The Second Great Depression?

‘Green Shoots’, ‘Summer of Recovery’, ‘V-Shaped Recovery’ and other mindless platitudes have dominated all main stream media outlets since the first months of 2010. These fairy tales, spewed by paid government mouthpieces and financially compromised economic analysts, have confused the American public. Based on all observable evidence, the American public is being misled by Federal officials and paid shills who present unchallenged, upbeat government statistics. The general public has nowhere to turn for unbiased economic information. This paints a confusing economic environment because mainstream sources are riddled with self-serving lies, manipulations and distortions that conflict with personal experience.

Wall Street and the financial media advertisers have something to sell. Selling you what they don’t want is one way their multi-billion dollar bonuses are funded. Never delude yourself to believe that your best interests are their priority. They are not. The fraud allegations brought by the SEC and others against the largest Wall Street banks and brokerage houses scream that Wall Street will do anything and everything to separate you from your money. Anything! There is probably a list of priorities in a corner office on Wall Street somewhere that puts the public’s financial well-being somewhere lower than a snake’s belly in a tire rut.

The US economy is on the cusp of tumbling into an abrupt and extended economic collapse. The Federal Government and the financial media will not admit it, but for the last two years, our country’s financial system has been on a multi-trillion dollar life support. There has been no recovery. There has only been a temporary delay of the day of final reckoning because trillions of dollars have been injected into a small portion of the banking system. The economy nearly died with AIG, Lehman and Bear-Stearns. Trillion dollar transfusions stolen from the pockets of the taxpayers under the threat of martial law did not restore the economy. The bailouts bought some time, but nothing has been fixed.

Our economy can be compared to a heroin addict who needs another fix, the drug of Quantitative Easing/infinite money printing. Withhold the fix and the addict will go into withdrawals. It will be painful, it will be a horrible experience, but the addict will live and possibly go on to a productive life. The ‘Bank Bailouts’ and ‘Stimulus’ were no different than supplying drugs (infinite money printing) to an addicted economy. Over time, addicts require larger and larger fixes to achieve the same results. Eventually, the amount of drugs the addict needs to achieve his high becomes so large it will kill the addict. The US Government and the Federal Reserve are on the cusp of killing the US economy and the dollar with overdoses of fiat (created out of thin air), un-backed currency.

Gargantuan amount of debt cannot be cured by creating even more gargantuan debt. The Federal Reserve and federal government have refused to acknowledge publicly the existence of the un-payable amounts of debt in the economy and recognize the losses necessary to put the economy back on a sound economic foundation. The Federal Reserve and the government have decided to create unlimited amounts of currency to support inflated, unrealistic values in an attempt to save insolvent Wall Street banks. This scheme will fail and the groups who will be hurt the most will be retirees on fixed incomes and savers because this approach will debase the dollar to worthlessness.

This is the longest, deepest economic downturn since the Great Depression. The basic reason is the structural problem of our debt that the Federal Reserve and government refuse to address by allowing the markets to adjust to their true “fair market values”. Trillions have been spent supporting asset prices on Wall Street and home prices across America so the Wall Street and investment banks can put off recognizing their insolvency.

While accounting rules are changed to hide the true state of the insolvent banks, some facts cannot be papered over.

Housing is crumbling again. Some experts expect another dramatic drop in housing prices (anywhere from 15 to 50%). Mortgage defaults and foreclosures continue to set new records. Last year, 1.41 million people filed for bankruptcy. In March of this year, there were 1.1 million foreclosed homes on the market for sale and an untold number of properties held in “shadow inventory” by banks reluctant to flood the markets with too many properties at once. At the current sales volume, there is over a 12 month supply of properties on the market.

Commercial real estate is starting to collapse. With bankruptcies and ‘going out of business sales’, ghost malls and see-thru commercial buildings are already becoming readily apparent.

Unemployment is not 9.5%. Unemployment is actually over 21% according to the methodology used in the early 1990’s. There were 500,000 new jobless claims for the week ending July 24, 2010. The number of unemployed Americans on emergency benefits increased by 260,000 to 4.75 million during the last week of July, 2010.

The bull market in Treasuries is actually a bull market in pessimism in the US economy. Investors are currently removing tens of billions of dollars from the US stock markets in anticipation of an autumn stock market crash. A simple guarantee of a “safe haven” for funds is the apparent reason investors are putting their money in Treasuries. A two year Treasury yields the incredibly low rate of return of .498% (less than one half of one percent!). Return on funds is seemingly no longer a main consideration. Investors apparently are looking for simply a return of funds. Interestingly, China reduced its US Treasury holdings by 11% in May and June, or $100 billion, and is believed to be investing a large part of the proceeds in commodities.

Using the same methodology to compile statistics as used in 1980, the Consumer Price Index (inflation rate) is actually 8.57%, not the official 1.24% published by the Bureau of Labor Statistics. The federal government has changed how most of the economic figures reported to the public are compiled. The new formulas hide the actual state of the economy from the American public. Another benefit to the government is that by reporting bogus inflation figures, the government pays out less money to individuals whose payments are indexed to inflation (Social Security for example). Wal-Mart must have missed the latest headline government Consumer Price Index (CPI) inflation figures because they just raised their prices an average of 6% over the past six weeks.

With an actual inflation rate of 8.57% and a two-year Treasury yielding less than ½ percent, an investor in a two-year Treasury will lose over 15% of the value (purchasing power) of his money over the two year period. Professional investors and Wall Street now use alternate, accurate sources of economic information to base their investment decisions.

Fannie and Freddie currently have a $6.3 trillion liability and are still making the same type of irresponsible loans that nearly collapsed the economy two years ago. They are making 96.5% loans on $3,000,000 Manhattan luxury condominiums. Insanity!!

There have been 118 bank seizures so far this year whereas in 2008, only 10 banks had failed by August 2008. Banks are failing at an accelerated rate but more troubling is the discovery upon FDIC seizure that the assets on the bank balance sheets are worth only 30 to 50 percent of stated value. Fictitious asset prices on bank financial statements have been legalized by government mandated changes to Financial Accounting Standards Board regulations. Again, using these formerly illegal practices hides from public view the insolvency of the US banking system.

Boston University professor Laurence Kotlikoff has written in Bloomberg, “Forget the official debt…Congress has engaged in Enron accounting.” According to Kotlikoff, the real deficit, including non-budgetary items like unfunded liabilities of Medicare, Medicade, Social Security and the defense budget, is actually $202 trillion, or 15 times the “official” numbers. The Gross Domestic Product of the United States is $14 trillion. Fifth grade math indisputably proves that $200 trillion of debt is un-payable by a $14 trillion economy. The US has only two options, default or monetary debasement. The Federal Reserve just announced the start of the second round of Quantitative Easing. Quantitative Easing is monetary debasement.

Most of the public is aware of the dire financial situation of California, but few are aware that a great number of other states are in similar situations, unable to pay their bills. Like California, many of the largest states are bankrupt. New Jersey has not paid many of its creditors for months. California is preparing to issue IOUs for the second time. Illinois has pension debt and unfunded liabilities of $95 billion. Nationwide, state and local pensions are underfunded to the tune of trillions. Economically speaking, everywhere one looks is a Ponzi scheme, shell game, or smoke & mirrors. Nothing is real.

The Federal government is using lies, manipulation and deception to hide the true state of the economy in an attempt to buy time, hoping the economy will somehow improve. Unfortunately, hope is not a legitimate investment strategy. The federal government once before tinkered with the national economy in a similar, massive way. Franklin Roosevelt’s Treasury Secretary, Henry Morgenthau wrote in 1937 about that experiment, “We have tried spending money. We are spending more than ever spent before and it does not work…We have never made good on our promises…I say after eight years of this Administration we have just as much unemployment as when we started…and an enormous debt to boot”.

Bill Willkomm
August 25, 2010

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