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The Coming Economic Depression – August 2004 Update (pdf version)

This is the latest update to a series. Earlier sections appear here.

And when money failed in the land of Egypt, and in the land of Canaan, all the Egyptians came unto Joseph, and said, Give us bread: for why should we die in thy presence? for the money faileth. (Gen 47:15)

Greenspan On Drugs

Greenspan's recent speech before the senate show a remarkable detachment from reality. Even mainstream reporting (AFP) seems to concur, "They are Goldilocks forecasts," said Lehman Brothers' chief economist and former Fed staffer Ethan Harris. This speech and testimony cannot possibly reflect his real views. Greenspan is playing a political game and is placating a GOP majority in the Senate in an election year by up-selling a dynamic picture in a contentious election year. I speculated some time ago that Greenspan would do this in return for his recent reappointment. Jobs are not being created as quickly as anticipated and those that are said to be created are done so using questionable statistical methodologies. Greenspan stated that he does not see a Housing Bubble. This is ludicrous. The Median price of a house in California has increased 23.2% year over year in June to 368,000 dollars. In the Bay Area it is over $500,000 for a single family home, half a million dollars! In Santa Clara County it is almost $600,000. How can Greenspan testify (under oath) and say there is not housing bubble and the Senators sit there and listen to it and not call him a bald faced liar? This bubble does not just exist in California. Florida as well has seen marked increases in Real Estate prices in the Ft Lauderdale area increased 15% since the beginning of the year with brisk sales. Easy credit created by Greenspan is contributing greatly to these high prices; that coupled with 'no money down mortgages', ARM's and 'interest only' mortgages has contributed to a massive bubble . The FED is primarily responsible for the bubble that exists today. Fannie Mae and Freddie Mac are the other culprits. This bubble is real and very dangerous to the overall economy because if it bursts it will take the US economy with it. This is because of the spread trade that has been lucrative for many financial institutions. REIT's (Real Estate Investment Trusts) provide good returns on investment in the current rising housing market. This has helped beef up many portfolio's in the financial community and it provides and important impetus for continuing the low mortgage rates rates we see now.

“An investment institution can borrow short-term for 3 percent or less and get a yield from an REIT of 6 percent or more. A bank can borrow for as little as 1 percent overnight and then lend at 5 percent or more longer-term.It sounds like a no-brainer. But when short-term rates go up, the cost of funding a longer-term investment rises, and the income from the longer-term investment stays the same - or even falls, if the value of the longer-term asset declines.” - Real Estate Finance Place

When rates rise this spread trade will fade away as well as will the profits booked in financial institutions portfolio's. However beyond this there is real risk to the economy. As stated before in this long running series, Inflation in the overall economy is real and growing. It is not dissipating in the least. Gas prices, food, insurance, state and local taxes and fees, electricity, natural gas, are all up significantly and show not the slightest sign of leveling off. Greenspan spoke forcefully of a robust expansion and under-control inflation, yet the average person who goes to the grocery store, pays the utilities, buys medical insurance sees steep increases in prices. Thus, if your house does not use electricity, you do not need gasoline to put in your car, have no medical insurance, and evade your local tax man, your inflation rate is about the 1.1% Greenspan touted in his perjured testimony. Greenspan did mention 'transitory' factors such as oil prices but oil prices are not likely to decline significantly for any length of time ever again and he knows this. His testimony can best be described as obfuscation, quid pro quo election-year cheerleading and cleverly worded perjury. Even his testimony on the different trends in wages between skilled workers and 'less skilled' workers was very cleverly worded and said absolutely nothing that reflects the reality in the job market (he nervously shifted his chair just after making this statement). Greenspan and the Senators who sat there and listened to him have been making six figured salaries and reading falsified government reports for far, far too long. The only 'skilled' workers I see who have significantly seen increases in wages are Corporate CEO's and mercenaries sent to Iraq. Are hired killers the only kinds of jobs and exports to foreign nations that pay a good wage? I shudder to say that these kinds of questions are no longer hyperbole. Drugs and hired killers are our primary exports.

On a side note it is interesting to me to see the big banks tout the Bush administration's disastrous economic policies. Banks like Wachovia in a recent article went out of the way to sound upbeat and downplay the millions Americans that can't find work, it read more like a campaign strategy paper than an economic report. Wachovia is a big Bush supporter giving hundreds of thousands of dollars to Bush and is very close to the administration. See List of Top Bush Contributors. What do these high priests of usury want? They want to harm their customers with higher fees, tighten bankruptcy laws and protect themselves (at your expense) when the cycle of debt defaults begins in earnest. You may want to check out this site for more in who is buying whom and what they want with their legal bribes.

Big Trouble On the Global Scene

There has been serious problems in the banking world. We appear to be entering a period of serious instability in the Banking sector. Since the last update there have been three separate bank runs in three different nations. The first was in Russia after the Yukos debacle. The Second was in Taiwan with problems with several mutual funds. The Third is dealing with Global Trust Bank. This is a serious problem that seems to be recurring in the developing world. While it is too early to tell what exactly is causing this to happen, it should be noted that any bank run is merely a liquidity crisis coupled with public disclosure. These runs may be significant in ways that will not be disclosed to the public. One can only speculate why these recurring runs are transpiring because the big boys aren't talking.  The run in India was quelled only after a quick merger with Oriental Bank of Commerce (OBC). These 'shotgun weddings' seems to be the method of choice when a major financial institution is having real trouble. Look for more of these financial developments in the US and on the global scene. In America, the problem will never be allowed to get to the stage of a bona-fide bank run. Our financial system is sophisticated enough to identify problems and merge those troubled institutions before the liquidity crisis comes to public attention.

Nevertheless one must ask a very important question. Are these runs isolated events or are they tied to some other financial crisis hidden under the surface of the Global economy? Let us keep in mind here Greenspan's very unusual monetary expansion last month that has not been explained. Speculation here is premature as I have no sources that can shed light on this series of bank runs. The Indian bank run was solved by merging it with another Bank. This is a trend I have noticed for years in America. Sudden mergers of Banks when one has been scandalized or is in trouble. This month the same thing happened again, Riggs Bank which his under investigation for money laundering is to be suddenly merged with PNC bank. There is something brewing under the surface of the economy and I do not think that these events are unrelated.

Debt Burdens

The Current Account Gap has widened to 5.1% of GDP and some economists think that it will rise to over 6% of GDP before it finally peaks. Trade is likely to remain a big problem for the US for years to come. We should also note here that the US is also suffering from revenue shortfalls as it is not able to collect as many taxes from all of those millions of new jobs it created out of thin air. This was noted in the 2003 Financial Report Of the US Government released in June of this year. The following Charts and quotes come from this report, which incidentally has no release date in its pages.

“Revenues were down by $81.7 billion primarily due to lower tax collections and costs were up by $225.8 billion due to, among other things, fighting the global war on terrorism. This resulted in a net operating cost of $665.0 billion.” - Executive Summary

Chart showing deficit spending for (FY2003 and 2004)

“The 2003 balance sheet shows assets of $1,394 billion and liabilities of $8,499 billion, for a balance or negative net position of $7,105 billion. The Government’s responsibilities to make future payments for social insurance and certain other programs are not shown as liabilities according to Federal accounting standards; however, they are measured in other contexts. These programmatic commitments remain Federal responsibilities and as currently structured will have a significant claim on budgetary resources in the future.” Page 4

So, according to the Treasury Department, we are only 7.1 Trillion in debt if we don't count social security liabilities, but that was when this report was written, as of 29 July it stood at $7,308,426,855,798.06. To me this much debt does not pass the sanity test. What is our venerable government doing racking up so much debt and then tying to hide the worst of it by not counting important and massive liabilities?  The good news is (if you count this as good news) that the US has significantly increased its equipment holdings and this has made the balance sheet look rosier than it would ordinarily. This is because of a change in accounting rules and a marked increase in Military equipment. Rather than expensing these acquisitions, changes in GAAP allow them to be counted as assets. Fair enough, though I somehow don't think that we will be selling our nuclear arsenal to pay off our national debt, but it sure looks good in a balance sheet!

The US governments liabilities are significant and growing. We have raised the debt-limit once this year and will probably have to do it gain in October, just before the present fiscal year ends. Bush, who inherited a budgetary surplus is now running up red-ink in the most irresponsible manner.  The statutory debt limit is 7.384 trillion dollars. This means that he US Treasury will soon run out of borrowing authority and will have to go back to Congress and get it raised again, or the Government would shut down.  This is a very real problem as investors are getting more and more nervous and vocal about America's fiscal and budgetary health. How much longer they can (if they haven't stopped already) continue to finance our deficits is becoming a much more imminent and troubling concern. Lets look at what the report has to say about liabilities

Liabilities

This chart presents a 5-year comparison of the major components of liabilities reported on the balance sheets as of September 30, for fiscal years 1999 through 2003. At the end of fiscal year 2003, the U.S. Government reported

liabilities of $8,498.6 billion, as compared to $7,816.7 billion for September 30, 2002, an 8.7 percent increase.

Deficit spending as we are doing now always leads to higher interest rates, though many financial pundits will call this 'heresy'. One need only look at the situation in Brazil and Turkey to see that rising interest rates are necessary to attract investment in a debt ridden economy. This is where the US is heading. Let us note here that usually when a nation runs high deficits its currency depreciates accordingly. In the US this has not happened. Why? Foreign currency intervention and our status as reserve currency of the world have temporarily prevented this from happening on a significant scale. Yes the Dollar has depreciated significantly against the Euro, and noticeably against the Fed's nebulous 'broad basket of currencies'. There would be little cause for concert if the warning signs were heeded in Washington and a degree of fiscal responsibility had been enjoined. That is why the situation is so precarious today. We cannot afford to have our currency go down significantly because foreigners will demand higher interest rates when they lend us money. Once this happens a very nasty cycle of debt defaults will engulf the US economy and jeopardize the US and Global banking and financial system.

Overall Perspective of US Government Financial Condition

Source: US Treasury Dept

Look at those numbers and tell me if this nation isn't on its financial death-bed!

Carry Trade

The interest rate carry trade and other forms of financial derivatives will implode on significant rate rises. Derivatives have been increasing not decreasing and the risk is enormous. 87% of derivatives are comprised of Interest rate contracts. according to the Comptroller of the Currency.

Source: Comptroller Of The Currency

Yes welcome to the land of monetary lunatics who are gambling with your money while the people cheer and prepare to vote these psychotics right back into office.

Jobs

Once again Jobs are coming into the forefront of attention as mass layoffs are once again slowing creeping into the headlines.

St Paul Travelers – 3000 Jobs

IBM – 1600 Jobs

Mitsubishi – 1200 Jobs

State Farm - 500 Jobs

Kitchen World – 200 Jobs

Sears – 3300 Jobs

I have to tell you some of these announcements were buried pretty deep in the news. For the Sears announcement I had to go to a Middle Eastern paper to read the story! This is partially because I can't afford to subscribe to every newspaper in the nation to read the news on the Internet. Those with free services did not cover this story, or at least I could not find it and I am very good at scouring for news. I would not dare suggest that in a contentious election year that bad economic news is deliberately downplayed in our corporate press, perish the thought!

The jobs picture is looking pretty bad as the long term unemployed are a growing problem in America. Low wage jobs (as the table in the July Update showed) are created as the debts mount up to the heavens.

Economic and Political Upheaval.

There is so much happening in the world today that it would take a book to write. Concentration camps in Boston now are called 'free speech' zones. John Kerry and his Democrats are just as contemptuous of our Constitution as Bush is. We have a gay porn star (Chadwick Savage) servicing our elite at the Bohemian Grove, an exclusive occult club that has pagan altars and mock (they say) human sacrifices. Only the most powerful and wealthy are invited to attend. Some of the past attendees are former President George Bush, Defense Secretary Donald Rumsfeld, Dick Cheney, Alan Greenspan, Colin Powell, Jack Kemp, Henry Kissinger and just about everybody who is anybody in the US Government. Is it any wonder we have such high debts in America. Has it ever occurred to anyone that these guys may be deliberately destroying our once fine nation to turn it into something else?

In the month of July we have had massive floods in China and Bangladesh, locusts plagues in Africa and earthquakes and volcano eruptions in Indonesia. War continues to rage on in Iraq as the insurgents are becoming more brazen and skillful in their attacks on Americans and their Iraqi collaborators. But now in an interesting and strange development, we are now sheltering an Iranian terrorist group (hey, the US state Department calls them terrorists) in Iraq see story. Well the MEK (People's Mujahedeen) oppose the regime in Tehran. Obviously we want to use these terrorists to terrorize Iran. Yes, we have again yet another 'positive' development in America's so called 'war on terror'.

Reports are surfacing that middle eastern men are infiltrating the southern border and these men very well could be and probably are terrorists. This is something I have been saying for years, our border is open, no one is really watching it other than some overworked, underpaid and unappreciated civil servants. The forest fires in the western half of the US could very well be the work of terrorists, using an already sever drought that is occurring to set fires and destroy large parts of the US. The terrorists are smart and they will strike in ways and with methods that most Americans would never think of. Consider the economic damage done by all of these fires. Consider the insurance companies that must pay claims all caused by one person with a match and a grudge. The fact that the border is open is a political decision made by the Democrats and Republicans to court Hispanic voters and provide cheap labor to their campaign donors. We have no way of knowing how many terrorists have already entered America via the southern border, 100, 1000, 10,000 how can we know? Yet homeland security is taking in billions of dollars to give to contractors to build a better baby-food scanner for the nations airports. The Department Of Homeland Security is a nothing more than an sophisticated contracting scam. It is designed and run to keep tax dollars flowing to the coffers of GOP hacks. That is why another terrorist attack is inevitable. No one is securing our borders. One Group of concerned Citizens smuggled a WMD across our border just to show how easy it was to be done. There is no money in keeping the borders secure but there is money in ensuring another terrorist attack occurs to ensure yet more contracts when the inevitable outcry to 'do something' emanates from the victimized public. I am not being overly cynical here. If human life was important to these folks there would be no war in Iraq and we would not be torturing people and ordering our soldiers push Iraqi's off of bridges as we are in Iraq. Create a crisis and contract out the solution to your friends is the modus operandi of the Bush Administration. What does this have to do with the economy? Let a Nuke go off in a major American city and you will find out.

Oil again is in the news, the price of oil hit 43 dollars a barrel on the 28^th of July on news that the Russian oil conglomerate Yukos may be forced to shut down operations. Putin is either very shrewed or has miscalculated in his destruction if the Oil giant. Observing him for a few years now has led be to conclude that he is quite shred and savvy and weighed the consequences of having the oil giant fall into western (US) hands against causing a moderate amount of economic disruption in the Russian economy. Running the price of oil up is likely to shake up the financial markets and if we begin to see it go much higher real problems could emerge; problems especially for the debt ridden and derivatives exposed US economy. This is not a bad thing in the minds of many in the Kremlin. Also of note this month China and Japan are vying for oil resources in the China Seas. Each of these nations is oil thirsty. China is the largest Oil consumer after the United States. It has suffered some sever energy shortages and is not likely to let Japan develop resources that each nation has a claim to, even though Japan has almost no natural resources of its own. Eventually it is not likely to lead to war, I believe that some sort of accommodation will be reached. However, in a day of violent unilateralism and 'survival of the wickedest', this area bares watching.

Finally I do not expect much major economic news before the election. Though just after the end of the fiscal year look for some changes to occur in the Treasury markets and US currency. Steven Roach of Morgan Stanley calls the Federal Reserve the 'World's Biggest Hedge Fund' and even a Senator in Greenspan's testimony commented on this title. Rising interest rates will exacerbate our current account deficit. A stronger dollar should result from a rise in rates, though this is not a foregone conclusion. However a stronger dollar will also mean trouble for our account deficit. I think think this is the end game of our financial preeminence and major changes are just around the corner. What exactly? I cannot say but our debt, interest rates rises or lack thereof and the overall confidence in our ability to service that debt are going to be tested like it has never been tested before.

Rising US interest rates are a fourth factor that will widen our current account deficit.  Despite being the world’s largest debtor, low US interest rates (and apparently high returns on US direct investment abroad) have helped sustain the US surplus on net income payments.  A renormalization of rates will widen the current account gap as interest payments to foreign investors and central banks increase. - Richard Berner (Morgan Stanley)

Account deficits and treasury yields may sound too abstract to the average person, but our continued ability to service our debt and attract new lenders are key factors that will decide if one day the government shuts down because of a real and not imagined bankruptcy. The Government shut down once before in 1995. Does anyone remembers the book Bankruptcy 1995? Those that did and saw us shut down our government and then later raid social security to pay for our daily spending and issue inflation--proof bonds to attract investors knows that such an event is not a fantasy, sooner or later it is going to happen only this time there will be no Social Security Trust Fund to raid.

Brother ...can you spare a dime...?

- And what I say unto you I say unto all, Watch. Mark 13:37