Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Economic Depression: Who will Suffer the Least?

Economics / Economic Depression Aug 28, 2008 - 12:50 AM GMT

By: John_Browne

Economics Best Financial Markets Analysis ArticleThough few may have noticed, the past few weeks may be regarded as a global economic turning point. Evidence is mounting that the United States is entering a recession, with increasing signs that it could morph into a depression. While the current Administration appears resigned to bail out or nationalize large tracts of American commerce, the presidential candidates drift towards Great Society era spending proposals. At the same time, America’s principal economic rivals appear to be charting courses that are not in line with U.S. interests.


The Russian invasion of Georgia has revived tensions that have not been seen since the most frigid periods of the Cold War. With the Olympic Games over, China can relax and now exert its muscle without risking any politically motivated boycotts. Between them, these global players hold well over a trillion dollars, or 10 % of U.S. government debt, which they can use in as leverage in any strategic, economic or political confrontation with the U.S. There is also evidence that America’s economic power is even waning in our own back yard. This week, Honduras, a traditional U.S. ally in Central America, announced that it was throwing its lot in with a Latin American trade bloc dominated by Venezuela and Cuba!

For two years I have warned readers of a severe, real estate led recession and encouraged extreme asset allocations to cash, particularly short-term, hard currency government bonds, and gold. Last year, I urged short positions in financials and U.S. stock markets. Some ridiculed me. The financials are currently down some 84 percent. Apparently, the real estate crash is biting deeper than just about any market “expert” had imagined.

The size of the problem is enormous. A fall of just 20 percent in U.S. house values, (which is confirmed by the latest Case Shiller data release) wipes almost $5 trillion from the wealth of American consumers and businesses. This amounts to more than one third of America’s GDP and half of the total U.S. Government debt! How could the fallout be anything less than systemic?

Imprudent lending behavior, inspired by the housing boom, placed the security of banks depositors and shareholders at undisclosed and unprecedented risk. The banking problem is so large that failures cannot be allowed. The government has bent rules regarding financial reporting and the Fed’s lending criteria to keep the financial ship afloat.

The main focus for now is on government sponsored lenders Fannie Mae and Freddie Mac, who are now understood to be hopelessly undercapitalized. Despite the complete predictability of this outcome, even conservative investors, including many banks, had been persuaded that securities issued by both Fanny Mae and Freddie Mac were risk free. And although shareholders for both entities are likely to be wiped out, corporate bond holders, and those individuals and financial institutions who hold mortgages backed by both the GSE’s, correctly assume that the government will back their assets. However, hundreds of billions, perhaps trillions, of Federal dollars will be needed to make whole all who foolishly loaded up on Fannie and Freddie debt. Unfortunately, the Federal cupboards are bare.

This week, the Federal Deposit Incurrence Corporation (FDIC) announced that its problem list had increased from 90 banks to 117. Worse still, the FDIC announced its fund had fallen below its legal deposit ratio, forcing it to increase its levy on member banks. This, just when the net income of its member banks, in desperate need of retained earnings, has fallen by some 86 percent. As more banks begin to fail, the ultimate cost to the Federal balance sheet is hard to imagine.

But, as the old saying goes, ‘What’s good for the goose is good for the gander.’ So, if government financial ‘favors’ are granted to reckless investment firms (Bear Stearns) and now mortgage borrowers, what about other economically vital ‘multiplier’ industries like: automakers, airlines, credit card and insurance companies and even corporate real estate lenders? The logical conclusion for this current drift is hyperinflation. In order to make good on its promises the Federal Government will have to resort to the printing press…with a vengeance.

With America facing severe recession, many regions around the world will suffer. So who will suffer least? Nations that have run relatively prudent economic policies and those who ‘produce’ goods required even in an economically depressed world will continue to prosper increasingly, relative to the U.S.

The differential may become magnified as America’s government hyper-inflates. Investors will then increasingly dump dollar paper assets and buy hard currencies, government bonds of ‘producer’ nations and gold. Investors ahead of this depression curve will likely suffer least!

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

great dane
01 Sep 08, 10:14
who will suffer the least?

Who will suffer the least, indeed? It will be those of us who are already poor. We're used to it, and it will make no difference to us. We know how to survive. Depression? Recession? Listen to me, all you experts. It will be neither. It will very soon be total economic collapse. Look to the sky.


Wayne
03 Sep 08, 05:40
Russia - Georgia Conflict Facts
You must check your facts in regards to the Russian invasion of Georgia. It was actually the Georgians who tried to ethnically cleanse the South Ossetians after first turning off their water 2 months prior.

Apart from that you article is correct and shows good insight into the US Fed and government as well as a balanced account of the twin (Fannie and Freedie) soon demise.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in