This article previously appeared in the December 2009 edition of the Casey Report.
As crooked politicians, Federal Reserve hacks, and cheerleading media pundits inform you the recession is over, you probably have a sneaking suspicion they are lying.
The National Bureau of Economic Research is the arbiter of business cycle recessions. They define a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production.”
A depression is characterized by its length, and by abnormal increases in unemployment, a decline in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation, financial crisis, and bank failures are also common elements of a depression. Let’s assess where the U.S. economy stands at the moment:
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A few economic indicators such as GDP and Personal Income have shown minor positive blips in the most recent quarter due to the unprecedented stimulus applied by the government and Federal Reserve. These effects will be short lived as the stimulus wears off and the economy resumes its downward spiral. At this point in the crisis, real GDP has only fallen 3.7%. By contrast, between 1929 and 1930, real GDP declined by 8.6%. And by the end of 1932, real GDP had collapsed by 26.7%.
Remarkably, real GDP then surged by 43% between 1932 and 1937, to a level significantly above the 1929 level. This fact should be kept in mind as politicians crowed about a 2.8% increase in GDP between 2nd and 3rd Quarter of 2009 as the end of the crisis. The 4th Quarter growth of 5.9% was a mirage generated by inventory restocking.
To date, the Federal Reserve has printed well over a trillion dollars in an attempt to evade a deflationary collapse, including a $700 billion bank bailout and a $787 billion stimulus package. And then there was $3 billion wasted on Cash for Clunkers ($24,000 per vehicle), $28 billion squandered on the $8,500 homebuyer tax credit, and an artificial suppressing of interest rates to 0% with $300 billion of mortgage-backed securities. And all we’ve gotten is a 2.8% increase in GDP?
Based on government-reported figures, our GDP has not fallen anywhere near the amount it declined during the Great Depression. But if you believe government-reported figures, I have an indoor ski resort in Dubai I’d like to sell you.
The fact is the government has systematically underreported inflation since the early 1980s. By doing so, it has systematically overstated GDP. Economist John Williams presents the true GDP growth in the following chart. As you can see, the U.S. has effectively been in a recession since 2001. Using these figures, it is probable that we are in the midst of a second Great Depression.
In response, the bureaucrats and financial gurus scoff, pointing to unemployment of 25% during the Great Depression versus 9.7% today. Again, the government figures dramatically underestimate unemployment. The true, non-government-manipulated rate according to John Williams is currently 21%.
During the Great Depression, there was no FDIC. One-third of all the banks in the United States failed over a five-year period, with 8% of all U.S. banks going under in the first two years alone. In 2009 only 140 banks failed, but bank analyst Chris Whalen from Institutional Analytics predicts that at least 1,000 banks will follow before this crisis is over.
That would be 12% of all the banks in the U.S.
The fact is that the U.S. banking system has seized up, with many banks now deserving the label of “zombie banks.” Collectively, these zombie banks have hundreds of billions in toxic assets sitting on their balance sheets. Bankers know there is an avalanche of Option ARM and Alt-A loans that will reset in the next three years, setting off another bout of foreclosures. Bankers know commercial real estate is crumbling. Bankers know credit card and auto loan debt defaults are soaring. They will not lend in this unforgiving environment. The worst lies ahead for the banks.
Based on truthful economic figures, the current downturn is unmistakably not a normal cyclical recession caused by an overheating economy. Based on an accurate assessment of economic statistics, it appears that we are in the early stages of a second Great Depression. And it could be much worse than the first.
The economy bottomed in 1932 and proceeded to accelerate at a tremendous rate over the next five years. There is absolutely no likelihood for a strong economic recovery today. The structural problems fashioned by ignorant politicians and the Federal Reserve over decades have gathered into a perfect storm that threatens the crumbling, fragile levees that are keeping this country from economic collapse.
The Federal Reserve policies since its inception in 1913 have resulted in a 95% decline in the purchasing power of the U.S. dollar. The last 5% will be more traumatic and violent than the first 95%. The dollar has declined by 17% versus a basket of other fiat currencies just in the last year. The Obama administration and Ben Bernanke have blessed the dollar decline. But by doing so, they are playing Russian roulette with the U.S. financial system.
The Federal Reserve has set short-term interest rates at 0%. Inflation has been running at a 4% annual rate over the last four months, so real interest rates are a negative 4%. This is certainly one major factor in the dramatic decline of the dollar. The foreign countries that hold U.S. Treasuries know they are getting screwed. On a short-term basis, they have no choice but to hold these Treasuries. But on a medium- and long-term basis, China, India, Japan, and the Middle Eastern countries are exiting their USD positions.
The percentage of foreign reserves held in dollars has declined from 56% in 2000 to 41% today. China is using its dollars to buy natural resources across the globe. India used its dollars to buy 200 metric tons of gold from the IMF. The implications of our foreign creditors not trusting our fiscal policies will have dire consequences.
Peter Bernholz, professor of economics at the University of Basel, Switzerland, in his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, analyzes the 12 largest episodes of hyperinflations – all of which were caused by financing huge public budget deficits through money creation.
His conclusion is that the tipping point for hyperinflation occurs when the government’s deficits exceed 40% of its expenditures. The deficits being run by the Keynesians in Washington are now at that level, well beyond anything ever attempted in U.S. history. Our leaders have chosen to allow insolvent banks to keep toxic assets on their books at inflated prices, propped up bankrupt union-controlled automakers, instructed Fannie Mae, Freddie Mac, and GMAC to make loans that will never be repaid, and squandered $787 billion on payoffs to congressmen through pork projects that have stimulated nothing.
With unemployment of 9.7% and headed higher, the Federal Reserve has absolutely no intention of raising interest rates. President Obama and Timothy Geithner can do a hundred interviews declaring that reducing deficits is a huge priority, but their actions speak louder than their lying words. The national debt increased by $1.8 trillion in 2009, to $11.9 trillion. The OMB projects the 2010 deficit to reach $1.5 trillion. Even without a new colossal $2 trillion healthcare bureaucracy, deficits were expected to stay in the $1-trillion-per-year range for the next decade. The truth is that deficits will exceed $1 trillion annually and approach $2 trillion by 2019. The national debt would reach $25 trillion by 2019.
An unsustainable trend will not be sustained. The national debt will not reach $25 trillion in 2019. Unless the current policies of the Federal Reserve and Obama administration are reversed, the U.S. economic system will collapse well before that. In a recent report, Société Générale, one of France’s biggest banks, noted the possibility for collapse:
"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse. The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Aging populations will make it harder to erode debt through growth. High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt. “
There is no foreign country willing to buy the $13 trillion of debt paying 1% we will need to issue in the next ten years. Obama and Congress are working on another stimulus program, clearly indicating that they are going to continue their efforts to spend the country out of crisis.
Trust in the American financial system and its leaders is dissipating rapidly. At some point in the not-too-distant future, the U.S. Treasury will attempt to sell debt and foreign buyers will boycott the auction. That will mark the point of no return. The unprecedented levels of debt propping up the American Empire cannot withstand higher interest rates. When it collapses under the weight of its massive debt, the dollar will crash and hyperinflation will result. People need to prepare for a future of turmoil and uncertainty. From an investment perspective, gold will retain its value as the dollar falls. Shorting U.S. Treasuries will ultimately prove to be a great investment.
82 Comments
Anonymous
Hey folks, Marc Faber of the Gloom, Boom and Doom report featured one of Jim's writings in his monthly report this month.
CONGRATULATIONS JIM............... Keep it up, you ared heading towards the BIG TIME..........
Alessandro
Congratulations from anonymous people don't count.
12.5 billion a month = 150 billion dollars a year going for nothing more than interest rate charges on existing consumer credit card debt. Each one of those dollars, if kept in the local economy, would have generated a multiplying effect as it is passed on from consumer to business to employee to independent contractor, while also helping all the states with increased tax revenue.
Suspension of interest rate charges on consumers who are paying down their credit card debts would be the most impactful stimulus package possible since it bypasses the banks and instead focuses on localized stimulus. Get the national banks out of the credit card business.
If only local banks offered credit cards, the local community would come down hard on them if they became too greedy. Plus, state interest rate ceiling laws would apply. And finally, even if the rates were "too high", the money would simply be reinvested locally and still benefit that credit card holder's local community, which could actually mean a job opportunity to pay off the credit card debt.
Skyprince
TItle of article - Recession, Depression, or Systematic Breakdown. It implies a question. The answer is "yes" to all three and in that order. Then the re-building begins. Let's just get through the systematic breakdown as quickly as possible so that we can rebuild...without the lies, deception, and extend and pretend.
snowmansong
One minor error, India bought 200 tons of gold, not 200 billion. Good article though.
Whippet
@snowmansong: 200 metric tons = 200,000,000 grams of gold x $35 a gram = $7 billion dollars. Nowhere even close to $200 billion- nice catch.
If they could have bough $200 billion in gold they would have; that much is not for sale. Anywhere. Private or central bank markets. It's one screwed up world monetary system where the amount of cash in circulation surpasses the sum total of anything of value to back it up. Once people realize that screwed up little factoid...
bloodworm
"Aging populations will make it harder to erode debt through growth."
That is the one variable that did not exist when we got ourselves into trouble before. The usual govt and fed solution of spending and printing money isn't working this time. It's making things worse.
Covington
Jim,
Your writing is fabulous. Sometimes I wonder if you and others who write are crazy to think that the US and the rest of the world is on a road to perdition and whether I myself might be crazy for believing what you say but then logic just reafirms the truth that you put forth in your writings. The fact of the matter is that understanding history helps us to understand the future. The past and present actions of the Fed and the banking cabal over the past 100 years or so have been one crisis after another and trillions of dollars created out thin air and pumped into the economy without solid backing. So I say to myself I would have to be a complete moron not to understand where this is all leading. The goal of the elitist has been and allways will be a complete destruction of the world`s economy inorder to usher in a one world government and subsequently enslaving all of mankind. The bible predicts this very event. So in a nut shell the people had better come to grips with what is going to be happening. The US and the rest of the worlds economies are in the tank. We see the destructive effects of excessive debt everywhere coupled with artificial low interest rates and unemployment growing worse. How can one deny thes obvious facts?
I live and work in Mexico and people here are just as clueless as folks in the US. Government however is preparing for something. The central bank is now on a mad dash to accumulate dollar reserves. Why add to reserves if we are in a recovery? Just doesn`t add up. Allso as a side note the Federal Government is beefing up the Federal Police. Why Federal Police if we have the military involved in the war on drugs. They have even made anouncements to the effect that they wish to replace local officers with Federal Police. Something is coming down the pipe and I do not think that it has to do with drug trafficing. I think its going to be far worse.
Anonymous
Jim, your writing is fabulous and I got turned on to you from Marc Faber - nice work!
I do have some problems with the hyperinflationary outcome near term (although I do not rule it out in the long term). I cannot see how hyperinflation is possible until deleveraging of the private sector occurs. Right now credit is contracting at rates not seen since the early 1930's and the velocity of money is heading to zero - I cannot see how this will lead to hyperinflation anytime soon, no matter how much money the Fed prints. Irving Fisher, Von Mises, and Robert Prechter have done extensive work on this subject and their work is compelling.
I suspect the inflationary argument reflects what has already happened -which is what most economists do - attempt to drive a car by looking in the rear view mirror. We have already seen excessive credit expansion leading to inflated asset prices. Today we dont have any credit worthy borrowers to extend credit to and asset prices that have fallen dramatically from their highs leading to extraordinary debt to equity ratios. This seems to me to be highly deflationary.
Am I missing something?
Anonymous
when you boil chink made tennys, are they good to eat?
Roger Ramjet
Dear Jim Q.
Very good article! Your against the optimistic streak in our culture. You know, everything is great, we'll make it, hurrah, hurrah, everything is wonderful. As far as I'm concerned, that is what got us into this mess in the first place. "Sure I'll lend you 1 (one) million to buy that house, even if you do wipe tray at the local fast-food joint." I have one problem. You have no positions! With 3 children and a wife, your doing nothing to protect your finances? Come on, who you kidden! Roger Ramjet Gold: long, Etf's: short+long, Shorting Treasuries, other very liquid investments including Hard currency funds...............
Stealth Bull Market
Change the stuck record JimQ you moron.
Clearly where the stock market is concerned the sovereign debt crisis talk is just background noise that continues to keep the scared money away from investing, just as has been the case for the past 12 months where every correction breeds panic sell commentary.
Which is great for a stocks stealth bull market, the longer scared investors are kept in perpetual state of fear, the greater will be the bull run. How far could the stock market run ?
Get on board for DOW 16,000 you suckers!!
Anonymous
Jim,
I liked you're writing, it's hard to accept this harsh reality your article certainly makes a valid argument , and its quite scary.
Do you believe that there is any hope for America yet?
Robmu1
Where is The Burning Platform?
MRay
Is this third grade? Who stole my ruler, and deleted all my posts?
Robmu1
Response from Jim:
Jason controlled the entire site. Jim didn’t have access to members email addresses. Jason posted the donations button against Jim’s will and the $6,666 amount was a lie. Jason took away the Casey ads and refused to put up ads that Jim requested. Jason put up the links that he wanted. The Mission statement was completely Jason’s attempt to get rich off the site. Jim didn’t want any parts of Jason’s vision. He just wanted to write articles and have good debates.
Jim owns the domain name and a new site will be up and running soon.
croasdale
Crap, first one of my favorite podcasts gets messed up at iTunes (Radio Derb) and now one of my favorite sites is gone. WTF?
platoplubius
Wow....I guess this is like 3rd grade....If you don't play by my rules I will take my BALL and go home!!!! Give me a break!
Smokey
This site has never been able to get any traffic. You could find a better environment for discussion at any public outhouse. Jim will have a much better, new website, because he knows what he is doing, and how to induce dialogue. People liked TBP for a reason.
Robmu1
Jim and TBP will be back soon. I'll let you all know when, assuming Jason lets me. Avalon tried to post here and she is banned too.
Flyguy
This reeks of two people on the same team killing each other.
The real enemy must be thrilled to see this happening.
Can't we spend our energy railing against politicians, health care socialism, etc.
I am saddened.
anon the great
Jim's update is here...http://seekingalpha.com/instablog/239719-james-quinn/58143-the-burning-platform