Is the U.S. Economy Teetering On the Brink of Collapse? | ||
AlkalizeForHealth
"In the 1930s, it was not obvious to people living through debt deflation that their world was coming apart. The crisis came in pulses, each followed by months of apparent normality – like today." - Ambrose Evans-Pritchard Will your house do the NASDAQ meltdown?
| This page was first published in 2002 and is updated regularly.
Debt came down during the depression in the 1930's due to defaults. It was not repaid. The lenders lost the money. Banks and businesses closed. Unemployment soared. Real estate values plummeted as people lost their homes. Alkalize For Health notes that interest on debt is not a cost of doing business. Rather, it is a cost of financing. A business without debt may succeed where an identical business with debt may fail, due to the burden of interest charges. Debt destabilizes the economy. Debt accelerates growth during good times and accelerates bankruptcy during recessions. Therefore, for a more stable economy, Alkalize For Health recommends that interest expense on all forms of debt no longer be tax deductible when calculating income taxes. (Total U.S. Debt chart courtesy of Gabelli Funds.) The liability/debt side of a balance sheet is always reliable. The asset side of the balance sheet is often unreliable. Those who feel today's high debt levels are not a problem because they are backed by mortgages and other assets are standing on a quicksand of unstable valuations. |
AlkalizeForHealth Bush administration prevented states from fighting predatory lending. The FBI is presently investigating "all levels of the mortgage systems" for fraud.
Fraud and greed of trusted rating agencies helped spread credit crisis.
The alternative may be brutal, involving high unemployment, falling tax revenues, devaluation of the currency, and foreclosures. Great Depression of 1873. The center of global finance moved west. Now it is happening again, though this time "west" means China. $70 billion pay and bonuses to Wall Street staff in 2008. Compensation for a job well done? This may be the end of the US dollar as world reserve currency. National currencies should stay within national borders. For international trade there needs to be an international unit of exchange. Modeled after Special Drawing Rights of the International Monetary Fund, we would suggest starting with a trade-weighted average of all currencies in the world. Due to the importance to every nation of the value of the International Currency Unit (ICU), the calculation needs to be transparent. The only way to accomplish this is to have the ICU traded in the markets like any other currency. Internationally traded commodities such as oil and gold would be priced in ICUs. The ICU and national currencies would be fully interchangeable in the foreign currency markets. The ICU would not be printed money and would have no physical existence. It would simply be a unit of account designed to facilitate international trade and flows of wealth. National currencies need to continue so that each nation can control the monetary and fiscal policy appropriate for its needs. Nations might consider the creation of coupons or special / restricted currencies so that monetary and fiscal policy can be more tightly focused to the needs of particular regions or industries. A strong military requires a strong economy to support it. As the American economy implodes a power vacuum will be created in the world. When the U.S.S.R. went bankrupt their fleet was tied to the wharf and left to rust. The U.S. surface fleet is obsolete anyway. Obama is engaged in political theatre, designed to distract the masses until the real estate debacle ends in 2012. Interest expense is 10% of the federal budget and rising. NEW YORK (Dec. 15, 2008) - The sum of America's liabilities and other financial commitments now exceeds the collective net worth of its citizens. -Peter G. Peterson Foundation
Proper regulation of Wall Street
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Neither a borrower nor a lender be;
There are a number of factors threatening the U.S. economy at this time: 1. According to the Federal Reserve Bank's Flow of Funds Report for the first quarter of 2008, total American debt is $50 trillion which is 350% of GDP. This is far above the 1933 level shown in the Total U.S. Debt chart near the top of this page. As shown in the chart, in 1929 total US debt was about 150% of GDP. It rose to its peak of 264% in 1933 largely due to contraction of GDP. The enormous pile of debt presently owed by Americans has the potential to cause an economic implosion greater than the 1930's when GDP contracted by nearly 30% and unemployment rose to 25% of the workforce. Here is an updated chart from Weiss Research:
The U.S. Gross Domestic Product (GDP) in 2008 is estimated to be $14 trillion. GDP growth has stalled and may even be declining. (Goldman Sachs projects a 5% decline in GDP during the 4th quarter of 2008.) The total U.S. $50 trillion debt is growing at an annual rate of about 9%. Interest rates are rising, and will rise much more quickly if global investors begin to doubt the ability of the United States to pay. Interest rates will also rise if money that formerly flowed to the U.S.A. is invested elsewhere. For example, the half trillion dollars the Chinese government is spending on infrastructure in order to stimulate the Chinese economy will no longer be available to invest in U.S. treasuries. Also, there is a growing tendency for international investors to use their US dollars to buy commodities rather than hold currency. Faith in fiat currencies depends on the financial strength of the governments that issue them.
Look at this chart showing the Credit Default Swap rates on U.S. 10 year treasury bonds. "The cost of insuring against a U.S. government default is soaring. And similar trends exist in the bond markets of Germany and Britain." - Sean Brodrick, November 2008. In fact, since the end of September 2008 the Credit Default Swap rate on McDonald's debt has been lower than that on U.S. treasury debt, suggesting that "flight to safety" money would do better by purchasing high quality corporate debt. Banks will generally limit the size of a loan to a customer so that loan payments do not exceed about a third of the customer's income. Using this rule of thumb, $14 trillion annual GDP could finance at most about $5 trillion in loan payments (principal and interest). With $50 trillion of debt, this $5 trillion payment will be entirely consumed by interest payments at a 10% interest rate. If the economy shrinks, then the ability to pay is reduced proportionately. However, given that interest rates are still relatively low and the total debt is increasing by 9% annually, it seems the United States is already unable to pay even the interest on its debt. Update November 2008 - According to Bloomberg.com "U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit". It is easy to pledge money. Paying is another matter. Look at the Total U.S. Debt chart at the top of this page. Imagine it to be a volcano. Government borrowing, pledging and money printing is the "blow off top". Soon we may start down the other side. It took about 30 years (1980-2009) to reach the top of the debt volcano, suggesting that it may take about 30 more years to get back down. Microeconomic incentives that motivate behaviors by individuals and companies need to be consistent with the macroeconomic situation that is most beneficial for society as a whole. Banks have lobbied for tax incentives that encourage debt. This has generated more business for banks, but the end result has been to place the entire economy in a perilous situation. These tax incentives need to be changed to encourage saving instead. 2. Interest rates tend to move in long cycles. Interest rates bottomed in 2005 and are now rising. Rising interest rates affect stock prices two ways: 1) bonds compete with stocks for funds and can take money away from the stock market, and 2) rising interest rates increase borrowing costs and reduce earnings, putting downward pressure on stock prices. Interest rates go up as default rates rise. Fear of loss makes lenders reluctant to lend, reducing the supply of loans. Interest and principal payments on debt increase the demand for money, which places further upward pressure on interest rates. How high interest rates go in each cycle depends on the amount of debt owed at the beginning of the cycle. This is one reason why interest rates may spike very high before this cycle is over. Government borrowing to finance huge bailouts is driving up interest rates for everyone. In fact, U.S. federal government borrowing requirements are so excessive that by 2010 they may reach a point where they are impossible for the market to fund. We suggest that this event will bring an end to the present illusion of an economic recovery taking place starting 2009. There is an epic battle being waged between the ideas of Milton Friedman (increase the money supply to inflate prices and prevent deflation), and Irving Fisher (defaults and asset liquidation will drive down prices until people decide to buy again and then the economy will recover). Politicians are generally in the Milton Friedman camp, because it allows them to "do something". We maintain that the problem is so large that their doing something just amounts to political theatre and adds to the total debt. In the end, the debt problem must be resolved and Irving Fisher will prevail. Governments should limit themselves to damage control, and take measures to prevent this from happening again. First, interest rates rose for sub-prime borrowers, then for prime borrowers. Eventually interest rates will rise for the government, too. The trend of rising interest rates may continue for many years. Bonds fall in value as interest rates rise. If you want to speculate on the possibility of rising interest rates for government debt, you might consider purchasing exchange traded funds such as PST and TBT. Update May 2009 - Interest rates on government bonds are now rising. 3. By collectively investing retirement funds into the stock market, stock prices have been bid up to incredible levels. When baby boomers retire and try to remove this money from the stock market, prices will plummet to unbelievably low levels. The "baby boom" is anyone born during the years 1946 to 1964. They will begin to reach age 66 starting in 2012. There is no way all investors can successfully remove their money from the stock market. If you want to buy stocks, we suggest investing globally. Emerging markets such as China, India and Latin America have younger populations and their stock markets will be less influenced by population patterns in developed countries. Using a measure called "comprehensive income" which is less manipulated than "net income", during 2008 the S&P 500 companies collectively lost about $200 billion. In other words, there is no price/earnings ratio because there have been no earnings. However, reported earnings are a lagging indicator both when the economy is growing and shrinking. This means the stock market could start going up at any time, reflecting nothing more than the general level of confidence that things are getting better. What we are seeing today is not a typical bear market. The business cycle has its ups and downs. The economy overheats so the Fed raises interest rates and we have a bear market until things cool down. This is not what is happening today. Today's bear market is caused by too much debt. We have not seen a bear market like this since 1929, and debt at the beginning of the Great Depression was proportionately much less than it is today. With a regular bear market, when the economy cools down the Fed can lower interest rates, which increases borrowing and stimulates the economy. Lower interest rates will not help an economic collapse caused by too much debt. Increasing the amount of debt just makes the problem worse. Debt by its very nature cannibalizes future spending. In the short run debt acts as a stimulant, but in the long run debt is a drag on the economy due to interest expense and loss of future sales. The level of debt in the U.S. economy has been increasing since 1980, to the point where it is difficult to take on any more debt. The time has come for people and corporations to face the accumulated mountain of debt. Consumption is going down, which will cause employment to go down in a vicious cycle until we reach a bottom. There is no knowing how long this will take or how far down is the bottom. (Goldman Sachs predicts that unemployment will increase to 9% in 2009 and even higher in 2010.) The Japanese economy entered a debt recession in 1990 and low interest rates since then have not helped. Borrowing and spending by the Japanese government has not restarted economic growth. The Japanese stock market has had its ups and downs since 1990. However, the economy cannot grow until the excess of debt is gone, and the Japanese people and companies are still paying off this debt. Had the Japanese government allowed the economy to collapse and the debt to be liquidated through bankruptcies and defaults, the recovery would have begun much sooner. However, this drastic alternative is not politically popular. We seem to be entering what is known as a "secular bear market". A secular bear market can last for a very long time. However, even in a bear market there are rallies. Pressure is building for one now (December 19, 2008). The average dividend yield on the S&P 500 is 3.48%. This compares to a yield of 2.54% on a 30 year treasury bond and 2.1% on a 10 year treasury bond. The last time this happened was 1958. Short term treasury bills are paying 0% to .25%. These low interest rates also make certificates of deposit offered by banks at around 3% very attractive, helping to recapitalize the banks. One investment strategy that worked through the depression of the 1930's is dollar cost averaging. Regularly putting a small amount of money into your retirement account buys more shares when prices are down. When you come out the other end of the depression and prices are back up, then you are far ahead. This assumes two things. First, the companies whose shares you buy do not go bankrupt. Companies that should survive include the ones whose services you use every day, such as telephone, cable, electricity, gas, etc. This type of company often pays good dividends, which can be a source of income in hard times. Second, you can afford to hold on for the long term and will not be forced to sell at a loss due to unemployment, retirement or other reason. The dollar cost averaging strategy assumes the bear market does come to an end one day. This has not been the Japanese experience. After many ups and downs, their stock market today (November 2008) is at the same level as it was in 1982. So once again we come back to investing in emerging market economies that have the best chance of growing, or you might find sectors of the North American market that have the best chance of growth such as alternative energy. We discuss the coming decline of global oil production and the need for alternative sources of energy further down this page. Food may be another good investment, as global food supplies such as grains are at the lowest levels in decades. Fresh water is also increasingly scarce as underground aquifers become depleted and glaciers disappear. Commodities in general have fallen in price so far that they are starting to look cheap again. All the reasons we heard in 2008 for high oil prices and high food prices are still valid. If you invest in gold and silver, we strongly suggest that you purchase either the physical metals or mining stocks. Stay away from exchange traded funds (ETFs) that claim to be backed by physical bullion. If these claims turn out to be fraudulent, then your ETF investment will be worthless, while the value of physical metals and mining stocks skyrocket. If you are an institutional investor, consider purchasing the metals on the futures exchanges and take physical delivery.
4. Social Security had
its beginnings during the depression of the 1930's as part of President
Now there are less than 2 workers per retiree. Social security covers nearly everyone, and the average person lives much longer. More than 80% of the population lives past age 65. Yet the age of retirement has been increased only to age 66. All of this has created a massive unfunded liability. We say the liability is unfunded because the reality is that the Social Security trust funds have been spent. Social Security is as it was originally designed to be - a "pay as you go" system. The large size of the "baby boom" retirement population living for so much longer may create an intolerable burden for the next generation. People should be encouraged to work past age 66 if their physical and mental health are adequate. In fact, it may become necessary to raise the retirement age to 75 or even higher. Older people should not feel slighted if they are asked to step down from positions of responsibility, and to continue working at more junior positions. This will give younger people a chance to move up. Medical costs are greatest at birth and in old age. Here is another unfunded liability that the next generation cannot be expected to pay for. Part of the answer will be increased home care, which is far less expensive than hospitals and nursing homes. Also, people need to learn how to take better care of their health. Falling property values result in lower property taxes to cities. As a result, cities are beginning to declare bankruptcy (1, 2), as they find themselves unable to pay fixed costs such as pensions promised to retired police, fire fighters and other municipal employees. States are slashing their budgets and asking the federal government for help as tax revenues decline. However, tax revenues are declining for the federal government as well, with a big hit coming with the 2008 tax year when capital gains are replaced by capital losses, plus declining income taxes due to business losses and rising unemployment. U.S. corporations are being manipulated into bankruptcy so they can dump their pension plan obligations onto the taxpayer. Upon emerging from bankruptcy, these companies are better able to compete with other companies around the world that do not carry these burdens. However, it is unlikely that the coming generation of taxpayers will be able to pay all the obligations that it will inherit. The Pension Benefit Guarantee Corporation (PBGC) has had a deficit each year since 2002. Revenues to all levels of government are declining, and the costs of the unfunded social safety nets are just beginning to soar. There will be no option but to find ways to increase revenues and decrease payments for Social Security, Medicare and the PBGC. Even with retirement now at age 66 (soon to be 67), in the years ahead Social Security is projected to be underfunded by $15.6 trillion and Medicare by $33.9 trillion. These numbers assume the economy continues growing at the same rate as it did in the debt-stimulated past. How likely is this? Insurance companies and private pension plans expect a certain return on their equity, bonds and real estate investments in order to fund the pensions. If expected investment returns do not materialize, these companies will be unable to meet their obligations. Defined benefit pension plans may soon be unavailable. In their place will be defined contribution pension plans. You put your money in, but there is no way of knowing what you will receive. With this type of pension plan there is a great incentive to supplement your pension with additional savings. The $2 trillion social security trust funds were "invested" in U.S. government treasury bonds and spent by the government. When we say that the social security program is unfunded, this is another way of saying it is likely the coming generation will be unable pay the many trillions of dollars of debt and other liabilities that are presently being accumulated. A great danger of massive borrowing by the U.S. government in order to bail out the economy is that the credit worthiness of the government itself is declining. The end result of continuing on this path could be a massive default of government debt. Before this happens, however, you can expect the government to confiscate any assets it can get its hands on (Roosevelt confiscated all gold held by Americans, Argentina recently confiscated the assets of private pension funds), plus hyperinflation and restrictions on the movement of money out of the country. Anyone who says the U.S. government debt is not a problem because it is within historical norms as a percentage of Gross Domestic Product (GDP) is ignoring the additional debt owed by households and corporations. It is the credit worthiness of the entire U.S. economy that is being called into question. Plus, what happens if GDP begins to shrink as it did in the 1930's? Update November 2008 - The U.S. government may be planning a stealth takeover of $10 trillion in U.S. IRAs, 401Ks and private pension plans. To "protect" you from fluctuations in the stock market, the government will offer to make an inflation-adjusted annual contribution and guarantee a 3% interest rate in your "Guaranteed Retirement Account". In return, you will be giving your retirement savings to the government (so the money can be spent) rather than owning shares in productive assets. The tax laws will be amended to make this revised system attractive. If the government "monetizes the debt" (uses printing presses to make money and spends the money to pay off all or some of its debt), it is a stealth default. The lenders will have lost because the money is worth less. If all G20 countries do this simultaneously, then all their currencies will be worth less simultaneously. It would be a collective devaluation of paper currencies. This would be a good reason to buy gold and other hard assets. At this time, China is loading up on gold, oil, copper, aluminum and other materials, plus buying low cost shares and debt of companies that produce the raw materials that China needs. China and other countries with surplus funds are also buying farmland around the world rather than putting their money into U.S. debt. President Roosevelt devalued the dollar 41% by changing its value from $20.67 to $35 per ounce of gold. The dollar is no longer pegged to gold, but monetizing much of the debt can accomplish the same thing. However, the strength of the currency must be maintained because without it the economy cannot recover. Hyperinflation is not an option, so there is a limit to printing money. "Helicopter Ben" seems to be trying to prevent price deflation by printing money and inflating the currency.
"A strong currency — the nation's social and political anchor. It gives workers a reason to work and be team players; families a reason to save and come together; entrepreneurs a motive for innovating." - Dr. Martin Weiss. Let's hope the Fed gets it right and we do not end up with the "Bernanke peso". "The fate of a country is inseparable from the fate of its currency." - Milton Friedman 5. The Federal Deposit Insurance Corporation (FDIC) "watch list" has grown to 171 problem banks. However, an independent review of the US banking system came up with 700 problem banks. Weiss Research identifies more than 1,600 banks and savings & loans at risk of failure. The FDIC has $45 billion to cover more than $5 trillion of deposits. The closing of just one large bank could consume all of the FDIC's $45 billion. Can taxpayers afford to pick up the tab for the remainder? The FDIC insures deposits up to $250,000. What happens to business accounts when a bank closes? How many businesses could afford to lose their payroll if the bank closes just before payday? To find the financial condition of your bank, go to www.thestreet.com, click on "PORTFOLIO & TOOLS", then "Banks & Thrifts Screener". Banks are rated on a scale from A to E, with A being strong, C is middling, and E means the bank is very weak. Slight variations in strength are reflected by + and - signs. Look for a rating of B- or better. Since September 2007 the Federal Funds target rate has been cut 11 times, falling from 5.5% down to about 0%. If the Federal Reserve keeps short term interest rates very low, and banks lend this money long term, the interest rate spread could do wonders to recapitalize the banks. This way, banks must lend in order to recapitalize themselves. Combined with delaying market pricing of their their bad debt (which exposes their lack of capital), in time they can work their way out of the hole they find themselves in. This has worked in the past. However, it takes time. Banks are lending. The problem is not so much with the banks as with the disappearance of customers for securitized debt. It used to be that banks would originate loans and sell them to Wall Street for securitization. This market is gone and will not soon be coming back. There is much discussion of the government (taxpayers) purchasing toxic assets from banks. When subprime debt qualifies for "AAA" ratings, it is because some of the default risk has been transferred to another tranche. The tranches to which the default risk is transferred cannot be sold and are worthless to anyone, including the taxpayer. We suspect that banksters planned from the beginning to sell this worthless toxic debt to the government, and intentionally created a crisis to accomplish this. At present, corporate management nominates members of the board of directors for shareholders to ratify. This makes the board subservient to management and leads to management being paid like royalty while shareholders and the public get abused. Board members should be nominated by shareholders, with no management involvement. Project Censored analyzes the interlocking corporate directorships that give corporations control of U.S. news media. 118 people sit on the boards of directors of 288 American and International corporations. There has been a coup in corporate America, and shareholders have lost control of their businesses. This tiny group of non-owners have covertly seized control of corporate America. They use their control of the news media and a small portion of shareholder money to fund and control who gets nominated and elected to government office and what they do there. In this way, the group has extended its influence to a coup of government as well. Taxpayer money then gets funneled back to the corporations they control. "They frankly own the place." - Senator Richard Durbin State and federal supreme courts tainted by corporate money. Questions raised about the composition and competence of the New York Fed. This is how a small group of men exercise disproportionate influence in society: "a structured pattern based on concentration of control, interlocking directorates, financial services, joint ventures, professional reciprocal favors, commonality of interests...long term friendships, and, at its worst, greed and arrogance."- Moss, page 431.
"What seems to spook people now is the possibility
"Behind every
great fortune lies a great crime." Update October 2008 - There once was a time when stock options could only be purchased "over the counter". Now there are regulated exchanges where stock options are bought and sold. Credit default swaps and other derivatives can only be purchased "over the counter" at this time. There are about $600 trillion of these unregulated derivatives on the books of large banks, creating a huge "systemic risk" or risk of causing a chain reaction of defaults when a major bank goes broke. It is the threat of total economic collapse that banks have used to force government bailouts. It is time for new exchanges to be created to remove the "systemic risk" and so that everyone can trade these new products. If the systemic risk is not dealt with, there will be periodic panics forever into the future whenever a large issuer of over the counter derivatives gets into difficulty. 6. The value of the U.S. dollar has declined dramatically relative to other major currencies. A few years ago the US dollar could buy a Euro for 88 cents. Now a Euro costs more than $1.50. When the dollar goes down, internationally traded commodities (oil, copper, etc) go up in price. This means inflation of prices. It also means that Americans are less wealthy relative to the rest of the world. By global standards, Americans have taken a 50% cut in pay, plus all American assets (including the US stock markets) have fallen in price by half simply due to the loss of purchasing power of the dollar compared to other currencies. Update August 2008 - Due to the falling value of the US dollar American manufacturers are more competitive globally. As a result exports of US manufactured goods are increasing. On the other hand, with rising oil prices and the incredible quantity of oil the US imports, the trade deficit remains virtually unchanged. To improve the balance of payments, it is necessary to reduce and eliminate American dependence on foreign oil. 7. The U.S. Federal Reserve Bank has worked to dampen the business cycle. All of life is cyclical, and the business cycle serves many useful purposes. For example, recessions cause debts to get paid off, marginal businesses close freeing up resources for stronger businesses, all businesses are forced to consolidate and become more efficient, the threat of unemployment causes people to save for a rainy day and become more self-sufficient, and so on. A mild business cycle is healthy for the economy.
"Stability breeds instability." Stability leads to excessive risk taking and too much debt. Instability leads to more conservative investing and less debt. The cycle is natural and self-correcting. By interfering with the business cycle, the Federal Reserve Bank has allowed the build-up of extreme imbalances. “Time’s glory is to calm contending kings, Update August 2008 - Recently the Fed has been bailing out banks, investment banks and brokers by means of its Term Auction Facility (TAF), Term Securities Lending Facility (TSLF), and Primary Dealer Credit Facility (PDCF). The Fed now holds more than $500 billion in low quality debt instruments that the banks and brokers were unable to sell in the open market. Update October 2008 - The global credit crunch is about to enter a new and more dangerous phase. One of the factors that made the depression in the 1930's so bad was the Smoot-Hawley bill of 1930 which tried to protect American jobs by increasing tariffs on imports. Retaliatory action by other nations against American exports resulted in a significant reduction in global trade and increased unemployment everywhere. A similar situation is being created today as the credit crunch spreads to include the letters of credit that finance international trade. Letters of credit require international banks to trust each other. When banks do not accept a foreign letter of credit then the shipment is not shipped. This is starting to happen now. Unshipped goods are beginning to pile up in ports. If it gets worse, international trade will grind to a halt. The one growing sector in the U.S. economy at this time is the export sector. Over 90% of the world's trade goes by ship. The collapse of international trade is clearly seen in the Baltic Dry Index which is an index of what it costs to send non-liquid exports by ship. The Baltic Dry Index has fallen more than 90% since May 2008. Update January 2009 - The Baltic Dry Index is now rising. See chart. Central banks must guarantee LIBOR (interbank) lending worldwide until the credit crisis has worked itself out and international banks can once again trust each other's solvency. Without this, the world risks sliding into a global depression similar to the 1930's.
“The wicked leader is he who the people despise. The good leader is he who the people revere. The great leader is he who the people say, ‘We did it ourselves.'” - Lao-Tzu
8. Keynesian economics calls for governments to stabilize the economy by borrowing and spending during recessions in order to stimulate the economy, and paying off the resulting debt during good times. However, U.S. governments are now saddled with such a pile of debt that added borrowing during bad times may soon not be possible. Plus, there is another factor. Look at the chart to the right (courtesy of Weiss Research). So much U.S. consumption is foreign goods that economic stimulus paid for by U.S. taxpayers will probably do more to stimulate the Chinese and oil exporting economies than the American economy. However, there is no evidence that Keynesian economics works. It did not end the depression in the 1930's and it has not helped Japan since its real estate and stock market bubbles popped in 1990. At best, government spending during times of high unemployment can reduce suffering. Watch this 7 minute video. 9. The world petrochemical
supply and demand balance is becoming precarious. Starting 2008,
world petrochemical supply is expected to begin its terminal decline.
What
this means is zero or negative economic growth going forward. Every time the
economy attempts to grow and oil consumption increases, the price of oil
will rise to a level high enough to reduce demand (this is called "demand
destruction") to the level of dwindling
global supply. Petrochemical prices will continue to rise, perhaps dramatically, as the world competes for a declining supply of petrochemicals. The 1970's oil price shock caused stagflation in the U.S. economy. The coming oil crisis will be much worse than the world experienced in the 1970's and will be permanent, unless the world learns how to live without petrochemicals. In the coming years as the petrochemical supply begins to decline more rapidly, people, companies and countries around the world will start to hoard. When this happens, gas pumps may often be empty. Criminals will hijack gasoline tanker trucks to sell the gasoline on the black market. Nations will go to war for oil. (The chart to the right was produced by ExxonMobil in February 2004.)
“We should leave oil before oil leaves us. That
should be our motto.”
"The IEA performed a comprehensive study of 800 of the world’s largest oil
fields. And it concluded that depletion in conventional oil fields is
occurring at a rate in excess of 9% per year. (That’s an average. We see
depletion rates in excess of 15% in Mexico’s Cantarell field, for example.)
This means that absent large amounts of new drilling, new investment in
enhanced recovery and new discoveries, the current worldwide oil output will
decline by over 9% per year. And if it keeps going along this trend (there’s
no reason why it won’t), the base of world oil output could conceivably dry
up within seven-10 years." Is the United States economy teetering on the brink of collapse? Yes. Will it go over the edge? Only time will tell. A "muddle through" Japan-style stagnation lasting for decades may be possible, as debtors work to pay off their debts. Rather than a "consumer economy" it will be a hard work economy. Considering the alternatives, this would be a good outcome. A default by one of the large banks with massive derivative holdings could cause a global economic collapse overnight. The alternative is a slow motion collapse as the American economy is dragged down by the weight of an intolerable burden of debt. The United States must become self sufficient for its energy needs. The smart grid and alternative energy proposals by president Obama make good sense. Many infrastructure projects are long overdue, and a recession offers lower materials costs and available labour. Beyond this, he is just adding trillions of dollars to the debt burden this generation is dumping onto the next generation. The best way to cure an economic slump is to go through it. Pause a moment, have another look at the Total U.S. Debt chart near the top of this page and ask yourself how you think it might be resolved? Will it be like other bubbles and come crashing down? Personal debt has become more expensive and is harder to get. Corporate debt is more expensive and sometimes even impossible to get. The final shoe to drop will be when government debt becomes more expensive and even the government has difficulty borrowing money. If the "flight to safety" money begins to go somewhere else, watch out. What do we think is about to happen? Assuming governments of the world can prevent a rapid global economic collapse caused by the bankruptcy of a major issuer of derivatives (large European banks are in a very precarious situation), we predict a slow and relatively orderly economic collapse bottoming sometime in 2012. The slow collapse will minimize collateral damage - the unnecessary destruction of good businesses due to temporary lack of financing. The slow collapse should allow many companies to become self financing or to find private financing. The Fed is driving interest rates down so that home owners can refinance these mortgages at reasonable rates, but this will not necessarily help millions of people who are losing their jobs or have mortgages that are "underwater". House prices will continue to decline during this period as foreclosures flood the market with homes for sale. While people struggle with their debts they will spend less. The retail industry will shrink (140,000 retail businesses closed in 2008), causing rising unemployment. Vacant stores in shopping malls will become common. The bankruptcy of hundreds of thousands of retail businesses will cause commercial real estate to collapse. Banks forced to retain money to cover loan losses will be unable to increase lending. With governments around the world experiencing falling tax revenues and rising costs, interest rates will rise as governments compete to borrow from a limited pool of funds. Lacking the ability to borrow enough money, governments will print money, which will eventually cause inflation. Then government budgets will be smashed by high interest rates on their debt, inability to borrow, inability to print money due to inflation, and low tax revenues due to high unemployment. Governments will be forced to default on many of their promises. After 2012 we will be faced with decades of economic stagnation until the overhang of debt has eventually been repaid or liquidated. It took 30 years to create the mountain of debt, and will probably take another 30 years to pay it off. The torch of economic growth will pass to those nations who are debt free. How can you protect yourself? Here are some suggestions: 1. Your best investment is to pay off debt.
Interest rates go up and down in response to changes in the supply and demand for money. If lenders start to feel that the money they lend is not going to be repaid, then they will stop lending.
Plus, losses from the mortgage crisis reduce the ability of banks to
lend. (As a result, total lending in the United States is declining.) These will cause interest rates to spike upwards. Adjustable Rate Mortgages and renewals of conventional mortgages may carry interest charges that are unaffordable.
Many corporations are already experiencing soaring interest costs and difficulty in gaining access to new debt. (See 1, 2.) To protect yourself from an interest rate spike, you need to become debt free as soon as possible. You may choose to ignore this suggestion, however there are plenty of wealthy people around the world with lots of cash willing to purchase American assets for pennies on the dollar. In fact, the coming "debt trap" economic collapse may have been engineered with just this thought in mind. (U.S. Home Sales chart courtesy of The Daily Reckoning.) If you are depending on credit cards to get by, you should know that many people are about to lose their credit cards and lines of credit as banks try to reduce their risk. As much as $2 trillion of consumer credit may be chopped. If necessary, you might consider credit counseling and debt consolidation. If you have savings to invest, keep some cash so that if your investments go down in value you can buy more. If you invest in North America, consider buying dividend paying stocks, and sell covered call options to enhance your income. Or purchase shares in emerging markets, oil and agriculture. 2. Move your personal and business bank accounts to a bank with a rating of A or B. Avoid banks with ratings of C, D, or E. To find the financial condition of your bank, go to www.thestreet.com, click on "PORTFOLIO & TOOLS", then "Banks & Thrifts Screener". Keep some cash in a safety deposit box or other safe place so that you can survive in the event of a "bank holiday" (the government closes all the banks for an indefinite period). You can access your safety deposit box even during a "bank holiday". Open a bank account in another country and keep some of your savings there. 3. Invest in yourself. Look after your health. Without health, your life has no foundation. Improve your job skills. Develop a skill you can barter. Encourage your community or a local charity to start a barter currency such as "Calgary Dollars" to make bartering easier. 4. How can you live if you are unemployed? Reduce your living expenses as low as possible (downsize). Look for ways to diversify your income or live on less income. If you have a choice between retiring at this time and continuing to work for a few more years, unless you have a lot of money saved up you might be wise to continue working. Create a do-it-yourself economic recovery. Don't expect help from the government. 5. Live in a location that has public transit so that you can get around without a car. (This assumes that cities can afford to continue their mass transit systems. Apparently this is in doubt, so a bicycle to peddle around town might be a good backup.) Unless a solution is found for declining global oil supplies, gasoline will be increasingly unaffordable in the years ahead. The present low oil price is largely due to a temporary spike in the value of the U.S. dollar as a "safe haven". Don't expect this situation to last for long. 6. If you buy a car, make sure the seats fold down so that you can sleep in it. Municipal parking lots in Santa Barbara, California become homeless shelters at night, with people allowed to sleep in their cars. After having lost their employment, their homes are foreclosed, and their car becomes a shelter of last resort. Like it or not, tent cities are springing up in urban centers across North America and Japan. Similar to the shanty towns of the 1930's, tent cities in city parks have become the last resort of the homeless. Entire families with nowhere else to turn are swelling the population of this new urban phenomenon. City leaders should understand that tent cities may be the lowest cost way to deal with this growing problem and take steps to make it humane. Toilets, showers, laundry and a soup kitchen should be provided. Pay telephones, message center and mail service will help make it possible for residents to look for work and eventually lift themselves out. If you have money, please make regular donations to your local food bank. 7. Everyone needs to eat. Plant a garden so at least you have food. If you do not have a yard, why not make some window boxes, create a container garden on your balcony, grow vegetables in hanging baskets, plant something indoors, or grow sprouts in your kitchen? Each square food of garden is precious. Divide your small garden into square feet and plant something different in each. Lettuce is a good plant to grow. It is highly nutritious and matures faster than most other vegetables. Practice vertical gardening so you can use your wall space. Use a dehydrator to preserve food for the winter (eg. "sun-dried tomatoes".) Trees on your boulevard should produce nuts (walnuts, heart nuts, etc.) or other edibles. All vegetation around your home should serve multiple purposes (food, wind break, shade, fuel, mulch, compost, etc.). Learn to maximize the nutritional value of food that you purchase.
8. Store enough dried food in your home to keep you going for several years. (Remember the story in the Bible about seven good years followed by seven bad years? Well, the United States has had more than 60 good years and the bad times may be just beginning. Begin preparing now, "just in case".) It is amazing the feeling of security that comes from having a cupboard filled with dried foods, and they are not expensive. Given the rate of inflation in food prices, a cupboard full of food is a smart investment. Money spent on nutritionless edible substances is money wasted. 9. Super-insulate your home (R-40 walls, R-60 roof). A super-insulated home will not allow you to freeze to death in winter even with no supplemental heat. The best insulation may be sprayed-in-place polyurethane foam. Diversify your sources of heat away from petrochemicals. Natural gas supply in North America is already declining (about 50% of homes are heated by natural gas). Global oil production is also declining (about 50% of homes are heated by oil). Biodiesel from algae could replace conventional heating oil. For many homes, a ground source heat pump could provide heating and cooling. 10. Actively support and implement measures that will move the economy and your personal situation away from dependence on petrochemicals. Make your home and community self-sufficient for as many of its needs as possible. Also, you might vote in support of candidates who are willing to change the tax system. In addition to "progressive taxation" where the rich pay proportionately more, we need a tax system that taxes "bads" and does not tax "goods". For example, a carbon tax on coal, oil and natural gas would help reduce global warming and encourage the development of alternatives. The carbon tax could be made revenue neutral by removing taxes on employment. Most new employment is created by entrepreneurs, but it is too complicated and expensive to hire someone. The red tape and costs involved with hiring an employee need to be reduced to the absolute minimum. Similarly, the present tax system encourages debt by allowing interest payments to be tax deductable, while discouraging savings by taxing interest earnings, dividends and capital gains. This situation needs to be reversed. Interest paid on debt should not be tax deductable, and this change can be made revenue neutral with offsetting changes to taxes on proceeds from savings and investment. Ideally, earnings from savings and investment should be tax free. Thirdly, there should be a national sales tax. The effect of this tax would be to discourage consumption. The sales tax can be made revenue neutral by reducing income taxes. This revised tax system will help lay the foundation for future prosperity. If you do all these things, you can rise above the turmoil of the world and live a life free from fear. Avoiding stress is important for cancer prevention. When a person gets sick what they need is rest, not stimulants. The economy needs a rest, and has reached a point where stimulants have less and less effect. The basic problem with the economy is too much debt, and the ONLY way to fix this situation is to get rid of the debt through repayments or defaults. Either way, the economy will get smaller. With defaults it gets smaller quickly (as lenders lose the money), with repayments it gets smaller more slowly (as payments of interest and principal consume money that could otherwise be used productively). If the slow road of repayment is chosen, it is possible for the economy to still grow but the growth faces stiff headwinds. The growth will not take place in declining industries. Out of the ashes of the old economy is springing a new economy, the economy of the future. Only this can grow quickly. Government "stimulus" must be focused on the areas of the economy that are growing if it is to have a lasting effect. Creativity is the basis of economic success. Look at Japan, a small island nation with few resources. Theirs has grown to be the second largest economy in the world. The only resource they have, and ultimately the only resource that is needed to make an economy prosper is people. It is the creativity and intelligence of the people that makes an economy grow. Scientific research on the Transcendental Meditation (TM) technique clearly shows that practice of TM increases creativity and intelligence. Social and economic applications of TM and its related programs can uplift the mental functioning of an entire population virtually overnight as evidenced by lower unemployment and other measures. We cannot afford to ignore a program like this that has good evidence of its effectiveness and costs a fraction of what is being wasted on bailouts. Here is a way to promote growth in the economy that does not depend on monetary and fiscal policy. The present economic collapse has already cost trillions of dollars in stock market losses and real estate losses. The entire mess was not inevitable and could have been prevented. Many observers have been commenting for years on rising debt levels, bubbles in stock markets and real estate, faulty ratings from rating agencies, and so on. In a sense, the present situation is a reflection of our collective lack of intelligence. It is said that those who do not learn from the past are doomed to repeat it. Our inability to recognize the value of technologies that could increase our individual and collective intelligence is symptomatic of our lack of intelligence. Scientific evidence that individual and collective intelligence can be raised first began appearing in the 1970's, yet we are still not applying these technologies widely. So the collective dullness will continue and more economic accidents can be expected in the future, continuing ad nauseum. Greatness requires a measure of self-sufficiency. The interdependence fostered by trade is fine up to a point, but to stake one's life on it and to give up self-sufficiency for the essentials of life makes one vulnerable and is a sign of weakness. This principle applies to all levels of society from individuals to nations. The modern economy is neither capitalist nor socialist. History shows that unfettered capitalism leads to all kinds of abuses, and unfettered socialism leads to total corruption. To control the abuses of capitalism while retaining the efficiencies and dynamism of a market economy a certain amount of government regulation and participation is necessary. This is called a "mixed economy". The challenge is to find the right balance between the efficiency of the market and regulation by government. Finding this balance is an ongoing organic evolutionary process that requires constant oversight by the consciousness of the population. Corruption breeds in the hidden corners of the economy and government, out of public awareness. In self defense, the public needs full disclosure of what is going on and why.
The American Society of Civil Engineers' (ASCE) 2001 report on the state of America's infrastructure:
Since 2001, the wars in Iraq and
Afghanistan have cost nearly a trillion dollars. The cost of these wars doubles when
hidden costs are included. These hidden costs are interest on debt
incurred to pay for the wars, the cost of treating wounded veterans, and the
higher cost of oil.
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AlkalizeForHealth U.S. economy shrinks as IMF warns of Great Depression. Ghost inventory hanging over housing market. Wind, water and sun beat other energy alternatives, study
says. Polywell fusion technology is also worth trying. The cost to set up a demonstration reactor is minimal. "Shirtsleeves to shirtsleeves in three generations." The Fed is not a public institution. Despite attempts by Congress, the Fed has never been audited. The U.S. dollar has lost 98% of its value since 1913 when the Fed was established. You can buy a home in Detroit for a dollar. Investors are buying them by the city block for use as rental units. This chart shows the average 87% decline in Detroit housing prices since 2003. "No man is good enough to govern another man without that other's consent." - Abraham Lincoln Know your enemy
1,
2,
3,
4
| If the purpose of the Iraq war was to get cheap oil, it has been an enormous failure. If the purpose of the
Iraq war was to give control of Iraqi oil to American oil companies, this has
also failed. In October 2008 Iraq signed a 22 year agreement with China
National Petroleum Company involving "$55
billion, or 87% of Iraq's total revenue".
Is the oncoming collapse of the U.S. economy just an unfortunate accident? "In politics, nothing happens by accident. If it happens, you can bet it was planned that way." "Our problem-ridden world has been guided by ... hooligans."
Alan Greenspan was a student of the Great Depression. Therefore, he knew how to prevent a depression and how to cause one. Since the ongoing economic collapse was created on his watch (1987 - 2006), we can only assume that it was done intentionally. The question is "why"? Who are the puppetmasters and what are their intentions?
If somebody wanted to weaken the United States, the policies in place starting 1980 have accomplished that goal.
The Japanese real estate and stock market bubbles of the 1980's popped in 1990 and sent that country into a tailspin from which it has still not recovered. Japanese real estate values dropped each year for 13 years, ultimately declining 50% to 80% from the peak. In 2008, the Japanese stock market is still down about 80% from its peak.
"There is no means of avoiding the
final collapse of a boom brought about by credit expansion. The alternative
is only whether the crisis should come sooner as a result of the voluntary
abandonment of further credit expansion, or later as a final and total
catastrophe of the currency system involved."
"Save your money," she advised. "In three years it will
be depression."
********************
The most benign way out of America's predicament is for there to be such a surge of creativity and growth in the U.S. economy that the ability to pay off its debts is vastly increased.
The airline industry is under extreme pressure due to high fuel costs. Jet fuel can be made from algae at reasonable cost. If necessary, airlines should make their own fuel by starting algae farm subsidiaries. Protected from oil price increases, the airlines will feel that they do indeed have a future. Read more about biofuel from algae. Oil from algae is carbon neutral and does not contribute to global warming. The auto industry is collapsing. High fuel prices are driving down the value of American-made vehicles. At the end of a two year lease, an SUV that was supposed to be worth $22,000 is actually selling wholesale for as little as $11,000 to the used car market. American car manufacturers are getting out of the auto leasing business, but it is too late. As existing leases expire, the car manufacturers find themselves taking massive losses on used vehicles. Biodiesel, and to a lesser extent cellulosic ethanol can be manufactured from algae at reasonable cost. Vehicle purchasers must have confidence that low cost fuel will be available for the life of their vehicle. The flow of money to oil exporting nations is the greatest transfer of wealth the world has ever seen. By making fuel at home, these many hundreds of billions of dollars each year will remain in the hands of tax-paying Americans, and much of it will be spent in ways that further add to the local economy. The U.S. government's "Energy Independence and Security Act of 2007" requires the utilization of at least 36 billion gallons of biofuel in 2022. Biodiesel and celluosic ethanol from algae are the best way to meet this biofuel requirement. If the major oil companies want to have a future, they would be better off developing algae farms that can provide unlimited oil forever, rather than expending great effort to find small quantities of oil within the earth that will soon be depleted. However, even small-scale algae farms should be very profitable and there is room in this emerging industry for companies of all sizes. From the Gulf of Mexico northward through the central United States there is a wind corridor that could be used to generate a huge amount of wind power (See USA wind energy maps 1, 2). Across the southern United States there are deserts that could be used to generate electricity via solar thermal towers (See USA solar energy map). In the western states there is a huge area where the earth's heat comes close to the surface that could generate massive amounts of geothermal electricity (See USA geothermal energy map). A modern high voltage direct current transmission system could link these areas and branch out to everywhere in the United States that requires electricity. Large facilities containing vanadium redox batteries can stabilize wind generated electricity and shift wind and solar power to peak times. In this manner there is enough reliable electricity available to provide all the electrical energy the United States requires many times over from sustainable sources. Most of the investment required can come from private enterprise. What is needed from government is leadership. Rising unemployment and under-employment is adding to the housing collapse and undermining Social Security, Medicare and other government programs. A massive program to make biodiesel from algae, plus develop other alternative energy sources such as wind, solar and geothermal, would create a great number of jobs for Americans. These would be good paying, high skilled jobs that cannot be outsourced to other countries. Add to this the employment that this program would restore to the airline and auto industries and you begin to firm up demand for housing. A study by Greenpeace finds "At an equal investment, wind power generates 5 times more jobs and 2.3 times more electricity than nuclear." - Wind Vs. Nuclear 2003 The American economy is in for a tough time until the end of 2011 when the mortgage debacle largely comes to an end. This cannot be helped. But unless steps are taken now to solve the problem of peak oil, the situation will get progressively worse. Peak oil and the ensuing decline of global oil production is a problem that will not come to an end unless an alternative source of fuel is found. By taking appropriate initiatives now, the oncoming economic collapse can be cut short and America will emerge stronger than ever, with wealth to pay off its debts, self-sufficient for fuel and with an abundance of energy to be used by all its citizens to build for themselves a better life.
"When the economic logjam breaks up, among the first
things that will happen is that worldwide energy supplies will tighten. And
eventually, the world will confront its long-term lack of investment in the
energy industries.” U.S. fossil-fuel related emissions were 5.88 billion metric tons in 2006.
*** Signs of Hope We would like to end this page with signs of hope indicating that the economic collapse may not be so bad, or that recovery is on the way. 1. The collapse of oil prices from a high of $147 dollars a barrel to about $47 dollars a barrel (January 2009) is acting as a huge $100 a barrel subsidy to the global economy. With global oil consumption of about 86 million barrels of oil daily, this subsidy is worth about $3 trillion annually. The reduced cost of oil imports is dramatically improving the U.S. balance of payments. More money is staying within the United States. The same applies to many other raw materials for the global economy. Prices are down and supply is up. 2. The Baltic Dry Index is starting to recover (January 2009). Port shipping volume may be rising. (April 2009) This is a positive indication for world trade. 3. The London Interbank Offered Rate (LIBOR) has fallen, indicating that banks are beginning to lend to each other again. The high spread between treasuries and corporate bonds is attracting money to corporate bonds and the spread is slowly decreasing. The 30 year fixed mortgage rate is presently between 5% - 6%, which is lower than it has been for a long time. (January 2009) 4. In the past three years the median house price has fallen 23%, while the median income has risen 10%. This has restored the relationship between house prices and income to a level not much different from that during the housing boom of the 1980's. Combined with low mortgage interest rates, housing is becoming affordable once again. According to one writer, these are signs the economy is fixing itself (January 2009). Five reasons to buy a house this year. The prices of copper and lumber are going up (April 2009). The real estate market is picking up in Detroit. 5. New housing is changing. Instead of McMansions, people are looking more carefully for the "right size" of home, and want "green" features such as energy-efficient heating and cooling. 6. Car prices are down, and the quality of cars is better than ever. This is a good time to buy a car. The same applies to many other consumer items. 7. The volatility index (VIX) that measures the volatility of stock markets has fallen from a high of 96 to the mid 40's. A normal range is 10 to 20, with 30 indicating high volatility. The VIX seems to be slowly returning to its normal range (January 2009). 8. The stock markets are going neither up nor down. The markets are in a trading range going sideways. In the recent past, nearly every share price was going down. Now, each company is being judged on its merits (January 2009). 9. The value of the Japanese yen has peaked and is beginning to fall. This suggests the carry trade has finished unwinding and the amount of leverage in the global economy is reduced. Plus, individual Americans are starting to save and pay off their debts. (April 2009) 10. The Financial Accounting Standards Board (FASB) has relaxed its "mark to market" rule. This change recognizes that assets may have long term value greater than is reflected in short term market fluctuations. Allowing companies with a long term investment horizon to value their assets from a long term perspective is valid, and in one stroke this accounting change has removed a huge deflationary pressure from American assets. This will make a tremendous difference to the second quarter 2009 financial reporting for many companies with long-term investments. In our opinion this rule change marks a turning point in the financial crisis. (April 2009) Now we need banks to permanently reduce their leverage to a tolerable 10:1 from a fool hardy 40:1, and we need a proper exchange set up for credit default swaps. 11. The velocity of money, an indicator of the pace of economic activity, has turned up. This indicates that the economy as a whole may have turned a corner. (June 2009)
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Copyright © 2000-2009 AlkalizeForHealth |
Roosevelt's
"New Deal". At the time it was passed, retirement was at age 65 and the average person died at 60.
Less than 10% of the population lived past age 65.
Furthermore, only about half of the population qualified to receive Social
Security, and there were 40 workers for each retired person.
"...without
home equity withdrawals the economy would have been so bad it would have
been almost impossible for Bush to have won a second term." - John
Mauldin
