The Specter of An Economic Depression

Over the past year, more and more economists, journalists and finance experts have mentioned or discussed references to the economic depression than at any other time that I can remember. More and more of them have also stated that there is a real possibility of an economic depression as opposed to just a recession. No longer is the 'D' word being dismissed outright. An employment from Nov. 2008 report indicated a staggering 533,000 jobs lost, prompting University of Maryland business professor Peter Morici to state that "The threat of a widespread depression is now real and present". (See the article in the links section below). The monthly job loss rate then accelerated to around 750,000 jobs per month (hopefully the peak) in early 2009 before settling down to a rate of about 250,000. While rate of job loss has decreased, the unemployment continues to climb, and by all estimates will continue to do so well into 2010. Some reports project stagnant job growth until 2014.

Once only used by those labeled as 'chicken littles', the dreaded 'D' word is no longer reserved for those prone to hysteria. Click here for CNBC news that references possible economic depression The collapse of mammoth instituations such as Bear Stearns, Fannie Mae, Freddie Mac, AIG, Lehman Brothers and others is history making in and of itself. The reverberations from these quakes will be felt for years to come and will be felt on main street, there's no doubt about that now. The era of easy and quick credit is over and the cheerleaders who were trying to find a bright spot in the economic turmoil have all but disappeared into the woodwork now.

Interest rates that had been kept so low, for so long, due to perverse monetary policy allowed the proliferation of equally perverse lending and borrowing practices, thereby creating a housing bubble that has burst, and may have even farther to go. The credit default swaps market is starting to implode (underscored by the near collapse of AIG) as well. This situation has now bled over into the credit markets, which at the time of this artice have seized up. Particularly worrisome is the commercial paper sector which is frozen. This is a part of the banking system that provides short-term loans to large corporations and many mid-sized businesses. Banks are so scared that they won't even lend to each other, let alone to businesses. If businesses can't get the short term loans that they need to function things will get ugly real fast.

In fact, even if the bail out plan is approved quickly (it appears that Congress will eventually shove that cowpaddy down America's throat) we are still in for a deep recession at the very least. In fact, the initial effect of the bailout plan might even accelerate bank failures due to the fact that they will now have to "come clean" with exactly what their toxic investments are actually worth when they try to sell them to Uncle Sam. They'll be forced to "mark to market", and in some cases that will result in larger losses for certain lending and investment institutions. Foreign banks are scared as well. Recent LIBOR (London Interbank Offered Rate) interest rates have skyrocketed due to fear. This will, in turn, push up the mortgage rates of any adjustable rate mortgage (ARM) that is tied to LIBOR, which could push the foreclosure rate even higher! See the white paper from Weiss Research (link below) to get details on why the bail out WILL NOT WORK!

I called my congressional reps and senators and complained about the cost of the bail out etc. I am not happy about this at all, but it looks like they're going to go ahead with it, mainly to prevent the meltdown of the credit markets and the Federal Reserve balance sheet. Joe taxpayer will be left with the bill and a bunch of garbage securities. Of course, the real reason for the bail out plan is to buy back all the garbage securities that were sold to foreign investment banks. They're doing this to prevent the foreign investors from dumping all their U.S. assets and crashing the U.S. economy. Foreign investors are ticked off, and who can blame them? Wall St. sold them AAA rated investments that later turned out to be worthless garbage!

But wait! There's more. Just wait until the $55 Trillion (yes Trillion with a 'T') in credit default swap (CDS) derivatives starts to unravel and cause further economic meltdown. Then you'll see things get downright SCARY! One hedge fund manager describes the CDS derivatives as the 'dark matter' of the financial universe. I mean even an experienced hedge fund manager doesn't know the nature of toxic waste involved in these things. For more information on this check out this article: The $55 Trillion Dollar Question

Due to recent events, I have increased my holdings in precious metals, just in case a hyper-inflationary event ensues. This may or may not happen, I'm not sure. In fact, if you ask economists and finance folks, they'll give you different opinions as to whether this economic depression we're entering will be inflationary of deflationary. As of the end of 2008 it appears that we are in a deflationary spiral, with oil at about $42/barrel, gasoline below 2$ and retailers cutting prices to make sales. Stocks, bonds, and commodities appear to be falling at an accelerated rate due to deleveraging, i.e. banks, hedge funds and big investors are selling assets to raise cash. This rapid liquidation of assets is causing prices to fall. Things are deflating which increases the odds that the government will introduce massive spending plans and capital injections into the financial system and the economy. If the Treasury starts increasing the money supply for this bail out (which by some accounts will cost alot more than $700 Billion) then who is going to lend us the money? Our credit rating around the world may be questionable. While the U.S. Gov't still has a AAA credit rating, some of the rating agencies are reconsidering that and may in the future downgrade that rating which would be a disaster for the U.S.

Geeezz, come to think of it, these are the very same credit rating agencies that rated all those toxic investments (based on garbage subprime home loans that everyone knew would never be repaid) as AAA - the very highest credit rating, totally safe - a great investment right? Well, we all see what happened there. Alot of these so called AAA securities are now totally WORTHLESS. So why should I even trust the AAA credit rating of the U.S. Gov't? Especially considering that we are BROKE! We are the largest debtor nation on Earth. By contrast, we were a large creditor nation at the start of the Great Depression. Think about that one.

So if foreign countries don't lend to us, what other option is there? Print mo' money! That's right. The U.S. Treasury can increase the money supply by issuing more treasury securities to buy up the garbage that banks want to get off their balance sheets. Or it can inject more cash into the banks to prop up lending and increase the money supply. Or it can issue checks to the public in the form of 'emergency relief' or something like that. This may make the public feel good initially, but if the economy does not produce a commensurate amount of goods and services to keep up with the increase in the money supply, then the money will become worth less and less......and over time will eventually become worthless. It's called currency debasement and it has happened to just about every civilization that has been on a fiat currency throughout history. Fiat currency, is not backed with a tangible asset such as gold or silver. Therefore, you can just issue as much as needed. It works for a while, but sooner or later, the game is up and the money is worthless.

I am not giving investement advice to anyone, I am just explaining my position and why I am buying small amounts of silver and gold here and there to put away just in case we get a huge inflationary event. Gold and silver tend to hold their value during such inflationary episodes.

It is my sincere hope that there will be some light at the end of the tunnel, but it may take a long time to get there. If that's the case, then I'll breathe a sigh of relief when this is all behind us. However, if that light in the tunnel turns out to be a train coming the other way, then I want to be at least somewhat prepared for the wreck that lies ahead.

Please see the recent economic news and past economic news and videos below for more information about the coming recession/depression.

Update Oct. 11, 2008: The International Monetary Fund (IMF) has warned that the global financial system is on the verge of a meltdown. The governments of the world are trying to come up with a coordinated plan that will restore confidence of the bankers and to get credit flowing again. See link to Reuters news story below. Also, please view the links to the Jim Cramer videos (see article links below) and watch the videos. Whether you like Jim Cramer or not is important. The fact that he is saying that a 'Great Depression' scenario is still a possibility and is not far-fetched should be a warning sign to everybody about just how severe the economic/financial situation is and how severe it could become.

Update Nov. 10, 2008: At this time it appears that GM may be on the verge of insolvency or bankruptcy, with Ford and Chrysler also in dismal shape. GM sales are down about 45% from last year and all of the automakers, foreign and domestic saw a huge plunge in sales. President-Elect Obama and his team are scrambling to implement a rescue plan to save the sinking economy. Consumer confidence was recently reported to be the lowest ever, since index has been tracked. The economic forecast is looking very dismal at this time, with virtually no economist saying that things will improve. ITulip has forecast that about 10 million jobs will be lost by the end of 2009. See article link below.

Update Dec. 5, 2008: The jobless rate has increased to 6.7% and the unemployment figures just released showed an "almost indescribably terrible" 533,000 jobs lost in the month of November. This accelerating job loss is a sign of further deterioration in the economy as well as exacerbator of the situation. This is sure to accelerate foreclosures and the decrease in consumer spending even further. Another recent report indicated that a staggering 10% of the residential mortgages in the U.S. are either in foreclosure or are delinquent at least 30 days. A business professor at the University of Maryland has stated that "The threat of a widespread depression is now real and present." See the most recent articles below. About 1.26 million jobs have been lost of the past three months (Sept., Oct. Nov.), "a pace of job destruction exceeded only once since 1945". A closer look at the details of the report is provided in the article below.

Update: Jan. 2, 2009: In an interview with CNBC, economist Martin Feldstein says that during the Depression FDR only spent the equivalent of less than $200 Billion in today's terms (1% of GDP). President-Elect Obama and Congressional Democrats are proposing an economic stimulus package for early 2009 that is speculated to be on the order of $800 Billion! WATCH VIDEO: http://www.cnbc.com/id/28470517

Update Jan 14, 2009: The year appears off to a rocky start with banking troubles starting to emerge, particularly at Citigroup and Bank of America which has asked for more federal bail out funds (TARP). Citigroup was forced to sell of its Smith Barney brokerage unit to Morgan Stanley. Citi shares fell today by over 20% to close at $4.53. Bank of America and HSBC also have problems that will come to light this year. One notable quote from Christopher Mustascio, managing director at Stifel Nicolaus (see CNBC article below for more):

"There's certainly going to be more bank failures in 2009 as the economic backdrop continues to deteriorate and the smaller banks start to feel the pain," Mustascio said. "In the past quarters much of the pain has been on larger banks, investment banks, on a mark-to-market basis that has been driving asset valuation writedowns. Now you've got a full-fledged recession...Some of these banks are not going to be able to deal with that, and you're going to see failures."

Update Jan 15, 2009: Societe Generale analyst says that a depression is ahead.

Update Jan. 31, 2009: At the World Economic Forum in Davost, Harvard economics professor Ken Rogoff tells CNBC that big U.S. banks must be liquidated in a decisive restructuring of the banking system. Regarding the unemployment outlook, Mr. Rogoff indicated that U.S. unemployment will continue to rise until at least through 2010 and possibly through 2011. He indicated that this is a "a very deep financial recession" and that in these types of situations unemployment usually rises for five years. FIVE YEARS?!!? Why not just call it what it is, A DEPRESSION! See link below for more information and CNBC video interview with Rogoff. Also, 4th quarter GDP for 2008 declined 3.8%.

Update Feb. 3, 2009: U.S. auto sales dive off a cliff! Ok, we all know that the auto industry (both foreigh and domestic) has been in decline over the past year since the credit crunch started, but the latest auto sales numbers for Jan. 2009 are truly ugly! GM down 49%, Chrysler down 55%! Toyota, Honda, Nissan down 32%, 30%, and 28% respectively. Auto sales were the worst since 1982 on an annualized basis and have fallen behind China's for the first time ever! "We're in the mouth of this monster, and we have a lot of work to do," Chrysler sales chief Steven Landry said. The only bright spots in the auto market were Subaru and Hyundai which posted increases of 8% and 14% respectively. Hyundai sales increased due to heavy promotion of it's new buyer protection program and increased sales of the Sonata and Sante Fe models. Another bright spot, Ford's retail sales, while lower than January 2008 levels, held steady over the last three months. However, the outlook is grim, Ford's top analyst George Pipas said he expects industrywide fleet sales to be down 65 percent for the month. Those declines combined with factory shutdowns in late December and most of January may lead to an annualized U.S. sales rate below 10 million, he said. Want to see the breadth of this problem? Just look at the 2008/2009 auto sales chart (Wall St. Journal) in the links section below and just look at all the red! It is indeed a bloodbath. See links below for details.

Update Feb. 21, 2009: Paul Volcker, former Federal Reserve chairman and advisor to President Obama stated that he didn't "remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world". He also criticized the "financial innovation" (risky securities such as credit default swaps and exotic financial products that got us into this mess) and stated that "There is little correlation between sophistication of a banking system and productivity growth". Mr. Volcker's statement appears to confirm the severity of the current financial/credit dislocation and it's equally severe effects on the main street economy.

Update Mar. 9, 2009: It is clear that a deflationary pattern has developed and that the economy continues to deteriorate. Job losses continue to build with 651,000 jobs lost in February. The unemployment rate has jumped to over 8% and some 11.6 million Americans are out of work. Shanty towns in California, Warren Buffett has recently stated that the economy has "fallen off a cliff", car sales down drastically with no end in sight. A recent article in Bloomberg indicates that a "Depression Dynamic" is ensuing as the markets appear to be tracing a pattern somewhat similar to the 1930s. Sure we do not have the soup lines and bread lines that we had during the Great Depression, but that is because we now have unemployment benefits, food stamps and welfare programs that did not exist in the 1930s. Bear in mind that almost 32 million Americans now receive food stamps, up about 700,000 in just the last month alone! http://www.msnbc.msn.com/id/29550899/

Update May 16, 2009: More fall out in the auto industry as GM announces that it will eliminate 1100 dealerships and Chrysler announces 789 dealership cuts and that's just for the first year. Additional dealerships may be shuttered in 2010. GM stock hovers barely above $1. The question on many a mind these days is: Will GM declare bankruptcy?

Update July 2, 2009: Green shoots turn out to be weeds. The official national unemployment increased to 9.5%. The total unemployment rate (U6) which includes underemployed workers shot up to 16.5%. Also, June auto sales posted a plunge. GM sales were down 33% from a year ago, Honda down 30%, Chrysler down 42%, Hyundai down 24%, Toyota down 36% from last year. One bright spot is that Toyota posted an 11.2% increase in sales in the 2nd quarter over the 1st quarter. Another bright spot is that Ford is boosting June production 16% over the 3rd quarter of 2008. These are terrible numbers. Let's hope that this is the bottom and that the worst is behind us!!

Update September 19, 2009: The number of Americans on Food Stamps has shot up to about 35 million (an increase of about 3 million since March of this year). Essentially, one in nine Americans receives food stamp aid. The official national unemployment rate is 9.7% with states such as California at 12.2%. Lending has continued to decrease as financial institutions seeks to shore up their balances by retaining cash instead of lending it out. As lending decreases, so does consumer spending which is around 70% of the economy. The specter of tighter regulation will further crimp lending growth.

Additionally, there are indications that we are in for a very big downturn in the commercial real estate sector - there are indications that it has already begun, with some cities experiencing record office space vacancies. According to an article in Nashville Business Journal, the national office vacancy rate is 15.7% and is projected to reach 17.5% by the end of 2009. The article also indicated that commercial mortgage delinquency rates hit 4.1% in Q2, up from 1.9% a year ago.

'Option Mortgages to Explode Officials Warn' - A Sept. 17 article from Reuters indicates that federal and state officials are bracing for a new wave of mortgage delinquencies and foreclosures stemming from option ARM (adjustable rate mortgage) loans that will reset to higher interest rates. 

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