Posted on 12/29/2002 1:59:05 PM PST by arete
Shortly after the surprising half-point cut in interest rates, we began to hear the Federal Reserve talking about the aggressive way it would deal with deflation. In case of falling prices (deflation), a Fed governor had this to say." …..the U.S. government has a technology called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost….. a determined government can always generate higher spending and hence positive inflation….."
This shocking pronouncement prompted analyst Marshall Aurbach to write of the Fed, "….they leave us less concerned with the prospects of deflation and more aghast at the apparently limitless measures America’s financial and monetary officials appear prepared to countenance sustaining an increasingly unsustainable system."
Why would the Federal Reserve be broadcasting assurances they can deal with deflation? (Code word for depression, debt collapse and credit crunch). Newsletter guru Richard Russell provides an answer. "It’s inflate or die. I’ve warned about this for a long time, and now, finally, it’s happening. It’s very important that you understand what’s happening, and unfortunately, I can’t write it all, and I can’t tell it all. Therefore, you’ll have to do some reading on a regular basis if you want to understand the extraordinary trends and events that are taking place today.
"The Fed is now in what I call a ‘death struggle’ to stave off the forces of deflation. Part of the problem is the bursting of the great stock market bubble. Part of the problem is the rise of the Chinese low-cost manufacturing colossus. Part of the problem is the many years of monetary inflation that has been sponsored by the Fed and, most recently, by the greatest inflationist in all U.S. history, Alan Greenspan."
Along the same line, Richard Daughty, the Mogambo Guru, writes, "This is truly a watershed moment in history, and you are there. Things will tend to get very interesting from here on out. Well, ‘interesting’ in the sense of degrees of bad news happening to somebody else. And when ‘somebody else’ finds it interesting watching the bad news happening to you, personally, then perhaps you will find it all even more interesting, as a euphemism for catastrophe."
So, what does the Fed see? Perhaps they were disturbed by a recent economic report from Northern Trust that asks, "How are we going to service the highest debt levels in the history of the world with corporate profits shrinking?" Corporate profits in the third quarter were down 1.8%. Calling this a "pitiful profit performance" Northern Trust went on to say, "Fourth quarter profits from current operations stand a better-than-even change of being down a larger percentage than they were in the third quarter….. Sustained economic growth is dependent on profit growth. Without profits, there will be no new hiring of workers and no new capital spending."
Newsletter writer Jay Taylor concludes, "Profits are simply not only failing to grow, but in fact are declining even as equity prices rallied over the past several weeks. Unfortunately in our view, this makes us terribly vulnerable to another major move downward."
Another newsletter author, Bill Buckler, delivers a factual analysis of what may be spooking the monetary authorities. "The current U.S. financial/economic situation is enough to rattle the bravest man. In October, the federal government ran a budget deficit of $54 billion. Federal spending was up by 8.6%, revenues were down by 20%. Individual tax returns are down by 13% from only a year ago….. total U.S. credit market debt exceeds $U.S. 34 TRILLION! In 2002, state revenues are down by 6%. Thirty-eight states are in budget and fiscal trouble. All over the U.S., state and local governments are now raising taxes to close the gap. U.S. personal bankruptcies are up 12% compared to a year ago. Behind the stage, the U.S. economic foundation is crumbling.
"The U.S. is, itself, today a growing financial and economic danger to the rest of the West as well as to of the rest of the world…... The central geo-financial fact is that both the U.S. net external debt and the current requirement that it be "funded" by the rest of the world to the annual tune of $US 456 Billion are dangers of a truly global magnitude. According to the International Monetary Fund, the United States accounted for fully 71% of the total global deficit in 2001. The U.S. is draining the savings of the world.
"Asian Central Banks alone hold $US 1.4 TRILLION in liquid U.S. "paper". If just a part of this immense stock of funds lent to the U.S. were to start to run for the exits, the entire U.S. financial system would be forced up against a wall and then off a cliff."
Mr. Buckler further warns about our economic decline. "Over just the past two years, the United States has lost 2.1 million manufacturing jobs. Between 1998 and 2001, machine tool orders plummeted annually from $U.S. 5.2 Billion to just $U.S. 2.6 Billion. They continued sliding through the first half of 2002 with just $U.S. 1.1 Billion worth of orders. Machine tools are the seed corn of economic life. These are the specialised plants that manufacture the actual machinery which is later used to make everything from refrigerators to cars to 747s. To see machine tools go into such a massive decline (from $U.S. 5.2 Billion to just $U.S. 2.2 Billion) in less than five years means….. that the U.S. will be producing LESS goods in the future.
And what of the consumer? Can we count on this engine of economic growth to continue plunking down the plastic? Newsletter author Porter Stansberry explains, "Imagine your own family’s balance sheet. What would happen if you maxed out every available credit source over the next six months? Your rate of consumption would soar, you’d place great demands on the economy and, eventually, your needs would slowly decline. You’d be left with few wants…and a lot of debts. You’d stop buying anything for a long time, until you were able to repair your family’s balance sheet.
"That’s essentially what has gone on in America over the last ten years. The savings rate declined from around 5% (which is weak) all the way to a negative figure in the late 1990s. People were spending more than they made each year, mostly by tapping into home equity loans. Now we’ve reached the point where most people (and most corporations) are close to tapped out.
"Back in 1992, consumer credit as a percentage of disposable personal income stood close to 16%. Today it’s over 25%. And that means an overwhelming majority of people’s income today goes towards taxes, interest and paying down debts."
Bill Buckler adds, "Taxes and government charges are rising fast and health insurance premiums are soaring. Debt free individuals are making NEGATIVE returns on their investments. Indebted individuals are going bankrupt in record numbers.
"Millions of people have contracted such huge levels of debt that their income (from whatever source derived – wages, salaries, investments, etc.) is barely enough to service it. And as state and municipal government imposts continue to increase, more and more of them are going under.
"If the U.S. consumer stops borrowing to consume and starts saving, then the U.S. system is lost. Worse, for the U.S. financial powers that be, if the U.S. consumer starts to actually REPAY loans, there is NOTHING with which to stop the U.S. system from DEFLATING."
In a letter to Richard Russell, one of his subscribers eloquently summed up our current predicament, "To put it in the simplest and truest terms, the ONLY thing the Fed, our political leaders, Wall Street, and the vast majority of economists in this country believe to be the basis for all economic thought and policy is to increase public and private debt and create more fiat money. That’s it. Nothing else. Not a lot of imagination. Five thousand years of economic history, social commentary in the writings of the greatest minds that ever lived, and just plain common sense dictates that this is a recipe for disaster, has never worked, and is against every principle of honesty, integrity, discipline, prudence, good judgement, foresight, and wisdom.
"Richard, it’s over. The future we ignored and trashed for the benefit of the present over the past half century has now arrived."
I understand that the military is experimenting with a new "Greenspan" bomb. When dropped on the enemy, it causes their economy to collapse.
Richard W.
Comments and opinions welcome.
Richard W.
We need something like a Jubilee, or we WILL have one by other means -- catastrophic. A Jubilee gives folks of honesty and integrity a few years of sustenance -- otherwise they are starved, and all suffer.
A more plausible scenario is that we will just cave in on ourselves and our enemies will have occasion to kick us in the teeth. My prayer is for mercy from God, and that the American people (those that haven't already) will return to the Lord early, however we seemed to have hit the snooze button soon after 911.
Prosperity is just around the corner.
State expenses grew 55.4% from $572B to $889B in even shorter period from 1990 to 1999.
What?
This!
The Bible has this economic thing called a "Jubilee Year" -- all debts forgiven, properties rebased by lottery, every fifty years.
I live a fiscally debt-free conservative lifestyle and have no need to be forgiven for any debts... So, I call this idea... Commie BS drivel, understand?
You can create money, but you can't control where will it go. Rather than effecting price stability of goods Alan's mountain of fiat has found its way into real estate and equity bubbles. Their solution to malinvestment? Cranking up the money supply at even a greater rate. I doubt it will work.
I think that everyone plays lip service to this phenomenon but how many people really understand the scope, magnitude, and ramifications of this. China is thriving, no, booming, while the rest of the world is in some cases barely treading water or in some cases going right down the tubes. China can produce much of what we can produce and at a fraction of the cost. They are agressively building a 21st century economy by taking the best of what the West has to offer and adding their own low cost labor and economies of scale.
It seems like the only way out of this dilemma is further innovation on our part, just like we've done in the past. No way can we compete on cost, and we don't have the political will to put up huge trade barriers, and even if we did, it would probably work to our detriment.
Seems like we need to find the next "big thing" just like we always have in the past. Otherwise, the Chinese are going to eat our lunch.
Much as we turned the Middle East into a player by developing their oilfields, at the eventual peril of our own domestic production, we shall too empower China by exporting the expertise while neglecting domestic production.
Who the F is in charge around here?
Have all the adults taken leave of their senses?
We are acting as if we are a stupid nation intent on our own demise.
Well on second thought maybe the proof is in the pudding.
You have that right, I do and believe exactly what I want, this is America get used to it.
Do you live in the old testament, does the Bible have any relevance or weighting in today's economics? Oh, how about ancient Rome's economy, didn't think so, was it ever used in 16th century Europe? When in fact was the last time this Jubilee thingy was celebrated?
Listen pal come around here and attempt to force me to relinquish the debt instruments I hold and you should expect to see your God. I make a very good living legally getting over on this screwed-up system, I ain't without deadly force giving up any of these gains, go back to Russia already creep.
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