The Coming Of The Second Great Depression

Here’s a quote from an insightful interview with Warren Brussee, author of The Second Great Depression. Read the entire interview when you get a chance.

If people had been saving, some cushion could have been found through reducing the savings amount. But people have had a negative savings rate for the last 24 months. People have been living on the edge, and there is no cushion. The economy has been carried by the money that housing put into the economy. With that source gone, and with people now beginning to have to repay their loans, we are going to be driven into a deep recession, followed by a probable depression.

Chicken Smith View:

Another brief re-cap of some of the major events that will prompt the next depression:

1. 2000 – 2003 In an effort to avoid a recession, due to several quarters of negative GDP, the Fed lowers the Federal Funds Rates from 6.5% in May 2000 down to 1% in June 2003.

2. 2001 – 2005 Housing market soars as demand for homes exceeds supply. New homes are built. A huge sub-prime mortgage sub-sector of consumers purchase homes that they otherwise wouldn’t qualify for by taking out adjustable rate mortgages (ARMs).

3. 2002 – 2006 Consumers cash out on their rising property values by taking out equity mortgages to pay for travel and non-durable goods.

4. 2003 – 2005 A huge surge in the economy results from all the spending prompted by the cash out. Excessive spending causes Americans to deplete their savings and assume more debt. Inflation begins.

5. 2004 – 2005 In an effort to reduce the inflationary effects of the economic boom caused by the housing market and the increase in consumer spending, the Fed begins to raise the Federal Funds Rate. The rate goes from 1% in 2004 up to 5.25% in June 2005.

6. 2006 – 2007 The housing market reaches its peak and begins its downward path as interest rates rise and most demand has been met. Home builders all but stop new construction. Housing related businesses begin to see unemployment due to lower sales. ARMs begin to reset and homeowners experience sticker shock as their mortgages rise by as much as 50%.

7. 2007 – 2010 The American economy goes into a depression due to the domino effect that the housing market has on the rest of the economy.

I believe the Fed interest rate adjustments were just a band-aid on what would have been normal cycle recession and we simply delayed it and made it worse. We are now facing a major depression precipitated by the fact that we no longer have any savings and now-a-days every Tom, Dick and Harry have money in the stock market. It’s no longer something the informed investor does, rather something anyone with an internet connection can participate in.

The Dow Jones Industrial Average recently rose to 13,000 in seven weeks, when it took more than seven years to reach 12,000. Capital spending is down and companies are buying up their own stock. Consumer spending is only temporarily up right now, as that will take a big hit once everyone wakes up. The price of consumer goods as well as food staples such as corn and milk are going up, that in turn, raises the price of all sorts of products that come from those prodcuts and food prices usually don’t come back down.

The best advice I can offer is to save your money, but don’t keep it in a volatile place (ie, not the stock market), have some tangible assets (ie, a home that’s already paid for, maybe gold, maybe a bio-fuel car, or solar panels), and have a plan to ride out a downturn in the economy (ie, a backyard vegetable garden, maybe some canned goods).

If history is any indicator, things should get better. I say should because there are other factors that will come into play here that have not been part of previous recessions and the Great Depression, factors such as the devaluation of the dollar, foreign ownership of US companies and US debt, and a general disdain for all things American in some parts of the world. So even if our dollar is cheap, world-wide interest in some of our products has been diminishing, so there may not be an increase in our exports due to our devalued dollar.

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.

“There’s an insanity out there that I don’t understand” -Alan Greenspan, 3/15/07

Chicken Smith View:

The events that have unfolded over the recent past are evidence that our current U.S. economy is faltering and is headed for a major depression.

The reports in the mainstream media of a weakening economy which were hard to find around this time last year, are ever more visible as of late than ever before. The general public is finally waking up to the debt and the financial crisis that is about to shake this country.

Signs of a Recession:

Bank Failures – Metropolitan Savings, with total assets of approximately $15.8 million at the end of the third quarter 2006, was closed by the Pennsylvania Department of Banking. “Worries about financial stability start to creep in” according to Prechter’s Market Perspective. The Mortgage Lender Implode-O-Meter reports 39 lenders (and counting) have now gone kaput

Foreclosures Rise – Late mortgage payments rose to a 31/2-year high in the final quarter of last year, and new foreclosures surged to a record as borrowers with tarnished credit histories had trouble keeping up with their monthly payments, the Mortgage Bankers Association reported on 3/13/07. Hold on to your assets. The deepest housing decline in 16 years is about to get worse. Reported Bloomberg.com on 3/12/07.

Inflation Up – The government said before trading started in New York that the February PPI rose 1.3%, more than double expectations. One reason was rising food costs, which showed the highest increase in three years. – Forbes.com, 3/15/07

Cost of Labor Up – The Labor Department reported that the cost of the labor needed to produce each unit of output soared by 6.6 percent, far higher than the 1.7 percent initial estimate and well above the 3.2 percent increase Wall Street was expecting. Reports the AP in a Boston Globe article on 3/7/07.

Manufacturing Orders Down – New orders for manufactured goods in January decreased $22.9 billion or 5.6 percent to $383.1 billion, the U.S. Census Bureau reported on 3/6/07.

Dollar Down – In recent years, the U.S. Dollar has dropped to record lows against the Euro. In addition, it has reached record lows against several other currencies as well. There’s doubts about how strong the U.S. economy is. Reports Bloomberg.com on 3/16/07

Overall Debt Up – The greatest economic threat today isn’t deflation in the housing market. A bigger worry is that a meltdown in the debt markets could force the global economy into a credit squeeze and recession. MSN Money 2/23/07. This is because there is compelling evidence that a recession is dead ahead. MSN Money 9/25/06.

Greenspan is Sounding the Alarm – If home prices keep falling, there could be more of an impact on the broader economy’s momentum, he indicated. Consumer spending fuels two-thirds of national economic activity. CNN Money.com 3/15/07.

Recession Indicators Can Be Seen Everywhere

“While much of the sharp sell-off in stocks on Tuesday has been blamed on the Chinese stock market, there is also growing concern among investors that earnings growth going forward will be the weakest in nearly five years, since shortly after the end of the last recession in late 2001.” – CNNMoney.com, February 28 2007

Fourth-quarter gross domestic product (GDP) numbers were revised down to 2.2% yesterday from the government’s previous January announcement that our GDP had surged to 3.5%. According to CNNMoney.com, the lower growth is attributed to “sharply lower spending by businesses“.

In addition, durable goods orders “showed a 6.0 percent decline in new orders… excluding aircraft and defense spending.” According to CNNMoney.com “That reading is typically the clearest barometer of business spending. It was the largest such decline in three years and one of the biggest drops on record.”

Chicken Smith View:

If nothing else points to a coming recession, just realize that if companies are tightening up their spending, then there is less investment taking place in our economy. That, in turn, translates to lower sales, lower employment, and an overall decline to our already weakening economy. Add that to our increasing inflation as measured by the consumer price index (CPI), our current (and increasing) foreclosure rate, our drop in housing sales, the rise in consumer debt (credit cards, equity loans), and a whole slew of other factors (ie, inverted yield curve) that are pushing their limits on our increasingly taxed economy.

Dow Jones, Nasdaq, S&P 500 Nosedive, Recession Ahead

In a precursor of what’s to come, the major US stock indices took a plunge today after sour news regarding Chinese & US manufacturing and a statement by former Fed chief, Alan Greenspan.

The Dow Jones Industrial Average went down nearly 550 points during afternoon trading before settling for a loss of 416 points for the day.

Chicken Smith View:

Start getting used to those downward trend charts, as the stock market will really get hit hard once people start realizing that our artificially inflated economy is nothing but hot air.

For those of you who want to have a little bit of money left over after the forthcoming 1929-like collapse of our economy, do yourself a favor and get your money out of the stock market now!

Even Greenspan thinks “It is possible we can get a recession in the latter months of 2007.” By “warning” us, it’s his way of talking to the history books and telling them; “while my economic policies initiated between 2001 – 2005 may be partially responsible for the recession, at least I gave the public a warning at the start of 2007.” At least he’ll be right.

Credit Derivatives – The Spark That Will Burn Us All

“The biggest risk in the financial markets today isn’t that a deflating housing market will trigger a stock-market bust, but that the huge expansion of risk-taking… will overwhelm the debt markets, creating a quick reduction in the amount of money available to borrow and forcing the global economy into a credit squeeze and recession.” – MSN Money, February 23, 2007

Chicken Smith View:

This MSN Money article by senior markets editor Jim Jubak is too important to ignore. Please read as much of the actual article and understand the reasons why we are all facing a serious economic downturn in the not too distant future.

As mentioned in one of my previous posts, these credit derivatives have pretty much invaded (poisoned) all forms of investments. Your current portfolio may not be safe, especially if you are diversified.

Forget Web 2.0, Next Up Is Great Depression 2.0

“In real terms, the economy is already in recession… Industrial output continues to flag (in January it was down by another .5 percent) while millions of good-paying factory jobs are being airmailed to China where labor is a mere fraction of the cost in the USA. Also, automobile inventories are up while factory production is in freefall.” – Online Journal, February 22, 2007

Chicken Smith View:

Let’s look at a couple of charts from the government’s Bureau of Economic Analysis (BEA):

This chart represents our current trade defecit. Yes, it’s negative. Yes, it means that we import more than we export. We also spend significantly more than we make. So how can we do that? Credit. Just like you can buy all you want on your credit cards and only pay the minimums each month, so too does the rest of our economy. From a regular person like you or me all the way up the food chain including investors, corporations, our government, everyone in our country is living on credit. Which leads us to this next chart:

This chart shows our ever increasing debt. And of course, there’s no collective plan to reduce that in any way. Unfortunately, these credit defecits can’t go on forever. Eventually some market condition changes (ie, foreign investors start dumping their dollars, too many banks collapsing, a market crash, too many bankruptcies, etc.) and the credit bills will become due. That’s when no one will have the money to pay them back and everyone will start waking up to the fact that credit is not infinite.

So, how will all this end up? Economists don’t know, the Fed doesn’t know, investors don’t know, banks don’t know, and the government doesn’t know. The fact is that because the future is so uncertain, it’s in a lot of people’s best interest not to know, or worse, say that everything is going well “there’s nothing to see here, move along…” and it’s all blue skies ahead.

The truth is, that the signs are all lining up, just like they did prior to the first Great Depression, and the signs are all pointing to a dramatic down-turn in our debt-ridden economy. But wait, aren’t we a world power, the richest, the biggest spenders, the best? Well, sure, but we’re also the the biggest debtors, close to 60% of all world-wide credit is consumed by us. One of the major factors of the Great Depression was buying on margin. This is true today, and we’re so deep in credit that there’s really no way out unless the market corrects itself via Great Depression 2.0.

BTW, do read the Online Journal article by Mike Whitney if you get a chance. It lays out the causes of the next depression in greater detail.

Home-Flippers Halt Trips To Home Depot, Now Shopping at Wal-Mart

“Wal-Mart’s net income climbed 9.8 percent… Home Depot, the world’s largest home-improvement retailer, slumped 28 percent…” – Bloomberg, February 20, 2007

“Flipping, overall, is down everywhere” – Orlando Sentinel, February 15, 2007

“For all of 2006, one in four flippers lost money” – Bloomberg, February 5, 2007

Chicken Smith View:

The headlines pretty much sum it up. Do you hear that? That’s the loud hiss of the housing bubble deflating and soon to take the rest of the economy along with it. I’m sure many of these professional (and amateur) home flippers have massive credit card bills that will never see a zero balance again. When money is short and times are tough, then you know it’s time to shop where you get the most bang for your buck.

These are probably all the same people who keep thinking there’s nothing wrong with our bubble economy. Many must take comfort in knowing they’re not alone. However, it can’t be much comfort to know everyone else is weighing down the same sinking ship that you’re on.

Here’s a link to a Forbes article to help keep you up at night. As if you needed any help!

The World Is One Big Credit Card That’s About To Default

“Everything would tick along perfectly well – until the credit card companies realised they weren’t making any money, and called a halt to the 0% interest rate deals. Then everyone would have to pay back the money they borrowed in the first place. The property market would collapse as people sold houses to pay back loans. Stock markets would plunge. It would be a financial disaster.” – MoneyWeek.com Feb. 27, 2006

Chicken Smith View:

If you read the entire MoneyWeek article, they discuss something called Stoozing which is when you borrow money at a low interest rate (ie, Introductory 0% Credit Card Offer) and you deposit it into a safe investment (ie, 5% Online Savings Account). Before the credit card’s introductory offer expires, you either pay it back and keep the interest payments or you keep moving the debt into another 0% offer. Meanwhile, you’re earning 5 percent off the money in the bank.

Now if you’re talking about credit cards, it’s probably not a lot of money we’re talking about. Let’s say you borrow $30k on your credit card offers at 0%, you put that money in the bank at 5% interest. Let’s say you manage to juggle the debt for one year. The most you’ll make is about $1500 for the year.

Now that may not be so bad if it didn’t cost anything, but it would require a lot of time, effort and careful management making sure not to exceed the introductory periods and not to spend the initial capital, otherwise, you’ll lose any chance of making a profit. I’m sure many will be tempted to try it, however, it generally requires opening new credit cards and that can negatively affect your credit score.

So obviously, this is not a get rich quick scheme, however, if you translate a similar scenario onto the global stage by large corporations in the millions of dollars, now we’re talking serious money. Sadly, this is going on right now throughout the investment world, however investors don’t call it Stoozing, the term they prefer to use is called Carry Trade.

It might as well be funny money, because what it does is it artificially inflates market prices, as everyone is essentially “buying” on credit. Eventually, when the bill for the original balance needs to get paid or if the interest rates suddenly change, someone is left holding the hot potato and fortunes can be wiped out.

This is what’s going to sour the global economy. According to HSBC Currency Strategist, David Bloom, “The carry trade has pervaded every single instrument imaginable, credit spreads, bonds spreads: everything is poisoned.”

This is what passes for record profits in so many markets. It’s a house of cards and the winds of change are starting to blow. Everything is being bought on credit in one way or another, both at the consumer level and at the professional investor level, this cannot go on forever, and it will get ugly. Banks are starting to feel the pain and are scrambling to get an influx of some real cash by offering high interest rates on savings accounts. It may be too late. If anything can be learned from this, it is; you stooze, you lose.

U.S. Automakers Cut Nearly 100,000 Jobs; Chrysler 13k, Ford 45k, GM 32k

In the latest round of job cuts to be announced from a U.S. auto manufacturer, Chrysler announced today that it is cutting about 13,000 jobs in North America.

Add that to the 45,000 job cuts planned by Ford, and another 32,000 planned by GM, and you have a cool 90,000 jobs that have simply vanished.

Chicken Smith View:

This time it’s not outsourcing, rather the decline of an industry that was started and revolutionized right here in the United States. And no, Toyota & Honda will not be able to pick up the slack and hire 90,000 unemployed workers.

Add that to the continuing decline in manufacturing jobs, the outsourcing of high tech jobs, and the loss of jobs in general, and you have another fine ingredient in the boiling pot that is our bubble economy.

Signs Are Starting To Show. First Up… Banks.

British-based HSBC Bank has encountered a problem with its US-based lending division. An unexpected rise in sub-prime loan defaults.

“A growing number of debt-ridden Americans defaulting on their mortgages have forced British banking giant HSBC Holdings to increase its provision for bad loans…” -Forbes, February 8, 2007.

“The problems follow warnings from experts throughout last year that a slowing US economy and rising borrowing costs would lead to an increase in bad loans by homeowners” – Gulf Daily News, February 9, 2007

“Signs of credit deterioration from the slowing U.S. housing market have already shown up in recent results of other banks as more borrowers fall behind.” – MarketWatch, February 8, 2007

American based sub-prime lenders such as Delta Financial, Countrywide Financial, American Home Mortgage Investment, Washington Mutual, IndyMac Bancorp Inc., New Century Financial, and Marshall & Ilsley Corporation, some of which are really large outfits, are seeing and will continue to see a rise in defaults. How much of this pounding they’ll be able to absorb is anybody’s guess.

Chicken Smith View:
With such revelations from HSBC, it now becomes a clearer picture as to why their HSBC Direct Internet Savings division is currently offering a 6% interest rates on their savings account. They clearly need the money to bail them out of some really bad investments (sub-prime loans).

Remember the inverted yield curve? I mentioned it in an earlier post or a personal e-mail, regardless, this is a very important indicator of the times we are in. The simplest way to explain it is as follows; money invested for a short period of time earns a higher interest rate than money invested for a long period of time.

In general, a yield curve is not supposed to be inverted. Think of a regular savings account and a Certificate of Deposit (CD). The savings account is liquid and can be accessed at any time (provided the bank is open). Because you’re not committing to keeping your money in the bank for any length of time, the amount of interest you earn will be relatively low compared to a CD which requires the money remain in the bank for a set period of time (ie, 12 months). This is generally how things are supposed to work.

However, when the curve is inverted, the opposite is true. Hence you can put your money in a savings account and earn 6% right now or you can place your money in a CD and earn a paltry 3% over the course of a year. It doesn’t seem to make sense. And it shouldn’t, as Inverted Yield Curves, historically predict a down-turn in the economy.

This, my friend, is what I’m talking about. The signs are everywhere, the defaults, the inverse curves, the outsourcing, the job losses, the weakening dollar, the rising price of gold & gas (just wait), the drop in the housing market, the drop in construction, the loss of manufacturing, the rise in personal debt, the rise in corporate debt, the rise in national debt. It’s all happening at the same time. Each factor is pressing against it’s limits. The good times have never lasted forever, and I doubt this time will be an exception.

What to do?

I’m not telling you to head for the hills, just be aware. Save your pennies, better yet, save your pre-1965 dimes and quarters. Don’t spend your money frivolously, as a dollar devaluation will require more of it to purchase less than you can today. I’m not a big fan of the stock market, and my fear is that it will take a dive right along with the rest of the economy, so a minimal amount of investing in paper currency and stocks would be my recommendation. If you invest in anything, it’s probably best that it be a hard asset, something real and tangible, like a tangerine farm or a chicken coop (with chickens). I’m sure you can come up with better ideas.

Just realize that things are not right, no matter what the press, politicians, your friends, or some bosses try to tell you. Look for the facts. See the signs. If the banks start taking it in the rear, don’t think you’ll somehow escape unscathed.

Times are booming! Really…

“So why, when America is in the midst of an apparently never-ending sweet spot, are American families in the same precarious financial position that they faced during the Depression?” -Moneyweek.com Feb. 7, 2007

Chicken Smith View:

Why is it that while everyone at the top keeps saying that all is well, all those beneath them echo the same happy-go-lucky, lemming-minded sentiment, even when all is not well for them? Are we all suffering from delusions of grandeur? And no, the middle is not the top. The top is doing well, if you’re not part of the top, then chances are conditions will be changing for you in the near future.

As consumers, it seems that we’ve all been lulled into this sense of prosperity, even when there is none. For example, why is it that so many are spending money they don’t have on frivolous items such as Playstation 3s, BMWs, Sony Bravias, iPods, Coach, and Victoria’s Secret when they quite literally have ZERO dollars in savings and tens of thousands in debt?

It almost defies logic. I refer back to that Lending Tree commercial where the guy has it all (the new car, golf club membership, big house, etc.) and admits “I’m in debt up to my eyeballs… somebody help me”. Yet he’s smiling the whole time and sarcastically asks for help, knowing full well that he doesn’t really want any.

And why should he want help? He’s having too good a time living it up and enjoying the life he always dreamed of without having had to work too hard for it. It’s almost a no brainer come to think of it… while others sacrifice years of their lives trying to get ahead so they can afford some luxuries, the “smart” ones get to put it all on credit. It’s perfect. No need to struggle, sacrifice, take risks, start your own business, none of that.

Here’s the “secret”: A) Get a job, any job. B) Open 3-5 credit cards. C) Build your credit for 3-5 years. D) Buy a house with no down-payment (all you need is a pulse and some creative application filling techniques). E) Start spending. F) whenever you can’t make the minimum payments, simply play hot potatoe between the 10 credit cards you probably have by now. G) If that gets tough, and if some time has passed, or screw time, if the housing bubble is in full swing, get an equity mortgage and “buy” some more toys or go on more vacations. H) Sit back and enjoy. If the house of cards that you built starts tumbling down around you (it can take years or even decades), file for bankruptcy or call Lending Tree and try again.

So why bother working and saving for the American dream, when you can have it all now on credit! While the example is a bit extreme, there are many who have worked hard, have studied to get higher degrees, have struggled and taken risks, but yet somehow they still fell for the credit trap. It’s something that sneaks up on people, even those who say “that would never happen to me”. The allure of shiny new things is all too appealing and hard to resist.

The sad state of affairs however, is that while all this is happening at the local consumer level (you and me), other factors in our economy are in full play. Because so many are too busy having a good time, they really aren’t intereseted in putting much effort into their work. So American companies have, over the past few decades, been outsourcing jobs to other countries. I guess they figure the work can’t be much worse and at least it will be much cheaper.

Besides, since other countries don’t have such easy credit as we have here in America, the workers there, more than likely, will be in desparate need of those 75 cents per hour to put food in their kids’ mouths. Employee loyalty will be higher, employee turnover will be lower, wages will be much much much lower, benefits will be non-existent, and the fat cats back here (those at the top) will pocket the added profits. So why wait? Let’s lay off more Americans!

Don’t think that this isn’t happening every day. We are losing jobs. And while traditionally they have been blue-collar manufacturing jobs, other areas such as programming, accounting, analysis, and graphic design are being exported too. Job losses that are in the hundreds of thousands every year and showing no signs of stopping.

Don’t believe me? Just last week, J.P. Morgan Chase & Co. CEO Jamie Dimon said “We can do business anywhere around the world, we would like to see New York thrive because we have a lot of people here, but I don’t think it would damage us dramatically,” [if more business moved overseas]. And he’s not alone. Huge “outsourcing consultant” firms like Accenture are raking in tons of profits advising all sorts of companies and industries on how to export American jobs overseas.

So, you see, times are good for those at the top and the companies they run. As I’ve stated before, just because corporate america is doing well, does not mean that Joe-six-pack is doing well. Talk to average folks, not just those in the cubicles around you, not just those business aquaintances and sales people who generally try to prove they’re doing well so you can have confidence in working with/for them, not just friends who are often trying to hide the fact that they’re in debt up to their eyeballs, talk to strangers, the waitress, the cleaning person, the contractor, the painter, the immigrant, the day laborer. These are the ones who feel it first. Then talk to the telemarketer, the tech support person, the graphic designer, and the investment banker who just got laid off from a sweet job.

Housing was a big part of what kept our economy afloat after 2001. That was mostly due to the Fed’s lowering of interest rates. Last year the fed stopped lowering the rates. We are currently in a holding pattern and the market is setting records every other day. However, housing has already taken a big dive and is yet to see more. The dollar has been going down and other countries are diversifying their portfolios (ie, dumping dollars). Our nations’ debt levels are at record highs and our savings are at record lows. Foreclosures are also at record levels and all this consumer credit will have a significant impact on the banking industry and our economy.

Winter in general is a time of uncertainty, but there isn’t much that will improve in the warmer months ahead. Well, not unless you count over inflated stock prices that will rise further before they are due for a sudden correction later in the year. At that point people will start to notice, but it may be too late.

A lot of our current upbeat economy news has been modified to showcase the “positives” and down-play the “negatives”. However, if you dig deeper, you’ll see that the economy is really placing its bets on consumer spending which, unless you count purchasing everything on credit and paying only the minimums as actual spending, means our economy is headed for disaster.