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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Deepening Economic Depression

Economics / Economic Depression Oct 05, 2008 - 06:50 PM GMT

By: David_Vaughn

Economics

Best Financial Markets Analysis ArticleWe definitely live in interesting times, huh?

I believe future historians will allocate Monday, September 29, 2008 as the start of the second Great Depression. That is not to say we may yet see exciting corrections and even occasionally a stronger US dollar. Still, the ultimate trend is down, down, down.


“President Herbert Hoover did not know how to meet this crisis.” “Nor would he (President Herbert Hoover) argue for direct relief to the unemployed and starving because he feared that doing so would corrupt them.” “(…they believed that helping the individual citizen weather the Depression would corrupt him or her…)” “ Hoover …was not willing to go far enough. He believed that the depression was part of the normal business cycle…” "…prosperity was just around the corner." “The best thing for the country to do would be to wait the crisis out.” historicaltextarchive.com/sections.php?op=viewarticle&artid

Up until 1980 we were witnessing a significant deterioration of US markets. These past 20 or so years' times have been good. What we see now is a gradual shifting back toward that down hill slide that was interrupted in 1980. Should we expect all declines always to pop back up quickly? Japan through the 1970s and 1980s were on the top of the world and American managers traveled to Japan to study their success. But even after over 10 years their economy has not recovered.

“… Japan since the late Eighties had been wrestling with a stagnant economy…” “Printing money to solve a nation's economic problem can never be sustained. Eventually, it will lead to the debasing of a nations currency and run-away inflation. Yet for a short period, it can create an artificial prosperity, deluding the masses into believing this new prosperity can be sustained. The long-term consequences of inflating their money supply will spell disaster for America …” rense.com/general69/econm.htm, Bruce Porteous, 2-26-6

Many Americans still believe this economy to be invulnerable. Even the popular Christian financial radio commentator Dave Ramsey believes any down turn will be a mild one and he believes anyone who buys gold to be nuts. I mentioned before that the last 20 odd years have witnessed a short term spike. In the same way ancient Rome was in a major decline, but experienced a short term turn around when Emperor Diocletian came into power in the late 3rd century and introduced some new economic policies. Let's debase the currency! That always works for a while.

“Inflation, however, remained a serious issue: In spite of attempts to wean the nation off metal currency…metal currency remained in wide circulation.” “By 301, however, the system was in trouble, strained by a new bout of inflation.” “Diocletian therefore issued his Edict on Coinage, an act re-tariffing all debts so that the nummii, the most common coin in circulation, would be worth half as much.” “This edict risked giving further momentum to inflationary trends…” en.wikipedia.org/wiki/Diocletian

But we digress don't we? We are witnessing events that have never, never occurred in this generation. We are watching many of the greatest banks in the US and around the world going bankrupt.

“Believing that America 's salvation must be entrusted to private initiative, he (President Herbert Hoover) hesitated to adopt proposals that required federal involvement in efforts to revive business. When lengthening bread lines and escalating joblessness finally convinced him of the necessity of such steps, the measures proved inadequate.” npg.si.edu/exh/hall2/hoovers.htm

I was standing in the lobby of Wachovia when they ceased to exist and their stock plummeted to zero. Now another bank will pick up Wachovia for ten cents on the dollar. Is this for real or am I dreaming? Jim Willie said it best in an article he wrote a week or so ago. Digest the following quote below.

“We are in historically unprecedented times.” Jim Willie, kitco.com, 9-16-2008

I like that quote as it describes in a nut shell what is happening today. Notice the words “unprecedented times?” This is a road we have not been down before since 1929. Banks going under with abandon? If you read these web sites often you have heard warnings from dozens of writers over and over. And as this meltdown grows many of the middle class are still contentedly drinking coffee at Starbucks. I think it is very obvious that our economy is very quickly going down the tube. As I write this there is a young articulate fellow behind me in this coffee shop who thought the 700 plus Dow drop was quaint. It always comes back up and it always will, right? The US economy is invulnerable right? Herbert Hoover in 1930 showed us real well how to handle a financial crisis.

“… Hoover argued that the role of government was one of an "umpire" rather than "player". He believed that America owed its financial prosperity in the 1920s to this "non-interference" policy and it was just a matter of time before natural economic forces would bring about a revival of trade.” spartacus.schoolnet.co.uk/USAhoover.htm

What was the Great Depression?

“Thousands of investors lost large sums of money and many were wiped out, lost everything.” “The ensuing period ranked as the longest and worst period of high unemployment and low business activity in modern times. Banks, stores, and factories were closed and left millions of Americans jobless, homeless, and penniless.“ 42explore2.com/depresn.htm

And what is happening now at this very moment?

“With financial institutions going into survival mode (if they are survivors, that is), available credit is rapidly disappearing.” supplyexcellence.com/blog/2008/09/24/bank-credit-market-supply-chain-risk/

The real disaster growing with momentum is a growing squeeze on credit markets.

•Late last month, Bank of America agreed to give beleaguered Sears only $5 million when it tried to renew a $1 billion secured facility.

•Two banks canceled letters of credit to women's clothier Talbots in April. Aeon, Talbots' majority shareholder, agreed to provide a $50 million credit line.

•GE Capital Solutions earlier this year said it was cutting back on its unsecured inventory financing in the furniture business, offering no new credit lines and giving existing customers a "reasonable" amount of time to find other options.

"Even before the credit crisis, there were a number of (furniture) retailers hanging on by their fingernails," says Ray Allegrezza, editor in chief of trade magazine Furniture Today. "Now, more than ever, the survivors at retail are going to be the ones who either have cash or have access to it." usatoday.com/money/industries/retail/2008-09-18-retail-credit-squeeze

What are the real reasons for the bailout plan?

So, who really will the 700 billion dollar bailout pay off? These are interesting facts that you will not hear over the cable money shows or CNN. The borrower is slave to the lender and that is what we have been observing these past few weeks.

“The top five foreign holders of Freddie and Fannie long-term debt are China , Japan , the Cayman Islands, Luxembourg , and Belgium . In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities." “ Mr. Paulson noted that more than $5 trillion of debt and mortgage-backed securities issued by Fannie and Freddie is owned by central banks and other investors world-wide .”Failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Mr. Paulson said.” “ Paulson has repeatedly cited foreign ownership as a reason for the intervention .” “We are no longer in complete control of our sovereignty.” “More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia .” huffingtonpost.com/hale-stewart/freddie-and-fannie-bail-o_b_124713.html, 9-8-2008

Debt to foreign creditors is at the heart of our financial problems now…beginning with Freddie & Fannie.

“…the US , chronically dependent on foreign funding, would be ill advised to treat its money sources badly.” “Of the GSEs' $5.2 trillion in debt (their own corporate bonds plus MBS), $1.3 trillion is in the hands of foreign investors and central banks.” “…foreign central banks are exiting GSE debt and have pulled back significantly from purchases of new paper.” “The companies rely heavily on overseas investment, often up to two-thirds of each new multibillion-dollar note offering, to help pare funding costs and keep mortgage rates low.” nakedcapitalism.com/2008/08/foreign-investors-selling-freddie.html, 8-17-2008

Does all this sound confusing and hard to follow? What is now being illustrated is just how dependent to foreign borrowed money we are. Earlier this year George Soros commented about the growing credit & debt crisis.

“GEORGE Soros, billionaire, philanthropist and hedge fund legend, has characterized today's situation in global markets as the most severe since the Great Depression.” “We are in a period of financial wealth destruction ...” “The billionaire blamed the lack of transparency in the credit default market, which he calculated at $US45 trillion, as the root of the curtailing of bank-lending, and hence the credit squeeze.” “That is an amazing figure,” Mr Soros said, noting that the size of the CDS (credit default swaps) market is equal to the total wealth of US households and five times the national debt level.” theaustralian.news.com.au/story/0,25197,23515757

Sounds like 1929 is repeating again. Is the economy in a serious financial crisis NOW? The simple fact is that many, many banks are anticipated to go under in coming months. 1,000 banks estimated to fail soon.

“In an exclusive interview with CNBC.com, Wilbur Ross, chairman and CEO of WL Ross & Co., says he sees possibly as many as a thousand bank closures in the coming months.” "I do think a lot of the regional ones will (close)…” cnbc.com/id/26710362, 9-15-2008

Any of you know who Jim Cramer is? I know the majority of you do. He has the most popular money TV show call “Mad Money.” The evening of the great crash he was in near tears and said he had steered so many of his followers wrong. He had the CEO of Wachovia on his show just 2 weeks earlier. And of course the Wachovia executive misquoted the dollar amount in bad Wachovia loans. But what captured my attention dramatically was a statement Jim Cramer made rather quickly. I doubt if many of the TV watchers even caught his words because he said them so quickly. Jim Cramer said you must own gold now. And another favorable few words was the 2 words “mineral stocks.” Interesting. These financial gurus are not unaware. They understand where we are now. It is tough to believe. It has been talked about by contrarians for so many years that when the event finally happens it is difficult and hard to truly comprehend. And what is primarily driving the economy to the garbage heap are derivative hedge funds. These are very dangerously leveraged bets.

What are derivatives?

“Just to clarify this credit pyramid that looks like a Ponzi Game: you start with 20,000 euros invested by some investors into a hedge funds of funds; this is all equity. Then, this fund of funds borrows - at a leverage ratio of three - and invests the initial capital and the borrowed funds into an hedge fund. Then this hedge fund takes this fund of funds investment and borrows - at a leverage ratio of two - and invests the raised capital and the borrowed funds into a deeply subordinated tranches of Collateralized Debt Obligations (that are themselves highly levered instruments with a leverage ratio of nine). So the final investment of 1 million has behind it 20,000 of equity capital and 980,000 of debt. So, if the value/price of the final investment falls by only 2% the entire capital behind it is wiped out. This is a credit house of cards where a dollar of capital is turned into 49 dollars of additional debt to finance an investment of 50. The systemic dangers/risks of this fragile credit house of cards are complicated to assess as they depend on how much of this debt/credit accumulation is concentrated or spread among many financial intermediaries. But, at face value, this kind of leverage ratios looks scary.” rgemonitor.com/blog/roubini/173905, 1-20-2008

What is Warren Buffet saying about the multi billion dollar bailout and the present calamity?

“Billionaire investor Warren Buffett, calling the market turmoil ``an economic Pearl Harbor,'' said Treasury Secretary Henry Paulson's $700 billion proposal to prop up the U.S. financial system is ``absolutely necessary.'' bloomberg.com/apps/news?pid=20601087&sid=a8B.QQmw5A8M&refer=home, 9-24-2008

Oh, let's talk about gold for a moment. Even the Motley Fool is recommending gold now. Now understand that when the Motley Fool begins to recommend gold and gold equities it is time to wake up.

Motley Fool - “700 Billion Reasons to Own Some Gold”

“Amid this financial crisis of historic proportions, gold is once again gaining favor as a tangible store of honest value. Though often maligned as an outdated relic, gold has tripled in value since 2001. Meanwhile, the greenback has declined 33% against a basket of foreign currencies.” “For those of you wondering what that has to do with your future, I have a list a mile long of reasons to consider having at least some gold exposure. For the purposes of this article, I've pared the list down to five: 

1. Inflation looms ever larger. $700 billion is a ridiculously large sum. But while we've been busy debating the ethical quagmire of conditional capitalism, the Federal Reserve announced a $630 billion bump to its currency injections into the financial system on Monday. Combined with operations earlier in September, that brings the total announced just in the past month to more than $1 trillion. Even without the help of Treasury's $700 billion lifeline, the Fed is placing dollars into circulation at an alarming rate, which many analysts believe is decidedly dollar-negative and predictive of a continued rise in the rate of inflation. As troubled as I am about these policies, there has been a clear negative correlation over time between the value of the U.S. dollar and the price of gold in dollars. For this reason, I view every subsequent commitment of dollars by the billions as a billion more reasons to own gold. 

2. Physical gold is becoming more scarce. The combination of renewed investor demand and a global mining industry facing countless challenges to production has altered the supply and demand dynamic to favor the long-term gold investor. For starters, we have bullion ETFs taking massive quantities of gold bullion off the market. The physical holdings of the SPDR Gold Shares (NYSE: GLD) ETF soared to a new record above 755 tonnes of gold at the end of September. That's more gold than China held in reserve as of June. Furthermore, the Central Fund of Canada (AMEX: CEF), a closed-end fund that owns gold and silver, issued another non-dilutive share offering in September to purchase more bullion. In recent weeks, this Fool watched with interest as a single major purchase wiped out the supply of the world's largest gold refiner, the futures market in Vietnam lacked an adequate supply to redeem contracts for bullion, and the U.S. Mint ran out of the popular gold buffalo bullion coin. Demand is growing, and the above-ground supply of gold appears to be shrinking fast. 

3. Banks are looking to build gold reserves. Across the globe, banking industry experts are forecasting major gold purchases by central banks and private institutions alike. The manager of Austria 's central bank believes that the banks of nations with smaller gold reserves could be considering adding gold to protect themselves against currency fluctuations. China may be starting the process already. Jeremy Charles of HSBC believes institutional investors such as private banks will want to reestablish gold holdings as well. 

4. Guess who's long on the TOCOM? Serious gold investors love to watch the Tokyo Commodities Exchange (TOCOM). The TOCOM lists the names of the entities conducting trades, permitting gold bugs to track the shifts in long and short positions for major traders like Goldman Sachs (NYSE: GS). Reversing a long-standing net short position, a Japanese subsidiary of Goldman shifted to a net long this week.

5. Insiders agree: gold is going much higher. From Goldcorp (NYSE: GG) founder Rob McEwen, to Fronteer Development Group (AMEX: FRG) CEO Mark O'Dea, mining industry executives are increasingly comfortable spelling out their long-term price targets for gold. Executives from Gold Fields (NYSE: GFI) and Barrick Gold (NYSE: ABX) have estimated that the all-in cost of mining gold from the ground amounts to about $800 per ounce for the industry, suggesting the long-term price floor continues to build upward.

“In addition, analysts from Barclays Capital and GFMS believe that gold will reach new highs within the next six months, while Superfund Financial's Aaron Smith expects to see $1,500 gold over the next two to three years.” “Nonetheless, as Goldman shifts from short to long on the TOCOM, and Washington tries to smother a financial fire with cash kindling, I still believe both bullion proxies and well-chosen gold miners will reaffirm gold's relevance as a tangible "safe haven" asset.” fool.com/investing/general/2008/10/02/700-billion-reasons-to-own-some-gold.aspx , 10-2-2008

This whole story is about serious debt and terrible leverage and zero regulation by powerful moneyed interests including the US government. And also let's remember that this is essentially money owed to our foreign buddies. We want to keep that paid up before they get mad and pull the plug. As you have noticed many 401K plans are down 60% to 70%. Physical gold is an insurance to protect capital in times of financial crisis. That is what gold has already begun to do. Think preservation of capital. That is what physical gold is all about. The simple fact is that our economy sits on the edge at this moment. We are not talking about a possible problem down the road. We are talking about a problem that is here NOW!!!

The ship is sinking at this moment.

By David Vaughn
Gold Letter, Inc.
David4054@charter.net

© Copyright 2008, Gold Letter Inc.

“The Worldwatch Institute, an organization that focuses on environmental, social and economic trends, says the current rate of global demand for resources is unsustainable.”  

The publisher and its affiliates, officers, directors and owner may actively trade in investments discussed in this newsletter. They may have positions in the securities recommended and may increase or decrease such positions without notice. The publisher is not a registered investment advisor. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment-related advice. The news and editorial viewpoints, and other information on the investments discussed herein are obtained from sources deemed reliable, but their accuracy is not guaranteed. © Copyright 2008, Gold Letter Inc.

David Vaughn Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

David Whitford
22 Oct 08, 17:58
Economic Depression

I have been reading your article with intrest. I am not an educated man but I have been telling people for about 5 years now that our current economy was not sustainable in the long term. I watched while homes that were purchased for $100,000.00 or less lept to over $500,000.00 in a matter of 9 years. I asked where is the money comming from to pay for these homes?? Then the 40 year mortage arrived. Vehicles that were less than $20,000.00 were now costing over $60,000.00. During this time wages rose little. I own a small oil Field Consulting company so I could increase my rates to counter rising costs but that too has come to an end as Oil Companies are rethinking their capital projects and look to reduce costs. Send me more of your thoughts.

Thank You

David Whitford


John Petty
24 Oct 08, 18:02
The Great Depression Part II & The Cause

Here is an article about the fed chairman during the time of the Great Depression and what he thought caused it. The same thing is happening again for the same reasons. Please read:

In Review: America's Most Egalitarian Banker

Marriner S. Eccles, Beckoning Frontiers: Public and Personal Recollections. New York: Alfred A. Knopf, 1951.

At the start of the Great Depression, Marriner Eccles hardly seemed someone who might lead a charge against the economic orthodoxies that justified grand hoards of private fortune. By the early 1930s, after all, the Utah-born Eccles had become the top banker in the Mountain West, the organizer of the first multibank holding company in the United States.

But Eccles had also come to understand, after watching the great speculative bubbles of the 1920s pop into massive misery, that prosperity — to endure — needs to be shared. Eccles began speaking out on that theme, shortly after the Great Depression began, and soon caught the attention of the early New Dealers.

In 1933, Eccles would become an assistant secretary of the treasury. A year later, Franklin Roosevelt would appoint him to the Federal Reserve Board. He would become Board chair in 1935 and remain in that central position for the next 13 years. No one individual, over those years, had more of an impact on economic policy in the United States.

Looking back on those years, in his 1951 memoir Beckoning Frontiers, Eccles would do his best to explain the impact he set out to make. Mass production, he noted at the outset, demands mass consumption, but people can’t afford to consume if the wealth an economy generates is concentrating at the top.

In the years leading up to the Great Depression, that concentrating was accelerating. A “giant suction pump,” charged Eccles, “had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth.”

“In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands,” Eccles observed, “the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

Sound familiar? The decade of the 1920s that Eccles describes in his 1951 memoir comes across today as eerily familiar. Then as now, the U.S. economy was floating on a sea of debt.

Then as now, inequality was hollowing out the nation. Eccles put the matter bluntly: “Had there been a better distribution of the current income from the national product — in other words, had there been less savings by business and the higher-income groups and more income in the lower groups — we should have had far greater stability in our economy.”

How would Eccles have reacted to our current debt-ridden, war-torn economy? We can’t, of course, know for sure what Eccles would do. But we do know what he did. In 1942, during World War II, a high-powered team of New Deal officials that included Eccles proposed to President Roosevelt that “a ceiling of fifty thousand dollars after taxes should be placed on individual incomes.”

In our current dollars, this $50,000 ceiling would equal about $700,000. What did FDR do with the Eccles proposal? He turned around and asked Congress to place a 100 percent tax on all individual income over $25,000.

Congress would eventually set the nation’s top tax rate at 94 percent on all income over $200,000, and that top tax rate would hover around 90 percent for the next two decades, years that would see the greatest period of middle class prosperity in U.S. economic history.

In 2005, the latest year with statistics available, America’s leading hedge fund managers and the rest of the nation’s top 400 income-earners faced a top tax rate of 35 percent. They actually paid, after loopholes, just 18.2 percent of their incomes in tax.

Marriner Eccles would not approve.

Stat of the Week

In the two decades between 1986 and 2005, America’s top 1 percent of taxpayers saw their share of the nation’s income jump from 11.3 to 21.2 percent. Over those same years, the federal income taxes the top 1 percent paid dropped by an equally stunning margin, from 33.13 percent of total personal income in 1986 to 23.13 percent in 2005, the most current year with IRS stats available. Taxpayers needed to report at least $364,657 in 2005 to enter the top 1 percent.

About Too Much

Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org


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