Warning of Severe Economic Collapse, Mainstream Media Sustainable Recovery Hype

By: ArbitraryVote at www.marketoracle.co.uk

The mainstream media and government are communicating that the economy is on a positive track toward recovery while downplaying the likelihood of another economic catastrophe similar or worse than that experienced in the fourth quarter of 2008 and first quarter of 2009. In actuality, there is a significant chance that the US will experience a severe economic collapse, beyond what has already been experienced, either this year or within the next few years. If there is a perceived, sustainable economic rebound before this happens, do not be fooled - the underlying economic problems still exist and will likely eventually surface in economic collapse.

This following analysis further explores this warning by describing:

1. The 4 key reasons an economic collapse is likely imminent
2. Why these 4 reasons make the economy vulnerable
3. Warning signs and triggers to monitor to foresee a collapse before it happens
4. What can result from an economic collapse
5. Ideas for preparation

The 4 Key Reasons an Economic Collapse is Likely Imminent

1. The U.S. has unprecedented, massive amounts of current and coming debt.
2. Foreign countries have experienced their own crises, and they cannot offer added levels of debt funding for the U.S. Even if they could, they are unlikely to do so.
3. Productivity is declining, and everything the government is doing is further hurting productivity.
4. The U.S. is printing unprecedented, massive amounts of money and no longer has an ability to control inflation and deflation.

1. The U.S. has unprecedented, massive amounts of current and coming debt.

1. Over $11.4 trillion in current debt and growing
2. $1.8 trillion deficit in current budget - $9.3 trillion over next decade (likely to be higher)
3. Outstanding future debt of $43 trillion to $102 trillion from entitlements
4. Debt Comparison to U.S. GDP

A. Over $11.4 trillion in current debt and growing

U.S. federal debt is now over $11.4 trillion. As this graph is slightly outdated, you can imagine how far off the graph the line will need to go to chart the increase.

B. $1.8 trillion deficit in current budget - $9.3 trillion over next decade (likely to be higher)

The $3.6 trillion budget most recently passed is estimated to incur a $1.8 trillion deficit. The deficit is estimated to add up to $9.3 trillion over next decade. These are estimates by the government, but they include economic assumptions that have already been exceeded.

For example, the budget assumes a max of 8.1% unemployment. We are now at 9.4% unemployment. This means the deficit will most likely be larger than projected.

Even with the current estimates, the deficit line on the outdated graph below will go far off the chart. Also, the federal debt discussed above (bullet "A") will increase over time by the amount of the deficit.

C. Outstanding future debt of $43 trillion to $102 trillion from entitlements

The U.S. has made long-term commitments to fund Social Security, Medicare, and Medicaid. Because of the increase in the retiring Baby Boomer population and the continuing increase in medical costs in the U.S., the demand on these payments is also increasing. Additionally, the U.S. government borrows from already-collected funds to undertake additional spending, adding to the entitlement funding problem.

The coming added debt estimates from entitlements are as low as $43 trillion and as high as $102 trillion. To put these debt levels in context, total U.S. Gross Domestic Product (GDP) is about $14.1 trillion and falling.

Graph from a 2008 U.S. Government Accountability Office report

As the above U.S. Government Accountability Office graph is outdated from 2008, here are a few important points to note:

1. The graphed values are based on the $43 trillion low-end estimate as of 2008. There are several other estimates all the way up to $102 trillion.
2. Since this graph was created, there are already significant increases required given the recently reported acceleration of the social security shortfall.
3. Increasing interest rates beyond 2008 projected levels are likely to add to the debt beyond what is stated here.
4. Likely slower GDP growth will increase the percentage of GDP stated here.

Healthcare reform is an attempt to ease the blow of the coming Medicare debt tsunami. While it is possible that this will have some medium-term effect on the debt outlay (to the detriment of healthcare quality, of course), on the contrary it is also quite possible that it will quickly add cost/debt, and regardless, the timing for these changes to take effect will have little impact for several years.

D. Debt Comparison to U.S. GDP

Below is a government-created graph of U.S. public debt (i.e. not including intragovernmental holdings, which bring the current debt total to $11.4 trillion) projections as a percent of GDP through the coming decades.

Graph from a 2008 U.S. Government Accountability Office report

As the above U.S. Government Accountability Office graph is outdated from 2008, here are a few important points to note:

1. We have already exceeded debt that is 50% of GDP and we are moving quickly past this level given our unexpectedly large current and projected budget deficits.
2. The data line must be shifted significantly to the left given the recently reported acceleration of the social security shortfall.
3. Increasing interest rates beyond 2008 projected levels are likely to add to the debt beyond what is stated here.
4. Likely slower GDP growth will increase the debt percentage of GDP stated here.

2. Foreign countries have experienced their own crises, and they cannot offer added levels of debt funding for the U.S. Even if they could, they are unlikely to do so.

The issuance of U.S. Treasury securities is how the government gets loans to fund its spending activity beyond what it collects in taxes. If you buy a Treasury, you are giving the government a loan, which it has to pay back to you with interest. About half of public-owned government debt is held by foreign creditors.

The 3 most significant U.S. debt holders are Europe (European Union and UK), Japan, and China. Japan and China make-up almost 50% of foreign held U.S. Treasurys at 21% and 24% respectively. It is unlikely that these lenders will continue funding U.S. debt to its requirements.

Largest Holders of U.S. Debt - U.S. Treasury (2009)

The 2 key reasons why the U.S. is losing support from its debt holders are:

1. Countries are experiencing their own crises and funding (and having trouble funding) their own stimulus
2. Countries do not like our currency devaluation as it hurts the value of the return on their U.S. Treasury investments.

Take a look at the recent status of the larges U.S. creditors:

Europe

Several EU countries and Russia are significant holders of U.S. debt. All of these countries have their hands full with economic problems in their own countries and with countries for which they are responsible within the EU. Take a look at the current landscape in Europe.

Countries in Europe that have recently collapsed or are on the brink of collapse:

- Iceland (collapsed) - Latvia (collapsed) - Russia (on brink) - Hungary (on brink) - Ukraine (on brink) - Additional Eastern Europe countries (on brink)

In recent time as Eastern European countries have attempted to emerge as viable economies they have become significant borrowers from Western Europe. As Eastern Europe feels pain, the banks and economies of Western Europe feel pain as well.

Failure to save East Europe will lead to worldwide meltdown - Telegraph (2009)

World Agenda: Eastern Europe's economic collapse stalks the West - Times Online (2009)

Eastern Europe's Economic Crash - Business Week (2009)

In addition to Russia's severe economic struggles, they are signaling a move away from the U.S. dollar:

Russia to propose new reserve currency at G20 - Reuters (2009)

Russia Warns Against Relying on Dollar - New York Times (2009)

Russia plans to reduce U.S. Treasury holdings in its reserves - MarketWatch (2009)

While all Western Europe countries are struggling, here are a few noteworthy economic situations currently unfolding:

Britain

Will Britain go bankrupt? - MoneyWeek (2009)

George Soros: Britain may have to seek IMF rescue - Times Online (2009)

Germany

Germany's slump risks 'explosive' mood as second banking crisis looms - The Telegraph (2009)

Spain

Spain's Economic Outlook Grimmest in Europe - New York Times (2009)

Ireland

Is Ireland fated to be another Iceland? - Guardian News (2009)

Celtic Tiger tamed as economy collapses - The Independent (2009)

Ireland is ECB's sacrificial lamb to satisfy German inflation demands - The Telegraph (2009)

Switzerland

Switzerland threatened with bankruptcy - CreditWritedowns (2009)

Japan (holds 21% of foreign held U.S. Treasurys)

Japan: Worst crisis since war's end - CNN (2009)

Japanese exports plunge by nearly 50% - Guardian News (2009)

Japanese GDP falls at biggest rate since 1955 - MSNBC/Associated Press (2009)

China (holds 24% of foreign held U.S. Treasurys)

China is the largest creditor for the U.S. The country is currently growing at close to half the projected pace before the crisis. The lifeblood of their economy (exports) is declining rapidly, and unemployment is rising quickly.

China exports down 25% - Washington Post (2009)

China Puts Joblessness for Migrants at 20 Million - New York Times (2009)

ADB Cuts China 2009 GDP Forecast On Global Crisis - Wall Street Journal (2009)

China is making loud signals about the declining value of their U.S. Treasury holdings, and backing up their words with consistent moves from long-term treasury holdings to short-term treasury holdings. They are also quite vocal about the need for the world to move away from the U.S. dollar to a new global currency.

Wen Voices Concern Over China's U.S. Treasuries - The Wall Street Journal (2009)

China Takes Aim at Dollar - The Wall Street Journal (2009)

China pushes SDR as global super-currency - Reuters (2009)

A 'Copper Standard' for the world's currency system? - The Telegraph (2009)

China's gold reserves jump, making nation No. 5 holder - MarketWatch (2009)

China's central bank frets over Fed bond purchases - MarketWatch (2009)

China's Short-Term Treasury Binge - The Wall Street Journal (2009)

China is quickly diversifying their investments away from the U.S. so that they do not have so much dependence on exports to the U.S. and the declining value of their U.S. Treasury holdings. They are doing this by investing in other country's tangibles and through focusing more on growing their own domestic economy.

China said to mull buying oil with foreign reserves - MarketWatch (2009)

China Starts Investing Globally - New York Times (2009)

China's shopping spree - The Independent (2009)

China overtakes the US as Brazil's largest trading partner - The Telegraph (2009)

Brazil Turns to China to Help Finance Oil Projects - The Wall Street Journal (2009)

Most recent statistics show China's holdings of U.S. Treasurys now likely at nearly half of China's GDP. Given the country's troubled economic situation in the crisis, signals of looking for a U.S. dollar alternative, and the diversification of their investments into other country's tangibles and their own domestic economy, China is not a reliable source for ongoing elevating levels of U.S. debt.

3. Productivity is declining, and everything the government is doing is further hurting productivity.

Economic productivity is were value is created, which enables the government to collect the money it requires (i.e. in the form of taxes) to pay for its spending and debt. Additionally, productivity enables U.S. citizens to grow their savings and makes them more likely to invest the savings in U.S. Treasurys (i.e. debt). In our current situation, not only is productivity declining, but the government is overwhelmingly hurting the ability for productivity to grow at a pace that would allow our debt to be managed.

Signs of declining productivity:

-GDP is declining

-Corporate earnings are down

-Layoffs/unemployment is up

-Productivity centers like automotives and manufacturing suffering

-Venture capital is suffering

-Private equity is suffering

-Mergers & acquisitions (M&A) and IPOs are suffering

-Technology, biotech, and other cutting edge industries are suffering

-Exports are suffering

-Growing population of retiring baby boomers

-Low international competitiveness in education; not in PISA top 20 of math, science and reading

-Personal and business savings are low

-Personal and business debt is stretched

What government is doing to hurt productivity for the long-term:

-Causing regulatory uncertainty through bailouts and changed rules/laws

-Protectionist policies are being implemented

-Tax structure hurts productivity - corp taxes, increases on cap gains, talk of national sales tax, etc.

-Attacking property rights/contracts

-Crowding out investment and industry with special public works projects

-Nationalization of industries - auto, banks, and more to come

-Welfare and unemployment entitlements expansion

-Unionism is getting more government support

-Implementing stifling health care reform

-Economically invalid environmental approach

-Adding equal opportunity laws

4. The U.S. is printing unprecedented, massive amounts of money and no longer has an ability to control inflation and deflation.

There is a common fallacy that the definition of inflation is rising or higher prices. Instead, inflation is actually an increase in the supply of money to a level that devalues the currency's purchasing power. Higher prices are not inflation, but a result of inflation; when there is more money to buy the same amount of stuff, the prices of the stuff rise. Inflation harms the economy as it causes the following:

1. Errors in economic calculation (organizational planning) for entrepreneurs
2. Products and services become more expensive before incomes can rise to afford them.
3. Dilution of the value of the dollar.

As described above, the U.S. cannot rely on other countries' or our own productivity to manage our exorbitant debt. Rather than allowing defaults on this debt, the government is resorting to unprecedented amounts of money printing:

1. $10.5 trillion committed, $2.7 trillion spent for crisis bailouts
2. $1.2 trillion Fed balance sheet expansion - expected to expand to $4.5 trillion by September '09. Much of the purchases for this expansion are illiquid, long-term assets that are not easily sold when the money supply needs to be reined in as inflation escalates.
3. Included is $300 billion dollars for Treasury bond purchases (i.e. quantitative easing) expected to expand to $1 trillion in purchases, especially since interest rates are quickly becoming uncontrollable.

Here is the recent history of the Fed's balance sheet:

Here are the implications for the monetary base:

You may ask yourself why we haven't yet experienced inflation given all this money printing. What is actually happening is we are experiencing less deflation (contraction of the money supply, and appreciation of the dollar) than we otherwise would have without the money printing. Any kind of economic stabilization in the near future would cause the excess reserves (held-back credit) now in the banking system to quickly infiltrate throughout the economy and inflation would ensue. However, it's important to note that economic stabilization is not a requirement for inflation to surface and we could see inflation before any kind of recovery.

Why These 4 Reasons Make the Economy Vulnerable

Imagine if a guy named John took on a bunch of debt above the level of income and potential income that would allow the debt to be paid off. John then tries to float the debt by taking on new debt to pay off old loans hoping eventually he would make enough income to pay off all of the debt - except his income continues to decline. Eventually creditors would not be willing to lend to him and he would default and need to start over.

This is the state of the U.S. government, except for one difference; the government's ability to print money to eventually pay off the debt at a diluted value. However, this makes the government's economic situation worse off than John, who would have defaulted. The below information more directly outlines the current U.S. situation.

1. Because of the government's bailout philosophy and long-term policy plans, U.S. debt will continue to grow larger. Eventual rising interest rates will add to this debt load.
2. The debt has to be paid off - If it is not paid off, we will default and collapse.
3. Productivity and taxes normally pay off debt, but we are becoming less productive and tax revenues are declining rapidly. Also, dramatic tax increases to cover debt are counterproductive to the economy. Even a good case turnaround in productivity is not likely to be enough to service the rapid debt growth.
4. We are resorting to printing money to pay off the debt, but this devalues the dollar, which hurts our creditors when they are paid back with money of less value than they lent out.
5. Major creditors, such as China and Russia, are swiftly switching their policies to have less dependence on the U.S. dollar.

These factors alone can cause a flee from the U.S. dollar (i.e. a currency crisis), which would have a catastrophic effect on the economy. In the near term, it is not likely that a given country would make a bold move to run from the dollar as it would hurt their own economy to harm one of their most important customers (i.e. U.S. imports). However, much international tension has built during the crisis that makes the international community more likely to run away from the dollar in the case of an unknown event (e.g. another financial catastrophe, a natural catastrophe, a significant terrorist attack, another war, etc.)

On top of these factors and despite what the mass media is communicating about "green shoots" and economic recovery, the U.S. economic situation is not getting better. There are several economic factors existing and forming that could cause an exacerbation of the current situation to trigger a full breakdown of our economic system.

Status of the Banking System

At the core of our economic system is the banking system. Despite the mass media and government's claims, the banks are in bad shape with significant threats to their survival approaching in the near future:

1. The government's bank stress test results were not good, but still depicted U.S. banks as much healthier than they actually are. 

a.  The criteria used for the worst case economic scenario was about as bad as the current economic situation, and will most likely be surpassed within the year.

b.  Recently changed accounting rules propped up the financial condition of the banks to favor better test results.

c.  The banks argued aggressively with the government to release better than actual results so that shareholders and customers would not lose faith.

d.  The tests were performed in a short period of time. Past bank stress tests have historically been quite inaccurate, and that is under testing processes performed over significantly longer time periods.

e.  The tests focused on 19 banks making up about 70% of the banking industry. The other 30%, which are smaller more localized banks, face different kinds of current and approaching problems.

2. The banks need more capital to survive, hence the government bailouts and capital-raise requirements. The government estimates the banks will need about $600 billion to cover approaching losses. Given this total and the allotment to each loss category, it is highly likely that the estimate will miss the mark by hundreds of billions, if not trillions, of dollars. Several significant problems that have not yet hit the banks and were underrepresented in the stress tests are:

a.   Residential Mortgages - estimated $1.1 trillion to $2.6 trillion in losses approaching from non-subprime Alt-A and Option ARM mortgages. Take a look at the below Credit Suisse graph to see the magnitude of resets approaching.

b.   Commercial Real Estate - estimated $1 trillion+ losses starting in 2009 through 2013; 60% of commercial real estate lending comes from non-stress-test banks (smaller/regional banks)

c.   Corporate loans and bonds - estimated $390 billion in losses to come

d.   Credit card and auto loans - estimated $350+ billion in losses to come; most of the losses by 2010

e.   Leveraged buyout (LBO) exposure - several hundred billion dollars in likely private equity leveraged buyout losses stemming from $1.4 trillion in deals made in 2006 and 2007

f.   Interest rate swaps (IRS) - these derivatives add several trillion dollars of exposure in the event of volatile and/or rising interest rates.

Note: The TALF and other government programs are supposed to help stifle the blows from the coming residential and commercial real estate losses. However, so far the TALF has been extremely ineffective. Less than $20 billion out of $1 trillion has been activated because the associated underlying assets are not deemed as good investments. Additionally, most of the key approach through these programs is to support the asset-backed securities and to refinance risky loans. The ability to refinance is highly problematic with dramatically declining residential and commercial real estate values, let alone rising interest rates.

The diagram below depicts how the underlying problems are likely to play out within the banking sector, a current linchpin to the U.S. economy.

Diagram 1: Likely Progression of the U.S. Banking Sector and its Economic Impact

Below is further explanation of the above diagram:

1. Given the banks current conditions and coming wave of losses (residential real estate, commercial real estate, LBOs, etc) described above the diagram, the banks will likely need to be nationalized as the government will not allow them to collapse.
2. This will be done by converting bank debt to equity and diluting non-government shareholders.
3. This does not remove the underlying asset and capitalization problems. Instead, the government will print money and take on more debt to cover the losses.
4. The money printing and increased debt supply will cause a natural rise in interest rates (i.e. to drive demand to buy U.S. debt) and decline of the dollar. If higher interest rates stifle the ensuing inflation, they will also further hurt the economy (e.g. causes more defaults, harder for lending, etc). If inflation continues despite higher interest rates, hyper-inflation is likely to ensue causing an economic collapse.

Other Noteworthy Factors

1. California (13% of U.S. GDP), New York, Massachusetts, New Jersey, and other states are having multi-billion dollar budget deficit problems because of rapidly declining tax revenue and over-spending. If this doesn't lead to further bailouts (and therefore more money printing and/or debt), their infrastructures and economies will further breakdown before a leaner spending structure can emerge.
2. The Pension Benefit Guaranty Corporation has a $33.5 billion dollar deficit (tripled in the last six months). They also estimate that the auto sector has $77 billion in underfunded liabilities, with $42 billion not funded at all. Pension breakdown is likely to continue to rise with state pension stress rising and as the auto sector triggers additional pension cancellation in other sectors.
3. Obviously rising unemployment, expiring unemployment benefits, prematurely rising interest rates, rising oil prices, and a weakening stock market will only exacerbate and add to the banking and broader economic problems outlined.

The banking and economic conditions, combined with the U.S. debt situation and money-printing practices, can lead to economic breakdown or more money printing to stave off the economic breakdown. The latter is the more likely case given the government's economic philosophy and direction during the crisis. However, this strategy only delays the inevitable as the underlying problems still exist. The resulting catch-22 of inflation and rising interest rates are what can cause catastrophe.

The economic dangers of inflation were touched on in an earlier section, but there are also several significant economic dangers of spiking interest rates:

1. Loans (personal and business) based on adjustable rates are more likely to default or become more difficult to service.
2. People and businesses are less likely to borrow or be able to borrow, which can actually be a good thing, but slows the economy in the short-term.
3. The interest on budget deficits and the national debt increases, adding significantly to the country's debt load.
4. Interest rate swaps (i.e. hundreds of trillions of dollars in derivatives) run risk of default.

The U.S. interest rate and inflation conundrum is unavoidable as debt is too large, productivity is too low, and money printing is our way of remedying the situation. The U.S. is vulnerable to an economic collapse through spiking interest rates, extremely high inflation (i.e. hyperinflation), or both spiking interest rates and extremely high inflation. The below diagram depicts the dangerous spiral.

Diagram 2: Inflationary Spiral Toward Collapse

Unprecedented Situation

Because of America's great history and foundations of patriotism, many have said that we've been through this before, the country is resilient, we've always figured it out, and we will again. Positive thinking can certainly work wonders, but it is also important to not let it cloud the logic behind the critical nature of the current U.S. situation. The U.S. has been a great country, but history shows that even great countries can fail.

As the first several graphs on this page depict, the U.S. is in a situation of unprecedented debt, deficits, and money printing. Additionally, the recent economic crisis has triggered problems in several sectors, and there are new, large problems on the horizon. All of this while policy direction shows little sign of an ability to fuel significant economic growth that might solve U.S. debt problems and cushion the coming economic blows. 

The comparison has been made of our current situation to Japan's "lost decade" or the U.S. Great Depression with the assumption that this crisis likely can't exceed the pain of those periods. However, there are many differences in today's U.S. economic situation that remove much of the relevance of a comparison. Aside from these differences, key underlying factors that spared Japan and the U.S. from a severe economic collapse were:

1. Japan had high savings rates and high demand for their exports (core to their economy) from healthy countries elsewhere. Although Japan did not experience a severe collapse, 20 years later their stock market is still around 80% lower than its peak before their crisis and they are experiencing continued economic stagnation.
2. In the Great Depression and different from today's status, the U.S. had:
   1. High savings rates
   2. Excellent productivity increases to fuel the move out of the depression
   3. Countries with the wherewithal to purchase a strong base of exports from a key producer
   4. No weighty entitlement programs hanging over to add gargantuan debt levels to large preexisting debt
   5. High proportion of high character citizens that were not reliant on entitlement programs and better knew the value of hard work

Scenarios for the U.S. economy:

The conditions described to this point are enough to cause a severe economic catastrophe. However, the recent crisis combined with the current monetary policy direction, add extra elements to the equation that make catastrophe more likely.

Scenarios #1 and #2 below both stem from the Fed's plan to inflate (increase the money supply to cover the output gap) its way out of the crisis and eventually pull back the money supply once the economy begins to grow. The Fed knows it must rein in the money supply once growth begins, because if they do not, inflation will become uncontrollable. It is important to note that this has never worked in the past without experiencing  heavy economic pain. However, the main problem with the Fed's current situation (unlike past crises and inflationary periods) is that they have virtually no ability to pull back. The Fed cannot effectively sell its balance sheet assets to rein in the money supply because:

1. The political nature of the assets they have purchased and are propping up
2. The long-term nature of the assets they have purchased
3. The political nature of forcing interest rates up to appropriate levels

Even if they could sell off significant enough levels of balance sheet assets and increase interest rates to rein in money, an economic breakdown would follow because of the newly removed support of the latest grown asset bubbles within the economy.

Here are possible scenarios for the U.S. economy:

Scenario #1: Hyperinflation

Hyperinflation is the dramatic devaluing of the currency in the case of a mishandled money supply increases by the central bank. This has happened many times in many countries in recent and distant history, and is most likely when a country has a fiat money system (currency backed by no assets), a lack of confidence in the government, and significant national debt that the country cannot manage to service. To understand the conditions that lead to hyperinflation and the results that stem from it take a look at the hyperinflation periods experienced by Zimbabwe, Argentina, Brazil, Germany, and others. Once hyperinflation begins, government tools used to fight it may stop the process, but deep economic pain is not avoided. As outlined at the beginning of this section, the Fed has put itself in a unique situation in which these tools are unlikely to be effective.

Scenario #2: Deflationary spiral

As the Fed continues to put trash onto its balance sheet (which it has continually done during this crisis) and prices rise from inflation, there can come a point where the collapsing asset prices of the Fed's purchases will cause a panic for lenders (people and countries) to sell those assets at the highest possible price - getting their dollars back before the asset prices fall. As the economy prior to this scenario will be in pain from higher prices, there will be no production to replace the perceived value of the Fed balance sheet. The Fed will not be able to meet this elevated demand. Dollars would be quickly sucked out of the market causing them to spike in value (the opposite of inflation). Global currencies in turn collapse with the increase of the dollar and exports are halted. Locally, as the dollar rises dramatically, prices collapse and borrowing is stopped making the economy motionless. [Arbitrary Vote came aware of this particular deflationary scenario through an article by Karl Denninger of the Market Ticker blog]

Scenario #3: Long term stagnation and economic deterioration

The government's bailout and money printing policies distort pricing, hinder economic calculation, perpetually increase interest rates, cause fascist corruption, and leave no ability for genuine economic productivity to increase as entrepreneurs and businesses are discouraged from participating in the economy. Ultimately this is likely to create an environment that makes one of the above collapse scenarios more likely, but stagnation and slow decline can last for many years if not decades.

Scenario #4: Another economic boom and more dramatic bust

In the unlikely event that the Federal Reserve succeeds at credit expansion to turn the economy back to significant growth, the new growth will be based on the same artificial fundamentals as our recent two bubbles - the dot com bubble and the housing bubble. A new bubble would be larger and more far reaching than ever and would burst harder than ever, sure to break what should have been allowed to break during the last two bursts, but with added problems from the most recent government remedies.

Scenario #5: War

The worst case scenario, and hopefully the least likely, is war. Throughout history times of economic stress have spurred on wars for various reasons (protectionism, government breakdown and disorder, desperation, the belief that it is an economic net positive, etc).

Scenario #6: Sudden revolutionary breakthrough to avoid collapse

All of the above scenarios are doom and gloom scenarios. Unfortunately that is the reality of the situation. However, there is a reason for hope no matter how unlikely this scenario may be to transpire. A revolutionary breakthrough, similar in economic magnitude to the industrial revolution or the information revolution, could ignite powerful, genuine growth that would allow the U.S. to grow its way out of its dire circumstances. We have no way of knowing if this will take place, but a couple possibilities might be an artificial intelligence revolution or a breakthrough in a ubiquitous energy source, such as cold fusion. 

Warning Signs and Triggers to Monitor to Foresee a Collapse Before it Happens

One event or a combination of several events can signal or trigger an economic collapse. Below are several events to keep an eye on to gauge the likelihood of a collapse:

An strong increase of treasury yields/interest rates - 10-year bonds are used to set mortgage rates. The Fed has tried to suppress these rates through expanding the Fed balance sheet and quantitative easing. Rates dropped shortly after announcing their plans, but have risen against their will since. A strong move above 4 or 5% on the 10-year yield could signal the abandonment of faith in U.S. Treasurys, or the ability for the U.S. to pay back the loans with money of held value. A spike in this rate can trigger a run on treasuries and a stifling of the economy. Additionally, the 1-month T-bill spiking above the current 0-.25% level could have a harmful effect.

A failed treasury auction - Throughout the year, the Fed holds auctions to sell Treasurys so that it may borrow money to fund the budget deficit. There can come a time when the supply of those Treasurys is so high and demand for them so low that not all treasuries offered are sold. This is a failed auction. We have already had a few auctions this year that did not fail, but interest rates on the treasuries had to be raised to entice people to participate, which sends signals that U.S. debt is not very attractive. If an auction were to fail, the consequences could be a run on the U.S. dollar.

A U.S. debt rating downgrade - The credit ratings agencies (Moody's, S&P, Fitch) rate U.S. treasurys just as they would any loan. The U.S. has long held a AAA rating on its debt. A downgrade of the U.S. credit rating would send a loss of confidence to its creditors and potential creditors which could cause rates to rise and an abandonment of the dollar.

A strong drop in the U.S. dollar index - A declining value of the U.S. dollar is a sign that inflation (the increase in the supply of money) is increasing and confidence is being lost in the currency. A strong dip in value could cause an abandonment of the dollar.

A bank holiday - Although unlikely given the potential for bank nationalization, a bank holiday could be ordered if the government believes the public has lost confidence in the banks and fears a run on the bank deposits. Bank business would be halted for a day or so to allow the government to absorb or prepare for potential losses. 

Bank nationalization - Given the high probability of U.S. banks experiencing losses beyond existing losses and those projected through the stress tests, the government has put in place triggers to convert bank debt to equity. This is the technical way of saying that the government is taking increased ownership in the banks under the premise that it will instill confidence and health in the banking system. This process will be accompanied with the announcement that the ownership will only be temporary, but the magnitude of the situation makes this highly unlikely. As Diagram 1 above depicts, nationalization does not solve the underlying problems and can lead to a worsened economic situation.

Another economic boom - If a collapse does not happen first, eventually the Fed's massive money printing and credit expansion could artificially boost economic indicators and GDP. Given the likelihood that this would reach all parts of the economy (i.e. rather than just housing or a given sector) the size of the unjustified over-investment could lead to a much more powerful and deep economic bust.

Other economic signs and triggers - In conjunction and in addition to the signs and triggers outlined above, significant stress in the following economic areas could contribute to or trigger an economic collapse:

• Commercial real estate defaults
• Alt-A and Option ARM residential mortgage defaults
• Credit cards and auto loan default increases
• Life insurance company struggles from falling stock market
• Private equity problems from past leveraged buyouts
• Retail struggles
• Oil prices rising
• Food shortages from recent record droughts around the world
• Default on commodities futures contracts
• Interest rate swap defaults from rising interest rates
• Pension collapse
• Corporate bond defaults
• Municipal bond defaults
• State fiscal collapses
• Collapse of Eastern European countries or other countries to spur contagion

Unknown disaster - Other events that could trigger economic turmoil in the economy's vulnerable state are:

1. Natural disaster (hurricane, earthquake, flooding, pandemic, etc)
2. Unnatural disaster (terrorist attack, escalation of international tensions such as Afghanistan, North Korea, Iran, etc)

What Can Result From an Economic Collapse?

Imagine if the money you have in your savings account, checking account, or U.S. treasurys, which you thought were all safe places save your hard-earned money, lost half or even 90% of their value overnight. This is exactly what can happen in our current situation. This can have a catastrophic effect on the economy and social well-being.

Further economic deterioration leads to rising unemployment. Unemployment benefits eventually run out. The government has added an extension to unemployment benefits, but hundreds of thousands of people are passing the time limit of the extension. People will have devalued dollars and in many cases no income or hope of income at all.

Historically this type of financial stress on a mass basis often leads to civil unrest. In an extreme economic crisis, unrest is possible in the U.S. because of:

1. General desperation from extreme financial hardship
2. Racial tensions because Obama ratings may drop and blame could be placed – Various races may attempt to place blame on one another.
3. Class tension because of a large percentage of the population receiving entitlements and bailouts (handouts) while producing nothing. Entitlement and bailout outlays are increasing while ability to produce/create is decreasing.
4. Class tension because handouts will eventually have to be cut back which will cause more stress and anger
5. Class tension because of the mass perception of corporate and executive greed

Ideas for Preparation

With so many possibilities of how the U.S. economic situation can play out, it is difficult to know exactly how to prepare. Below are some ideas that may be helpful as you evaluate your own personal situation.

Protect your finances

A major challenge will be to protect your finances, especially since the normal safe-havens of treasurys, money markets, and cash are no longer safe. Verify what has been written within this webpage with other sources and evaluate your own situation accordingly. Arbitrary Vote is not offering investment advice, but here are a few ideas to help you think about such an unfamiliar situation:

• Don't play the stock market unless you are intimately familiar with the economic situation and investing. There will be continued extreme volatility in the markets and a lot of known and unknown triggers for industries to collapse, while very few winners will emerge. PE ratios are still quite high. The stock market will rise if there is inflation, but the business and currency values won't. For example, Zimbabwe had the greatest performing stock market in the world during their hyperinflation, yet their economy was in complete collapse.
• Diversify your investments. Precious metals such as gold and silver are strong with uncertainties in inflation, government, and currencies. Have at least a little gold and silver in your house as a safety fund. Also various other commodities do well in economic crises. Food/agriculture commodities could be a nice idea as they usually do quite well in inflationary environments, and food shortages are likely to be prevalent in the near future as recent major droughts and population growth are effecting food supply and demand.
• Minimize your fixed income investment exposure, such as money markets, CD's, savings accounts, or U.S. Treasurys. The amount of money you have in cash should be minimal and as liquid as possible so that you can move money to safer places in anticipation of a crisis. Note that you want to try to figure out where to put your money before the crisis happens, as once it happens, it will be too late as your money will have already lost its value.
• If you have significant debt, there are two sides to the payoff argument. One side says pay off debt as quickly as possible so that you don't run the risk of it becoming more expensive in a deflationary environment or with rising interest rates. The other side says don't feel the need to pay off quickly as debt becomes cheaper for you as inflation kicks in; plus the government's policy moves are likely to eventually give your debt relief anyway. Evaluate your unique personal situation and come to the best conclusion for yourself.
• If relevant, get pension dollars as quickly as possible, or at least a strong understanding of your pension's status and funding source. Pensions are extremely pained and may not be reliable sources of income.
• If relevant, accelerate receiving social security payments. Social security is extremely pained and a run can be made on it. Additionally, the government is likely to decrease payment amount and extend the point at which benefits may be claimed. Aside from the payment amount decreasing, the value of the dollar amount will decrease because of inflation.
• Thinking of buying a house? Housing prices may still have a long way to go down for the following reasons:

1. Foreclosures are still rising.
2. Another heavy wave of defaults is on the way from non-subprime Option ARM and Alt-A mortgages.
3. In many cases where the Option ARM and Alt-A problems don't cause foreclosure, they will cause early sales that will add to inventory and/or push prices down further.
4. Many are leaving major residential real-estate states such as California, Florida, Michigan, New York, etc adding to inventory and/or hurting prices in those areas.
5. Layoffs are continuing.
6. Interest/mortgage rates are rising.
7. Loans are harder to get considering interest rates and bank reluctance.
8. The government's activity is artificially propping up housing prices (even though prices are still declining).
9. The banks will eventually have to start moving foreclosed assets off of their books at lower prices or they will face bankruptcy/nationalization. Both scenarios are not good for housing prices.

This means lowered demand and excess and increasing supply. This translates to falling prices that will take a long time to bottom with a slow turnaround after the bottom. Keep in mind that after Japan's housing bubble and bust in the 80's, housing prices are still about 80% lower than they were at their peak.

This does not mean there aren't still a few decent buys out there. Be sure people are moving to and not away from the area where you are buying, and viewing the purchase as a long-term living investment (as opposed to a 2 or 3 year flip) will likely be your best bet. After all, houses are real and valuable assets that act as shelter and will still be standing even if the surrounding economy takes an unprecedented dive.

Other preparation measures to think through

• Protect yourself and your family
• Be aware of increasing crime
• Self-defense skills could be valuable
• Owning a gun may be valuable
• A stock of extra preservable food
• Communication plans and meeting plans with your family in case of emergency
• Evaluate your city or region and its demographics, government, and economic situation. An accessible second home or family/friend home as a retreat may be valuable depending on where you live. Additionally, it may make sense to begin evaluating your country in a similar manner. Aside from the potential future safety issues in the U.S., you may be surprised to hear that the country ranks 6th on The Heritage Foundation & Wall Street Journal's Index of Economic Freedom and 36th on the Reporters Without Borders' 2008 Press Freedom Index.
• Educate yourself - Understanding the situation and the potential outcomes is a major step toward proper preparation. Don't take this website's word for it. Compare mainstream and non-mainstream media and information sources and look at the facts yourself. Investigate economics, political, and financial books, blogs, and websites. A few suggestions are: Meltdown by Tom Woods, Peter Schiff books and blogs, Jim Rogers books and blogs, Ron Paul books and blogs, Mises.org, etc.

Some of these measures may sound extreme. All of it may not be necessary. However, in this environment, being mentally and physically prepared for the worst case scenario is a wise strategy as anything less, but potentially still harmful, will be easier to deal with.

If you have any questions, thoughts, opinions, ideas, or helpful information, feel free to post or discuss them within the forum. Updates based on new information and the evolving situation will be posted at the bottom of this webpage.

Note: All of the graphs within this report are cited. In the interest of time, much of the other statistics are not. Arbitrary Vote is happy to provide citations and background information on any of this information at your request.

UPDATE:  Hope and Solutions

Before and since posting this “Warning” page, a few private comments have been submitted claiming that Arbitrary Vote harps about the problems of the world, but does not offer hope through proposed solutions.
If you dig deeper within several of the main pages of the website (e.g. industry regulation, healthcare, climate change, etc.) you will find suggestions for solutions; there will be more to come. While specifics are mentioned, the overriding theme of the solution ideas is that it is impossible to find all solutions through one person or single group of people (e.g. the government). Instead, free markets will offer the widest range of possibilities to most efficiently find the best solutions.
Hope lies in the next blossoming of this approach just as it has blossomed many times in world history to provide the greatest periods of economic growth and improvements in living standards our species has ever experienced. The application of this approach includes, but is not limited to: fixing healthcare, solving global warming, regulating the economy, regulating industries, minimizing hunger, etc. It is a system of freedom based on the merit of individuals and their rights to their own private property. It produces the many ideas that improve our living standards and chances of survival as a species.
As it stands, the government is swiftly building on its monopoly on ideas and property, while its citizenry stands by believing it will fashion them into the right solutions. It is implementing a system that has failed every time attempted throughout history. Not only has it failed to produce, but it has ended painfully in all instances. The magnitude of its reach and momentum is overwhelming to any individual wanting it to change. This can easily drain hope from all who realize this.
The Arbitrary Vote website is alerting you of the truth behind the causes and consequences of the problems we face; the biggest problem being our society’s approach to solving problems. It is not up to Arbitrary Vote to find the specific solutions.  It is up to each of us, not as a government, but as individuals, to think, work, and create them. This is what has worked in the past, and this is real reason for hope.
With that said, it helps to clearly understand the inherent problems of government, the superior potential of following sound economic principals, and why these contradicting forces make it unlikely to solve major problems. Aside from the introduction to these concepts that Arbitrary Vote provides, deeper understanding can be found through Mises.org, Ron Paul’s Campaign for Liberty, and other suggested organizations, books, and blogs dispersed throughout this website and beyond.
One can live their life each day blindly hoping problems will be solved and things will get better by means of their government. They may be sorely disappointed as have the many in the past who have taken the same route. Wouldn’t your hope be better founded if you took the action to solve the problem yourself?

http://www.arbitraryvote.com/

The U.S. is the most prosperous nation on earth. Prosperity has led to the comfort of its citizens. Mainstream media and government have long been the predominant channels for educating the broad public on affairs that directly affect their lives. What they communicate is generally what is believed and accepted.

Arbitrary Vote aims to provide to its readers an alert about the direct and underlying causes of America's economic troubles while elucidating the consequences of leaving the country's current direction unchanged.
Few of the concepts within this website are new, but are seldom heard by the broad public. While the presentation of concepts is simple, the website allows readers to dig deeper toward background facts and theory that elaborate on simplified statements. Additionally, the community nature of the website enables interaction and debate around the issues, which certainly can influence the core website content.

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Financial Dictatorship Spreads To Europe

Gordon Brown looks to have surrendered significant powers over the City of London to new bodies of European Union financial regulators, according to a high-ranking Brussels official.

British Prime Minister Gordon Brown, left, shares a word with Dutch Prime Minister Jan Peter Balkenende during a round table at an EU summit in Brussels.

The European Commission and other EU officials are celebrating after the Prime Minister accepted on Thursday night the creation of European supervisors over national regulators.

Senior EU officials described how in return for a promise that Brussels regulators can not have power to tell the British government when, and by how much, to bail out banks, Mr Brown has given ground on a broad range of other supervisory powers.

"One year ago, if you had asked if was it possible to go so far as to have the Prime Minister of Britain accepting not only common principles but common systems of auditing and binding decisions at the EU level, then I think that no one would have believed it," said a senior official.

Meeting in Brussels, EU leaders are agreed on the need for better oversight of banks and financial institutions to prevent a repeat of last year's crisis, which has tipped the global and European economy into its worst downturn for 70 years.

The proposals involve creating three pan-European watchdogs next year to ensure countries introduce new rules on supervision. Under the proposals, there is to be a European Banking Authority in London, an Insurance Authority in Frankfurt, and a Securities Authority in Paris. All European leaders agreed today to their creation.

The new bodies will have the authority to ensure European Union market laws are implemented similarly in every country.

There is also to be the establishment of a new European Systemic Risk Board that would monitor the build-up of risks to stability in the region.

According a draft EU summit communiqué, Mr Brown has also lost a battle to keep control of a powerful "Systemic Risk Board" (ESRB) out of the hands of the European Central Bank.

The ESRB will monitor potential threats to financial stability and, where necessary, issue risk warnings and recommendations for action and supervise their implementation. Britain had fought hard to ensure chairmanship of the new body was rotated among all EU countries but appears to have conceded control to eurozone countries.

"The members of the general council of the European Central Bank will elect the chair of the ESRB," the draft communique states.

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Bank of England, Sterling and Government Treason

Many people believe that the Bank of England is a privately owned corporation. Many people believe that it’s owned by the Rothchilds.

NEITHER of these beliefs is true.

The truth is much WORSE.

by Mike Robinson

The story of the Bank of England is the story of the British Empire. The British Empire was never a political empire. It was always a monetary financial empire, as much a parasite on the people of Great Britain as the rest of the world. The idea of the Victorian’s British Empire bringing civilisation to the darkest parts of the world is one that needs real reconsideration by many Britons.

The Bank of England was originally set up as a core part of the British Empire - making huge profits from loans to the British East India Company and other tendrils of the Great British parasite. The mainstays of the trading activities of these companies were drugs, warfare and the looting of raw materials from poverty stricken nations.

As the banker to the Government, the Bank also did quite nicely from lending to the Treasury, thank you very much. In those days, the profits of the Bank went into the hands of the shareholders.

In 1844, the Rothschild inspired desire to take complete control of Britain came true with the Bank Charter Act. This gave the Bank of England the monopoly on the production of Sterling, and control of Britain’s money supply. In Northern Ireland and Scotland, where to this day commercial banks are allowed to print their own money, they must have one Bank of England note in reserve for every note of their own that they issue.

1946 brought the “nationalisation” of the Bank. At the end of WWII, Britain was more or less bankrupt, so it was agreed that instead of paying cash for the shares of the Bank, shareholders would receive 3% Treasury stock instead. With the 1946 Bank of England Act, all the Bank shares were transferred into the possession of the Treasury solicitor, and there they are to this day. It remains a corporation, not a government department.

In 1977, the Bank set up a wholly owned subsidiary called BANK OF ENGLAND NOMINEES LIMITED, (BOEN), a private limited company, no. 1307478, with 2 of its 100 £1 shares issued. According to its Memorandum & Articles of Association, its objectives are;-

“To act as Nominee or agent or attorney either solely or jointly with others, for any person or persons, partnership, company, corporation, government, state, organisation, sovereign, province, authority, or public body, or any group or association of them….”

Bank of England Nominees Limited was granted an exemption by Edmund Dell, Secretary of State for Trade, from the disclosure requirements under Section 27(9) of the Companies Act 1976 , because, “it was considered undesirable that the disclosure requirements should apply to certain categories of shareholders.”

Add that to the fact that the Bank of England is protected from prying eyes by its “Royal Charter” status and the Official Secrets Act. What have we got here?

In 1998, the final piece of the puzzle fell into place. In return for fixing the 1997 elections and getting New Labour into power, the Government enacted the 1998 Bank of England Act, which gave the Bank’s Court of Directors complete independence with regard to monetary policy.

So if we add this all together, we have a nationally owned institution which has the monopoly in the production of the national currency, and has independent control of the country’s monetary policy in the hands of a Court of Directors who serve the private banking system as they have since the Bank was established.

Think about it - private banking control of our currency and monetary policy, fully independent of government. When Gordon Brown signed away government oversight of the Bank, he committed Treason on a scale not seen in Britain since the Heath government took us into what would become the EU.

Since 1998 we have seen the Bank rapidly inflate the money supply, while at the same time relaxing regulation on how banks could lend. No longer were banks required to have cash in reserve for loans they made. Instead the vast majority of currency entering the economy did so as a result of commercial banks entering some numbers into a ledger - money out of thin air, literally.

Working for the private bankers, the Bank of England set things up to maximise the returns for their banking colleagues’ speculative activities, in the full knowledge that as a nationalised institution, it would be the UK taxpayer who was carrying all the risk, and not, as would have been the case before 1946, the shareholders.

The Court of Directors is working for the Anglo/Dutch/Saudi empire - the still-alive-and-kicking hidden hand behind the British Empire of the Victorian age. So it’s no surprise that the solution they provide to today’s manufactured monetary financial collapse is to print more money. Their aim is to destroy the last vestiges of British sovereignty; for a hyper-inflated and hyper-devalued Sterling to be replaced by a single, global, currency, under a single world fascist government.

Gordon Brown announced the new financial infrastructure at the G20. He announced the new global currency - to be issued and managed by the newly reinvigorated IMF.

This has to be stopped. It has to be stopped now. We want our country back, before there’s no country left. We want our country back from the parasites that use one square mile of London as their base of operations. Back in a way it hasn’t been for about 250 years. Join is in this fight - come to the next British Constitution Group conference in London on the 13th June, and find out what you can do.

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Royal Mint is warned that one in 20 £1 coins is fake

BBC study finds fake rate is twice as high as first thought

The pound in your pocket may be worth even less than you thought. According to an investigation by the BBC, as many as one in 20 £1 coins may be a forgery – double the Royal Mint's estimate.

Willings, a company that specialises in detecting counterfeit coins for the banks and vending-machine industry, said that as many as 73 million may be circulating. The recession provides an additional incentive for people to turn to less legitimate methods of making money and the scale of forgery appears to be rising. In the last quarter of 2008, the Royal Mint removed 270,000 fake pound coins from circulation, compared with 97,000 for the whole of 2007. The Royal Mint said: "We are concerned at the apparent upward trend."

A spokesman for Willings said: "We would estimate that as many as 5 per cent of coins we test are fakes. We've been collating them for the past four months or so, and already have a collection of several hundred.

"We can manage a 50 to 60 per cent detection rate while the machines being used by the Royal Mint can only pick up around 30 to 40 per cent."

The former Queen's Assay Master Robert Matthews added: "The Mint is really trying to play down the problem and keep it as low-key as possible. They've not produced any publicity material for banks to tell us how to differentiate between real and fake coins. They don't want to undermine public confidence in the coins – you might get people refusing to take them."

A further challenge to the pound comes from the Swaziland lilangeni coin, worth about 14p and extremely similar to the British coin. While Royal Mint is making little comment, there is an outside chance that the authorities will be forced to withdraw the existing coins and replace them with a design that is harder to copy.

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Going for gold: How the world's mints are coining it

The world's mints are coining it as unprecedented numbers of savers search for safer investments

A few years ago his visits to the mint, founded more than 800 years ago, might have seemed eccentric. No longer. From the Russian Georgy Pobedonosets to the American Eagle, gold coin production is being cranked up in mints around the world to satisfy customers believing the assets may be immune to the global financial crisis.

Russia's state-controlled Sberbank says it has never seen such strong demand for investment coins. In Australia, the Perth Mint had to suspend new orders for gold coins because it could not keep pace with overseas demand. And, in America, the US Mint says sales of its one-ounce American Eagle gold bullion coins rocketed by more than 400 per cent to 710,000 ounces in 2008. "The demand for gold and silver," said US Mint spokeswoman Carla Coolman, "has been unprecedented."

Austria's Philharmonic, named after the Vienna Philharmonic Orchestra, was the world's best-selling gold coin in the last quarter and sales soared 544 per cent in the first two months of 2009. "There is no sign of demand abating," Austrian Mint's marketing director Kerry Tattersall said. Sales this year are expected to exceed 2008's record levels. "At present, production is struggling to keep up with demand."

Hans Dieter Rauch, who sells both collectors' and investors' coins in his boutique on Graben, one of Vienna's most exclusive shopping streets, said revenues rose 300 per cent last year. "It's the man in the street, not particularly rich people but normal citizens like you and me," said Mr Rauch, 65, monitoring the fluctuating price of gold on a screen in his back room.

Gold hit a record high of $1,030.80 (£700) an ounce in March 2008 and last month rose back above $1,000. Jewellery sales by cash-strapped Americans and Europeans have helped to slow the metal's rise in recent weeks.

The Czech Republic's Komercni Banka this month added gold coins and bars to its traditional portfolio of products. Even the Central Bank of Armenia is at it, issuing 10,000 gold coins with a Zodiac signs design. And, in New Zealand, Michael O'Kane, head bullion trader at the mint, said it was averaging a month's transactions in a day.

Wealthy investors are more likely to invest in bars than coins as the premium for production costs is lower, said Wolfgang Wrzesniok-Rossbach, head of sales at the precious metals group Heraeus. "If you buy a kilo bar you have to pay the surcharge for producing the bar, which is pretty low, only once" he said. "If you buy 30 1oz coins, which would be about equal to a 1kilo bar, you have to pay 30 times that amount."

Coins have the edge for small investors who want flexibility and appreciate their aesthetic allure. Demand is for more than physical products: in the past few years, gold has been sought after for speculative gains, with interest in gold-backed funds in particular soaring. But since the financial crisis accelerated last autumn, interest in coins and bars has increased, with investors seeking security rather than profit.

Other manufacturers are reducing output and jobs, but the Royal Canadian Mint quadrupled capacity to produce its bullion gold and silver Maple Leaf coins in late 2008, and the Austrian Mint is producing in one week what it usually churns out in a month. It has extended its shifts throughout the night and weekend and recruited more workers to cope with the surge in demand.

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More IMF Economic Medicine Is Not the Solution

by Michel Chossudovsky

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Fred Goodwin’s house vandalised

Source

by davidgerard

JUSTICE DEPARTMENT, London EC1, Wednesday (NNN) — Sir Fred Goodwin’s house and car in the Grange, Edinburgh have been attacked by vandals.

Revellers queued for several hours for the opportunity of a piece of the action. Two scenes-of-crime officers from the Scottish Police Services Authority kept the crowd orderly. Neighbours, who said Sir Fred had not been seen there for weeks, did a roaring trade in rotten tomatoes and cabbages and bits of wood with a nail through the end.

Sir Fred is assumed to be overseas, reportedly hiding out with a false beard under an assumed name in a market stall in Marrakesh.

Lothian and Borders Police said that officers were acquiring CCTV footage and carrying out door-to-door inquiries in the neighbourhood. “Our inquiries are at an early stage and we are appealing for anyone with information about this incident to contact us. We’re looking at OBEs for the participants and recommending a knighthood for the organiser.”

The attack is considered likely to presage similar activity in the London G20 meeting protests planned for early April. Barack Obama, who will be attending, called on protestors to take action in an orderly and civilised manner. “Torching houses and smashing cars creates a horrific waste in spent carbon. All these materials can be recycled and used again. The same goes for the bankers — reusing their organs is a lot more socially responsible than tearing their guts out and hanging them from streetlights. What would Al Gore do? I beg you, think of the planet.”

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Britain's Great Depression?

The full story on the financial coup d'etat in the UK

by Nadeem Walayat

Global Research

The purpose of this analysis is to map out to the trend of the UK recession for 2009 and 2010 in terms of depth, the bottom and the potential recovery. The most recently released GDP data shows that the UK economy actually did fall off of the edge of a cliff during the fourth quarter of 2008 by contracting by a shocking 1.5% GDP. This compares against the governments recent forecast for 2% GDP contraction for the whole of 2009 which paints a picture of gross under estimation of the actual extent of the degree of economic contraction that is taking place at this time, and hence the adoption of the easy going terminology of "Quantative Easing" to hide the truth of money printing on a scale that could bankrupt Britain, the evidence of which has been played out in the currency markets with sterling's fall to a 23 year low against the dollar, a fall of over 30% in barely 6 months.

The fourth quarter GDP crash of 1.5% is far higher than expected and explains why the government panicked as evident by the deep interest rate cuts from 5% to 1% in just 4 months. The rate cuts are in addition to the £1 trillion banking sector bailout liabilities. The rate of contraction at 1.5% per quarter implies an annualised collapse in the UK economy of 6% which would amount to loss of national income of £72 billion, against which the government has so far committed £40 billion in the form of tax cuts, industry support and stimulus packages. However the deviation of the trend for 2.5% growth per annum puts the gap at an additional £30 billion per annum.

The £1 trillion committed towards halting the banking sectors collapse on face value seems like a huge amount that should kick start lending, however this should be set against contraction of an estimated 30% of the UK credit market or £1.2 trillion as distressed foreign banks pulled the plug on UK operations, on top of which we have had housing market deflation of £250 billion, and stock portfolios erasing a further £400 billion, which sets the £1 trillion of injections and liabilities against deflation of an estimated £1.85 trillion.

The recession looks set to run throughout 2009, with the consensus view forming pf the opinion that the recession will be the worst since the Great Depression of the 1930's during which time the UK economy contracted by 10%, the question now being raised is whether Britain is heading for its own Great Depression on a scale worse than that of the 1930's ?

Britain's Great Depression of the 1930's

Britain's GDP during the 1930's Great Depression fell by 10%, which on face value compares favourably against that of the United States that saw GDP contract by 30%. However unlike the United States, Britain did NOT boom during the 1920's on the contrary the 1920's was a period of stagnation that started out with the Depression of 1918 to 1921 that saw GDP fall by 25%. Therefore Britain's Great Depression in fact started in 1918 and did not end until 1937 and therefore lasted nearly 20 years. However in today's economy, Britain is coming off of a 10 year+ boom, therefore even a 10% contraction would not be on the scale of what Britain experienced during its Great Depression. However the argument could be made that having enjoyed a boom, Britain subsequent bust will unwind much of the gains made during the past 10 years as the United States experienced during the 1930's, therefore this suggests economic contraction on a greater scale than that of the 1930's, especially if protectionism takes hold which was the nail in Britain's economic coffin during the 1930's.

British GDP Has Already Collapsed by 30%

British GDP (AMBI) at the end of 2008 is estimated at £1.275 trillion, against £1.267 trillion at the end of 2007. However sterling has collapsed against major global currencies by 30% or more, which translates into a real terms collapse in the countries GDP of 30%, i.e. 2007 GDP of $2.7 trillion has now fallen to $1.8 trillion a collapse in GDP of over 30%. The Government, Bank of England and FSA are failing in their primary duty which is to preserve the purchasing power of the currency.

The Labour government has destroyed the purchasing power of the British Pound by 30% so as to save on 1% or 2% on the actual officially published GDP data during 2009. That's a price of 30% for a net benefit of at most 1.5% which will still not prevent a deep recession from occurring. Quantative Easing is madness personified which for several months had been supported by the mainstream press which my November article illustrated -Bankrupt Britain Trending Towards Hyper-Inflation? , which sacrifices long-term growth for possible short-term benefit

Therefore whatever is the conclusion of this analysis in terms of sterling GDP contraction during 2009, what readers need to remember is that the real purchasing power of Britain's currency loss of 30% means that the countries GDP has already been sacrificed in lieu of hoodwinking the electorate into believing that things are not as bad as they actually are.

British Pound Crash Failing to Boost Manufacturing

Manufacturing was supposed to the save the economy from the economic bust in the light of sterling's 30% devaluation, however given the collapse in global trade and demand which has put paid to that false assumption, as I pointed out over 6 months ago, sterling's fall will not benefit Britain as the manufacturing base of the country has shrunk to such as small sector of the economy that it cannot hope to offset the Financial sector's depression which once contributed more than £40 billion in profits a year to Britain's bottom line, and now is consuming tax payers fund to the tunes of several hundreds of billions into an ever expanding black hole.

To make matters worse the crash in the oil price has hit UK North Sea oil foreign exchange earnings and therefore contributes to sterling's downtrend with an exchange rate drop of 30%+ that offsets a large part of the benefits of the fall in crude oil prices. In fact we may reach a point in the near future of rising petrol prices despite continuously depressed crude oil prices, which the analysis of 8th December ( Crude Oil Forecast 2009- Time to Buy?) concluded would remain depressed for the duration of economic contraction i.e. probably the whole of 2009.

UK Interest Rates

The February rate cut to 1% fulfills the forecast target for 2009 (4th Dec 08 - UK Interest Rates Forecast to Crash to 1% ). ,The next stop would be a similar Zero Interest Rate Policy (ZIRP) as that adopted by the United States that have cut their interest rate to 0.25%.

Whilst the base interest rate stands at 1%, the 3 month libor rate is at 2.14% and the real economic interest rate is at 3.54%, which clearly indicate evidence that the banks are still refusing to the lend and in-effect hoarding government bailout cash injections much of which is being used to reward bonuses to culpable staff.

Financial Armageddon.... Postponed?

2 minutes and 20 seconds into this C-Span video clip, Rep. Paul Kanjorski of Pennsylvania explains how the Federal Reserve told Congress members about a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occurred over the period of an hour and threatened a further $5 trillion to be drawn out triggering a total collapse of the Worlds Financial System, which then prompted Hank Paulson's emergency $700 billion TARP bailout action.



Video Served by Youtube

Following Septembers close call with financial armageddon the governments of the world have been busy recapitalising bankrupt banks with tax payers monies, however the $500 trillion derivatives monster continues to deleverage and thereby implying that the risks of financial armageddon have only marginally improved on September 2008. There still exists the high potential risk of financial and economic collapse that would be accompanied by extreme currency market volatility.

Bankrupt Banks - HBOS Blows Up in LLoyds TSB's Face

The shot-gun wedding between HBOS and LLoyds TSB last September in the amidst of the financial markets panic following Lehman's bankruptcy to prevent another Northern Rock nationalisation is increasingly blowing up in Lloyds TSB's face as yet again the reassuring words that bankers say one week turn out to be completely untrue. The Lloyds Chairman was congratulating himself barely 3 weeks ago of how the takeover would result in cost savings of £1.5 billion per year. With today's announcement of a £10 billion loss by HBOS for 2008 shatters the Chairman's illusion and Lloyds TSB's balance sheet, as ever it will not be the bankers that pay the price but the tax payer. Already the UK Tax payer has pumped in capital injections of £18 billion into the LLoyds TSB HBOS group.

The Lloyds TSB share price crashed by nearly 50% on the news to close at just 61p valuing the bank at just £10 billion, which is set against UK Tax payer capital injections of £18 billion which therefore values tax payers £18 billion investment at just £4 billion, or a £480 loss suffered by every UK tax payer. As I have warned several times over the past 6 months, the government propaganda of actually making a profit on these capital injections into bankrupt banks is an illusion which is now being borne out.

Given the size of the HBOS and Lloyds TSB loan book, then that £10 billion loss is just the tip of the ice berg as 2009 will turn out to be a worse year than 2008 in economic terms as £10 billion of share holder equity cannot hope to defend against a loan book well in excess of £1 trillion, where even a further 1% loss due to bad debts would equate to more than total shareholder equity, and given the crash in UK house prices of 20% to date with a further 18% expected as per the UK housing market forecast, I cannot imagine how the bank can hope to survive in its present form.

HBOS Bankrupting Lloyds TSB

Lets get one thing straight, LLoyds TSB / HBOS is to big to be allowed to fail, therefore in this crisis there are two measures of bankruptcy without loss of banking operations and they are a. Nationalisation , where in effect the shareholders lose all off their holdings and in effect the bank is bankrupt as far as they are concerned, and b. Capital injections that dilute existing shareholder equity and increase tax payer exposure, in this regard the governments current holding at 43% of the group is pretty close to the magic 50.1% majority shareholding level that to all intents and purposes means nationalisation by the backdoor, and given the £10 billion loss it is only matter of time before further capital is injected into Lloyds TSB / HBOS, therefore it is highly probable that the bank will be effectively become bankrupt as far as shareholders are concerned sooner rather than later as has occurred already with the Royal Bank of Scotland where the governments holding now stands at 78% which is just a stones throw away from full nationalisation and as Northern Rock shareholders have found out, nationalisation results in the 100% destruction of shareholder equity as I warned of before Lehman's went bust (09 Sep 2008 - BANKRUPT Banks Wiped Out by Tulip Backed Securities)

Lloyds TSB / HBOS Depositors

Many customers holding accounts across the two banks are worried that they are now unnecessarily exposed in terms of the FSCS £50k guarantee per financial institution. In this respect I have some good news in that the guarantee is per licence, and as HBOS retains a separate licence to Lloyds TSB which means that savings are guaranteed at £50k per person per bank i.e. a £100k guarantee across both banks.

LLoyds TSB / HBOS Service

The 30 million or so customers of the giant UK retail bank will experience a deterioration in the quality of service as costs are cut and the number of staff that services the client base is significantly reduced this means less branches and less counter staff and therefore longer branch queues and greater difficulty in resolving account issues. Also the merger of the two has yet to be processed in terms of combining operations that was purported to save £1.5 billion per year, therefore expectations are for much disruption in client account operations especially where queries requiring manual intervention to be resolved.

Nationalisation - The Only Solution

The banks are bankrupt ! The only things keeping them alive is tax payer moneys in the form of capital injections and loans that are now nudging above £1 trillion. The only real solution as I highlighted last November ( Bankrupt Britain Trending Towards Hyper-Inflation?) is for the systematic nationalisation of all of the retail banks, where each bank is MADE INSOLVENT, then the profitable assets nationalised and quickly restructured with new competent management and re-privatised with clear limits on its business plan so as to avoid trading in any Securitized debt and a ban on any money market borrowings which are the prime reason the banks are now exposed to bankruptcy. Other controls should be placed on pay limits across the group so as to prevent the culture of bonuses that has destroyed the banks. Also retail banks should always be limited to operating within the means of their depositor base, which is how 99.9% of the public assumed was the way they operated.

IMF Revises UK GDP Forecast Again.

The IMF has revised its GDP forecast for the UK economy for 2009 from -1.5% (November 2009) to -2.8%, and the forecast for 2010 is now +0.2%. The forecast still seems overly optimistic in the light of UK fourth quarter GDP contraction of -1.5%. The IMF has a good track record of being WRONG, overly optimistic forecasts that are continuously revised lower.

The Institute of Fiscal Studies Talking Sense

Finally reports from mainstream institutions are starting to emerge that reflect the crash in the UK economy that will hit the economy hard for many years after the recession ends. The IFS in a recent press release states :

Treasury figures suggest that the credit crunch will cost the Exchequer an ongoing 3.5% of national income (or a little over £50 billion a year in today’s terms) in lost tax revenue and additional social security spending. This excludes any long-term impact from the Government’s interventions in the financial sector, although even a large one-off loss adding to public sector debt should increase the ongoing cost in extra borrowing relatively modestly compared to the impact already reflected in current Treasury forecasts.

In the PBR the Treasury signaled spending cuts and tax increases starting in 2010–11 and raising 2.6% of national income (£38 billion a year) by 2015– 16. If the public finances evolve as the Treasury hopes, this tightening would have to remain in place until the early 2030s before debt returns below the ceiling of 40% of national income Gordon Brown set as one of his two fiscal rules in 1997. So there is no prospect of a Government being able to readopt these rules any time soon. We hope they will be reformed in any event.

Unfortunately, the Green Budget does not expect tax revenues to grow as strongly as the Treasury hopes over the next few years. In the absence of any additional spending cuts or tax increases, we forecast that the Treasury would have to borrow 1.5% of national income more in 2015–16 than it predicted at PBR time – even if the economy performs no worse than expected in the PBR. This would take public sector net debt above 60% of national income, from where it would decline only very gradually over subsequent decades.

The key point is that the IFS states that the Uk will run a 1.5% budget deficit until 2016, and UK debt is not expected to return to below the ceiling of 40% of GDP until 2030 from a rate above 60%. This therefore supports my scenario that after the recession the UK will be heading for many, many years of stagflation.

Confederation of British Industry Forecasts 3.3% 2009 Contraction

The CBI - The UK's leading business group predicts the recession, which began in the third quarter of 2008, will last throughout 2009. The economy is expected to contract by 3.3 per cent and unemployment will reach close to 2.9 million by the end of the year. After six quarters of negative growth, the economy is expected to stabilise early next year with the recovery building throughout 2010.

The CBI predicts the economy will contract by a cumulative 4.5 per cent over the six quarters of negative growth. GDP growth for 2009 has been revised down from -1.7 per cent in November to -3.3 percent. In 2010, GDP growth is expected to be 0.0 per cent.

The impact of the recession and the fiscal stimulus will take a toll on the public finances with net borrowing for 2009/10 expected to reach £149 billion and £168 billion in 2010/11, which represent 10.6 per cent and 11.8 percent of GDP respectively.

The CBI is clearly following hot on the heels of the IMF in doubling its rate of contraction for the UK economy from Novembers -1.7% to now -3.3%. The key point here is the CBI now recognises that government borrowing is set to soar for the tax years 2009-10 and 2010-11 totaling £317 billion, up £100 billion and now virtually identical to my forecast of November 2008 of £314 billion, did the CBI read my forecast ?

UK Money Supply

One of the key driving forces of the 1930's Great Depression was the collapse in the money supply of the United States that fell by 25% and was tracked lower by GDP. However that lessons appears to be have learned given the amount of Quantative easing taking as both the US and UK governments embrace the money printing presses in an attempt to stop deflation from taking hold and thus igniting another Great Depression. Yes, rampant growth in the money supply is inflationary, however the money supply adjusted for the velocity of money paints a truer picture a the below graph illustrates

UK Money supply M4 (blue) has risen sharply from the 10% targeted low of mid 2008 to the current level of 16.6%, on face value this is highly inflationary and has been taken by many economists and market commentators to suggest much higher forward inflation. However the money supply adjusted for the velocity of money which takes into account the state of the economy as a consequence of the credit freeze tells a completely different story. The UK economy is now in extreme real monetary deflation of approaching -15%. The leading indicator of the implied money supply, is suggesting recent deep interest rate cuts will lift future money supply growth out of extreme deflation, however it will still be far from supporting the levels north of 15% which accurately forecast forward inflation during 2008.

Therefore the primary objective of the UK government is to prevent a deflationary downward spiral from taking hold at ANY COST. The Bank of England has been instructed to ignore inflation, and focus wholly on preventing DEFLATION. The price for this will be higher future inflation IF they succeed in preventing the deflationary downward spiral that if they fail WILL result in a another GREAT DEPRESSION. For more on the impact of economic deflation, download the world's foremost expert on and proponent of the deflationary scenario, Robert Prechter's FREE 60-page Deflation Survival eBook

UK Inflation

The Bank of England's quarterly inflation report forecast UK inflation of just 0.5% in 2 years time, with the UK economy now forecast to have fallen by GDP 4% by the middle of this year. It was not so many months ago that the Bank of England was forecasting growth of 2% for 2009.

Bank Governor Mervyn King implied by his accompanying statement that he does not have a clue what he is doing, as the UK economy under his and Gordon Browns collective stewardship continues to fall off the edge of a cliff, the Bank of England Governor stated :

“The United Kingdom economy is in deep recession. The length and depth of the recession will depend to a significant extent on developments in the rest of the world, where a severe economic downturn has taken hold.”

• The economy faces its deepest recession since the post-war years of 1945 and 1946, and its worst peace­time decline since 1931.
• The Bank is likely to reduce interest rates further, perhaps to as low as zero, in an attempt to prevent the downturn becoming worse than the depression in the 1930s.
  It will resort to new drastic measures to pump extra cash into the economy as soon as this week.
• Unemployment – which hit 1.97 million yesterday – will rise further and house prices will continue to fall in the coming months.

My commentary during the summer months of 2008 seems to have been proved accurate in that the BoE MPC at those monthly meetings remained paralysed by the fear of inflation and more or less sat sipping tea and conversing about the weather whilst the economy continued to burn towards the fourth quarter crash.

What is the Governments Solution ?

Quantative Easing aka Printing Money - The consequences of which are that Britain is at increased risk of bankruptcy as I first warned off in April 2008 following the first print run of £50 billion by the Bank of England and reiterated on a near monthly basis since ( archive ), with the most recent article ( UK Interest Rates Crash to 1% New Record Low) updating to the current position of Britain's path towards bankruptcy.

The British Pound responded to the Bank of England's report by resuming its bear market after the correctly forecast bounce from £/$1.37 to above £/$ 1.45 and now again on route towards parity to the U.S. Dollar. (21st Jan 09 - British Pound Panic Selling, Counting Down to Bankrupt Britain )

FSA - Who Should Regulate the Regulator?

To illustrate the point in how wide the gap is between competent regulation of the UK banking system and how it is actually being regulated by the FSA, not just before the credit crisis broke in August 2007, nor in the immediate aftermath which witnessed the run on Northern Rock Bank, but to this very day some 18 months on as witnessed by the resignation of Sir James Crosby, Gordon Browns own appointment as the Deputy Chairman of the FSA on allegations that during his tenure as the head of HBOS (Halifax), he sacked Paul Moore due to the alleged complaints he had made about the banks risk taking that had not been properly minuted at HBOS board meetings.

Deflation of 2009 Will Eventually Turn to Inflation

My earlier analysis of the UK inflation concluded that the UK is heading for real deflation during 2009, with the RPI inflation measure expected to go negative by mid 2009 by targeting -1.2% . The expectations are for similar deflation across the world, as deficit spending stimulus packages cannot hope to compete against the loss of asset values which are in the order of ten times the amount of planned stimulus. The analysis also concluded in that the immediate risks to the forecast are to the downside i.e. prices spiking lower than expected.

This therefore implies for further stimulus packages far beyond that which have been committed to date, with all of the associated consequences of collapsing currencies under the weight of growing deficits and liabilities which sets the scene for higher future inflation as the deflationary impact of collapse in crude oil during the second half of 2008 starts to leave the inflation indices during the second half of 2009, thereafter the deflationary forces of contracting economies will compete with the inflationary forces of money printing and rising commodity prices.

UK Unemployment

UK unemployment shot up by 48,000 for November 08 data to 1.97 million, and remains on target to bust above 2 million on release of data for December 2008. The unemployment claimant count soared by 11% for January to 1.28 million, up a shocking 129,000 on the month and confirming that the pace of unemployment is accelerating as the economy fell over the cliff during the fourth quarter.

My original UK unemployment forecast based on July 08 data is for unemployment to rise to just above 2.5 million by April 2010, however the UK economy continues to deteriorate at an alarming rate with projections of a severe recession of more than a 4% GDP contraction implies that the UK is heading for an unemployment rate that could pass above 3,000,000. The jump in claimant count alone for Dec 08 and Jan 09 totaling 226k implies sharply higher unemployment for December and January, this despite the fact that he unemployment statistics are heavily manipulated to under report true unemployment which would be nearly 6 million higher if all those of working age (16 to 64) were included in the data.

The real number of unemployed in the UK now stands at 7.86 million for November as the below graphs illustrate, the actual dip in total inactive is due to net migration as eastern european workers are apparently returning home in the face of increasing difficulties in the UK labour market.

Gordon Brown Bankrupting Britain to Win the Next Election

The indepth analysis of November 2008 illustrated why Gordon Brown is well on the route towards bankrupting Britain as the liabilities by 2012 will exceed £3.5 trillion from £1.5 trillion at the end of 2007, as the prime consideration for the Prime Minister is to win the next election at clearly ANY COST.

The above liabilities do NOT include the £5 trillion of additional liabilities should the government be forced to nationalise virtually the whole banking sector. However, again people need to realise that the future gets discounted in the present, which is why the Bank of England, Treasury and Government policy makers do not comprehend that they cannot embark on the route towards £3.5 trillion plus of liabilities without the market reacting by selling out of the currency long before the country arrives at the debt destination. The effect of this is to make the current crisis far worse as the market seeks to discount the over 80% of the £5 trillion banking sector debt which is denominated in foreign currencies. Therefore the facility to inflate out of debt through "Quantative Easing" does not work, as the repayments have to be made in foreign currencies against which the countries debt burden rises as the currency falls and therefore puts Britain's banks under greater pressure. The impact on the economy is deflationary whilst import prices rise thus suggesting a stagflationary outlook or worse.

On top of ever expanding public liabilities that at the end of 2008 stood at an estimated £2 trillion, there is also the private sector debt of £2 trillion weighing down on the economy and sterling.

Time is running out for the government, forget 2011, 2010, even mid 2009, a currency collapse would bring the debt crisis to a head within a matter of days. Just as occurred with Iceland as it did not take 3 or 4 years for Iceland to collapse into hyper-inflation, it took 3 or 4 days!, as I warned off in the article Iceland Going Bankrupt? , and subsequently warned that all of the conditions that led to the bankruptcy of Iceland are present in the UK.

Workers In revolt, What's the Answer ?

In Britain workers have been in revolt against foreign workers shipped over from mainland Europe when their exists a mass of domestic unemployed labour. Britain's free market attitude towards the labour market whilst working well during the boom times and in a level playing field, however what exists in much of Europe is not a level playing field with labour restrictions and subsidies increasingly becoming the norm. Take steel workers, in Yorkshire, Corus has announced 8700 job losses whilst in Holland 6,500 Corus steel workers receive 70% of their pay from the government. Off course this is one of the benefits of being in side the EURO which allows one to get away with such action by a country such as Holland without paying the price in terms of currency collapse.

Whilst this is a help in the short-term however as the 1970's and 1980's illustrated supporting loss making industries in the long-run is the sure fire way towards economic stagflation. Therefore whilst there is undoubtedly much pain in store amidst a global economic downturn, there is no long-term advantage towards subsidising zombie industries for which demand is collapsing. It would be better for the government to pay for the re-training of workers for new technologies and industries that will conqueror the world coming out of recession then keep them stuck in industries in terminal demise.

Bailout of the Auto Industry

Conservatives Whistling in the Wind - The conservative party, as embodied by Kenneth Clarke seems to understand the problem even less than the labour government by calls for the underwriting of car loans to support the auto industry. The flaw here is that 86% of cars bought into the UK are imported therefore such an exercise would for £1 underwritten, 86p would be supporting foreign manufacturers.

Collapse of the Euro ?

Many commentators are contemplating the death of the europe due to countries with the Euro zone pulling in opposite directions such as Ambrose Evans-Pritchard who has apparently declared war on the Euro. I would happen to guess that the vast majority of these Euro doom commentators FAIL to understand or conveniently ignoring that had countries such as Ireland been outside of the Euro then they would already have collapsed Iceland style. Therefore the current crisis has in effect strengthened the Euro domestically regardless of what the rate does against the Dollar and other currencies. Domestically there is fear amongst many of the smaller countries within the Euro of what would happen to them IF they were outside the Euro and therefore the risks of a Euro collapse are vastly exaggerated. On the contrary countries such as Iceland who were vehemently anti Euro will be lining up to join the Euro as soon as their economy has Stabalised as the risks of being outside the Euro are infinitely greater than being in the Euro.

Right across Europe Euro Skeptics have been sidelined by the collapse of the banking system that emanated out like a contaigent form the United States as every countries greedy banks sought to capitalise on the collatorised debt bubble. Clearly the Euro has been a life saver to many small countries under which umbrella has allowed the countries to undertake extreme measures that would not have been possible outside of the Euro right across the continent. From Ireland guaranteeing 100% of bank deposits, to Holland and many other countries subsidising wages upto a rate of 70% to keep workers employed. Unfortunately for Iceland, their own banks extreme level of greed and the populations fierce independence has led to the destruction of that economy.

Protectionism on the Rise

One of the primary reasons why the 1929 crash resulted in the Great Depression was because of the rise of protectionism and the collapse of global trade.

Demonstrations and many heated discussions are taking place right across the developed world to protect workers from foreign labour, more so in countries with huge trade deficits that have effectively exported their manufacturing base abroad i.e. the United States and Great Britain, against these are countries that rely heavily on exports such as the fast developing countries of China, India and developed counties of Germany and Japan.

The arguments on both sides are convincing. My own personal take is that there should be a level playing field, if there is then everyone wins, if there is not then one side loses and the other side wins. Unfortunately we are NOT living in a era of a level playing field, this is particularly true where China and other asian countries are concerned as they seek to manipulate their currencies lower and thus interfering with the normal working of the market that will tend to correct trade imbalances. Clearly the zero interest rate policy is a response to this in that the western governments are in effect punishing countries that seek to manipulate their exchange rates and therefore subsidising western budget deficits. However the severe recession itself will go a long way to correcting unsustainable trade imbalances as global trade collapses.

UK Retail Sales

Headline retail sales bounced strongly in December rising by 2% to an annualised 3.7% as distressed retailers slashed margins on stock to avert bankruptcy amidst price cutting in the wake of heavily discounted stock in the closing down sales of major retailers such as Woolworth's , Zavvi and Adams, that collectively account for some 50,000 jobs.

The expectation that over Christmas and January retail sales activity 'should' rise due to discounting materialised as our European and American cousins boosted retail sales volume by benefiting from the 30% crash in sterling which means the already liberally advertised 20% discounts translated into a 50% discount for European shoppers, much as Briton's benefited not so long ago from the cheap shopping trips to New York at an exchange rate north of £/$2.00.

However as earlier analysis suggested that the fall in sterling will result in much higher high street consumer prices during 2009 as those retailers that have not gone bust seek to replenish stocks at much higher prices during 2009. This confirms analysis that the January Sales for Britons may prove to be more illusionary than real as the fall in sterling has already soaked up corporate margins.

Retail Sales Trends

The above graphs illustrate the strong rebound in retail sales, both headline and real retail sales trend that has moved out of deep deflation. However as per the points mentioned earlier, it is highly unlikely retail sales volume will grow past the January sales season into February 2009 and March 2009, in the face of heavy job losses and retailers going bankrupt.

For more on the impact of deflation, download the world's foremost expert on and proponent of the deflationary scenario, Robert Prechter's FREE 60-page Deflation Survival eBook

UK Housing Mortgage Market Lending Crash

The Council of Mortgage Lenders (CML) mortgage lending data released today shows a 49% crash in the number of mortgages granted to home buyers to just 516,000 which is the lowest number since the mid 1970's property crash. There were 32,000 house purchase loans in December, a decline of 5% from November and the lowest level since monthly records began in 2002.

Michael Coogan, CML director general, said: "The shortage of mortgage funding and reduction in the number of active lenders has reshaped the mortgage landscape in the space of a year. This low level of transactions is insufficient for the functioning of an efficient market.

"Measures are now in place to seek to restore the flow of funding to the mortgage market, but this will take time to feed through. Further action may still be necessary to increase transactions, stabilise prices and restore confidence."

The CML data supports that of the British Bankers Association BBA which saw the total amount outstanding contract from £524 billion to £496 billion.

However on a marginally brighter note mortgage lending for house purchases rose from record lows during December 2008, which implies that the flood of tax payers money amounting to more than £1 trillion, coupled with angry arm twisting pressure from both the government and Bank of England on the part or wholly nationalised banks such as HBUST , Northern Pebble , Bradford & Bunglers and RBF'd-up is starting to show at the very least a pause in the crash of the mortgage lending market, which helped to contribute towards a small bounce in the house prices for January 2009 that my next article will elaborate upon.

UK House Prices

A cheer went up amongst housing market participants across the land as UK house prices rose by nearly 1% in January 2009 as measured by the Halifax. However the government is throwing everything including the kitchen sink at the housing market to bring about a halt to the ongoing crash in nominal terms. The amount of money printed has mushroomed from the £50 billion of April 2008. that I warned was just the tip of the ice-berg that would soon mushroom into the hundreds of billions, we are now in the process of leaving the hundreds of billions behind and moving into the trillions, sums that seriously risk the bankruptcy of Britain.

The mainstream media has jumped on the one month bounce to start contemplating the return of the housing bull market i.e. The Times reports - The 10 towns where house prices will bounce back first - " Property website's recorded a surge of activity in the first few weeks of this year, estate agents had a busier January than previous months and Halifax even reported a small rise in house prices."

UK Housing Market Affordability and Interest Rates

The February rate cut to 1% fulfills the forecast target for 2009 (4th Dec 08 - UK Interest Rates Forecast to Crash to 1% ). with the next stop a similar Zero Interest Rate Policy (ZIRP) as that adopted by the United States that have cut their interest rate to 0.25%. The deep cuts in interest rates whilst not wholly passed on have resulted in a fall in the economic rate of interest from over 6% in September 2008 to 3.54% today. This is having a positive impact on the affordability despite the recession and hence supportive of house prices in the short-term.

UK House Price Forecast 2007 - 2012

The rise in UK house prices during January 09 brings a pause to the house price crash that is now into its 18th month as the above graph illustrates as per the updated house price forecast that covers the trend into 2012 which projects for a total drop from peak to trough of 38%. However, as I have warned many times over the past 18 months, the government has in its power the ability to print money to bring nominal house price falls to standstill, this money printing is now quaintly termed as "Quantative Easing" so as to hide the truth and mask the continuing crash in house prices that despite the opinion of the mainstream press by the likes of Anatole Kaletsky and Ambrose Evans-Pritchard HAS put Britain on the path towards bankruptcy, as explained in the depth analysis of November 2008 - Bankrupt Britain Trending Towards Hyper-Inflation?

The Labour governments primary objective remains to maximise its chances of winning the next election, this will be to the detriment of future growth as the consequences of printing money and the exploding debt burden risks a currency crash that at best means many years of stagflation and at worst hyperinflationary bankruptcy along the lines of the Weimar Republic and the most recent example of Iceland. This is evidenced by the following graph of UK house prices in terms of inflation, and our key trading partner the United States (U.S. Dollar), with a similar fall observed against the Euro.

The above graphs clearly illustrate that the UK housing market has crashed by 25% (real terms) and over 40% (U.S. Dollar / Euro) which is having a severe impact on the UK economy as the real deflation of a 40% loss of value of house prices added to the more than 50% of that of stocks is tipping the UK economy towards economic depression. Therefore home buyers need to guard against the ILLUSION of stabilising house prices whilst the real terms crash in house prices continues.

UK House Prices Regional Trends

While average house prices as of December 2008 are down 20%, in terms of price crash experience Northern Ireland tops the list at 35%, meanwhile Scotland continues to buck the trend by only registering a 6% drop to date.

Commercial Real Estate Bust of 2009

As the retailers go bust, financial institutions close or get down sized, and corporations go bust, this is going to lead to a crash in the value of commercial real estate that has already begun.

UK Financial Sector

The financial sectors of all of the countries of the world are already in a deep depression, which is leading to contraction across the whole globe against which governments are battling with ever larger stimulus packages, however Britain with its extraordinarily large financial sector was always destined to suffer the most, more so then other large developed european countries such as France and Germany. Therefore all the talk by Gordon Brown showed a great deal of bare faced cheek when he repeatedly stated how Britain was best faced to face the global economic downturn when in fact the exact opposite was true. The United States estimated bank losses are in the region of $2 trillion, UK bank losses are estimated to be $1 trillion, the only problem here is that the UK economy is only about 1/7th the size if the U.S., therefore British banks are exposing the UK tax payer to 3 times the losses as U.S. tax payers hence the reason why sterling is being dumped, which as much of the debt is denominated in foreign currencies has the effect of making matters worse as the value of the debt rises in sterling. The Bank of England and the FSA have a lot to answer for, exactly what have they been doing in their ivory towers whilst the financial institutions were busy turning themselves into hollow husks ?

International Trade in Meltdown

Global trade is collapsing and taking with much of the mainstream media hype that currency devaluation of 30% will boost the British economy. Yes we have hade a 30% devaluation in sterling, but who is going to buy our goods ? Who do we export to ? World trade fell over the cliff during the past 4 months, with shocking figures come through from right across the globe. Which means that despite the 30% devaluation, 30% of the value of Great Britain PLC wiped out for NOTHING, as our exports WILL FALL during 2009 NOT RISE ! ALL of the COST of devaluation with NONE of the GAINS, which illustrates the degree of incompetence right at the core of the institutions that are taking the decisions that are destroying Britain's long-term future, and I fear far worse to come as Britain embarks on the next stage of currency devaluation that WILL lead to HIGH inflation ? How high well that depends on how much the government wastes on trying to bolster bankrupt banks.

Global Economic Slump - Japan Back in Economic Depression

Today's recession is experiencing a global meltdown in international trade, where literally economies are falling off the edge of a cliff right across the globe. What this means is that it is extremely difficult for a small economy such as Britain's to buck the trend.

Japan yesterday released truly shocking GDP data for the fourth quarter of 2008, the Japanese economy contracted by 3.3% which equates to an annualised rate of 13.2% which is on par with magnitude of contraction that is associated with an economic depression. All exporting countries are experiencing a crash in exports which fell by 14% in the quarter, as western consumers stop buying and start saving. Japans industrial plunged by nearly 10% in December 2008, down 20% on the year earlier.

Japans government is expected to respond to the economic crisis by announcing a further stimulus package of more than $200 billion as the government again attempts to fight against the deflationary spiral that has kept Japan in depression for approaching 20 years.

The collapse in the Japanese economy is ironic in a way as Japan in the same vane as many other asian countries was not exposed to U.S. subprime mortgage derivatives on the same degree as western banks, which during 2008 had given life to the argument of decoupling between the east and the West, however the exact opposite seems to be occurring with the asian exporting countries being hit harder than the consuming countries.

Global Trade Green Shoots ?

The Baltic Dry Index is a measure of global trade in terms of the price charged for chartering ships for the shipment of raw materials. Following the crash from a height of nearly 12,000 as the global economy fell off the edge of the cliff, the BDI has recently bounced, however as the chart shows the degree of recovery is insignificant compared to the preceding collapse, whilst a positive development the BDI needs to build on the rally to date to start to imply that the world economy in terms of international trade is hitting bottom, which I would expect to be reflected in 3rd and 4th quarter GDP data, which would imply a short severe global recession. This is also a potentially bullish signal for industrial commodities that have been decimated during the crash in global trade.

UK Recession Projection / Forecast Conclusion

In the final analysis, the projected course of the recession over the next 2 years is as illustrated by below graph in that the severe recession is expected to bottom at an annualised rate of -4.75% GDP in the fourth quarter of 2009, which will be followed by a recovery as the rate of GDP contraction improved as government stimulus measures announced to date and deep interest rate cuts as well as future stimulus kick into gear. The UK economic recovery is expected to continue into the fourth quarter of 2010 i.e. after the general election. The total recession from peak to trough is expected to see GDP contract by 6.3% and therefore this will be the worst recession since the 1930's Great Depression.

Unfortunately for the Labour government the economic cycle is completely out of sync with the election cycle as the economy is not expected to emerge from this severe recession until AFTER the next election as 2010 1st quarter GDP is estimated to be at an annualised rate of -3.9%, this therefore increases the probability of Labour losing the next election as the state of the economy is nearly always the primary determining factor for the electorate. However the Labour government will do its up most to battle against the election especially once GDP data shows contraction of more than 4% annualised, therefore the expectations are strong that the Labour government will sacrifice long-term growth for the short-term possibility of turning the economy around before the election. This also suggests that the 2010 recovery may not be able to take hold and therefore sets the scene for a weak 2011-2012, perhaps a double dip recession.

By Nadeem Walayat
http://www.marketoracle.co.uk

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