THE HISTORY OF THE FUTURE - DIFLATIONARY DEPRESSION 2012-2014
Yair Nir from the black dreams 2011 15 Oct
The hard truth as to why we as a society can not stop the economic collapse, and Discussion about how the coming economic collapse will happen, and how to prepare yourself
Economic indicators show the economy is heading into a deflationary Depression. Out of control debt and high unemployment will force the United States to either cut entitlement benefits or print money. Either way hard times are coming or those on uncertain and unstable incomes will suffer the worst. Economic collapse will appear and come out across the globe.
Recessions are not measured exclusively by GDP contractions. Unemployment, industrial production, real manufacturing, wholesale trade sales and real personal income (less transfer) are all considered.
The U.S. consumer is still the engine of U.S. growth and contributes over 70% of aggregate demand. Yet the over-indebted U.S. consumer--whose deleveraging process has yet to start--will likely continue to put the brakes on consumption, while the savings rate continues to creep up. While this will encourage a rebalancing in the U.S. and global economy, in the medium-term it isn't likely to support strong U.S. and global growth.
A sharp rise in public debt burden--the U.S. Congressional Budget Office estimates that the public-debt-to-GDP ratio will rise from 40% to 80% (in the next decade), or about $9 trillion--will also put a dent in growth.
If long-term rates were to increase to 5%, the resulting increase in the interest rate bill alone would be about $450 billion, or 3% of GDP. The implication is that the fiscal primary surplus will have to be permanently increased by 3% of GDP, which could constitute further pressure on the disposable income of the U.S. consumer.
The U.S. population is aging. With employment still falling,-the rate of human capital accumulation will fall. Moreover, workers who remain unemployed for a long period of time lose skills, while young workers that enter the workforce, but don't find a job, don't acquire on-the-job skills. Reduced investments in worker training and education, coupled with lower capital expenditure, are a recipe for lower productivity ahead. Today, the official unemployment figure is between 9 percent and 10 percent. The real figure is closer to 20 percent when the following is included: underemployed; part-time workers, who seek full-time work; discouraged workers, who stopped seeking employment; and first time job seekers, who are not permitted to file for unemployment insurance unless they are terminated from employment.
While unemployment was near 25 percent during the early 1930s, the economic demand was more closely matched to the skills possessed by labor. As such, the system retained an adequate capacity to effectively resorb the labor pool. Certainly, the inception of WWII facilitated this absorption rate.
Deflationary pressures are still present in the U.S. economy. Demand is falling relative to supply, and excess capacity is still promoting slack in the goods markets.
For example, The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September 2011, The entire gain was "seasonal adjustment." All of it. In other words, in actual dollars there was not only no increase there was a net decrease in sales of approximately five percent - not annualized either, month-over-month!
And now let's go to the BIG PICTURE and try to understand what's going here and where are we heading to…..
In the next graph I try to show a 70 years picture of the economic trend, 1945, post Great War, and forecast from 2012 to 2015, which I believe, will be the bottme of the depression.
Yes, there are many efforts to avoid the economic collapse, but other then pure economic reasons will cancel all efforts. To give explanation the forecast above we have to go back to the first years of exiting out from the great DEPRESSION, when the era of the "BABY BOOMERS" began, 1945 -1960
The 15 years were the pick of all times in civilization expending and birth.
In this graph 1929-1949 crisis , 1949-1967 growth ,1967-1982 social unrest , 1982-2000 comfort and personal expansion , 2000-2016 crisis
Those Baby Boomers came to financial maturity in personal earnings and spending in the years 1980 -2000, bought larger houses, invested in growing and front edge technologies.
Than , when accumulated capital and privet wealth came to a pick , they began leveraging their property by using it as base for more and more loans for investing in real estate or commodity speculation or equities in their mainland or in emerging markets . Conservative bankers began too to use the nostro equity of their banks for investing in high leveraged packages .
The cause of the Great Depression in the 1930's and the Great Recession beginning in 2007 was an overleveraged economy. An overleveraged economy is the direct result of artificially-provided low interest rates from the central bank and superfluous lending on the part of commercial banks. That easy money provided by banks eventually brings debt levels in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sector to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, which is marked by the selling of assets and the paying down of debt.
However, all efforts on the part of our politicians today are to fight the natural healing process and to promote the accumulation of more debt. During this latest economic contraction, the Fed took interest rates to near zero percent and the administration is leveraging up the public sector to record levels in order to re-leverage the private sector. The government's philosophy is tantamount to sticking a frost bitten man in the freezer so he won't have to suffer the pain associated with thawing off his extremities.
And here we come to the year 2000 and the exploding of the TECHNOLOGY BUBBLE , the first big bubble in the new era .
In the end pick of the technology bubble you could find shares of business that never in its life earned 1 dollar and beaded every day millions of dollars, did not have any model of earnings, but its shares cost towsennd of dollars. Or others who earned small money but its P/E was 400-700 times earnings.
chart illustrates how the recent rise in earnings as well as the recent stock market action has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio).. From 1900 into the mid-1990s,
The PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The P/E increased during the dot-com boom (late 1990s,. As a result of the recent spike in corporate earnings as well as relatively lower stock prices (e.g. the S&P 500 currently trades 11.7% off its April 2011 post-financial crisis highs) the PE ratio has dropped to a level that has not existed since 1990
The next bubble came to its first end on 2008; you can call it Debt Crisis or the housing bubble,
I say here that it was only the first end because we are not yet seen the end of it which will come on the first half of 2012 ,
What was the biggest trigger to unfold the housing bubble ?
The generation which started the bubble the " BABY BOOMERS " ended and explode the housing bubble . that generation ,came to maturity and
Began prepare themselves for retirement in the late 2000 th ,
They stopped buying big houses, they stopped leveraging their capital and stopped spending, but started accumulate capital for their retirement.
As the aggregate demand dropped the bursting of the bubble began.
But first let us focus on some critical event we are experience this days
I call it Euro Quake 2011 , the fallout from this crisis could be many times worse than the Lehman Brothers collapse that ushered in the Great Recession of 2008 .
the bailouts of Greece, Ireland and Portugal failed miserably ... tax increases and spending cuts are doing more harm than good ... most megabanks are vulnerable to the crisis ...
Nobody can save Europe now ... next major countries most likely to default ...are Italy, Spain and Britain!
The beginning of the euro zone was established on some base indicators of the economy of the members of the union, but the aspiration of the rich members to expend their exports caused a catastrophic result of entering some very weak and poor members, those poor members, forge their basic economic indicators and borrowed money to improve the standard of living without any ability to repay the loan. The big lenders were the European banks and some American banks .
All Europe economy is doomed from the same reason that there is no following generation to pay the debt of the older generation which is coming to its retirement age.
Why will it fall
The reduction in GDP which occurred during the Great Depression was the direct result of consumers paying down debt and selling off assets. Household debt as a percentage of GDP reached nearly 100% in 1929. The only other year it approached that level was in Q1 of 2009. To put that number into perspective, after the depression ended Household debt did not go back above 50% of GDP until the third quarter of 1985.
From the start of the depression to the end of WW11, Household debt fell from 100% to just above 20% of GDP. Although it was a painful process, it was the only real solution to an economy soaked in debt. But today, thanks to government efforts to carry on our debt-fueled consumption splurge, this current Great Recession has witnessed Household debt barely contract at all; it fell to 92.53% of GDP in Q1 2010.
To make matters even worse, during this current crisis u.s government's response to the economic contraction has been to dramatically increase their borrowing. At the start of the great depression, gross Federal debt was just 16% of GDP. It peaked at just fewer than 44% by the time the depression ended. So while the National debt did increase significantly during that period, it still was relatively benign when viewed from a historical perspective. At the start of this Great Recession, the gross National Debt was 65% of GDP. Today it has exploded to 90% of GDP! Therefore, if you compare the relatively harmless level of debt in the 1930's with that of today.
While it is true that the National Debt did rise dramatically during WW11 (120% in 1946), consumer debt plunged concurrently. So while the nation was adding on debt during the process of fighting and winning the Second World War, households were taking the necessary steps to ensure their balance sheets were well prepared for the aftermath of the battle.
Today, for the first time in our history both the gross national debt and household debt are at or above 90% of GDP.
Many are contending , unfortunately most of those in power at this time, that the government must spend more while the consumer contracts. Their hopes are based in the belief that once the economy gets going they can unwind that debt.
There are two problems with this Keynesian theory. One is that government spending doesn't increase GDP; it only serves to choke off private sector growth. And the other is that the government never believes it's ever a good time to pay off the debt incurred. Therefore, the country is left with a private sector that is contracting and with a massive overhang of debt. That contraction in growth exacerbates debt to GDP levels even further. A long period of debt reconciliation still lies ahead.
If one does not know the real cause of a problem, they should also be unable to provide a genuine solution. Messer's Obama, Bernanke and Geithner do not understand the real cause of this debt crisis.
MARC FABER 01/01/2011 = what should happen in the US is for the president to tell the US, you have to tighten your belts. 'We have to go through hard times for 5 years to repair the damage that was committed over 20-25 years by the Federal Reserve, by the Treasury, by the politicians, and somebody has to tell the truth. But the politicians keep on fueling the illusion that you can spend yourself out of the misery, and that by printing money you will improve the economy, which is not the case...."
If one does not understand that the progenitor of a depression is debt, they will also be unable to provide the genuine solution, which is
d e l e v e r a g I n g. it will be hurtful but it will heal .
And now ….get with me, yair, (Yair Nir from the black dreams), to the space ship which will take us to the not far future …. Your future, whereever you are staying on this planet.
Some of the events will work in contradiction and will revoke each other
What caused the crisis in 2008 was excessive credit growth, excessive leverage in the system, and now the private sector is deleveraging, but governments are printing money, and through huge fiscal deficits are creating even more debt growth. So in other words, what killed the economy is now being applied to revive the economy, and I think this will lead to a disaster.
Pessimism about asset price gains lifting their net worth will lead to the old fashioned route of deleveraging and saving. Household debt as a percentage of disposable income will not trending down because of downtrend in income, this ratio stood at 114.6% in the second quarter of 2011. The direct impact would be slower growth of consumer spending
The bond market is headed for a major crash, with many states and cities no longer able to service their massive debt loads. So, what will that look like when the day of reckoning finally arrives ? How many policeman, fireman, teachers, will find themselves without work? What will happen with crime on the streets?
Forget inflation. Forget price increases.It’s cash…cash…cash. Cash on the barrel…cash in hand…cash and carry. You got cash ? You da king! I expect cash to be more valuable. And if we’re right…it will be more valuable.Stocks, for example, will free fall 30%-60% from the bottom of 03-2009 . And gold. It will lost $700 , its price will be $900 ,but wait before cheering , gold will recover much faster and much earlier than the economy and the stock market
And about cash … The Dollar will gain and will be much stronger currency as the safe haven currency.
Copper, oil, gold and silver, all will fall on fears of slowing growth but much less then equities and bonds, Chairman of the Federal Reserve, and other central banks, they can print an unlimited quantity of money, but you cannot print gold. Gold is limited by its annual supply of around 2,500 tons annually.So it is not that gold is going up, it is that the paper value of money, the purchasing power of money is going down vis-à-vi a unit of account, which is gold.
HOW MUCH INFLUENCE HAVE RESSESION ON COMMODITIES PRICE
following chart displays the inflationary 1967-1982 Secular bear cycle in CPI terms
Gold is commodity, silver and platinum is commodity!
You think buying a house is a good deal after its price went down 40% ? , Mr. Market doesn’t care. Just as he didn’t mind pushing up prices to dizzying heights he also doesn’t mind pushing them down to dreary lows. He’s an equal-opportunity deceiver. First, he made people think that housing always goes up. Now, he’ll make them think that it always goes down. And when he’s finished, you’ll be able to buy a house for about half today’s price.
SURPISE! Population pressure will ease. The rate of immigration, for example, is also going down. There are reports of illegal immigrants returning home in such numbers that there are now more leaving than coming. Besides, with so few jobs opening up.
A trade and currency war with China will have a detrimental effect on both countries but less so for the Chinese. For China it will mean less exports and a lower value on their current Treasury holdings. Eventually, the Chinese will grow its middle class and be able to consume its own production. But for the U.S. it will mean a much higher interest expense on our debt as the Treasury Department scampers to find a replacement for China's support of u.s bond market. It will also send interest rates up to a level that would cripple u.s still overleveraged private sector and now massively-indebted public sector. it will mean the return of inflation in earnest for all U.S. consumers -- especially given u.s heavy reliance on imports.
And for the finale….. as we know the nature of politicians , A GREAT WAR IS WAITING FOR US IN THE END OF THE TUNNEL …….
Save your money , protect your family , protect your business , expect cash to be more valuable , invest a good proportion of your wealth in gold , not now ,only after the first big shock ,when the dust will sink .
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this article.
Yair Nir from the black dreams
On our way to long bear market October 2011
