Just The Beginning, More Losses And Social Unrest, Great Depression 2.0 On The Way

January 3, 2009

Sad but true, the worst is yet to come. We’ve yet to even scratch the surface of the financial & social losses that are to come. It’s been over two years since I started sounding the alarm via e-mails and this blog, and not because I’m some sort of psychic, but rather because the writing has been all over the walls. It just took some reading. The threat of a recession was real then, and now that it is finally here (and for over a year now), the threat of a “Great Depression 2.0” is even more real.

There have been others that have been warning us all for much longer and I thank them for having alerted me as well. Among them were; Peter Schiff from Euro Pacific Capital and David Walker, former United States Comptroller General. Both of which continue to try to wake up the American public to the reality that is unfolding in front of us.

Nonetheless, there are still idiots and/or optimists that are saying that this recession will be all be over and done with come Q3 2009. Don’t believe it for a second. This recession we’re in is serious stuff. This is not your grandparent’s recession. This is the culmination of over 70 years of the collective mind forgetting every last piece of common sense in how to run global, government, corporate and personal finance. This time it will be much worse and it will be a depression.

Go ahead, call me what some people called me two years ago… a nut job, a Chicken Little, a pessimist, or a party pooper, but the worst IS yet to COME. Think LA Riots, think post-Katrina looting, think unemployed, homeless, hungry and angry inner city residents turning over and burning cars in protest of the sad state of affairs.

Rioters during the 1992 LA Riots turn over a police vehicle

Rioters during the 1992 LA Riots turn over a police vehicle

Once that begins to happen, our government will need to, regardless of what they might otherwise state publicly, detain thousands, maybe hundreds of thousands of people in camps. All in trying to maintain law & order.

This will be only part of the social consequences from our financial collapse and the economic decisions that have led to our over consumption, under production, outsourcing, deforestation, pollution, environmental, political and societal damage.

However, we will first have to experience further losses of jobs, homes, companies, banks, local governments, retirement accounts, life savings, followed by further bail outs, followed by a deflation/inflation roller coaster ride, and finally the total collapse of the dollar (potentially being replaced by the “Amero“). I think by then a large number of people will just lose it and crack under pressure. Then we’ll have a series of people going postal, rioting, looting and all out mayhem and disorder in the streets. Certainly some places more so than others (think NYC compared to Utah).

Add to that the increasing number of natural weather disasters that we are experiencing brought on by global warming (or just the natural cycle of things – if you don’t buy the whole global warming bit) and you’ll have even die-hard atheists converting to one of the many religions that promises eternal salvation before or after suffering through apocalyptic times.

Stay safe and have a plan of action!

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

September 8, 2007

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

August 20, 2007

New York MagazineNow 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

July 13, 2007

More Clippings About Our Economy From Contributing Editor RH:

New York PostIts 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

Financial Times.comThe 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

Wall Street BearThe 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

ReutersThe 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

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

Wall Stree Journal OnlineDisappointing 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

Times OnlineAfter 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…

June 20, 2007

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

bloomberg.com“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

Conde Nast Portfolio.comThe 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

BusinessWeekAn 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

Financial Times.com“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

MSN MoneyA 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?


The Coming Of The Second Great Depression

May 3, 2007

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

May 1, 2007

Negative Savings
The Great Depression 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.

Negative SavingsGeneral 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.cashing out home equity

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.penniless

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.

US DebtGovernments 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
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 Consumptionexcessive 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
bad 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
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 Disasterdanger sign
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.