Performance of a Number of Global Stock Exchanges Year-To-Date

Except for a few Asian countries, and special situations not pictured perhaps, it looks like a global slump from here.

There are still a select few unbroken housing bubbles out there that may find some adjustment in a future capital crisis.  Canada and Australia come to mind, among others.

Despite the billions of taxpayer funds poured into them, some if not quite a few of the troubled multinational Banks are still in trouble, and a few may be teetering.

Does anyone who is well informed not recognize that the policy errors of the Central Banks and their political cronies have failed to foster a sustainable recovery after five long years of enormous bank subsidies and public misery?

And the fruits of this selfish foolishness may likely be another crisis that is even more decisive?

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.


Related:  The One Percent's Plots To Overthrow Democracy

Jim Rickards and Max Keiser On Currency Wars and the Late Great Depression

I think you will find this to be thought provoking, even though you may not agree with all which they say.

Keep in mind that in the US currently there is a record disparity between the haves and the 'have enough to just get by.' 

So when one talks about economic states and statistics, and they are naturally referring to the familiar averages and norms, in fact there may be much fewer people there at the average than usual. 

Enjoy.

The Great Depression in Ten Pictures

Some of these slides are from my previous blog site, when I was considering some of the policy decisions and data from the first Great Depression in the US. This study was from 1999 to 2001. It was fully fleshed out in my mind by Bernanke's (in)famous essay of 2002, The Fed Has a Printing Press. That pretty much cleared the air for me on the future investment path for gold.

Although I do not list it here, you may also be interesting in the posting, Why the Feds Seized the Gold in 1933. The purpose was to devalue the dollar AND to use the proceeds to recapitalize the banks that were remaining after the FDR bank holiday.

Since the US is not on a gold standard now, the Fed has no need for the gold. It can expand its balance sheet with a few keyclicks, as long as that is their policy decision. Any wide scale confiscation of private property at this point would be purely gratuitous and rather unlikely, recent hysteria not-withstanding.

The plunge in the stock market was 90% into its trough.  The initial decline was made much worse by the austerity that Hoover and his Treasury Secretary Mellon pursued.   

This is a busy chart but it shows the interplay of several key metrics.  In particular, it shows the disaster that is austerity in response to a financial credit crisis such as we are seeing today.

This is the kind of result produced by austerity.  There is a lot of misery in this chart until 1933 when Roosevelt took a more modern approach combining monetary and fiscal actions.  The increase in unemployment in 1938 was a direct result of the premature tightening of the Fed as can be seen on their balance sheet slide a few charts below.

Roosevelt's policies got the American economy back on track.  It was a sound marriage of monetary and fiscal policy.   What made it sustainable was the financial reform, the settling of the banking system, and the emphasis on jobs and growth in the median wage.

The Fed kept expanding the balance sheet into the 1938 period when they prematurely drained reserves out of a fear of inflation and triggered another recession.  That was a clear policy error and can be seen as clear as a bell on this chart below.

Perhaps this chart is what gave Bernanke the idea for 'Operation Twist.'  If so, he is fighting the last war.

Look at those real interest rates.  No wonder the country almost ground to a standstill.  The Fed and the Hoover Administration, particularly Treasury Secretary Mellon, ought to have been ashamed of this policy error.   The action of Roosevelt in 1933 in breaking the dollar against gold and recapitalizing the banks after shutting down the weak ones, and substantial investigation and reforms, did the trick.

The Smoot-Hawley Tariff was enacted on 17 June 1930.  Exports had already been plunging before that because when demand goes slack in a deep recession both imports and exports tend to drop with demand.  I think some of the rhetoric surrounding the issue of global trade in this case is nonsense.  In the Great Depression tariffs did not matter because no one was really standing as the buyer of last resort.  And if the tariffs went into effect in the middle of 1930, they certainly did not have an untoward impact on imports relative to the plunge in exports, again due to prevailing economic conditions.  Notice that net exports remain largely flat throughout the period.   To state this more precisely, the negative effects of Smoot-Hawley are vastly overstated by globalist advocates.  

 

Here is what the real exports and imports figures looked like until 1939.  Again, it is economic recovery and aggregate demand that makes all the difference.   Until tariffs are outsized and predatory, one-sided if you will, they will have much less impact than real economic growth.  And do not overlook the currency devaluation of the dollar to gold in 1933.

Personal Consumption along with Government Program spending and the currency devaluation were obviously factors to the real recovery in GDP especially since it did not come from net exports.  As can be seen from other slides in this series the dip in GDP in 1938 was due to the Fed's draining reserves by increasing bank reserve requirements out of a misplaced fear of inflation.

Another Look at What 'Worked' in the Great Depression

Here is a fairly simple picture of some of the major metrics during the Great Depression.  Too simple yes, but it tracks most of the major indicators.

Hoover followed a policy of 'deleveraging,' that is, allowing for the economy to liquidate its prior excesses without changing much else. The Fed did respond to this crisis by expanding the monetary base fairly significantly as you can see.

The recovery began under Roosevelt, who declared a 'bank holidy' and struck at the heart of the problem, clearing the banking system. But he also followed through with a major currency devaluation, stimulus programs, and significant financial reform.

And that last point is the most important. Hoover's Fed supplied stimulus, but there was really nothing done to fix the system that had caused the Great Crash of 1929 in the first place. And I suspect that if Roosevelt had not taken strong steps to clean up the fraud in the stock market and the banking system, his own stimulus would have fluttered and failed.

Now the common knee jerk reaction to this from those who study the schoolbook given by the monied interests is twofold.

First, that Hoover simply did not go far enough, and if they had only allowed the Depression to continue to deepen, eventually it would have bottomed and things would have improved. I think the answer is clear, in the examples of Italy, Germany and Japan. When an economy is tortured to that extent, the people do not continue to endlessly suffer in silence. They react, badly, and take matters into hand one way or the other.

They say you cannot fix debt with debt. And I say that like most simplistic slogans it is intended to mislead. The real issue is reform and how the debt is used and the gains distributed.

Secondly, they say that the Roosevelt recovery did not last. And it did not continue on a steady trajectory. The Fed engaged in some policy errors and caused a secondary slump in the late 1930s. And the world economy remained troubled. Roosevelt also faced an obstructionist Congress, and a Supreme Court that overturned many of his New Deal programs.

He also faced an attempted military coup d'etat funded by a few of the monied interests who also busy doing business with Mussolini and Hitler, as testified by one of its more decorated war heroes, but the history books don't like to talk about that.  Just another nut job.

Globally, the monied interests seemed to have choose amongst three options: 1.  Go along grudgingly with reform and accept a smaller percentage of the overall economy (Roosevelt), 2. Fund an oligarchic takeover of the government and seek to control it (Hitler), 3.  Sew your wealth into the dresses of your children, and die with them in a basement (Russia).

The US, like all other nations, has plenty of its own dirty little secrets that no one likes to talk about.

The point of this is that austerity following a financial collapse based on fraudulent imbalances does not work and almost always leads to civil disorder. And that stimulus alone does not heal the damage, although it does help to ease the pain if applied correctly.

No, the most important ingredient for a sustained recovery is to reform the abuses that allowed for such a spectacular bubble of excess to exist in the first place. It was all about the misallocation of productive capital and the negative effects of monopolies and financial frauds on the real economy.

At some point this lesson will be burned into our minds by the continuing stagnation of the unreformed economy, even if it is sold as 'the new normal' and not so bad on paper.  It will be a living hell for many, and they will eventually push back, and then things will be resolved, one way or the other.

I hope that the new school of economic thought that rises out of the ashes of what we have now is more serious and mature and thoughtful, if not wise.  But I have not found many economists capable of such original thinking, even among those who claim to carry the progressive banner.  

And certainly not among the ideological schools, who start with an a priori set of premises and then beat reality and torture the market participants to death with them and their supporting statistical and logical fallacies.  Since these schools are based on top down principles and assumptions, they are notoriously slow to change and adapt, but often most vociferous and extreme in their arguments, with adherents whose allegiance is less informed by the intellect and an actual understanding of things, and more like a belief system based on stubbornly held slogans and prejudices. 

Slouching Towards Bethlehem: Double Dip or Banana Split?

"If the 2010 contraction we are now monitoring in consumer demand for discretionary durable goods scales to the full economy as faithfully as the "Great Recession" did, the second dip will, at minimum, be 33% more painful than the first dip and will extend at least half again as long."

This is the case for trouble dead ahead, a worse decline in consumer activity and therefore GDP than the first, and the likelihood of further quantitative easing from the US Federal Reserve to patch over the inability of the political process to reform the financial system and balance the real economy because of their myriad conflicts of interest. These policy errors favoring a small minority will most likely result in a stagflation of the most pernicious and corrosive kind, high unemployment and a rising price of essentials, that may ultimately test the fabric of society. Obsession and sociopathy are not generally ruled or limited by the equilibrium of common sense and ordinary appetite, so I would not expect the powerful minority to draw back from the brink of this crisis voluntarily: a classic scenario for exogenous change. I would enjoy the moral irony of all this if I was watching from the distant future.

The good want power, but to weep barren tears.
The powerful want goodness: worse need for them.
The wise want love, and those who love want wisdom;
And all best things are thus confused to ill.

Shelley, Prometheus Unbound

NBER: Double Dip or Banana Split?
Consumer Metrics Institute
September 21, 2010

We founded the Consumer Metrics Institute precisely because we felt that the economic bureaucrats in Washington were out of touch with the economy that most of us live in. They remind us of those patients sitting in wheelchairs in the "memory impaired" wards at nursing homes: with crystal clear recall of 1937 but no clue about what they ate for breakfast. Thank you, NBER, for making our case.

In contrast, we measure what consumers are actually doing on a daily basis. If, for the sake of argument, we accept that we are not experiencing just "one big scoop," but rather a "double dip" (thereby making the 1930's a "banana split"), we can show evidence that the first dip ended early in 2009. Arguably, we've been monitoring in real-time what could be viewed as two independent consumer demand contraction events that were separated by a stimulus induced "sugar high" last summer. If so, the first dip is ancient history. What is important now is future course of the second dip -- which may just now be revealing itself.

We are far enough "up-stream" in the economic cycle that we can measure changes in consumer demand for discretionary durable goods long before those changes flow "down-stream" to the factories and the GDP. From our up-stream vantage point the "double dip" is not hypothetical, but rather something that we have been watching unfold on a daily basis since January. Now, for the first time, we may have measured what will be the worst of the second dip when it eventually hits the factories -- all because, ironically, our data has started to improve.

Over the 45 days from August 1 to September 15, our Weighted Composite Index has improved substantially, rising from recording a year-over-year contraction rate in excess of 9% to recently registering a contraction rate much nearer to 3%. This is the largest positive movement that we have seen since late 2009. That said, it is important to remember that consumer demand for discretionary durable goods is still contracting, albeit at a slower rate. But the improvement has stopped (at least temporarily) the decline of our 91-day trailing quarter average (our Daily Growth Index):



Our Daily Growth Index reached a -5.86% contraction rate on September 12, which was fully 97% as bad as the worst contraction rate reached during the "Great Recession of 2008" (-6.02% on August 29, 2008). A calendar quarter of comparable GDP growth has occurred among only 1.29% of all quarters of U.S. GDP growth recorded by the Bureau of Economic Analysis of the U.S. Department of Commerce, since the spring of 1947. This corresponds to level of contraction that should be expected only once in 19.4 years, and it comes close on the heels of the 2008 contraction that should occur only once in every 21.4 years.

One of the tools that we have used to monitor the 2010 contraction event is a chart that we call our "Contraction Watch," which overlays graphically the day-by-day progression of the current 2010 contraction onto the "Great Recession of 2008":



In the above chart the two contractions are aligned on the left margin at the first day during each event that our Daily Growth Index went negative, and they progress day-by-day to the right, tracing out the daily rate of contraction. This chart conveys important information about the 2010 event, in particular how it differs in profile from the "Great Recession of 2008." It has now lasted three weeks longer than the "Great Recession" and is perhaps only just now forming a bottom. Furthermore, that bottom is very nearly as low as the one experienced in 2008. Even if the 2010 contraction immediately starts to retrace the recovery pattern seen in 2008, we should expect at least another 120 days or so of net contraction before the consumer portion of the economy is growing once again.

We have previously pointed out that the true severity of any contraction event is the area between the "zero" axis in the above chart and the line being traced out by the daily contraction values. By that measure the "Great Recession of 2008" had a total of 793 percentage-days of contraction, and its severity can be visualized as the amount of area covered by red in the chart below:



Similarly, the current 2010 contraction has just reached 592 percentage-days, and its severity can be visualized as the amount of area covered by blue in this chart:



The blue area above already covers about 75% of the area covered by the 2008 "Great Recession", and the curve has only just begun to start back up. Looking ahead, should the 2010 event recover from its bottom exactly like the 2008 event did, it would still experience another 466 percentage-days of contraction before ending -- resulting in a grand total of 1058 percentage-days of contraction for the 2010 event, fully 33% more severe than the "Great Recession of 2008."

That probably bears repeating: if the 2010 contraction we are now monitoring in consumer demand for discretionary durable goods scales to the full economy as faithfully as the "Great Recession" did, the second dip will, at minimum, be 33% more painful than the first dip and will extend at least half again as long. This, of course, assumes that stimuli comparable to those seen in 2008-2009 will be available to cause such a recovery during 2010-2011. Furthermore, the upturn that we measured in 2008 started when unemployment was still at a 6.1% rate, substantially better than we are observing now. Absent fresh consumer stimuli and dropping unemployment rates, the consumer demand contraction we are witnessing now could very well linger even longer.

Supporting that concern is the shape of the 2010 contraction in the above charts, which is significantly different from that of the "Great Recession of 2008." Of particular interest is the fact that in 2010 consumer demand plateaued for some time in a zone between 1% and 3% contraction from about day-25 through about day-180, before falling off the plateau. Since our data is always reflecting year-over-year changes in consumer demand, we had anticipated a sharp dip in our index as an inverted reflection of the stimuli-induced "green shoots" of late last summer. The long plateau described above, however, is not a reflection of any such now lapsed stimuli -- and as such it may be a new normal baseline for a lingering consumer contraction. Before we get too excited about a new recovery we will wait until our Daily Growth Index breaks significantly above the plateau levels visible in the 2010 line within our "Contraction Watch."

We are monitoring the behavior of internet shopping consumers on a daily basis. Those "up-stream" consumer activities will flow "down-stream" to factories and the GDP over the course of weeks or quarters. It's really not unlike being far up a great river and watching a water-level gauge predict that communities further down the river will be flooding catastrophically in a few days or weeks. Although our flood-gauge may have just peaked, unfortunately the damage further downstream remains inevitable -- it simply hasn't arrived yet.

ZeroHedge: Richard Russell Slams Robert Prechter, Praises Gold, Tells Readers Get Out Of Stocks.

First, Richard Russell does not 'slam' Prechter because he is a gentleman and doesn't really 'slam' anyone. Fights between pundits can be fun in a voyeuristic way, but they are largely unproductive and generally used as a means of gaining attention, and providing distraction from what really matters, in the manner of panem et circenses. And sometimes people use provocative headlines to garner interest as well, in the manner of the New York Post and Daily News.

What Russell is saying is that Prechter is wrong in his interpretation of how deflation will play out, and what the endgame will look like. And he is saying almost the same thing that others, including Eric Janszen and myself, have been saying for quite some time, but in a slightly different ways.

Second, what Bob Prechter does not realize is that a contraction in credit does not imply a one for one decrease in 'money' just as an increase in credit these days does not result in a one for one increase in money. That is because credit is not money, it is the potential for money. Why more people don't get that is beyond me. They trumpet the diminishing returns of money production for each marginal dollar of credit, but they don't admit that this credit is vaporous, and as it dissipates it does not reduce money supply one for one either.

Third, and probably most importantly of all, even as the credit contracts, and the money supply contracts at some lesser rate as show in the money supply figures, the 'basis of value' of the money is also contracting. Since the US dollar is not based on gold, we have to look at what is providing the basis of its value. And what are those things, and what is happening to THEIR value.

And finally, there is a huge overhang of eurodollars out there, that are largely parked in Treasuries mostly of a moderate duration of three to ten years. By buying the Three and Ten year notes the Fed is 'monetizing them' and taking that supply off the market, softening the blow when foreign entities first stop buying them, and then eventually start selling them.

We can't detect the selling yet in the Fed Custodial accounts. And we do not have a reliable reporting of eurodollars because that is the ONLY component of M3 that was discontinued by the Fed a few years back. The rest were maintained. When the Fed said they would no longer report M3 what they were really saying is that they would no longer provide a reliable report on eurodollars. The conspiracy guys may have been right, but they were focusing on the wrong item.

Bernanke and the Fed are going to be playing these markets to manage bonds and the dollar, and it is going to be a balancing act, and most likely a race to the bottom. That is why it is hard to predict. So far Ben is being predictable, doing what he said he would do, even if it is not always clear to everyone. But he has some other things in his bag of tricks, and those might be a little more complex.

What the Fed is doing by lowering the Ten year note by buying it in the market, in addition to picking up the slack from the overseas banks, is trying to trigger another round of refinancing in corporates and mortgages. It is estimated that two trillion in refi's will be triggered if the Fed can get the Ten year down below 2.5 and even approach 2 percent.

And this prolonged quantitative easing has a secondary effect that supports this. These low rates tend to drive investors from low yielding instruments in search of return, which implies a mix of greater duration and risk. More on this at some future date.

I think Elliot Waves are popular because they are not particularly rigorous or scientific, are easily learned, and are flexible enough to justify almost any outcome you wish to see. Their value is that they remind people that things do not go straight up or straight down. Since most charting is just a forecast it might be no better or worse than the others.

But what does discredit Prechter is that he is using an economic monetary model from 'the last crisis' that was valid when the dollar was on an external standard. And it is a pure fiat currency now. That is a huge difference, and the failure to account for that in your thinking is an elementary mistake.

AND even worse, he has been repeatedly wrong about gold for the past eight years and has never admitted or understood why, and merely keeps moving his price levels. Although to his credit he has been very right about Treasuries, and people should not forget that either. Treasuries have been in an epic bull market for quite some time, and like bull markets in stocks have created quite a few market geniuses out there.

Bob has his points for and against like everyone else. He has made some very good calls, and some horrible misses. People tend to remember the hits and forget the misses.

Does Bob ever admit it when he is wrong? He has never done so on gold. And I find stubbornness in the face of failure to predict, the unwillingness to admit error and adjust, to be just the kind of amateurish investing error that causes people to take their trading accounts over Niagara Falls. And I think this is what concerns Richard Russell, that if and when the tide changes and the dollar resumes its long decline lower, that Bob will not recognize or admit it, and will take quite a few trusting souls over the cliff with him.

No matter what happens with easing or not, the primary issue is that a relatively small financial elite has taken control of the US economy, and is using it for their personal power and wealth, and corrupted the natural market processes.

And this corruption is being transmitted to the rest of the world's economy creating bubbles and collapses in distant places because of the importance of the US economy and the dollar. Since the Bankers have control of the issuance of the world's reserve currency, they can bend the world to their will, and their willfulness is not beneficial to anyone except themselves. The world is seeing the continuation of the 'cold war' under different means and with different objectives, and with a different set of adversaries and alliances.

But what about Japan? There are easily twenty examples of monetary crises and economic collapses since WW II, and Japan is the one seized upon as THE example of what MUST happen in the US, despite the tremendous differences in position of the two countries economically, culturally, and demographically. Talk about conformational bias. I have spoken about this at length in the past. Japan demonstrates that monetary outcomes in a pure fiat regime are a policy decision. And Japan was homogenous enough, and small enough, to play in its own policy sandbox long enough to realize the outcome that was achieved. Until recently, Japan was essentially a 'one party' democracy imposed on them after the War by the US, ruled by the LDP and the big corporations, the keiretsu.

All things considered, the Russian outcome seem more likely to me, except the US is short on natural resources, so it is hard to forecast what will finally trigger the recovery. The dominant industry is financial fraud, demand that seems to be on the decline in US' trading partners, unholy alliances amongst central banks notwithstanding.

The US financial sector is still greatly oversized, and exacting a debilitating tax on the real economy. The markets are manipulated and rife with fraud, so productive capital formation and allocation is short circuited by short term speculation at almost every turn. There will be no recovery unless the system can be brought back to a pre-bubble state. And the system will not cure itself by deprivation or a false austerity, dishing out more punishment to the victims. This will provoke a destructive reaction, not what anyone would call a cure.

That is the real issue. Everything else to me is a sideshow, gossip, distraction, and noise.

You can read the original article Richard Russell Slams Robert Prechter, Praises Gold, Tells Readers To Get Out Of Stocks.

The Monetary Base During the Great Depression and Today

Economic commentator Marty Weiss has put out this chart with the somewhat florid headline, Bernanke Running Amuck

"Fed Chairman Bernanke is running amok, and for the first time since the birth of the U.S. dollar, our government is egregiously abusing its power to print money.

Specifically, from September 10, 2008 to March 10 of this year, he has increased the nation’s monetary base from $850 billion to $2.1 trillion — an irresponsible, irrational and insane increase of 2.5 times in just 18 months.

It is, by far, the greatest monetary expansion in U.S. history. And you must not underestimate its sweeping historical significance."

This chart with its editorial commentary are from Marty Weiss.



Here is a closer look at this monetary expansion, without the editorial comment



Is it without historical precedent? I wondered.

Let's take a look again at a prior period of dollar devaluation and monetary expansion in a period of deep recession, the period in the 1930's in which the US departed from specie currency to facilitate the radical expansion of the monetary base.



As you can see, the Federal Reserve increased the monetary base in several steps, resulting in an aggregate increase of about 155% in four years. In this chart above one can also nicely see the contraction in the monetary base, the tightening, that caused a dip again into recession in 1937.

It is also good to note that the recession ended and the economy was in recovery prior to the start of WW II, which I would tend to mark from Hitler's invasion of Poland in August, 1939. There was a military buildup in Britain before then, but I believe that the common assumption that only the World War could have ended the Great Depression was mistaken.

If real GDP is any indication, the recovery of the economy was underway, but somewhat anemic compared to its prior levels, reflected in a slow decline in unemployment. It is absolutely essential to remember that the US had become a major exporting power in the aftermath of the first World War. The decline therefore of world trade with the onset of the Depression hit the US particularly hard. But the recovery was underway, until the Fed dampened it with a premature monetary contraction that brought the country back into recession, a full eight years after the great crash. Such is the power of economic bubbles to distort the productive economy and foster pernicious malinvestment.



What prolonged the Depression in the US was the Federal Reserve's preoccupation with inflation that caused it to prematurely contract the money supply. In addition, the Supreme Court overturned most of the New Deal employment programs before the economy had fully recovered from the shock of the Crash of 1929, and the severe damage inflicted by liquidationism on the financial system and the real economy. One can hardly appreciate today the impact of repeated banking failures, with no recourse or insurance, on the public confidence.

It is instructive to look at the Consumer Price Index for that period of time to see what was motivating the Fed.



It is fair to say that the Fed made several policy errors out of a fear of inflation. Keep in mind that it was only 1933 that the Fed had been freed of the gold standard, and there was tremendous pressure from the monied interests to maintain a strong currency, as we can see, to a fault. The public interest was sacrificed to protect the pre-Crash gains of the wealthy.

The US economy had a more difficult time adjusting to the collapse and the Depression because it had been a net exporting nation in the 1920's. The decline in markets for its exports, and the constrictions in international trade symbolized in the US by the Smoot-Hawley tariffs, affected it much more than other nations that had been net importers, and which exited the Depression earlier.

With the collapse of its export business, the US would have been well-advised to stimulate its domestic markets, to help take up the slack and help to rebalance its productive capacity. In this case, domestic liquidationism was exactly the wrong thing to do. This, by the way, is why the Wall Street money men starting looking at foreign direct investments in the domestic production of recovering economies such as Germany and Italy in the late 1930's. Indeed, the search for profit was so compelling that several of the money houses, and famous men, did not stop investing with the Nazis until they were prosecuted under the Trading with the Enemy laws.

This provides an instructive example to the exporters German and China in this modern crisis perhaps. Now is the time for them to stimulate domestic markets. China must create internal markets, and Germany best try and hold the EU together and keep it healthy.

Japan is in a much more difficult circumstance because of its particular demographics and cultural homogeneity. I see no way out for them in the short term.

Here is what the monetary base did during World War II. As one can easily see, war is bad for people but good for industrial output and monetary expansion.



Expansion of the monetary base during the war was nothing short of astonishing, if one forgets that there was a significant monetization of war debts occurring, and there was less opportunity for inflation because of rationing and wage and price controls. But inflation there was, and it gained a significant leg up after the War.



Here is our real GDP chart extended through the War so one can more easily see the build up and then the flattening of growth post War.



Where Do We Go From Here?

The status quo has failed in its own imbalances and artificial distortions. But while avoiding bubbles in the first place through fiscal responsibility and restraint is certainly the right thing to do, plunging a country which is in the aftermath of a bubble collapse into a hard regime, such as the liquidationists might prescribe, is somewhat like taking a patient which has just had a heart attack and throwing them on a rigorous treadmill regimen. After all, running is good for them and if they had run in the first place they might not have had a heart attack, so let's have them run off that heart disease right now. Seems like common sense, but common sense does not apply to dogmatically inclined schools of thought.

What the US needs to do now is reform its financial system and balance its economy, which means shrinking the financial sector significantly as compared to its real productive economy. This is going to be difficult to do because it will require rebuilding the industrial base and repairing infrastructure, and increasing the median wage.

The US needs to relinquish the greater part of its 720 military bases overseas, which are a tremendous cash drain. It needs to turn its vision inward, to its own people, who have been sorely neglected. This is not a call to isolationism, but rather the need to rethink and reorder ones priorities after a serious setback. Continuing on as before, which is what the US has been trying to so since the tech bubble crash, obviously is not working.

The oligarchies and corporate trusts must be broken down to restore competition in a number of areas from production to finance to the media, and some more even measure of wealth distribution to provide a sustainable equilibrium. A nation cannot endure, half slave and half free. And it surely cannot endure with two percent of the people monopolizing fifty percent of the capital. I am not saying it is good or bad. What I am saying is that historically it leads to abuse, repression, stagnation, reaction, revolution, renewal or collapse. All very painful and disruptive to progress. Societies are complex and interdependent, seeking their own balance in an ebb and flow of centralization and decentralization of power, the rise and fall of the individual. Some societies rise to great heights, and suffer great falls, never to return. Where is the glory that was Greece, the grandeur that was Rome?

The lesser concern for the US now is globalization, new trade agreements, and its debt, which is largely held by foreigners who have provided vendor financing while using exports to build their own economies. The mercantilists are addicted to exports because it provides them the means to bring in national wealth for the benefit of a narrow elite, without empowering the masses and allowing them a greater measure of say in their government, with only a modestly improved standard of living.

This Will Not Be Your Father's Inflation

Why is this important? Because as I think is apparent in the stunning chart contained in Debt Saturation in the US Dollar Economy, the US dollar is already entering an inflationary spiral that will lead to its destruction and reissuance.



Although as you know I always allow that deflation and inflation are policy decisions, at some point a threshold can be passed, and the likelihood of one event or the other becomes more compelling. The US is at that crossroads wherein it must change, or go down the painful path of selective monetary default, of a degree different than a hyperinflation, more similar to that which was seen in the former Soviet Union, than the monetary implosion of a Weimar.

One can watch the growth of the traditional or even innovative money supply figures, and be reassured at their nominal levels, only to misunderstand that money has a character and quantity of backing, that can erode as surely as the supply of money can increase, to produce a type of inflation that comes upon a nation quickly, like a thief in the night. It will bear the appearance of stagflation, because it is caused by a degeneration of the productive economy coupled with a disproportionately increasing money supply.

A transactional economy can have all the appearance of vital growth and activity, when in fact it may be an increasingly hollow shell, a Ponzi scheme, and prone to unexpected collapse. Such a systemic collapse was almost witnessed when the US financial system was threatened by the fall of Lehman Brothers. That event was averted. But the system still remains in a precarious, unreformed state of imbalance.

What does a country have to providing a backing to its money, except its natural resources, its productive labor, and the ability to create products of value? Some countries, or more properly empires, may provide the backing for their currency through force and fraud, and a sort of indirect or de facto taxation on the many. These types of arrangements can last many years, but can disappear quickly, based as they are on conditional situations, subject to relatively sudden change.

Cutting expenses to reduce deficits is a weak attempt to reform. One does not starve themselves back to health. What is needed is growth, savings and investment, the reallocation of capital and true valuation of goods and services. The productive economy must come back into balance with the administrative sectors, those being finance and government.

At the end of the day, some of the greatest impediments to economic recovery reside in the selfish and fearful desire for control and power in rather narrow oligarchies, both in the East and the West. They were the primary beneficiaries of the status quo, and they will seek to maintain and even recreate it, even though it has proven to be unsustainable.

Pictures of a Market Crash: Beware the Ides of March, And What Follows After

There are a fair number of private and public forecasters with whom I speak that anticipate a significant market decline in March. As you know I tend to agree to some extent, but with the important caveat that we are in a very different monetary landscape than the last time the Fed engaged in quantitative easing, the early 1930's. In short, I may allow for it, but I am not doing anything different about it -- yet.

The biggest difference is the lack of external standards. This introduces an element of policy decision that has been discussed here on several occasions. In other words, the Fed retains the option, albeit with increasing difficulty, to create another bubble, and levitate stock market prices in the face of deteriorating economic fundamentals.

The dollar was formally devalued by around 40% in 1933. We may yet see that done this time, but more gradually and informally. This is what makes gold controversial today; it exposes the financial engineering. So they feel the need to manage it, to denigrate it as an alternative to their paper. They want to have their cake, and eat it too.

Let's review where we are today.

The Bear Market of 2007-2009, marked by the Crash of 2008, has been a massive decline in equity prices precipitated by the bursting of the credit bubble centered around housing prices and packaged debt obligations of highly questionable valuations. The cause of the bubble was easy Fed monetary policy and the loosened regulation of the financial sector, which reopened the door to old frauds with new names.



Even today, I think most people do not appreciate the sheer magnitude of the decline, and the damage it has done to the real economy. This is the result, I believe, of three factors:

1. An extraordinary expansion of the Monetary Base by the Federal Reserve not seen since the aftermath of the Crash of 1929, and a swath of financial sector support programs from the Fed and the Treasury, resulting in a spectacular fifty percent retracement rally from the stock market bottom. This is the narcotic that permits the country to not notice that a leg is missing.

2. A comprehensive program of perception management by the government in conjunction with the financial sector to sustain consumer confidence and reduce the chance of further panic. In other words, a web of well-intentioned deceit, subject to abuse.

3. An understandable preoccupation by the individual with the details of breaking news, and a short term focus on particular events, diversions, and controversies, bread and circuses, without a true appreciation of the 'big picture,' in part because of some very effective public relations campaigns and a natural human reluctance to face hard problems.

This is resulting in a remarkable case of cognitive dissonance in which some of the victims of a spectacular man-made calamity are opposing remedies and aid as too costly and impractical, even as they walk around amongst the bleeding carnage.

For those who read the contemporary literature in the early Thirties, this is nothing new. In the early Thirties there was no sense, except for a few notable exceptions, of the magnitude of what had so recently happened. There was the sense of life goes on which seems almost eerie now to a modern reader. Indeed, Herbert Hoover could dismiss a delegation of concerned citizens with the advice that they were too late, the crisis was past, and all was well. Sound familiar?



The parallels with the Thirties and the Teens (today) are many, and uncanny.

There is the reformer President, elected to redress the extremely pro-business policies of his Republican predecessor. In the Thirties they had FDR who was a decisive and experienced leader. In the Teens the US has a relatively inexperienced community organizer, more influenced by the Wall Street monied interests, and a past history of 'playing safe,' who is trying to manage through indirection and persuasion.

There is a Republican minority in the Congress which opposes all new programs and actions despite giving lip service in order to delay and debilitate. In the Thirties the Republicans were over-ridden by a powerful, activist President, who created a "New Deal" set of legislation, much of which was later overturned by a Supreme Court which had been largely seated by the previous Republican Administrations.

Indeed, the remaining New Deal programs that were successful, the reforms of Glass-Steagall and the safety net of Social Security, are being overturned or are under attack in an almost bucket list fashion.



So what next?

Another leg down in the economy and the financial markets is a high probability.



Although one cannot see it just yet in the fog of corrupted government statistics, the economy is not improving and the US Consumers are flat on their back, scraping by for the most part, except for the upper percentiles who were made fat by the credit bubble, and are still extracting rents from it through officially sanctioned subsidies.

This was no accident; there is a consciousness behind it.

There are far too many otherwise responsible people who are not taking the situation with the high seriousness it deserves. Some would even like to see the US economy collapse, inflicting serious pain and deprivation because it may:

1.suit their investment positions and feed their egos because they think themselves above it all,
2. satisfy their ideological and emotional needs to see punishment administered, almost always to others, for the excesses of the credit bubble, especially if they are relatively weak, unwitting victims, and
3. the sheer nastiness and immaturity of a portion of the population which wallows in stereotypes, childish behaviour, and disappointment with their own lives. They tend to find and follow demagogues that feed their bitter hatreds.

They know not what they do, until they do it, and see the results. It is often a good bet to assume that people will be irrational, almost to the point of idiocy and self-destruction. And some of them never wake up until they are overrun, and then will not admit their error out of a stubborn sense of pride and embarrassment.

It seems likely that there will be a new leg down in financial asset valuations, as reality overcomes often not-so-subtle propaganda and disinformation. It may start in March, or it may be a 'market break' that provides a subtle warning for a large decline that begins in September 2010, with multi year progression to lows that are, as of now, almost unimaginable, at least in real terms. I cannot stress this issue of nominal versus real enough. As inflation comes, it will initially be in a 'stealth' manner, with the backing of the currency eroding slowly but steadily, and largely unrecognized for some time. It is not enough to try and count the dollars; one also has to consider the value behind them, the quality of the wealth, and its vitality. This is the case for stagflation.

The Fed is acting to mask quite a bit of this. One would hope that they would also not re-enact the policy error of their predecessors and raise rates prematurely out of fear of inflation before the structural healing can occur.

The debt incurred during the credit bubble cannot be paid and must be liquidated. So far we have largely seen transference of debt obligations from insiders to the public. Ironically these same insiders are lobbying to maintain these subsidies and transfers, and also to take a hard line against any further remediation of the consequences of the collapse, which they caused, on the public, to have more for themselves. Their greed and hypocrisy know no bounds.

But the policy error might not be caused by the Fed's direct action, but replicated by a governmental failure to stimulate the economy effectively AND to reform the highly inefficient and impractical financial system. The purpose of stimulus is to provide a cushion for structural reform and healing to occur, after an external shock, or even a period of reckless excess and lawlessness. The natural cycle can be disrupted beyond its ability to repair itself. But stimulus without reform is the road to further deterioration and addiction.

As it stands today the global trade system is a farcical construct that favors national elites and multinational corporations. Public policy discussion has been trumped by a handful of economic myths and legends that, even though disproved every day, nevertheless remain resilient in public discussions and reactions. This is because they have become familiar, and because they are the instruments of deception for certain groups of disreputable economists and policy influencers.

A more serious market crash might cause people to recognize the severity of their problems, and the thinness of the arguments of the monied interests for the status quo which is most clearly unsustainable. But a sizable minority of the population is always highly suggestible; demagogues rely on this.

The eventual outcome for the US is difficult to forecast with any precision now because there are multiple paths that events might take at several key decision points. Some of them might be rather disruptive and upsetting to civil tranquility. Game changers.

But as the dust continues to settle, the probabilities will continue to clarify.

"Suffering can strengthen our endurance. Endurance encourages strength of character. Character supports hope and confidence even during hard times and trials. And hope does not disappoint us in the end, because God has given us the Spirit and filled our hearts with His love." Romans 5:3-5

It is right to be cautious, and it is human to be afraid. But let us not allow our fears and trials to turn us from our genuine humanity in God's grace no matter how dire the day, even if it may drive some of the world once again into the jaws of desperation and madness. And if you stumble, gather yourself up and go forward again without turning from the way. For what is the profit to gain and hold some small and temporary advantage in this world, but to lose your self, forever.

Franklin Roosevelt's First Inaugural Address: A Fitting Reminder For Our Crisis Today

I remember my grandmother telling me how she and her family listened to this speech on the radio, in the dark days in the depths of the Great Depression. It is still hard for us now to appreciate how desperate and fearful the people were then. We think that we know, but most of us do not genuinely understand. How can we?

"Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone."

I never read it in full, but like most people just remember the famous quote about fear.

It's worth reading this. It shows a mindset in terrible, overwhelming times that was determined to set things right, not to take care of business, but to address the business of the people directly, and not only the immediate concerns of the crisis but the long term problems that caused the financial collapse in meaningful ways.

Ways, I should add, that stood the test of time until they were overturned in the 1990's by the efficient markets ideology and a multi-million dollar lobbying effort by Wall Street.

"There are many ways in which it can be helped, but it can never be helped merely by talking about it. We must act and act quickly. Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency."

Compare these words with those of the current president, and his slowness to respond with effective reform, and the ordering of his priorities. Does Obama do anything that is not first vetted by the corporate status quo? The most elite elements of the American establishment engaged in a plot to overthrow the Roosevelt administration, and found an investment climate to their liking in fascist Germany, even into the 1940's. How soon we forget.

Like him or not, FDR was a giant, a great leader, and his priorities were clear in his words and actions. He was a voice of hope and concern for the individual when the better part of the developed world was entwining itself in fascism, corporatism, militarism, and the spiral of self-destruction.

In comparison, for all his hypnotic rhetoric, Obama seems very insubstantial, and you'll forgive me for speaking so plainly, he appears to be a cheap bullshit artist in the service of special interests. And the majority of the Congress with him.

h/t Yves for the link to this speech.

Franklin D. Roosevelt
First Inaugural Address
Saturday, March 4, 1933

"I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our Nation impels.

This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper.

So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.

In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone.

More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment.

Yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.

Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, on unselfish performance; without them it cannot live.

Restoration calls, however, not for changes in ethics alone. This Nation asks for action, and action now.

Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources.

Hand in hand with this we must frankly recognize the overbalance of population in our industrial centers and, by engaging on a national scale in a redistribution, endeavor to provide a better use of the land for those best fitted for the land. The task can be helped by definite efforts to raise the values of agricultural products and with this the power to purchase the output of our cities.

It can be helped by preventing realistically the tragedy of the growing loss through foreclosure of our small homes and our farms. It can be helped by insistence that the Federal, State, and local governments act forthwith on the demand that their cost be drastically reduced. It can be helped by the unifying of relief activities which today are often scattered, uneconomical, and unequal. It can be helped by national planning for and supervision of all forms of transportation and of communications and other utilities which have a definitely public character.

There are many ways in which it can be helped, but it can never be helped merely by talking about it. We must act and act quickly.

Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency.

There are the lines of attack. I shall presently urge upon a new Congress in special session detailed measures for their fulfillment, and I shall seek the immediate assistance of the several States.

Through this program of action we address ourselves to putting our own national house in order and making income balance outgo. Our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy. I favor as a practical policy the putting of first things first. I shall spare no effort to restore world trade by international economic readjustment, but the emergency at home cannot wait on that accomplishment.

The basic thought that guides these specific means of national recovery is not narrowly nationalistic. It is the insistence, as a first consideration, upon the interdependence of the various elements in all parts of the United States—a recognition of the old and permanently important manifestation of the American spirit of the pioneer. It is the way to recovery. It is the immediate way. It is the strongest assurance that the recovery will endure.

In the field of world policy I would dedicate this Nation to the policy of the good neighbor—the neighbor who resolutely respects himself and, because he does so, respects the rights of others—the neighbor who respects his obligations and respects the sanctity of his agreements in and with a world of neighbors.

If I read the temper of our people correctly, we now realize as we have never realized before our interdependence on each other; that we can not merely take but we must give as well; that if we are to go forward, we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because without such discipline no progress is made, no leadership becomes effective. We are, I know, ready and willing to submit our lives and property to such discipline, because it makes possible a leadership which aims at a larger good. This I propose to offer, pledging that the larger purposes will bind upon us all as a sacred obligation with a unity of duty hitherto evoked only in time of armed strife.

With this pledge taken, I assume unhesitatingly the leadership of this great army of our people dedicated to a disciplined attack upon our common problems.

Action in this image and to this end is feasible under the form of government which we have inherited from our ancestors. Our Constitution is so simple and practical that it is possible always to meet extraordinary needs by changes in emphasis and arrangement without loss of essential form. That is why our constitutional system has proved itself the most superbly enduring political mechanism the modern world has produced. It has met every stress of vast expansion of territory, of foreign wars, of bitter internal strife, of world relations.

It is to be hoped that the normal balance of executive and legislative authority may be wholly adequate to meet the unprecedented task before us. But it may be that an unprecedented demand and need for undelayed action may call for temporary departure from that normal balance of public procedure.

I am prepared under my constitutional duty to recommend the measures that a stricken nation in the midst of a stricken world may require. These measures, or such other measures as the Congress may build out of its experience and wisdom, I shall seek, within my constitutional authority, to bring to speedy adoption.

But in the event that the Congress shall fail to take one of these two courses, and in the event that the national emergency is still critical, I shall not evade the clear course of duty that will then confront me. I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.

For the trust reposed in me I will return the courage and the devotion that befit the time. I can do no less.

We face the arduous days that lie before us in the warm courage of the national unity; with the clear consciousness of seeking old and precious moral values; with the clean satisfaction that comes from the stern performance of duty by old and young alike. We aim at the assurance of a rounded and permanent national life.

We do not distrust the future of essential democracy. The people of the United States have not failed. In their need they have registered a mandate that they want direct, vigorous action. They have asked for discipline and direction under leadership. They have made me the present instrument of their wishes. In the spirit of the gift I take it.

In this dedication of a Nation we humbly ask the blessing of God. May He protect each and every one of us. May He guide me in the days to come."

The Worst Is Yet to Come

One of the favorite retail analysts in the Cafe is Howard Davidowitz, and he is probably in the top ten overall. The accomplished shoppers in our crowd (predominantly the ladies for some reason, who have a canny sense of price and demand and store quality, whereas yours truly becomes overwhelmed by a numbing dread upon entering most retail establishments of the non-Home Depot or non-electronics persuasion) all tend to shake their heads in agreement when David speaks to the ups and downs of specific store chains and trends. I can think of no higher recommendation, for these are for the most part the front line consumers and they take their duties seriously.

Last night in speaking with a youngish acquaintance just completing law school (another one, alas) who was looking for advice on long term investments we observed that now is the time to remain liquid because 'the worst is yet to come.'

In 1999 I began an intense study of market bubbles and crashes as mentioned before. This included buying contemporary magazines and newspapers and reading them to see what was going through people's minds.

Today reminds me of the briefly sunny period in 1930-1 when most economists and public officials agreed that the Depression was already over and the economy was back on track. President Hoover dismissed a delegation of businessmen who came to Washington with ideas on stabilizing the economy with "Too late gentlemen, the slump is over."

There are few things from my childhood that I remember more vividly than grandmother's comments regarding this false recovery. "If we knew what was coming, we would have killed ourselves." This from as strong a person as I have ever encountered, with a faith that would break rocks. The Great Depression left an indelible mark, or more accurately scar, on her entire family, and my father's as well.

And I never heard the name "Franklin Roosevelt" from her lips without it being preceded by "God bless" followed by "he saved my family." Not all of her children unfortunately. She said she cried so much and so often that she was never able to cry again. And she did not, even at the end.

Of course it was the second half of the great stock decline after the 1929 Crash that did the most damage, because this is when the carnage moved from financial assets and the banks into the real economy, with unemployment rising to 25% into the trough of the Depression in 1930.

Roosevelt came into office and began spending and innovating with programs to attempt to mitigate the impact of the economic collapse on America's families. Other countries, such as Italy, German and Japan, made their own political choices. We need to bear in mind that America itself came perilously close to a genuine brand fascism, and not the cartoon caricature presidential overreach cited by the corporate elites of the day. Hitler and Mussolini were the solutions proposed by the industrialists, they were their men, and they bankrolled them heavily.

And so here we are. What comes next is anyone's guess. But by now you should be accepting and internalizing the general themes, including the devaluation of the dollar down to levels that are probably still not believable, an activist central government nationalizing key industries, civil unrest and agitation, and a confusing cacophony of hysterical mumbo jumbo coming from media whores and corrupt officials.

The crisis is not over. We have just finished the beginning, the easy part, the initial collapse of the bubble. The worst is yet to come.

Watch the video of this commentary from Howard Davidowitz linked below if you get an opportunity. His delivery is priceless New York style.


"The Worst Is Yet to Come": If You're Not Petrified, You're Not Paying Attention
Aaron Task
May 15, 2009 09:31am EDT

The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was "preposterous" to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.

"We're in a complete mess and the consumer is smart enough to know it," says Davidowitz, whose firm does consulting for the retail industry. "If the consumer isn't petrified, he or she is a damn fool."

Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: "The worst is yet to come with consumers and banks," he says. "This country is going into a 10-year decline. Living standards will never be the same."

This outlook is based on the following main points:

With the unemployment rate rising into double digits - and that's not counting the millions of "underemployed" Americans - consumers are hitting the breaks, which is having a huge impact, given consumer spending accounts for about 70% of economic activity.

Rising unemployment and the $8 trillion negative wealth effect of housing mean more Americans will default on not just mortgages but student loans and auto loans and credit card debt.

More consumer loan defaults will hit banks, which are also threatened by what Davidowitz calls a "depression" in commercial real estate, noting the recent bankruptcy of General Growth Properties and distressed sales by Developers Diversified and other REITs.

As for all the hullabaloo about the stress tests, he says they were a sham and part of a "con game to get private money to finance these institutions because [Treasury] can't get more money from Congress. It's the ‘greater fool' theory."

"We're now in Barack Obama's world where money goes into the most inefficient parts of the economy and we're bailing everyone out," says Daviowitz, who opposes bailouts for financials and automakers alike. "The bailout money is in the sewer and gone."

The Worst Is Yet To Come (Video) - Howard Davidowitz

Economist Niall Ferguson on the Financial Crisis: "There Will Be Blood"

"The way to make money is to buy when blood is running in the streets."
John D. Rockefeller

Here are excerpts of a lengthy interview with the noted economist Niall Ferguson. The entire interview can be read at the link provided to The Globe and Mail where it appeared.

Niall Ferguson, MA, D.Phil., is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School. He is also a Senior Research Fellow at Jesus College, Oxford University, and a Senior Fellow at the Hoover Institution, Stanford University.

Who can truly say what will happen? After all, life is a school of probability. But if the trends of hubris and reckless disregard for justice continue we may very well have an opportunity to test John D. Rockefeller's investment advice.

The Globe and Mail
'There will be blood'
By Heather Scoffield
February 23, 2009 at 6:45 PM EST

...Policy makers and forecasters who see a recovery next year are probably lying to boost public confidence, he said. And the crisis will eventually provoke political conflict, albeit not on the scale of a world war, but violent all the same.

"There will be blood."

...And much of today's mess is the fault of central bankers who targeted consumer-price inflation but purposefully turned a blind eye to asset inflation. (The emphasis is not only purposely, but willfully so - Jesse)

....Partly because they can throw so much at it, and they can do it at a lower cost than anybody else, because the U.S. retains the safe-haven status, which makes the world so unfair. Here is the world's biggest economy, which gave us subprime mortgages, rampant securitization, the collateralized debt obligation, Lehmann Brothers, Merrill Lynch. It is, in a sense, the fons et origo of this crisis. And yet, because it retains safe-haven status, in a global crisis, investors want to increase their exposure to the U.S. Hence, the dollar rally. Hence 10-year Treasuries down below 3 per cent yields. It's almost paradoxical that an American crisis ... reinforces the status of the United States as a safe haven.

...As you know, Chimerica – the fusion of China and America – is one of my big ideas. It's really the key to how the global financial system works, and has been now for about a decade. At the end of The Ascent of Money, I speculate about whether or not that relationship will survive. If it breaks down, then all bets are off, for the U.S. and indeed for Asia. I think that's really the key point. Both sides stand to lose from a breakdown of Chimerica, which is why both sides are affirming a commitment to it.”

... “There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out, that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable.

The question is whether the general destabilization, the return of, if you like, political risk, ultimately leads to something really big in the realm of geopolitics. That seems a less certain outcome....

...It's just that I don't see it producing anything comparable with 1914 or 1939. It's kind of hard to envisage a world war. Even when most pessimistic, I struggle to see how that would work, because the U.S., for all its difficulties in the financial world, is so overwhelmingly dominant in the military world.”

....“It's obvious, surely we know by now, that this is something quite different. It's a crisis of excessive debt, the deleveraging process has barely begun, the U.S. consumers are not going to suddenly bounce back and hit the shopping malls just because they get a tax cut. The savings rate is going to continue to rise. These processes have tremendous momentum that quite clearly differentiates them from anything that we've seen, including the early 80s, including 73, 74, 75. Those big crises, the ones that we have lived through, were bad. But seems certain to be deeper, and more protracted.”

...“One possibility is that policy makers are lying in order to encourage people and prevent depression from become a self-fulfilling psychological conditions. That's why it's called a depression … Maybe they don't really believe this, but they're saying it in order to cheer people up, and if they're sufficiently consistent, perhaps people will start to believe it, and then it will magically happen.”

...“August, 2007, was when this crisis began. And if you were really watching the markets carefully, April is when it began, when the various hedge funds started to hemorrhage. The stock markets carried on until October of that year. And in many ways, consumer behaviour in the U.S. did not change until the third quarter of 2008. So there was a massive denial problem. It was like Wile E. Coyote running off a cliff, and they'd run off a cliff and they didn't look down so they didn't start falling. As soon as people realized it was bad, the behaviour switched. Now, people have to try to unscare them before this thing becomes a self-perpetuating downward spiral. I think that's why you have to say ‘growth will return in 2010' with your fingers crossed behind your back.”

...“We kind of have had a bubble in the sense that we've seen such a rally in U.S. government bonds. It's tempting to say that will burst and we'll see yields go back up. Because, you know, $2-trillion worth of debt is going to hit the market this year, maybe more. Supply is exploding just when demand is contracting. You don't need to be a Nobel laureate to see that that has to impact on the price. The difference is there is this thing called the Fed that can step in and start buying the stuff if the foreign demand fades. So it's not completely guaranteed that we'll see bonds sell off in price. (Yes but if the Fed starts overtly monetizing Treasury Debt the limiting factor will be the value of the dollar. It is a 'hinged' constraint, Bonds and Dollar - Jesse)

“There is still this inertia that prevents the dollar from falling off a cliff, that keeps the Treasury market from falling off a cliff. That's really important to bear in mind. I don't think we'll see a bubble distressed assets, because I think the price of these assets has started to fall. Anybody who comes into the market now is essentially paying a premium. There will be better bargains in the middle of this year, and maybe even better bargains later on. If I were in the market to buy distressed assets, I would wait, I would wait a bit longer until they're really desperate. And it might even be better to wait until they're bankrupt.”

...“In the Ascent of Money, I argue that you can't really have a bubble if you don't have a monetary authority that has been excessively generous. From John Law in 1719 to Alan Greenspan in the late 90s, there's always a banker, there's always a central banker making credit too readily available. The second thing is, though, that regulation may not prevent that.”

..."The two great zones of conflict in the 20th century were central and eastern Europe, and a critical part of northeast Asia – Manchuria, Korea. It makes me a little nervous that those are also places that are going to take a very heavy share of the pain. But we're looking at a Great Recession, not a Great Depression. We may be looking at a Lost Decade.

There was a time when if you said the United States was going to suffer a lost decade like Japan did in the 1990s, everybody would have said you were a mad pessimist. That begins to look like quite a good scenario. And I think it's a realistic scenario.

One of the facts is if you subtract mortgage equity withdrawal from the Bush years, the real underlying rate of growth of the U.S. economy was 1 per cent. So much of the consumption has been fuelled by mortgage equity withdrawal. So that seems like a reasonable growth rate for 10 years.

We just don't have an improvement of standard of living of the sort we're grown used to. And indeed if you have a more equitable redistribution through the tax system, which Obama is committed to, it might actually be no discernible downside for middle America and lower-class Americans. So many of the benefits of the boom went to the elites. If you have a lost decade plus redistribution, it may not be that dramatic a change for many, many people. People just have to get over the fact that their wealth wasn't worth what they thought it was in 2006. Whether it's their stock market portfolio or their housing. If we simply go back to where we were, in 2005, that's surely not the worst thing that could happen to us.”

Corporate and US Treasury Yields from 1926 to 1934

The Bonds held up much better than one might have expected, and the spreads between corporates and longer dated Treasuries was remarkably uniform.

Bear in mind that these are yields on this chart, and the value of the underlying bonds moves in the opposite direction to the yield.