009, the overall unemployment rate for native-born Americans is 9.5 percent; the U-6 measure shows it as 15.9 percent.
- The unemployment rate for natives with a high school degree or less is 13.1 percent. Their U-6 measure is 21.9 percent.
- The unemployment rate for natives with less than a high school education is 20.5 percent. Their U-6 measure is 32.4 percent.
- The unemployment rate for young native-born Americans (18-29) who have only a high school education is 19 percent. Their U-6 measure is 31.2 percent.
- The unemployment rate for native-born blacks with less than a high school education is 28.8 percent. Their U-6 measure is 42.2 percent.
- The unemployment rate for young native-born blacks (18-29) with only a high school education is 27.1 percent. Their U-6 measure is 39.8 percent.
- The unemployment rate for native-born Hispanics with less than a high school education is 23.2 percent. Their U-6 measure is 35.6 percent.
- The unemployment rate for young native-born Hispanics (18-29) with only a high school degree is 20.9 percent. Their U-6 measure is 33.9 percent.
No wonder Chris Tilly – director of the Institute for Research on Labor and Employment at UCLA – says that African-Americans and high school dropouts are experiencing depression-level unemployment.
And as I have previously noted, unemployment for those who earn $150,000 or more is only 3%, while unemployment for the poor is 31%.
The bottom line is that it is difficult to compare current unemployment with what occurred during the Great Depression. In some ways things seem better now. In other ways, they don’t.
Factors like where you live, race, income and age greatly effect one’s experience of the severity of unemployment in America.
In addition, wages have plummeted for those who are employed. As Pulitzer Prize-winning tax reporter David Cay Johnston notes:
Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar, new data from the Social Security Administration show. Total wages, median wages, and average wages all declined ….
Food Stamps Replace Soup Kitchens
1 out of every 7 Americans now rely on food stamps.
While we don’t see soup kitchens, it may only be because so many Americans are receiving food stamps.
Indeed, despite the dramatic photographs we’ve all seen of the 1930s, the 43 million Americans relying on food stamps to get by may actually be much greater than the number who relied on soup kitchens during the Great Depression.
In addition, according to Chaz Valenza (a small business owner in New Jersey who earned his MBA from New York University’s Stern School of Business) millions of Americans are heading to foodbanks for the first time in their lives.
The War Isn’t Working
Given the above facts, it would seem that the government hasn’t been doing much. But the scary thing is that the government has done more than during the Great Depression, but the economy is still stuck a pit.
The amount spent in emergency bailouts, loans and subsidies during this financial crisis arguably dwarfs the amount which the government spent during the New Deal.
For example, Casey Research wrote in 2008:
Paulson and Bernanke have embarked on the largest bailout program ever conceived …. a program which so far will cost taxpayers $8.5 trillion.
[The updated, exact number can be disputed. But as shown below, the exact number of trillions of dollars is not that important.]
So how does $8.5 trillion dollars compare with the cost of some of the major conflicts and programs initiated by the US government since its inception? To try and grasp the enormity of this figure, let’s look at some other financial commitments undertaken by our government in the past:
As illustrated above, one can see that in today’s dollar, we have already committed to spending levels that surpass the cumulative cost of all of the major wars and government initiatives since the American Revolution.
Recently, the Congressional Research Service estimated the cost of all of the major wars our country has fought in 2008 dollars. The chart above shows that the entire cost of WWII over four to five years was less than half the current pledges made by Paulson and Bernanke in the last three months!
In spite of years of conflict, the Vietnam and the Iraq wars have each cost less than the bailout package that was approved by Congress in two weeks. The Civil War that devastated our country had a total price tag (for both the Union and Confederacy) of $60.4 billion, while the Revolutionary War was fought for a mere $1.8 billion.
In its fifty or so years of existence, NASA has only managed to spend $885 billion – a figure which got us to the moon and beyond.
The New Deal had a price tag of only $500 billion. The Marshall Plan that enabled the reconstruction of Europe following WWII for $13 billion, comes out to approximately $125 billion in 2008 dollars. The cost of fixing the S&L crisis was $235 billion.
So even though the government’s spending on the “war” on the economic crisis dwarfs the amount spent on the New Deal, our economy is still stuck in the mud.
Why Haven’t Things Gotten Better for the Little Guy?
Government leaders make happy talk about how things are improving, but happy talk cannot fix the economy.
Two fundamental causes of the Great Depression, and of our current economic problems, are fraud and inequality:
- Fraud was one of the main causes of the Depression, but nothing has been done to rein in fraud today
- Inequality was another major cause of downturns – including the Depression – but inequality is currently worse than during the Depression
There are, of course, other reasons the economy is still stuck in a ditch for most Americans, such as encouraging too much leverage, bailing out the big speculators, failing to break up the mammoth banks, and failing to spend wisely, where it will do some good. See this and this. But fraud and inequality were core causes of the Depression, and our failure to address them will only prolong our misery.
by Dr. Andrew Weil
“Depression can be devastating. Its worst form, major depressive disorder, is marked by all-encompassing low mood, thoughts of worthlessness, isolation, and loss of interest or pleasure in most or all activities. But this clinical description misses the deep, experiential horror of the condition; the suffocating sense of despair that can make life seem too arduous to bear.
Here’s something else we can say confidently about depression: it is complex. The cause is often a mix of factors including genetic brain abnormalities, sunlight deprivation, poor nutrition, lack of exercise, and social issues including homelessness and poverty. Also, cause and effect can be hard to tease apart – is social isolation a cause or an effect of depression?
Unfortunately, we can make one more unassailable observation about depression: the disorder – or, more precisely, the diagnosis – has gone stratospheric. An astonishing 10 percent of the U.S. population was prescribed an antidepressant in 2005; up from 6 percent in 1996.
Why has the diagnosis become so popular? There are likely several reasons. It’s possible that more people today are truly depressed than they were a decade ago. Urbanized, sedentary lifestyles; nutrient-poor processed food; synthetic but unsatisfying entertainments and other negative trends, all of which are accelerating, may be driving up the rate of true depression. But I doubt the impact of these trends has nearly doubled in just ten years.
So here’s another possibility. The pharmaceutical industry is cashing in. In 1996, the industry spent $32 million on direct-to-consumer (DTC) antidepressant advertising. By 2005, that nearly quadrupled, to $122 million. It seems to have worked. More than 164 million antidepressant prescriptions were written in 2008, totaling $9.6 billion in U.S. sales. Today, the television commercial is ubiquitous:
* A morose person stares out of a darkened room through a rain-streaked window.
* Quick cut to a cheery logo of an SSRI (selective serotonin reuptake inhibitor, the most common type of antidepressant pharmaceutical).
* Cross-fade to the same person, medicated and smiling, emerging into sunlight to pick flowers, ride a bicycle or serve birthday cake to laughing children.
* A voice over gently suggests, “Ask your doctor if [name of drug] is right for you.”
The message – all sadness is depression, depression is a chemical imbalance in the brain, this pill will make you happy, your doctor will get it for you – could not be clearer. The fact that the ad appears on television, the ultimate mass medium, also implies that depression is extremely common.
Yet a study published in the April, 2007, issue of the “Archives of General Psychiatry,” based on a survey of more than 8,000 Americans, concluded that estimates of the number who suffer from depression at least once during their lifetimes are about 25 percent too high. The authors noted that the questions clinicians use to determine if a person is depressed don’t account for the possibility that the person may be reacting normally to emotional upheavals such as a lost job or divorce (only bereavement due to death is accounted for in the clinical assessment). And a 15-year study by an Australian psychiatrist found that of 242 teachers, more than three-quarters met the criteria for depression. He wrote that depression has become a “catch-all diagnosis.”
What’s going on? It’s clear that depression, a real disorder, is being exploited by consumer marketing and is over-diagnosed in our profit-driven medical system. Unlike hypertension or high cholesterol – which have specific, numerical diagnostic criteria – a diagnosis of depression is ultimately subjective. Almost any average citizen (particularly one who watches a lot of television) can persuade him or herself that transient, normal sadness is true depression. And far too many doctors are willing to go along.
The solution to this situation is, unsurprisingly, complex, cutting across social, medical, political and cultural bounds. But here are three major changes that are needed immediately:
* Medically, thousands of studies confirm that depression, particularly mild to moderate forms, can be alleviated by lifestyle changes. These include exercise, lowered caffeine intake, diets high in fruits and vegetables, and certain supplements, particularly omega-3 fatty acids. Physicians need to be trained in these methods, as they are at the Arizona Center for Integrative Medicine at the University of Arizona in Tucson. See Natural Depression Treatment for more about these low-tech methods, or the “Depression” chapter in the excellent professional text, Integrative Medicine by David Rakel, M.D. (Saunders, 2007).
* Politically, if Congress – which seems hopelessly addicted to watering down all aspects of health care reform – can’t manage to ban all DTC ads in one stroke, it should start by immediately ending those for antidepressants.
* Personally, be skeptical of all DTC ads for antidepressants. The drugs may turn out to be no more effective than placebos. Many of them have devastating side effects, and withdrawal, even if done gradually, can be excruciating. While they can be lifesavers for some people, in most cases they should be employed only after less risky and expensive lifestyle changes have been tried.
Finally, recognize that no one feels good all the time. An emotionally healthy person can, and probably should, stare sadly out of a window now and then. Many cultures find the American insistence on constant cheerfulness and pasted-on smiles disturbing and unnatural. Occasional, situational sadness is not pathology – it is part and parcel of the human condition, and may offer an impetus to explore a new, more fulfilling path. Beware of those who attempt to make money by convincing you otherwise.”
About the author: Andrew Weil, M.D., is the founder and director of the Arizona Center for Integrative Medicine and the editorial director of www.DrWeil.com
This is what the US economy has been reduced to: McDonalds reports that as part of its employment event to hire 50,000 minimum wage, part-time (mostly) workers, subsequently raised to 62,000 it received a whopping 1 million applications, or a Tim Geithner jealousy inducing 6.2% hit rate (h/t X. Kurt. OSis). Alas, the US economy is now so pathetic that the bulk of the population will settle for anything. Literally anything. And the saddest part: over 938,000 applicants were turned away. Here’s hoping to Burger King needs a few million janitors in the immediate future too. And yes, aside from reality, things in America are really recovering quite nicely.
McDonald’s and its franchisees hired 62,000 people in the U.S. after receiving more than one million applications, the Oak Brook, Illinois-based company said today in an e-mailed statement. Previously, it said it planned to hire 50,000.
The April 19 national hiring day was the company’s first, said Danya Proud, a McDonald’s spokeswoman. She declined to disclose how many of the jobs were full- versus part-time. McDonald’s employed 400,000 workers worldwide at company-owned stores at the end of 2010, according to a company filing.
Earlier this month, McDonald’s said sales at stores open at least 13 months climbed 2.9 percent in the U.S. after it attracted more diners with items such as beverages and the Chipotle BBQ Bacon Angus burger. The fast-food chain has about 14,000 stores in the U.S. and more than 18,000 abroad. About 80 percent of all McDonald’s stores are franchised.
Since the end of World War 2, the United States has been the leading military power and the leading economic power on the entire globe. The U.S. has had the largest economy in the history of the world, the U.S. dollar has been used by nearly all of the nations on earth as a reserve currency and the U.S. military has had a physical presence in most of the countries on the planet. Today, the U.S. military is in approximately 130 different nations and it has a total of about 700 military bases around the world. But just like the Roman Empire, the U.S. empire has become overextended and it is starting to decline. Most of our politicians believe that we can continue to “police the world” and project our power to every corner of the globe, but the more we meddle the more the rest of the world hates us and the worse our financial problems get. America is now swamped with debts and our influence is fading. The truth is that what we are witnessing is the end of an empire and the beginning of a depression.
Over the past decade, the wars in Iraq and Afghanistan have cost U.S. taxpayers well over a trillion dollars.
So what have we gotten in return for a trillion dollars?
In Afghanistan, we haven’t even found the one man we supposedly went there to look for – Osama Bin Laden. It defies comprehension how a man with a really bad kidney disease can hide in caves and evade the most powerful military on earth for nearly a decade.
But at least we got rid of the Taliban and set up a good form of government, right?
Oh yeah, we set up a really wonderful government. For example, they recently arrested a one-legged Afghan Red Cross worker and sentenced him to death for converting to Christianity.
Fortunately there was enough of an international outcry that Said Musa was not hung, but the fact that the Afghan government wanted to string him up is enough to show that we have completely failed over there.
The same thing is true in Iraq. Yeah, we may have gotten rid of Saddam, but the nation is now in far worse shape than before we went in.
Before the war Christians felt safe in Iraq. Now large numbers of them are fleeing Iraq as fast as they can. More than 80 Iraqi Christians were recently beheaded on a single day. All the Christians were trying to do was attend a church service.
Now we are involved in a third war in the Middle East. Even though Libya was no threat to the United States, Obama felt compelled to stick our nose into a chaotic civil war.
Now it looks like our involvement in Libya could last for a very, very long time.
In a joint op-ed piece in the New York Times, Barack Obama, David Cameron and Nicolas Sarkozy declared that NATO military operations in Libya will not end until there is a regime change….
However, so long as Qaddafi is in power, NATO must maintain its operations so that civilians remain protected and the pressure on the regime builds. Then a genuine transition from dictatorship to an inclusive constitutional process can really begin, led by a new generation of leaders. In order for that transition to succeed, Qaddafi must go and go for good.
So exactly who are we “helping” in Libya?
It turns out that we are providing “air cover” for many of the same people who were shooting at our troops in Iraq.
Yes, you read the correctly.
According to The Telegraph, the leader of the Libyan rebels is even admitting that his “troops” include jihadists that were firing bullets at U.S. troops in Iraq….
Abdel-Hakim al-Hasidi, the Libyan rebel leader, has said jihadists who fought against allied troops in Iraq are on the front lines of the battle against Muammar Gaddafi’s regime.
What type of government do you think they are going to set up once this is over?
And all of this meddling is turning the rest of the world against us in a big way.
Most Americans don’t realize just how much hatred there is for America in the rest of the world. There are millions upon millions of people out there that now hate us with every fiber of their beings, and every time we bomb someone else world opinion turns against us even more.
Sadly, our meddling goes well beyond the three wars we are currently fighting. The truth is that the U.S. military is actively “conducting operations” in dozens of different countries.
For example, most Americans don’t even realize what the U.S. is doing in Pakistan.
How would you like it if a foreign power was conducting missile attacks inside the United States over the objections of our national leaders?
Well, that is what we are doing in Pakistan and we are going to continue even though Pakistani officials are adamantly objecting.
According to AFP, the CIA intends to continue conducting operations in Pakistan no matter what the Pakistani government says….
The Central Intelligence Agency has no plans to suspend “operations” in Pakistan against terror suspects despite objections from leaders in Islamabad, a US official said Thursday.
This approach to foreign policy is absolutely foolish. Attempting to have an “iron grip” on the rest of the world is only going to cause the rest of the world to deeply hate us and deeply resent us. We like to think of ourselves as “do gooders” but most of the rest of the world considers us to be tyrannical. Eventually the rest of the world will lash out at us.
In addition, maintaining our vast empire is bankrupting us.
As I have written about previously, U.S. military spending is wildly out of control. The truth is that U.S. military spending is greater than the military spending of China, Russia, Japan, India, and the rest of NATO combined.
The United States already accounts for 46.5% of all military spending in the world. China is next with only 6.6%.
Just one day of the war in Afghanistan costs more money than it took to build the entire Pentagon.
So will reducing military spending solve all of our financial problems?
Of course not.
In fact, if you eliminated every penny of military spending we would still have a gigantic budget deficit.
And that is another reason why our empire is dying.
The United States has the biggest debt problem in the history of the world.
Right now the U.S. government is over 14 trillion dollars in debt. Our debt is increasing by over 2 million dollars every single minute.
Our politicians are running up the national credit card as if there will never be any consequences.
But a very serious day of reckoning is coming, and when it arrives the rest of the world is not going to be in the mood to help us.
It is being projected that by 2021, the U.S. will be paying $1.1 trillion a year just in interest on the national debt.
So how big is a trillion dollars?
Well, if you were alive when Jesus was born and you spent a million dollars every single day since then, you still would not have spent a trillion dollars by now.
Our national debt is now at a tipping point. A recently revised IMF policy paper entitled “An Analysis of U.S. Fiscal and Generational Imbalances: Who Will Pay and How?” projects that U.S. government debt will rise to about 400 percent of GDP by the year 2050.
So what are our politicians doing about it?
During the last election, the Republicans made a “pledge” to the American people to cut $100 billion from the 2011 budget if they were elected.
Then once they got in they told us that $61 billion would be enough.
Then John Boehner gave in and agreed to cut the 2011 budget by only $38.5 billion.
Well, now it turns out that even the $38.5 billion figure was not even real.
According to the Congressional Budget Office, the “budget deal” will only slash $352 million (with an “m”) from the 2011 budget.
That is less than one percent of the $38.5 billion figure that was announced.
No wonder so many Tea Party activists are now declaring that John Boehner must go.
In the end, our politicians do not intend to do anything about our runaway debt.
The Democrats will shut down the government rather than allow serious cuts to social programs or entitlements.
The Republicans will never allow serious cuts to the military and they are pushing for even more tax cuts.
So how in the world is U.S. government debt ever going to be brought under control?
The sad news is that it is not going to be. It is just a matter of time before a great U.S. debt crisis strikes.
But the U.S. is not the only one with a debt crisis.
The European debt crisis just seems to get worse with each passing month. The bonds of several European nations have been significantly downgraded in recent weeks.
According to the Wall Street Journal, Moody’s actually downgraded Irish debt by two levels on Friday….
Moody’s Investors Service Inc. downgraded Ireland’s government debt by two notches Friday, taking the country to the brink of junk status, and kept its outlook negative.
Things are getting scary.
Bond yields all over Europe are going through the roof.
A year ago, the yield on 10-year Portuguese bonds was hovering around 5%. On Friday it reached 9.0%.
A year ago, the yield on 10-year Irish bonds was also generally in the neighborhood of 5%. On Friday it closed at 9.7%.
But that is nothing compared to what is happening to Greek debt. On Friday, the yield on 10-year Greek bonds skyrocketed to an astounding 13.83%.
Yes, a depression is getting a little bit closer every single day.
Things don’t look good in Asia either. Prior to the recent tsunami, the Japanese economy was the third largest economy on the entire globe.
But there are now very serious questions about whether or not Japan will ever fully recover from what has just happened.
The mainstream media has been really downplaying the economic damage that has been done to Japan, but eventually the truth will become clear. In a previous article, I contended that this was essentially a “death blow” for the Japanese economy….
The tsunami that struck Japan on March 11th swept up to 6 miles inland, destroying virtually everything in the way. Thousands upon thousands of Japanese were killed and entire cities were wiped off the map. Yes, Japan is a resilient nation, but exactly how does a nation that is already drowning in debt replace dozens of cities and towns that are suddenly gone? The truth is that thousands of square miles have been more completely destroyed than if they had been bombed by a foreign military force. The loss of homes, cars, businesses and personal wealth is almost unimaginable. It is going to take many years to rebuild the roads, bridges, rail systems, ports, power lines and water systems that were lost. Nobody is quite sure when the rolling blackouts are going to end, and nobody is quite sure when all of the damaged manufacturing facilities are going to be fully brought back online.
If all that wasn’t bad enough, the nuclear crisis at Fukushima just seems to get worse by the day.
According to the Los Angeles Times, seawater near the Fukushima nuclear complex was recently found to contain “iodine-131 at 7.5 million times the legal limit”.
Authorities in Japan recently upgraded the crisis at Fukushima to a “level 7” nuclear disaster, and almost everyone is finally acknowledging that this crisis is as bad or worse than Chernobyl.
Many now fear that vast portions of northern Japan may end up being uninhabitable after all this is over. The health effects and the economic effects from this nightmare are going to be felt for the rest of our lives.
But even if all of the things above were not happening, the rapidly rising price of oil could potentially be enough to push the world into a depression. The entire global economy is predicated on the ability to consume gigantic amounts of very cheap oil. Nobody has ever been able to prove that the global economy can continue to function normally if the price of oil stays above $100 a barrel for an extended period of time.
When oil goes up, people start staying home. Certain types of economic activity become unprofitable. The cost of transporting all goods increases. The amount of money being transferred out of the U.S. economy and into the hands of oil barons soars.
The average price of a gallon of gasoline in the United States is now $3.81. It is about a dollar higher than it was at this time last year.
If the price of oil stays where it is right now, the global economy can probably handle it, at least for a while. However, if it explodes up to $150 or $200 a barrel it is going to unleash hell on world financial markets.
The world is becoming a very unstable place. The U.S. empire is crumbling and the global financial system is on the verge of a nightmare.
Hopefully the rest of 2011 will not be as eventful as the first part has. We could use some global peace and stability for a while. Unfortunately, that is probably not going to be the case.
Each time we begin to approach the end of an announced QE period, the nervous jitters of financial markets start to set in. Will Bernanke continue with QE(n+1) or won’t he? Now it’s true that professional traders live and die by their ability to front run rumor and perception, but for long term investors who fret over such decisions, it demonstrates a fundamental lack of understanding of what QE really is. To put it succinctly, QE is an economic deal with the Devil. Once it is begun in earnest there can be no turning back. It must be played to its ultimate conclusion.
In Bernanke’s 2009 interview on 60 Minutes, he suffered a momentary lapse into honesty and stated that Quantitative Easing was effectively money printing. So why then the complicated euphemism of Quantitative Easing? Because that is what modern central banking sponsored economics is all about – the intentional obfuscation of otherwise simple economic principles to cause the eyes of normal people to glaze over. Once accomplished, the central bankers (and their financial community brethren) are able to pursue policies that greatly benefit themselves but are devastating to everyone else. .
Long term investors who worry about whether QE will continue clearly recognize the fact that everything is now correlated to the Fed’s balance sheet. What they don’t understand is how QE is related to the larger economic cycle and its mission of preventing economic recessions.
Keeping the tent inflated
Sometimes physical analogies are the most helpful in understanding complex relationships. Let’s think of the economy as a large inflated tent. The extent of the tent’s inflation is the health of the economy. Under normal economic conditions the tent is fully inflated. In the course of time, events take place that cause the need for a correction to the economic system. New technology can come along which obsoletes old industries, bad investments and debt must be liquidated etc. When this happens a free market economy will correct itself. Capital tied up in failed industries will be reallocated and invested in new businesses. New jobs will ultimately be created and people will go back to work. Of course this reorganization takes place over time and this is what a recession is – a healing process for the economy. In our tent we can think of this as a tear that forms in the fabric. While this hole is being repaired, air escapes and the tent begins to sag a little. The extent of the drooping is the extent of the recession. Once fixed, the tent and the economy go back to normal.
QE is a wholly different method of keeping the tent propped up. It does not repair the hole, but rather attempts to keep the tent inflated by pumping more air in than is escaping through the hole. This is the new money being created and pushed into the economy to offset the credit destruction in the banking system. This is a dynamic process that must be maintained. The catch is that the hole doesn’t just stay a fixed size. The tear begins to lengthen allowing greater amounts of air to escape. The economic tent begins to sag until the volume of air being pumped in is increased to overcome the outflow. This is why QE can never end. To stop now, with such a large hole, would result in a severe and frightening recession. The tent would lose a tremendous amount of air in the time it takes to make such an extensive repair.
This process continues until eventually the hole is so large that the tent collapses around the massive flow of pumping air. This is the ultimate fate of money printing as policy – a currency crisis – the endless flow of new money loses purchasing power faster than it can be created. We are left with an inflationary depression in which savings are decimated and the standard of living of most Americans is dramatically lowered.
QE is economic central planning
When an institution such as the Federal Reserve is allowed to create as much money as it wants and do with it whatever it pleases, without any oversight or transparency, then the free market and its self correcting mechanisms no longer exist. How can capital from failed business and banks be reallocated to more efficient uses when these institutions are bailed out and not allowed to fail? Prices and interest rates are the nervous system of a free market economy. They are the feedback mechanisms that direct all of the individual participants to behave in the most productive and efficient manner. There can no free market when prices and interest rates are de-linked from supply and demand. We are now a centrally planned economy run by our central bank.
But here’s the really insidious part of QE that almost no one in the general public understands: A free society cannot exist independent of free markets. There is a disequilibrium that occurs between the two and over time one will win out over the other. And so here we are, stuck in a decaying economic system that prevents resources from being used in their most efficient manner. We simply can no longer compete with freer markets in other parts of the globe. We are saddled with the weight of central economic planning much like the old Soviet Union was. There will be no recovery and no rush of new jobs created. We will live under the burden of a burgeoning Federal government that operates completely independent of the will of its citizens. It is now beholden only the money manufacturers at the Federal Reserve and will spend money as fast as Bernanke can add zeros to its account.
The problems we are experiencing have been a long time in the making. They began in earnest in 1913 with the formation of the Federal Reserve. It’s taken several generations for the Federal government and its central bank to usurp the world’s monetary system and as such few have noticed. But what’s different now is that we have hit the knee in the curve, the point at which events start to accelerate dramatically as we approach the end of the line. Those who understand QE realize that America as we knew it is already gone. Over the next decade the rest of America will become painfully aware of that fact as well.
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