Here’s part 3 of Graham’s Economic Collapse Essay.
The Coming Economic Collapse, Part 3
Courtesy of Graham Summers at Gains, Pains and Capital
Over the last two essays, we’ve detailed:
- How the US outsourced its job market starting in 1971
- The US’s economic shift from manufacturing to financial services
- The rise of credit as a means to maintaining one’s quality of life
- The real decline in US incomes since the early ‘70s
- The rise of China as an economic power (fueled by US consumer spending)
- The real Federal debt problem and deficits
- Why Obama’s Stimulus Plan won’t solve anything
- What the US needs to do to get out of this mess
Today, we’re going to detail what is most likely to happen in the coming years (at least in my opinion). Understand, I’m not a super bear or anti-America, just someone who tries to put two and two together and end up with four.
The US has a MAJOR debt problem. Including future social security and Medicare expenses we owe $65 TRILLION. Because we live in a world in which the words, “billion” get thrown around with too much ease, I’d like to put that number into perspective.
Let’s say you have a stack of $1,000 bills. $1 million would be a stack eight inches high. $1 billion would be a stack 800 feet high (think the Washington Monument). And $1 trillion would be a stack 142 miles high. Total US debt, if laid on its side, would be a stack of $1,000 stretching more than 1/3 of the way around the earth.
Ok, so where is the US economy REALLY at right now?
Year over year real employment, real industrial orders, real housing starts, and real retail sales are all posting their largest drops since the production shutdown following WWII. Put another way, the last time the US economy fell this hard this fast, we were intentionally shutting down the monster that was the US war machine in WWII.
This is no recession. We are already on our way to a Depression (a GDP contraction of 10%) possibly even another Great Depression. One in nine Americans are currently receiving food stamps. Real unemployment (without birth/death seasonal nonsense and all the other Federal gimmicks) stands at 20%.
So I don’t buy the “green shoots” theory at all. Having things get horrendous at a slightly slower rate is NOT a sign of a recovery. Green shoots can pop up anywhere including the asphalt in the parking lot outside my office. That doesn’t mean the parking lot is about to become a lush meadow.
No, the US is heading for a really, really rough time. The US monetary base has doubled in the last year. We owe $65 trillion in liabilities. The US government could tax every company and every American 100% of their annual incomes AND NOT PAY THIS OFF. The Feds will have to inflate this mess away. And they’ve got a master money printer, Ben Bernanke, overseeing this situation.
Now, I cannot foretell precisely how this will all play out. Typically when a bubble bursts it takes 10+ years, possibly an entire generation, before the assets that participated in the Bubble return to new highs (sometimes they NEVER do).
Now, we just got off the biggest credit / debt bubble in the world’s history. I’m talking about 30+ years of spending money we don’t have culminating in a period in which Americans were speculating in the single largest asset they ever purchase (a house) without putting a cent of their own money at risk (0% down NINA loans).
We also saw a bubble in stocks, Treasuries, and most every other asset you can invest in. So the idea that we can recover from this in a couple of years seems over enthusiastic to say the least.
Remember, Japan experienced a similar Bubble (though they had higher savings than we did) and “lost” a decade of economic growth. It’s worth noting that Japan WAS NOT an Empire like the US. Japan did not have an army with bases in 170 countries, a world reserve currency, and a crippled job market (history rhymes, it does not repeat).
So in terms of the real US economy, I don’t foresee a recovery anytime soon. The stock market may soar thanks to the Fed’s money printing, but a jump in financial speculation is NOT an economic recovery. If the S&P 500 goes to 20,000, but we’re drinking $1,500 beer and wiping ourselves with $100 bills, we haven’t gotten richer (nevermind the fact that an S&P 500 of 20,000 DOESN’T create jobs).
So how will we know when a bottom is in and the economy will recover? I’ve postulated a few signs (some humorous, others not so pleasant). Bear in mind, much of this is tongue in cheek. But like all sarcasm, there’s a grain of truth.
We will bottom WHEN:
- CNBC and Bloomberg start firing anchors and cutting their coverage time by hours, not minutes.
- Maria Bartiromo and Jim Cramer start telling investors to short the market with all they’ve got.
- Questions like “do you think we’re heading for a recovery” result in the questioner getting punched in the face or ignored like a loony tune.
- People HATE stocks and stock ownership has plummeted back to one in ten Americans (the pre-401(k) levels).
- Investing is no longer a hobby and people fight tooth and nail to retain their nest egg (honestly what the hell is “play” or “speculative” money?)
- The number of mutual funds has fallen by at least half (why are we paying fees for people who can’t beat the market?).
- People no longer want to get an MBA to become a broker or a financial advisor.
- Our economy is based on “making something,” not “offering advice.”
- Books about Warren Buffett no longer comprise an entire publishing industry (seriously, Amazon (AMZN) lists 5,000+ books on him).
- The Richest 500 people in the world are no longer all billionaires (never happened before in history… how’s that for concentration of wealth?)
- Guys like me are no longer writing about finance or investing but instead take up a respectable profession.
Then… we will have probably hit bottom.
Good Investing!
Go here for part 1 >>
Go here for part 2 >>
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