Dark clouds gathering over America
The mainstream media is full of it lately: recovery. The media jumps on everyone that says something about it, we heard Federal Reserve boss Ben Bernanke say: “the sharp decline in economic activity may be slowing”, and also: “the foundations of our economy are strong”. President Obama said earlier this week: “from where we stand, for the very first time, we are beginning to see glimmers of hope”. If they don’t say it loud enough, then the media itself will produce the propaganda. Like CNBC’s Jim Cramer, who said last week: “I am pronouncing the depression is over”… The reality is much different from what the Fed, the government, and the mainstream media wants you to believe. In fact, dark clouds are gathering over America.
The stock markets make a remarkable recovery, gaining more than 20% over the last months. But this is only a superficial recovery, all sectors of the financial system in the US are propped up with Fed loans and Treasury Bills. Without it, the system would collapse immediately. The balance sheet of the Fed is now a dumping ground for all toxic waste produced by the financial industry. Market commentator Edward Harrison from Credit Writedowns puts it this way: “This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks’ inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into depression-like circumstances once the temporary salve of stimulus has worn off.”
As the stock markets make a superficial recovery, the decline of the real economy is accelerating. Demand is falling in almost every sector, unemployment is skyrocketing, it’s getting tougher every day for the people on Main Street. But the government and the Fed are far more interested in saving Wall Street than saving Main Street. About $13 trillion has been thrown at the crisis so far, but less than 4% of that money has gone to the real economy, where people are struggling just to keep food on the table. More than 96% of the money went to Wall Street in a desperate attempt to save the system from collapse.
Meanwhile the US government is heading for a debt default. The Obama administration is spending like there’s no tomorrow, for example, in March this year alone the federal deficit was only slightly less than half of the deficit for the entire year 2008, and that was a record high year! At the same time, tax revenues are dropping. Last month government spending increased by 41%, but tax revenues decreased by 28%. For years foreigners, especially the Chinese, borrowed trillions of dollars to the US, but this is changing. With government spending getting out of control and vanishing tax revenues it’s possible that a debt default might happen already by the end of the Summer, or early Fall. By then the only way out for the US government is to order the Fed to create even more money out of thin air, making a destructive currency crisis almost unavoidable. This will not only have an economic impact, the danger probably lies more in its social impact.
Of course, we can’t know for sure what will happen in the future. But despite all the stories in the mainstream press about “recovery”, simple observation of what’s going on in reality shows that the chances of a social crisis in the future, caused by the current economic and financial crisis, are way too high for comfort. It’s probably not a bad idea for Americans to use this Summer to prepare for what might come. Right now stock markets, and also the dollar, are kept high artificially. This has a temporary, positive side effect: the price of gold is kept low, artificially. Recently it’s getting a little easier to find gold, so this is a good time to convert money that’s intrinsically worthless into something that keeps its value. Don’t think for a moment you would be able to buy something on a future black market with money, but gold will always be accepted. Make sure you hide your gold from the government, it’s very well possible the government will confiscate it, just like president Roosevelt did in 1933. Besides buying gold, stock up on food and other supplies, and be self-sufficient as much as possible. If you can, leave the city. In times of crisis it’s usually better to avoid crowds… and the government.
Rudy,
Get a grip, Rudy, before you have a stroke! Things are no where near as bad as you make them out to be. Although unemployment is high by historical standards there are still over ninety percent of Americans going to work every day. The pent up demand for goods and services in our country is huge, and it won’t be long before the vast majority of working Americans go on a spending binge.
As far as the U.S. defaulting on its national debt is concerned, it’ll never happen because the government can always issue more debt to cover it. That’s what it’s always done. When America engages in deficit spending it is really “selling off” a piece of the country, bit by bit. The party won’t be over until there’s nothing left to sell.
askcherlock, I really hope things are not as bad, now and in the future. I hope that I’m completely wrong here, but unfortunately, I think I’m not. I don’t have a crystal ball so I can see into the future, it’s just observing what’s going on right now and then see what outcome in the future is likely. And there are just way more signs telling us that it’s more likely the crisis will get worse, not better.
Over ninety percent of Americans go to work and receive a paycheck, but it says nothing about the real level of employment, the official unemployment numbers are sugercoated, these numbers don’t include people who seek a full-time job, but have to accept a part-time job, people who gave up on finding a job, etc. The true unemployment/underemployment rate is more like 15% – 19%.
At some point, not that far in the future, a spending binge is exactly what can kill the dollar. The Obama administration hopes this spending will bring recovery, ignoring the fact that the money involved will dilute the value of the dollar. I would not be surprised if we see the stock markets go up 20% or so when that spending binge comes, but it will be short lived as inflation sets in.
But your reaction raises deeper questions that are more interesting than just plain economic facts. In general, people don’t want to believe, let alone accept, that we might enter a period of economic decline like we haven’t seen in a very long time. People tend to think that how things are right now can continue indefinitely in the future, like your expectancy that the government “always” can issue more debt, because “that’s what it’s always done”. Yes, the government will be forced to issue more debt, through debt monetization to be more exact. But, this can’t go on indefinitely in a financial system based on fiat money, the government always will try to save itself and will issue so much debt through debt monetization, killing the currency in the process. Plenty examples of this happening with fiat money in history, there’s no reason to think it will be different this time. Issuing debt through debt monetization isn’t selling off a piece of the country, but pretend for a minute that it works like you describe. The biggest creditors of the US are foreign countries, so the US is selling off pieces of the country to these foreign countries. What do you think what will happen with the domestic currency of a country if that country is selling off itself bit by bit? And, is the end result of this scenario any less disasterous?
The crazy thing right now is that the US was on a spending binge for years, it was consumption financed with borrowed money that fueled the growth of the US economy, and it left a mountain of debt. Common sense tells us that if you already are up to your ears in debt caused by consumption and borrowing, the medicine to get out of the hole is to increase production and savings, not increasing consumption and taking on even more debt. Think of curing a heroin addict (the economy addicted to debt) by providing him another syringe with loads more heroin… Obama really seems to believe this Keynesian nonsense.
If you believe your wealth stored in dollars is safe in the future and Obama will fix everything, then just ignore the warnings. Maybe you think the people in this story (see here: http://www.chron.com/disp/story.mpl/front/6370000.html), are crazy, but I think they are smart. One of them says: “If you do nothing, you may not regret it. But if you do regret it, you are really going to regret it.”
Just happened upon your site today. Very interesting, I learned some interesting things. Ralph
The idea of being self-sufficient is gaining ground, here a story from USA Today:
http://www.usatoday.com/news/offbeat/2009-04-14-survivalistsinside14_N.htm