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Economic Recession, Depression, or Systematic Breakdown

Economics / Recession 2008 - 2010 Mar 04, 2010 - 04:52 PM GMT

By: James_Quinn

Economics

Diamond Rated - Best Financial Markets Analysis ArticleAs crooked politicians, Federal Reserve hacks, and cheerleading media pundits inform you the recession is over, you probably have a sneaking suspicion they are lying.

The National Bureau of Economic Research is the arbiter of business cycle recessions. They define a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production.”


A depression is characterized by its length, and by abnormal increases in unemployment, a decline in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation, financial crisis, and bank failures are also common elements of a depression. Let’s assess where the U.S. economy stands at the moment:

Economic Factor Peak to Trough So Far
Real GDP Decrease 3.7% real decline from December 2007 until June 2009 totaling $500 billion
Personal Income Personal income declined by $339 billion from mid-2008 to the 1st Qtr of 2009
Investment Fixed investment has declined by $543 billion, or 24%, since December 2007
Unemployment There are 8.1 million less people employed today than in 2007
Industrial Production Has fallen 12% since 2007
Bankruptcies National bankruptcies have risen from 800,000 in 2007 to 1.4 million in 2009, a 75% increase
Trade Exports and imports declined by 22% and 31%, respectively, between July 2008 and June 2009
Currency The USD has fallen 17% in the last year versus a basket of world currencies
Bank Failures 140 banks  failed in 2009, with 700 banks in danger of failing, according to the FDIC

 

A few economic indicators such as GDP and Personal Income have shown minor positive blips in the most recent quarter due to the unprecedented stimulus applied by the government and Federal Reserve. These effects will be short lived as the stimulus wears off and the economy resumes its downward spiral. At this point in the crisis, real GDP has only fallen 3.7%. By contrast, between 1929 and 1930, real GDP declined by 8.6%. And by the end of 1932, real GDP had collapsed by 26.7%.

Remarkably, real GDP then surged by 43% between 1932 and 1937, to a level significantly above the 1929 level. This fact should be kept in mind as politicians crow about a 2.8% increase in GDP between 2nd and 3rd Quarter of 2009 as the end of the crisis.

To date, the Federal Reserve has printed well over a trillion dollars in an attempt to evade a deflationary collapse, including a $700 billion bank bailout and a $787 billion stimulus package. And then there was $3 billion wasted on Cash for Clunkers ($24,000 per vehicle), $28 billion squandered on the $8,500 homebuyer tax credit, and an artificial suppressing of  interest rates to 0% with $300 billion of mortgage-backed securities. And all we’ve gotten is a 2.8% increase in GDP?

Based on government-reported figures, our GDP has not fallen anywhere near the amount it declined during the Great Depression. But if you believe government-reported figures, I have an indoor ski resort in Dubai I’d like to sell you.

The fact is the government has systematically underreported inflation since the early 1980s. By doing so, it has systematically overstated GDP. Economist John Williams presents the true GDP growth in the following chart. As you can see, the U.S. has effectively been in a recession since 2001. Using these figures, it is probable that we are in the midst of a second Great Depression.

In response, the bureaucrats and financial gurus scoff, pointing to unemployment of 25% during the Great Depression versus 10.2% today. Again, the government figures dramatically underestimate unemployment. The true, non-government-manipulated rate according to John Williams is currently 22%.

During the Great Depression, there was no FDIC. One-third of all the banks in the United States failed over a five-year period, with 8% of all U.S. banks going under in the first two years alone. In 2009 only 124 banks failed, but bank analyst Chris Whalen from Institutional Analytics predicts that at least 1,000 banks will follow before this crisis is over.

That would be 12% of all the banks in the U.S.

The fact is that the U.S. banking system has seized up, with many banks now deserving the label of “zombie banks.” Collectively, these zombie banks have hundreds of billions in toxic assets sitting on their balance sheets. Bankers know there is an avalanche of Option ARM and Alt-A loans that will reset in the next three years, setting off another bout of foreclosures. Bankers know commercial real estate is crumbling. Bankers know credit card and auto loan debt defaults are soaring. They will not lend in this unforgiving environment. The worst lies ahead for the banks.

Based on truthful economic figures, the current downturn is unmistakably not a normal cyclical recession caused by an overheating economy. Based on an accurate assessment of economic statistics, it appears that we are in the early stages of a second Great Depression. And it could be much worse than the first.

The economy bottomed in 1932 and proceeded to accelerate at a tremendous rate over the next five years. There is absolutely no likelihood for a strong economic recovery today. The structural problems fashioned by ignorant politicians and the Federal Reserve over decades have gathered into a perfect storm that threatens the crumbling, fragile levees that are keeping this country from economic collapse.

The Federal Reserve policies since its inception in 1913 have resulted in a 95% decline in the purchasing power of the U.S. dollar. The last 5% will be more traumatic and violent than the first 95%. The dollar has declined by 17% versus a basket of other fiat currencies just in the last year. The Obama administration and Ben Bernanke have blessed the dollar decline. But by doing so, they are playing Russian roulette with the U.S. financial system.

The Federal Reserve has set short-term interest rates at 0%. Inflation has been running at a 4% annual rate over the last four months, so real interest rates are a negative 4%. This is certainly one major factor in the dramatic decline of the dollar. The foreign countries that hold U.S. Treasuries know they are getting screwed. On a short-term basis, they have no choice but to hold these Treasuries. But on a medium- and long-term basis, China, India, Japan, and the Middle Eastern countries are exiting their USD positions.

The percentage of foreign reserves held in dollars has declined from 56% in 2000 to 41% today. China is using its dollars to buy natural resources across the globe. India used its dollars to buy $200 billion of gold from the IMF two weeks ago. The implications of our foreign creditors not trusting our fiscal policies will have dire consequences.

Peter Bernholz, professor of economics at the University of Basel, Switzerland, in his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, analyzes the 12 largest episodes of hyperinflations – all of which were caused by financing huge public budget deficits through money creation.

His conclusion is that the tipping point for hyperinflation occurs when the government’s deficits exceed 40% of its expenditures. The deficits being run by the Keynesians in Washington are now at that level, well beyond anything ever attempted in U.S. history. Our leaders have chosen to allow insolvent banks to keep toxic assets on their books at inflated prices, propped up bankrupt union-controlled automakers, instructed Fannie Mae, Freddie Mac, and GMAC to make loans that will never be repaid, and squandered $787 billion on payoffs to congressmen through pork projects that have stimulated nothing. 

With unemployment of 10.2% and headed higher, the Federal Reserve has absolutely no intention of raising interest rates. President Obama and Timothy Geithner can do a hundred interviews declaring that reducing deficits is a huge priority, but their actions speak louder than their lying words. The national debt increased by $1.8 trillion in 2009, to $11.9 trillion. The OMB projects the 2010 deficit to reach $1.5 trillion. Even without a new colossal $2 trillion healthcare bureaucracy, deficits were expected to stay in the $1-trillion-per-year range for the next decade. The truth is that deficits will exceed $1 trillion annually and approach $2 trillion by 2019. The national debt would reach $25 trillion by 2019.  

An unsustainable trend will not be sustained. The national debt will not reach $25 trillion in 2019. Unless the current policies of the Federal Reserve and Obama administration are reversed, the U.S. economic system will collapse well before that. In a recent report, Société Générale, one of France’s biggest banks, noted the possibility for collapse:

"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse. The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Aging populations will make it harder to erode debt through growth. High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt. “

There is no foreign country willing to buy the $13 trillion of debt paying 1% we will need to issue in the next ten years. Obama and Congress are working on another stimulus program, clearly indicating that they are going to continue their efforts to spend the country out of crisis.

Trust in the American financial system and its leaders is dissipating rapidly. At some point in the not-too-distant future, the U.S. Treasury will attempt to sell debt and foreign buyers will boycott the auction. That will mark the point of no return. The unprecedented levels of debt propping up the American Empire cannot withstand higher interest rates. When it collapses under the weight of its massive debt, the dollar will crash and hyperinflation will result. People need to prepare for a future of turmoil and uncertainty. From an investment perspective, gold will retain its value as the dollar falls. Shorting U.S. Treasuries will ultimately prove to be a great investment.

Join me at www.TheBurningPlatform.com to discuss truth and the future of our country.

By James Quinn

quinnadvisors@comcast.net

James Quinn is a senior director of strategic planning for a major university. James has held financial positions with a retailer, homebuilder and university in his 22-year career. Those positions included treasurer, controller, and head of strategic planning. He is married with three boys and is writing these articles because he cares about their future. He earned a BS in accounting from Drexel University and an MBA from Villanova University. He is a certified public accountant and a certified cash manager.

These articles reflect the personal views of James Quinn. They do not necessarily represent the views of his employer, and are not sponsored or endorsed by his employer.

© 2010 Copyright James Quinn - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

James Quinn Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Maarten
06 Mar 10, 00:19
Gold will not save you in a full blown collapse

I fail to see how precious metals will protect you in a partial or total economic crash scenario.

In a PARTIAL collapse, the governments will still ultimately control (with police and military force if necessary) what is deemed legal tender in their respective countries, and gold is NOT legal tender - i.e. you can NOT go to a supermarket and buy your groceries with gold. Or a car. Or anything. There is nothing stopping the financially and morally bankrupt governments from confiscating your gold (as FDR indeed literally did during the Great Depression), or hitting you with a 90% tax rate when you convert your gold/silver into a legal tender currency that you can actually buy something with in the marketplace. Remember, most people won't have gold/silver so don't look to them to protect your holdings from the governemnt (they may even deliberately vote in those suggesting they take/tax it).

If the current fiat money system (and consequently society/government as we know it) actually were to FULLY collapse, then again owning gold will not be very useful. Having guns and ammo would clearly be much better - to both protect what you have and take what you don't (including your precious gold)... it's after all what everyone else will be doing .

Buying gold and silver will surely NOT protect you or your wealth from either scenario. In the run up, it might be a great trade, and if you sell at the right point you could earn some actual money - but there is, as far as I can see, nothing that you can do to fully insure yourself as far as real wealth preservation is concerned from a monetary collapse event.


Nadeem_Walayat
06 Mar 10, 17:26
Gold

Past monetary collapses have seen currencies wiped out.

But Gold is still standing.


Maarten
07 Mar 10, 03:08
Gold

True. But does this apply to PEOPLE with gold, or just GOVERNMENTS? I agree that govt holdings of precious metals are useful as protection from financial upheaval (after all they don't have to buy groceries). But when the SHTF, I just don't see gold as being all that brilliant. Are those with gold really living it up in Zimbabwe? When the fiat system is dead, gold is going to buy you a whole lot of nothing - you can't eat gold.


Alfred
07 Mar 10, 13:34
Economic Recession, Depression

One may see that one is in a depression when comparing facts to a few of the other depressions.

There was no food stamps, welfare, Aid to dependant children, unemployment compensation, bailouts, stimuli programs building to nowhere, supplemental security income, medicare, medicaid of any part, etc in the last depression.

If one sees all that fake cash flow disappear then one surely would see the Greater Depression that is.

One now still gets to eat during this depression.

--

Alfred


Jan Noack
08 Mar 10, 17:04
Gold

I'm sure gold will always be able to be traded for groceries. You might not get what the real underlying value of gold is, but people will always swap some food for gold. They won't swap food for worthless paper though.

Think of the wheelbarrows full to buy a loaf of bread.

One figure that is different regarding unemployment during the grat depression era and now. The , in the 1930's there was only ONE breadwinner in most families. So 10% unemployed meant 10% of families with NO breadwinner.That is not the case now. To have the same effect we would need a higher unemployment level.


Maarten
09 Mar 10, 00:35
Gold

"but people will always swap some food for gold."

Try going to the supermarket and buying something with gold. No one accepts gold in exchange for anything... except cash - since cash is the only mechanism we have pricing something, and is accepted by everyone. In a collapse scenario, you might have your gold, but there will be no way to value any item, food or otherwise, in terms of gold. And what will they give you as change? There won't even be a way IN THE MARKETPLACE to check if what you have IS gold, or just lead painted to look like it. Gold will be be of NO use in a total fiat money collapse.


ED
09 Mar 10, 23:52
gold

gold will be of no use in fiat collapse. I strongly disagree,I would much rather have gold or silver than a failed currency in the fact that they,ve been stores of value and wealth for over 5000 years.as an educated species we know we must have a means of barter whether it is paper, precious metals, sea shells or bullets.people will accept gold for food but it may not be their first choice.that is what barter and trade are all about....TRUST in a product or store of value.


Maarten
10 Mar 10, 21:05
Gold

ED: you assume that you will be able to exchange goods and services for what you CLAIM is gold. Why would anyone believe that your gold is even real? Further, if the monetary system does collapse, there won't be any industry left (no supermarkets, no factories - all the supply lines will be unfinanced) - there will literally be nothing to purchase with your gold - even if there was somehow a way to authenticate it and value it. It will be exactly like Zimbabwe is now - as far as I'm aware gold is of no use there whatsoever, because there is nothing left to buy with it. Guns and ammo to take any remaining food and resources are by far your best bet - think Mad Max, as opposed to some sort of new gold based utopia.


Nadeem_Walayat
10 Mar 10, 22:05
Gold store of wealth

Zimbabweans who converted to gold a few years back have maintained if not gained in purchasing power as their currency has collapsed.

Zimbweas currency has been wiped out, their central bank is dead, but the economy is recovering strongly due to free enterprise and GOLD as currency.


Maarten
11 Mar 10, 03:07
Gold store of wealth

"Zimbabweans who converted to gold a few years back have maintained if not gained in purchasing power as their currency has collapsed."

Those that survived that is. Those from whom the gold was not physically taken either by looters or Mugabe's militia. There was (is - last I heard things were not much improved?) nothing much left to buy in Zimbabwe. With or without gold. And even they are not physically purchasing things in actual gold. They are EXCHANGING it for US$, Euros or SA Rand. Something they might as well have done in the first place. Of course gold outperformed those currencies - but so did AAPL stock. Gold is a nice TRADE - but I maintain it is a useless insurance policy for total or partial fiat currency collapse.


Nadeem_Walayat
11 Mar 10, 06:12
Exchange

Your reply supports holding gold as insurance.

They are EXCHANGING it for US$, Euro, SA Rand, therefore it is a store of value that can be EXCHANGED for other currencies, goods or services.

You are also correct that AAPL stock is also a hedge against inflation, but it is far higher risk than Gold i.e. of the US currency collapsed then it would become very volatile depending on the damage inflicted on the company as a consquence of economic collapse.

Look. - Before paper money was invented, what was used as a means of exchange - Answer ? GOLD and SILVER. Anything that is scarce and portable is a means of exchange, Gold is not the only thing that fits the bill, an ounce of gold is worth about $1100, if the currency collapses into hyperinflation then that ounce of gold would retain its purchasing power i.e. you would still be able to buy the same, if not more quantitiy of goods and services no matter what happens to ANY of the currencies that gold is EXCHANGED into at the time of effecting purchase. Or if all fiat currencies imploded, then yuor ownce would convert into parcels of 28 grams as currency that you would use to buy FOOD with, which you would not be able to do with a collapsing currency as the shops will be closed to you and only open to those with HARD currency - GOLD.


Chaos
11 Mar 10, 11:22
Gold store of wealth

Maarten- please, say you have short on Gold.


Rob
11 Mar 10, 15:44
Gold

The bottom line is that we are going loose everything we perceive as valuable in the fiat monetary system. Do nothing with your money and say goodbye for sure.

There is a chance, and i say chance that after the dust settles, perhaps some gold or silver will be worth something monetarily once again. If you have cash in a bank, or the stock market, or under your mattress, say good buy to it all for sure because it’s going to be worthless.

Having gold is the only option i can see that may help protect our accumulated wealth in the end. Remember, gold and silver have always stood the test time as being truly valuable.

Good Luck!!


Maarten
11 Mar 10, 21:23
More gold

Hey, FYI I have no position one way or another. And like I have said repeatedly, I really like gold... as a trade. But I have read too many doom, gloom and apocalypse stories here about how gold+silver is the ONLY way you can save yourself and family from financial ruin... - I simply must question that assertion. I fully agree that IF some sort of fiscal normality can be restored in a total monetary collapse scenario that any gold you might have had stashed away in the interim could be a great boon in your recovery.

All that said, I still think that our totally morally and fiscally bankrupt governments can and will simply seize your gold or tax it to a level that it won't be worth having should such an event actually transpire. That very possible outcome is never mentioned by the Gold Bugs. They just want to push the gold price - but don't seem to grasp that individuals aren't exactly in control of their respective country's economic policy or the military that could enforce said policy.


La Falce
14 Mar 10, 18:52
Gold for food

Just wanted to comment on gold and silver can't be used as legal tender.All you have to do is research hyperinflation and currency collapse in zimbabwe.

You might think,how can we compare ourselves to zimbabwe,that's my exact point,and that's why who believe otherwise will be caught off guard.

In contrarian or conspiracy manner,don't forget africa and asia or even south america have always been used as guinee pigs,if you can't accept that,well,you in denial anyway and your common sense is clouded by ignorance.

They didn't invent the word herd for no reason.


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