July, 2010

Trouble Dead Ahead as the U.S. Economy Continues to Soften

Current State of the U.S. Economy

It should be obvious to all Americans that the recession, which the U.S. government said began in December, 2007, continues to this day. In spite of periodic upbeat statements from the cheerleaders in government and business, there has been no significant improvement in the U.S. economy since December, 2007. Take a look at the unemployment data outlined in the table below:

Month/Year	U-3	U-6	SGS
Dec, 2008	7.2%	13.5%	17.5%
Jan, 2009	7.6	13.9	18.0
Feb, 2009	8.1	14.8	19.1
Mar, 2009	8.5	15.6	19.8
Apr, 2009	8.9	15.8	20.0
May, 2009	9.4	16.4	20.5
Jun, 2009	9.5	16.5	20.6
Jul, 2009	9.4	16.8	20.6
Aug, 2009	9.7	16.8	21.1
Sep, 2009	9.8	17.0	21.4
Oct, 2009	10.2	17.5	22.1
Nov, 2009	10.0	17.2	21.8
Dec, 2009	10.0	17.3	21.9
Jan, 2010	9.7	16.5	21.2
Feb, 2010	9.7	16.8	21.6
Mar, 2010	9.7	16.9	21.7
Apr, 2010	9.9	17.1	22.0
May, 2010	9.7	16.9	21.7
June, 2010	9.5	16.5	21.6
July, 2010	9.5	16.5	21.7

As you can see from the data, there has been no meaningful reduction in unemployment rates over the last 20 months. If the U.S. economy had really improved, as the cheerleaders want you to believe, the jobs picture would be substantially better than what the above data reveals.

Why Hasn’t the Economy (the Jobs Situtation) Improved After All the Government Stimulus Programs?

The various stimulus programs, totaling in excess of $1 trillion, failed to improve the economy (jobs situation) for the following reasons:z

1. as I have mentioned in my previous commentaries, the major cause of our financial and economic problems can be traced to the sale of derivative products, especially those in the unregulated OTC (over-the-counter) markets. None of the government stimulus programs addressed this problem;
   
   
2. the money, which the U.S. government poured into the banking system in order to stabilize it in 2008 and 2009, never found its way into the mainstream, every day economy. Simply put, banks did not lend the money that they received from the government to businesses of various sorts. Instead, the banks left this money with the Federal Reserve (perhaps they were forced to do so) as excess reserves (about $1 trillion). Some reliable analysts have estimated that, had the $1 trillion been lent out to businesses, the economy would have received a $10 trillion shot in the arm. This clearly would have improved the jobs situation as businesses with sufficient money tend to hire more people.
   
   

What Will the U.S. Government and Federal Reserve Do Next?

Since the U.S. economy hasn't improved in any material way in spite of the various stimulus programs and since this is an election year, the U.S. government and the Federal Reserve will very shortly announce additional "quantitative easing" measures (new stimulus programs). They will repeat what they have already done but probably on a much grander scale. I wouldn't be surprised to see "quantitative easing (stimulus)" programs totaling $2 trillion or about double the amount that the European Central Bank announced a few months ago to deal with the problems in Greece and other European countries.

What Will Be the Likely Results of a New Round of Quantitative Easing (Stimulus) on the U.S. Economy (Jobs Situation)?

Frankly, in my opinion, it will have minimal positive impact unless the banks are coerced into lending these funds to the many businesses who are being starved to death for capital. I don't believe that will happen.

What Will Be The Long-Term Impact Of All of These Quantitative Easing (Stimulus) Programs on the U.S Financial Health and the Country Itself?

The U.S. government is effectively bankrupt right now! The projected deficit for the fiscal year ending 9/30/10 is expected to be about $1.5 trillion. If Generally Accepted Accounting Principles (GAAP) were used, the projected deficit would be $4 to $5 trillion. The deficit is so large that a deficit would still exist even if personal income and corporate profits were taxed at 100%. Moreover, if the government eliminated spending on all its programs other than Social Security and Medicare, a deficit would still exist. The U.S. government will fund the new "quantitative easing (stimulus)" programs by going further into debt, i.e. selling more Treasury bonds, notes and bills to whoever is foolish enough to buy them. Many of the former purchasers of U.S. Treasury bonds, notes and bills are coming to the realization that the U.S. is not willing to take the difficult steps to get its financial house in order and hence are now reluctant to purchase additional U.S. Treasury bonds, notes and bills. Ultimately, piling more debt on top of an already over-indebted financial structure will lead to a hyperinflationary depression characterized by the following:

1. the U.S. dollar's loss of status as the world's sole reserve currency;
   
   
2. a reduced (perhaps dramatically reduced) standard of living for the citizens of the United States;
   
   
3. extremely high prices and/or shortages for the basic necessities of life such as food, medicines, medical care, gasoline, oil, natural gas, propane, etc.;
   
   
4. a dramatic collapse in the value of U.S. Dollar denominated paper assets such as savings accounts, U.S. Treasury debt (bonds, notes, bills), U.S. Agency debt (Fannie Mae, Freddie Mac, etc.), corporate bonds, state and local bonds, etc.;
   
   
5. much higher prices for "hard assets" such as commodities, precious metals, etc;
   
   
6. . continued deterioration in the prices of residential real estate and a STUNNING COLLAPSE in the prices of commercial real estate;
   
   
7. uncertainty with respect to the pricing of common stocks. In a normal hyperinflation, common stocks should skyrocket in price. In this case, any escalation in common stock prices might only accrue to companies involved with precious metals and, possibly, other commodities and energy;
   
   
8. much higher interest rates, possibly reaching the teens or higher;
   
   
9. additional bankruptcies of both large and small companies;
   
   
10. unemployment rates that exceed the 25% - 30% seen in the 1930's Great Depression;
    
    
11. outright collapse or substantial impairment of public and private pension plans such that individuals will not be able to count on the pension payments that they had expected in their "golden years;"
    
    
12. significant alterations to all entitlement programs funded by the U.S. Federal Government, especially Social Security, Medicare and Medicaid. The bottom line will be a substantial reduction in benefits for almost everyone;
    
    
13. a disproportionate negative impact on the "middle class," which is the backbone of an economically sound country;
    
    
14. secession movements by states which will be somewhat similar to the breakup of the Soviet Union in 1989;
    
    
15. increased protests, crime and violence, possibly resulting in the institution of martial law, as U.S. citizens become more desperate due to loss of jobs, homes, investments, pensions, etc;
    
    
16. increased reliance on various barter systems whereby like-minded individuals trade needed goods and services with each other;
    
    
17. a possible war (there are numerous flashpoints throughout the world) and/or swine flu outbreak which would serve to distract Americans from their dire economic circumstances;
    
    
18. a possible "bank holiday" in which all banks are closed for an undetermined time so that new bank rules can be imposed, weak banks can be closed, etc.
    
    

Actions that You Can Take to Defind Yourself and Your Loved Ones

1. Don't believe the "spin" that things are getting better! This will only encourage you to overspend and/or spend on the wrong items at a time when you can least afford to do so;
   
   
2. make sure you secure fixed (not variable) rates of interest on any debt you have. This will protect you from the coming higher rates of interest;
   
   
3. try to locate additional part-time opportunities to earn income as your full-time job just might evaporate in the months to come. Especially focus on part-time opportunities that have the potential to become full-time opportunities;
   
   
4. if possible, have a few months of cash available in a safe place outside of the existing banking system in the event a "bank holiday" is declared;
   
   
5. if possible, have a few months of non-perishable food supplies, medicines, and other necessities available in the event of any significant disruption in our "just-in-time" distribution system;
   
   
6. if you have any discretionary investment funds available, consider purchasing a few gold and/or silver coins from a reputable dealer;
   
   
7. lock in prices, wherever you can, for items such as heating oil, propane, natural gas, etc.;
   
   
8. establish relationships with like-minded friends and relatives so that you have a strong support group to see you through the difficult times;
   
   
9. be prepared to defend yourself and your family. Desperate people will do desperate things during desperate times;
   
   
10. above all, THINK FOR YOURSELF! Don't let anybody else think for you.
    
    

Closing Thought

"The central economic problem plaguing this country since 1913 has been the presence of the Federal Reserve System. Without the Federal Reserve System's debt-currency scheme having effectively supplanted the constitutional monetary system based upon silver and gold, it would have been impossible - not simply improbable, or difficult, but impossible - for politicians in the public sector and speculators in the private sector to have amassed the staggering level of unpayable, unconstitutional, and unconscionable debt that now bears down upon this country."