Great Depression 2.0 Underway

It’s all happening right in front of our very eyes. All that so many spoke and wrote about for so long. I tire in repeating the same things over and over again. So I won’t… and I haven’t for a few months now. Months that I have used for planning and putting into action an exit strategy in response to our current economic climate. Those who know me are aware of those measures. Those who don’t, can re-read my postings and get an idea of our current economic state and can devise their own plan.

You can also turn to your favorite news source to see what American bank, airline, auto manufacturer, or any other business has recently gone under or has been sold to a foreign entity. Feel free to post any comments to this blog. Best of luck! -C. Smith

Chief U.S. Accountant Quits, America “Will Fall Like Rome” States David Walker

David Walker, Comptroller General of the United States, has said that our government is “bankrupting America” and is using unethical accounting worse than Enron’s. He sees “striking similarities” with Rome and thinks both [political] parties are gluttons in a spending orgy.

You must read this article:
Bernanke’s Recession

Chicken Smith View:

That article provides 11 reasons why we’re already in a recession. There are many more reasons. Just browsing through the previous posts on this blog you can find a lot more.

Gold is nearing $1,000 per ounce. Something most people last year or the year before would have told you is “unreasonable”. Most people don’t know what’s going on.

Think about it. The top United States Government accountant. Yes, America’s Comptroller General, David Walker, the guy who has access to all our government books (cooked or otherwise), has spent the past few years on a nation-wide Fiscal Wake-Up Tour trying to wake-up Americans (laymen, industry leaders, politicians & the Federal Reserve) to the fact that we’re overspending and under-saving and that we’re headed for a collapse (ala Roman Empire). That very same guy has decided to quit his job. Did he just get tired of speaking to the wall?

If that doesn’t scream “the recession is here” to you, then please carry on with your spending and market “investments” as usual (and pray that 401k will still have something in it when you need it). Otherwise, “Wake Up!” we’re in a recession and possibly headed for a Second Great Depression, and it can easily take 5 years or more to see any signs of an improvement. If you haven’t saved anything up until now, now is a good a time as any. It could get ugly.

The Economy Crisis Is Contained… Yeah, Right!

Some News Links From Contributing Editor RH:

China’s Inflation Hits American Price Tags…
http://www.nytimes.com/2008/02/01/business/worldbusiness/01inflate.html?_r=3&hp&oref=slogin&oref=slogin&oref=slogin

‘It’s going to be much worse’ Famed investor Jim Rogers sees hard times ahead for the United States – and a big opportunity looming in China…
http://money.cnn.com/2008/01/30/news/international/okeefe_rogers.fortune/index.htm

U.S. Economy: Payrolls Fall for First Time Since 2003…
http://www.bloomberg.com/apps/news?pid=20601087&sid=agPvpBGH.EX4&refer=home

Countrywide And Chase sent letters to customers last week telling them they could no longer borrow against their credit lines because the total debt on the home exceeded the market value of the property. The lender says it is using computer modeling to determine which of its customers would have their cash spigot shut off…
http://globaleconomicanalysis.blogspot.com/2008/02/countrywide-and-chase-shut-off-cash.html

Home Depot to lower 10% of headquarters staff. For now!
http://www.marketwatch.com/news/story/home-depot-lower-10-headquarters/story.aspx?guid=%7BB2D577A3%2DA185%2D4D73%2D9AAF%2D377BDC78AB6A%7D

Say It Ain’t So, Municipal Bonds Are the New Junk: Joe Mysak
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_mysak&sid=auPmzvv3Al.g

Bush Says ‘Serious Signs’ U.S. Economy Is Weakening…
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJZqcryZJIqw&refer=home

Where a recession is already hitting hard…
http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhereARecessionHasAlreadyHitHard.aspx

It’s just the beginning… -RH

Chicken Smith View:

I know, you’re probably thinking; “boy, these people don’t let up that the sky is falling.” Well, it ain’t just us. It’s a lot of people all over the world that recognize the trouble we’re in and the uncharted waters we’re headed towards.

As you can probably see, people are only now starting to wake up to this, just as I started waking up to this towards the end of 2006, and others, much smarter than I, have been predicting a decline for much longer than I have (check out Peter Schiff). Sooner or later you’ll have to recognize it. If you don’t see the signs that we’re in a recession and possibly headed for worse, I can only think of a few excuses for that reasoning at this point in time:

1. Your wealthy – I figure if you’ve got a lot of cash coming in, and someone else is managing your money, you might not feel all the cash that’s going out. I’m choosing to define wealthy as someone who’s combined household income after taxes is above $750,000. Although if you make that amount, chances are you probably have lost some money in the stock market recently, so you must have felt it.

2. You’re a hard working schmuck and your wife handles your money – Well, here’s how I figure it; the more inflation hits us, the more you have to work, the more you work, the less time you have to stop and see what’s really going on. As the bills come in, your wife simply insists that you have to work more, ok, well maybe she’s working more too, but the point is you can’t afford to stop to smell the roses.

3. You’re a student – Everything is already expensive, you already owe a lot of money, and you don’t know any better. Keep reading and learning, these are tough economic times we’re headed towards, similar to our depression years that started in 1929 and lasted well over 10 years.

If you don’t fall into one of those categories above, then surely you must be seeing it everywhere, from food prices to heating prices, from housing crises to financial crisis, from social woes to political woes, from health insurance to home insurance, from the falling dollar to the negative savings rate. Even global weather is lining up right along the rest of our economic uncertainties to produce the “perfect storm” of a world financial collapse that is being spear headed by the U.S. Granted, unless those terrorists decide to attack us again, we’ll all survive this and things will eventually get better, but they’ll certainly get worse before we even see the light at the end of the tunnel.

Economy Fails, Lose A Turn (or a year or more)

Chicken Smith View:

One year ago on January 31, 2007, the DOW closed at 12,621.69.

Today, on January 31, 2008, the DOW closed 12,650.36. This is growth? This is cause for celebration?

So what happened to all the records that the DOW broke over the course of 2007? What happened to that glorious bull market everybody was rushing to be a part of? Nothing. It was never really there. And now we’re back to January 2007 levels. What’s next 2006, 2005, 2004?

Oh, the numbers did get to 14,000, but it was all irrational exuberance. Not a true representation of a market economy. That got left behind along with the old century. Today, it is no longer supply based on demand, rather it is demand based on supply — if you’ve got the money (or credit) and it’s available, just buy it. Who cares if it’s any good, everything eventually goes up, doesn’t it? Besides, when stocks are down, isn’t that the best time to buy?

Have you purchased eggs lately? Inflation is going through the roof! I don’t have to remind you of the housing mess, but what about the dollar mess? Or the frivolous lawsuit mess? Or the credit crunch? Or the political mess? Or the health care mess? Live in Massachusetts and can’t afford health insurance? No problem, just pay an outrageous fine for every month you weren’t insured to the Department of Revenue and at least those who don’t even work will be able to get some sort of sub-standard subsidized health care while you get taxed to death (you can thank Mitt Romney for that one).

It seems every aspect of our modern, “first-world” civilized life is taking a turn for the worse. And remember that the stock market is a trailing indicator, so that means we’ve yet to feel that pain. And that talk of a recession? Too late, we’re already waist deep in it.

What to do? You’ve got me. I’ve recommended everything from getting solar panels and digging your own water well to learning another language and exiting our currently collapsing U.S. society. The truth is, nobody knows what’s going on, nor what the best course of action is. For all I know, the rest of the world will suffer right along with us.

My feeling is that the U.S. will be in a recession and/or depression for at least five years. I’ve heard numbers as high as 15 and 20 years, which lead me to believe it can easily get to 10 years of economic turmoil or more. If the Great Depression is any indicator, we may be in this for over 20 years! According to this chart of the stock market crash of 1929, I’d say we might be headed for a big drop, followed by a “Short Recovery” followed by never-ending drops.

Head for the hills? Fuggit about it, just charge up your credit cards and hope Visa & MasterCard collapse before you do.

Why Hasn’t The Stock Market Crashed Yet? Joe?

Chicken Smith View:

As our markets keep trying to correct themselves (ie, come down off their high horse), there are major players in the system who are constantly propping up the markets with unnecessary and undue infusions of capital. Among these players are the Federal Reserve, corporations, foreign investors, and an ever growing group of individual investors — your average Joe.

It used to be that the majority of traders were, to a large extent, all professionals. In today’s financial markets, that no longer seems to be the case. Given the right tools, every Joe-six-pack can be a day trader.

What does this translate into? Potentially, a bunch of novices could be keeping (or at least helping to keep) our financial markets afloat. Every Tom, Dick and Harry now has a brokerage account or three, and the problem is that they all know just enough to make them think their “buy low, sell high” strategy combined with their computer savvy (so called “smart” trading software) will keep them out of trouble. They’re wrong.

The idea is simple; buy when prices are at their lowest and sell when prices are at their highest. However, this simple notion assumes one knows when something is at its lowest or highest price in real time. Retrospectively, we can all check the charts and see when something peaked or bottomed, but while its happening, we simply just don’t know, the price of a stock can climb or fall dramatically in a matter of minutes if not seconds.

The very concept that the “buying low and selling high” strategy will produce great returns is fraught with error, as one should never base their investments on price alone.

Even seasoned professional investors will sometimes fall for the herd mentality and begin following the bulls and buying when the markets are taking a tumble (also known as everything being “on sale”). Something that has, coincidentally, been occurring a lot lately. So it’s not too difficult to see how Tom, Dick & Harry can easily fall for it as well.

With online brokerages and local banks offering $7, $4 and even free online trades, it is now easier than ever to be a day trader, even if you don’t know a single thing about stocks or short term capital gains.

But that’s not enough to discourage your average Joe, who is just itching to jump in the stock market game, especially since he was one of the fortunate to be watching TV at 3am on a Sunday morning and plunked down hundreds of dollars for an investor kit that included “smart” trading software. Which, by the way, if properly configured, can do all the thinking for him… and we all know how much thought Joe wants to put into this.

Recently, whenever the Dow Jones Industrial Average Index (DJI) takes a 100 point nose-dive, it seems the very next day there is a 100 point jump. And vice-versa. So, is this really the natural and logical effect of a market driven by a bunch of professional traders? Or should the question really be: Just how many “Joes” are out there?

The Economic Truth Is Hidden Between The Lines

Chicken Smith View:

If you’ve seen Alan Greenspan’s recent peddling of his book in the media, you might think he’s an articulate fellow. However, the truth is he always had a convoluted way of saying things that left you either confused or thinking he agreed with you. This was dubbed “Fed Speak.” Even after leaving his post as Fed Chief, he still hasn’t changed his ways. Following are some recent quotes from Greenspan and what the average person might think of it, followed by what I think of it.

According to Bloomberg on November 18th: Former Federal Reserve Chairman Alan Greenspan said the dollar’s decline hasn’t affected the global economy and is a “market phenomenon.”
The Average Person Might Think: …Wow! Our dollar is doing phenomenally well. I’ll go shop for some more stuff made in China now.
Chicken Smith View: …what a bunch of crock! Define “market phenomenon.” Even the Great Depression can be classified as a “market phenomenon”.

And notice how Greenspan carefully crafts his sound bites with escape clauses and conditional statements…

Greenspan: “…dollar’s decline hasn’t affected the global economy…”
The Average Person Might Think: …oh, ok, so everything is fine with our economy. I mean the US is part of the global economy right?
Chicken Smith View: …the global economy is fine, but the American economy, taken on its own, is not fine.

Greenspan: the U.S. economy is “doing reasonably well”
The Average Person Might Think: …yeah, we’re doing reasonably well! My stocks are higher than last year, isn’t that all that matters?
Chicken Smith View: …considering how bad things will get later, we’re doing just fine. By the way, don’t forget to calculate inflation when valuing your stock earnings. Here’s a hint; it’s not 2%.

Greenspan: “So long as the dollar weakness does not create inflation”
The Average Person Might Think: …see, as long as there’s no inflation we’re ok. And the Fed says there’s no inflation, so we must be ok.
Chicken Smith View: …yeah, and I have brunch with Elvis & Lincoln every Sunday morning. Is he nuts? How can the dollar weakness not create inflation?

Greenspan: “If we can get beyond this housing problem I think we’ll do pretty well”
The Average Person Might Think: …it’s just a housing problem …everything else is actually doing pretty well. I mean, my stocks are up, right?
Chicken Smith View: …as soon as someone invents a time-machine, we’ll just skip over the forthcoming depression. Or not. Because we can’t just get beyond this housing problem, it’s a major part of this mess. So I guess that means we won’t do “pretty well”, huh Mr. ex-Fed Chief? BTW, isn’t the stock market a lagging indicator?

Read between the lines!!! A great economy does not need conditional statements like Greenspan is making. If the economy is doing well, it’s just that. You don’t need to preface it by saying it’s doing “reasonably well.” A great economy does not need “if this” or “so long as that” to quantify its position.

Greenspan is trying his hardest to sugar-coat the messes he made between 2001 and 2003. However, he’s actually telling some truth, it’s just not what you think you’re hearing. The truth is there’s an economic recession on its way that can turn into a depression if people (although mostly banks, corporations, and politicians) don’t wake up and stop begging the Fed to continue lowering interest rates to bail out certain sectors of the economy or groups of people.

People should request that their congressmen and senators express their constituency’s demands that the Fed not continue using stall tactics (ie, lowering interest rates) to delay an inevitable recession. It will only delay the problem thereby assuring an even bigger recession and/or depression.

Employment Plunges, Credit Tightens, Gold Climbs, Market Crash Forecast, Great Depression Ahead

The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987,” Greenspan was quoted by the newspaper as saying… http://www.reuters.com/article/ousiv/idUSN0640900320070907

Citigroup Unit Won’t Take New Mortgage Bank Clients… http://www.bloomberg.com/apps/news?pid=20601087&sid=aP1Ebhaa1J30&refer=home

The utterly ugly employment figures for August (a fall in jobs for the first time in four years, downward revisions to previous months’ data, a fall in the labor participation rate, and an even weaker employment picture based on the household survey compared to the establishments survey) confirm what few of us have been predicting since the beginning of 2007: the U.S. is headed towards a hard landing…. http://www.rgemonitor.com/blog/roubini/213894

33 percent of home loans didn’t close last month. A third of home loans originated by mortgage brokers failed to close in August as investors shied away from riskier borrowers, a new survey says… http://www.mcall.com/business/local/all-mortgages.6029291sep06,0,7164270.story

Countrywide May Cut Staff by 12,000. Countrywide Financial Corp., the nation’s biggest mortgage company, may reduce its workforce by 10,000 to 12,000 in the next three months, a 20 percent cut… http://www.bloomberg.com/apps/news?pid=20601087&sid=aQhytb8fv1Tk&refer=home

LEHMAN CUTS 850 MORE JOBS: Lehman Brothers Holdings Inc., which shut its subprime mortgage business last month, is cutting 850 more jobs, mostly at a U.S. subsidiary catering to borrowers with decent credit scores…http://www.nypost.com/seven/09072007/business/lehman_cuts_jobs_in_alt_a.htm

IndyMac to Cut 10 Percent of Jobs; May Post a Loss… http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azgqnpf9trLM

Don’t you just feel real sorry for gold? Look at that poor chart below and weep. …Actually weep for those idiots who cannot recognize a gold bull market when they see one. Hah! Gold will yet go where gold wants to go and perhaps where it has never been before– higher Margarita… http://www.kitco.com/ind/vaughn/sep072007.html

Gold Prices Climb As Stocks, Dollar Fall… http://www.forbes.com/fdc/welcome_mjx.shtml

Debugging Wall Street’s funky math. Big chunks of investment banks’ earnings are from assets that few know how to value. Should investors and regulators be concerned??? http://money.cnn.com/2007/09/06/magazines/fortune/eavis_level3.fortune/index.htm?postversion=2007090710

As Housing Market Cools, Far Fewer Become Agents… http://www.nytimes.com/2007/09/07/business/07agents.html?em&ex=1189310400&en=78ece3289daf0498&ei=5087%0A

America is already in a recession and the U.S. Government is flat broke to the extent of 8.9 trillion dollars. In other words, every man, woman and child in America owes $29,672 dollars in Government debt… http://www.opednews.com/articles/opedne_allen_l__070830_america_broke__2f_aver.htm

US Economy: Drowning in Debt… http://www.opednews.com/maxwrite/link.php?id=21979

American Dream Slashed Along with Home Values… http://www.opednews.com/maxwrite/link.php?id=37915

The Great American Dream still exists — in Iraq! http://www.opednews.com/articles/opedne_jane_sti_070329_the_great_american_d.htm

America’s House of Cards Economy… http://www.opednews.com/articles/opedne_michael__070814_house_of_cards.htm

Economic Armageddon Is Coming… http://www.opednews.com/articles/opedne_joel_s___070423_economic_armageddon_.htm

Bush’s Economy Is Poverty Stricken, Bleeding Jobs and Ready to Crash… http://www.opednews.com/articles/opedne_dan_meri_070524_bush_s_economy_is_po.htm

China’s Passenger Cars Leave US in the Dust… http://www.opednews.com/articles/genera_braden_g_070327_china_s_passenger_ca.htm

Chicken Smith View:

I know what you’re thinking; “how can this great, rich, powerful, generous and glorious country collapse?” Well, starting with the fact that the Egyptians, the Greeks, the Turks, the Ottomans, the Romans, the Mayas, the Spanish, the British and basically anyone that’s ever been in or part of a “great empire” all thought the same thing (even more so right before it collapsed), and then proceeding to the fact that we are facing similar historical events that preceded their demise, I think it’s highly likely that our great nation can see a reversal of fortunes in the near future.

What to do? Save your money! Have some gold and/or silver (no I don’t sell any). Consider the possibility of moving overseas (or across the border, Canada eh?). Get some useful skills such as learning to modify a car to run on cooking oil, building a solar panel, fortifying your home against intruders, digging a well in your back yard, learn another language, and anything else that can prep you for some tough economic times (which in turn can lead to some tough social times). Hey, if nothing else happens, at least you’ve got some good skills that will help you in our new world economy.

It’s Not Just Sub-Prime, It’s Credit And Debt Everywhere

“Now these funds, which were supposed to be brimming with cash—the “liquidity” you hear about all of the time—turn out to have not much at all, and there are virtually no buyers anywhere for these mortgage-backed bonds, because who knows if the mortgages that are in them are worth anything? We only know that each day they are worth less than the day before, because every week, thousands of borrowers are being foreclosed.” -New York Magazine, 08/20/07

Chicken Smith View:
A lot can change in a month, however, if you’ve been following financial news for the past year, you’ll know that the general media has only recently been waking up to our economy’s financial disaster and even so they are still quick to pigeon hole it as a sub-prime problem. The truth, however, is that our forthcoming financial collapse is not limited to just one part of the mortgage industry.

What we’re experiencing is a credit problem on a grander scale. Since 2001, there has been too much easy money going around. Whether it’s sub-prime mortgage loans, re-finance loans, grade A business loans, auto loans, credit card loans, or even student loans, the interest rates (often introductory rates) have been too low not to take advantage of. And that’s just what every Tom, Dick, and Harry did. They made use of their credit, worthy or not, and took on loans through the nose.

Enter debt. Eventually all loans need to be paid, and because many folks have been borrowing from Peter to pay Paul, some of these debts were never, realistically, going to get paid. That’s when defaults, bankruptcies, and foreclosures happen. Enter disaster. It’s almost too surreal to believe, but none of the lenders thought that the day would come when a good portion of these debts would not get paid.

Ok, maybe not none of them, but beside the sub-prime lenders, many lenders thought they were investing in safe and secure lending practices. After all, they’re just following the Fed’s lead (aka Alan Greenspan’s deluded measures to avoid previous “corrections”). And the real money is in the late fees, right? And if customers can’t pay those, the loans can simply be sold off to collection companies or hedge funds? And if the hedge funds lose, well, at least it’s all been chopped up into so many pieces that no one will get hit with the full brunt of the losses, right? Wrong.

None of this will bail anyone out if the majority of borrowers are not paying back their debts. This is yet to be seen, however it can happen. The outsourcing of white collar jobs is expected to increase over the next few years. Yes, accountants, graphic designers, middle-management, etc. Basically, anything that does not require a physical body state-side. That in addition to any blue collar jobs that might be remaining will all but disappear.

Money will be harder to come by as banks and other lenders tighten up their lending practices. There are already 20% down prime loans that are being denied. Some credit card companies are no longer allowing a double-digit minimum payment (ie $15) to carry an over 4-digit balance (thousands). So many who have been using credit cards to help them through the tough times, will not be able to do so anymore.

But wait, there will still be jobs such as construction, entertainment, dining, etc., right? Well, yes and no. While yes there will still be some of those jobs, it will primarily be to cater to the wealthy who will still need such services, however for middle-class America, there won’t be much money to put food on the table, let alone going out for dinner and a movie and renovating the kitchen, so a lot of those jobs will see a decline.

With less jobs, comes less money, comes less consumption, come less corporate profits, comes less jobs, comes a whole new vicious downward spiraling cycle. But wait, I heard that employment is up, corporate profits are up, GDP is up, inflation is moderate, our economy is strong, and you expect me to believe this crap?

As the famous 19th century prime minister of England, Benjamin Disraeli, once said; “There are three kinds of lies: lies, damned lies, and statistics.”

Don’t believe it? Just wait and see. When looking at stats, look at charts, don’t just see what’s up or down today. BTW, core inflation looks dandy, but it’s not reality. Unlike the Fed’s idea that it shows long-term inflation rates, it really just covers up the fact that current inflation is quickly rising. And don’t forget, we’re nowhere near the bottom, we’ve barely just begun.

Media Outlets Taking Notice Of The Pending U.S. Financial Crisis

More Clippings About Our Economy From Contributing Editor RH:

“Its going to get worse before it gets better. How much worse, I don’t know,”
http://www.nypost.com/seven/07122007/business/hedge_horror_business_paul_tharp.htm

The catalyst for this latest dollar weakness is concern that the US consumer, for years the mainstay of the economy, could be flagging. Such worries followed evidence that the US housing market still does not appear to be finding a bottom along with news that retailers are suffering….
http://www.ft.com/cms/s/9d692cde-2fdb-11dc-a68f-0000779fd2ac.html

The Coming Crash — Winners and Losers…
LOSER: People who actually believe that Bear Stearns, Merrill Lynch, Goldman Sachs, Citigroup, Wachovia, JP Morgan Chase, etc. actually give a crap about your retirement account, you personally or your money. If you actually go out and read the news, you will see the numerous stories where companies like these have been “fined” for misusing and abusing your accounts and your money. Churn and burn baby, because if you still think they care, you need a lobotomy. The disaster underway is of their doing and they will have all the help they need from you, the taxpayer to straighten it out.
WINNER: All homeowners who are in secure industries who did not take out an exotic re-finance agreement, have no credit card or other unsecured debt, and are actually able to save money. This means having a financial plan including a retirement program which includes safe investments (precious metals, non-US government bonds, etc.) and having at least three to six months salary socked away safely in case of sudden unemployment….
http://wallstreetbear.com/board/view.php?topic=47743&post=152263

The dollar dropped to a record low against the euro as
troubles in the U.S. mortgage and credit markets continued to dampen the currency’s appeal…
http://www.reuters.com/article/topNews/idUKN1238289820070712?rpc=44

Foreclosure Rates Continue to Climb Around the Nation and Taking Major Jump in California…
http://abclocal.go.com/kfsn/story?section=local&id=5469514

Disappointing results from retailers are renewing concerns that the housing market’s troubles may start weighing more heavily on consumer spending…
http://blogs.wsj.com/economics/2007/07/12/economists-watch-for-housing-to-weigh-on-spending

After the credit binge, markets fear the crunch is on the way…
http://business.timesonline.co.uk/tol/business/economics/article2062073.ece

Chicken Smith View:
The forthcoming economic collapse of our nation is under way. What’s been predicted for so long, with so many media outlets outright denying that we’re in any danger, many of them are now starting to see what’s happening and, actually reporting on it.

Keep reading reports from around the world and do not rely on any one source for all your news. However, do learn to spot trends and market movements. The Dow Jones is obviously not a good indicator, as it is highly illogical and mainly motivated by emotions and ignorance rather than actual market conditions. Otherwise, why would the Dow Jones be doing so well, while the dollar continues to make all-time record lows?

Are companies really doing that well? Look at retail numbers, look at employment numbers. Look at entire industries such as manufacturing. Look at our debt and you’ll know all is not well. Start saving your pennies gold, as financial and, might I add, social devastation the likes none of us, not even our grandfathers who went through the Great Depression have seen, will begin affecting every facet of society.

These are new times. While we have greatly advanced in many areas such as science and technology, we as a society have not advanced in financial literacy, nor have we been as financially prudent as we should have been. Instead, we’ve been taught how to be mindless consumers with absurd levels of debt that shackle us to our jobs, yes, even those who are self-employed are shackled. The victors? Corporations and their shareholders… for the time being, however the collapse will affect many. Some will be better off, most will not.

More Signs of the Times…

From Around the Web (thanks to contributing editor RH):

“It’s a blood bath,” said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. “We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.’‘
http://www.bloomberg.com/apps/news?pid=20601109&sid=akV2sasSGUY8&refer=home

The Financial Times and CNBC are reporting that J.P. Morgan Chase, Deutsche Bank and Merrill Lynch have been selling more than $1 billion in investments seized as collateral from two troubled hedge funds at Bear Stearns.
http://www.portfolio.com/news-markets/top-5/2007/06/20/Gunning-for-Bear

An investor in Europe, who didn’t want to be identified, says he’s been trying to get his money out of the hedge fund since February…
http://www.businessweek.com/bwdaily/dnflash/content/jun2007/db20070612_748264.htm

“We were restrained by a slowing US economy,” said Fred Smith, FedEx chairman, president and chief executive. “The weakened industrial sector is currently limiting demand for transportation services.”
http://www.ft.com/cms/s/7315b590-1f2a-11dc-ac86-000b5df10621.html

A wealth of conflicting market signals that no one seems able to explain makes it difficult to figure out when the music will stop and the bills will come due. But it’s time to get ready…
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/TheMarketsGameOfMusicalChairs.aspx

Chicken Smith View:
The articles speak for themselves. There are way too many negative market conditions (not to mention governmental & social ones) that are lining up to form what could be a tremendous collapse to our economy and, in turn, our society. The storm clouds are gathering… will you be prepared for the storm?

False Market Earnings Due To Declining Purchasing Power

Why your stock market investments look like they’re doing really well, but in reality it is not what it seems:

Chicken Smith View:

Bottom line… the Dollar is losing its value, that’s why the Dow Jones went from 12,000 to 13,000 in only 7 weeks, while it took 7 years to get to 12,000 from 11,000. That’s part of the reason why inflation is currently rising at such a fast pace.

That’s also why the market will crash when people start waking up to the realities of our current economic situation.

US Consumers: Negative Savings, Trillions In Debt, Negative Equity, Disaster Ahead

Negative Savings
In the early years of the Great Depression, the United States recorded one of its lowest personal savings figures up to that time. The 1932 figure was a dismal negative 3.1 billion dollars. That remained the worst year on record for the next 73 years.

At the start of the 21st century, that same personal savings figure dropped from a positive 174.3 billion dollars in 2004, down to a negative 34.8 billion dollars in 2005. The following year in 2006, that figure went down even further when it reached negative 102.8 billion dollars.

General economic principles state that consumers will save some of their disposable income and spend the rest. A negative savings rate means that U.S. consumers are spending more than 100% of their monthly after-tax disposable income . Other variables aside, the overall decline of personal savings (as has been consistently calculated over the past 80 years) indicates that the percentage of household savings has gone down to zero and is now in negative territory.

Ongoing Trends
In a recent Federal Reserve report, top economists state that the recent negative savings rate was partially caused by consumer extraction and spending of home equity during the past few years . A negative savings level is somewhat unusual and is generally not expected to continue for long, however, even adjusting for the equity extractions, that same report states that the actual saving rate trended down nonetheless.

Along with a decrease in savings, there has also been an increase in consumption. Known as personal consumption expenditures, this is a measure of the goods and services purchased by consumers . The ratio of nominal U.S. personal consumption expenditures to nominal Gross Domestic Product (GDP) has been trending up since the early 1980s and is now hovering near an all-time high of 70% . That is the highest percentage of spending as compared to GDP in the entire world .

These factors in combination with low interest rates and easy credit have caused an overall increase in household debt .

When consumers spend more than they earn, they are counting on future income not yet earned to pay off their current debt. If, and when, that unearned income does not materialize, consumers are no longer able to continue purchasing on credit. When the majority of consumers begin experiencing problems paying their debts, a serious economic collapse can be precipitated.

Debt & Debtors
A debt is a financial obligation to repay an amount owed . Three general categories of those who have debt in an economy can be classified as follows: consumers, businesses, and governments.

Consumers have a broad range of debts that come in all shapes and sizes. Some are in the form of credit cards, store cards, home loans, school loans, car loans, personal loans, back taxes, utility bills, rental payments, medical bills, and many other forms too numerous to list. Suffice it to say that there are myriad ways consumers can get themselves into serious and sizeable debt. At last check, U.S. Consumer debt was at an all time high of 2.4 trillion dollars (yes, that’s trillion with a T).

Businesses also have their share of repayment obligations. Small businesses often finance day-to-day business activities on credit cards and generally repay them when the bills come in. Businesses also owe money in the form credit from their suppliers, both foreign and domestic, and also have many of the same types of debt as consumers.

Governments have a slightly different set of debts, but they’re debts nonetheless. Governments fund social projects, wars, purchase goods and services, and finance a lot of it by issuing bonds, notes, and treasury bills that all need to be repaid with interest at a future date.

Corporate, government and consumer debt all have an effect on a nation’s economy, however consumer debt can be considered the one factor that can most adversely and subversively impact the underpinnings of what fuels a nation’s growth.

Consumer Debt
While corporate and government debt does not necessarily affect all consumers, consumer debt can affect all corporate and government institutions. This is because consumer spending directly contributes to corporate profits and government revenue. If spending were to stop all of a sudden, as a result of excessive debt, so too would our economy.

In essence, the foundation of a market economy can be summed up in one word: consumption. Personal Consumption Expenditures (PCE) is what fuels the engine of growth in a market economy and constitutes over 70% of GDP in the United States. PCE can be defined as the amount of disposable income that is not saved. As noted earlier, we currently have a negative savings rate in the U.S. This means all disposable income plus additional borrowed money is being consumed. This is where debt comes in.

Excessive Consumption
Excessive consumption ends up going on credit, either via credit cards, home equity loans, or other types of loans. Home equity loans theoretically are based on built up equity in a home, however, over the past few years, home prices rose at an extremely fast pace which ranged from 7.4 percent in 2002 to 13.2 percent in 2005 (about 3 to 4 times the rate of inflation). This gave the feeling of increased wealth and prompted many consumers to borrow on this equity. As home prices began to fall in 2006 and 2007 , this perceived equity has disappeared and consumers are left with large equity loans they still have to repay and no easy way to sell their home without going deeper in debt.

Another factor that is believed to have contributed to an increase in personal debt is that many Americans have felt wealthier, and therefore have spent more, due to the mostly uninterrupted rise in the stock market throughout the 90s and the last few years .

Within the past five years, a series of interest rate cuts as well as federal tax cuts may have also played a role in stimulating American consumers to spend beyond their means.

Credit
Via our nation’s system of credit, consumers are rated by three private nation-wide credit monitoring agencies who produce credit histories as reported to them by lenders. If there is excessive debt on a consumer’s credit report, then lenders will no longer extend credit to those consumers. When consumption can no longer continue, there is an inevitable slow-down in the overall growth of an economy. If the reduction in consumption is significant the results can be far reaching.

Suppose an average consumer has gone into substantial debt via credit cards, loans, medical bills, etc. All his credit cards are maxed out and his salary is barely enough to buy some food and pay the mortgage. Once his credit limit is reached, he can no longer consume. He will no longer be able to pay his bills and can subsequently lose his home and be forced to sell things off to repay some of his debts.

His non-spending on consumer goods and services in turn affects those businesses he would otherwise be supporting. As a result those businesses see a decrease in sales and are forced to lay-off some employees. Those employees in turn are then faced with insurmountable debts that they themselves have and were counting on their future income to pay back. Those people will now be facing a similar situation as our initial consumer.

Down Cycle
These conditions can prompt a down-cycle in the overall economy and can be devastating for not just a few, but the nation as a whole. When added to an already slowing economy, the effects can be multiplied and magnified. As more and more jobs are lost, more and more consumers cease to consume. Each incident of another consumer who can no longer pay his debts and can no longer continue his consumption affects not just him and his family, but his community and his state, and eventually the nation as a whole.

Through the understanding of the multiplier effect on an economy, we know that for every amount spent there is an equal amount of saving or investment that takes place elsewhere. For instance, a purchase of a home will earn the seller a profit, the listing agent a percentage commission, the selling agent a percentage commission, and a long list of other service providers who will benefit simply from the transaction of the sale.

After the house has been purchased there will more than likely be repairs and/or renovations that will equally create a long list of contractors, landscapers, plumbers, etc. that will benefit a nation’s overall GDP by multiples of the original amount spent.

The same multiplier effect will work in reverse if other conditions in the economy provoke a recession-like cycle. This could conceivably cause a prolonged recession or potentially a depression state in the economy.

Avoiding Disaster
A manageable, controllable, non-excessive amount of debt is generally understood, expected, and good for an economy. Debt that remains within the bounds of disposable income is debt that is more than likely going to be paid back. This has a positive effect in raising overall GDP as it stimulates capital spending which lays the groundwork for future growth.

In order to avoid a negative debt impact on an economy, a nation should avoid excessive debt when inflation is high or when there are unsubstantiated bubbles in the economy (as in our recent housing bubble). Debt should not be used to finance the purchase of stocks in companies as it can drive up their prices, making consumers and corporations feel more wealthy and likely to spend more on non-capital goods and cause an inflationary state .

On a more individual level, consumers need to go back to the basic principles that were in place after the Great Depression and before easy credit. The ideas of living within your means, not buying what you can’t afford, and saving your money for a rainy day, are all necessary in a society to avoid a potentially dangerous financial situations in an economy.