The Latest Signs Of Complete Economic Meltdown: Phase 2 Begins

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by Giordano Bruno

10/6/2009 – Neithercorp Press

At the end of 2008 we reported on the first phase of the “Great Recession” as it is now often referred, mentioning the importance of China and the BRIC nations in the eventual collapse of the dollar, and the continuing saga of unemployment which would grind on despite any effort (or lack of effort) on the part of the Federal Reserve and the government to flood the economy with liquidity, artificially propping up credit markets and the Dow.

The first phase of the collapse is nearly complete. The stock market tumbled near the 7000 point mark giving the government an opening to force through bailout legislation increasing government spending and the national debt to levels never before seen in history, while the private Federal Reserve has been quietly injecting fiat capital (no one knows exactly how much) into numerous domestic and foreign banks, the names of which the Fed has as yet refused to disclose. Some estimates, including that of Bloomberg, place the Federal Reserve’s money creation at around $24 trillion.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aY0tX8UysIaM

This massive level of printing press inflation has created a kind of new “Sucker’s Rally,” the likes of which has not been seen since the bullet-train rally of 1930 that eventually heralded the train wreck of the Great Depression. Banks, instead of using the bailout money to increase loans and unfreeze credit mechanisms as it was intended, have decided it would be better to bet the bag on the stock market roulette wheel. Trillions of taxpayer dollars have thus been thrust into the markets, creating the illusion of an investor resurgence. This is why the Dow has gained to nearly 10,000 points while the rest of the economy continues to sink into the quicksand.

In response to these inflationary practices (and as we predicted in 2008), the dollar has begun to tumble versus other national currencies, and gold has surged to a record high of over $1040 an ounce!

It is now October, 2009, and the “new sucker’s rally” is beginning to falter. Very soon, I believe, massive swings in the Dow like those we witnessed in 2008 will resurface once again, and stocks will resume their downward spiral, while at the same time, the dollar will lose the “safe haven” investment status it had in 2008, causing possible hyperinflationary conditions for the Greenback. Here are some reasons why:

The “Bernanke Theory”

In 1983, Ben Bernanke, the current head of the Private Federal Reserve, wrote a paper on the Great Depression which included a hypothesis that the loss of deposits during bank closures destroyed the liquidity of financial systems, and prolonged the Depression far longer than if those deposits had been artificially refurbished and injected back into the economy. Bernanke argued that disruption of the credit intermediation process due to bank failures and general turmoil in financial markets had significant effects on macroeconomic activity.

http://fic.wharton.upenn.edu/fic/papers/02/0235.pdf

This led him to believe that the only solution in staying another Great Depression was the willingness of governments and central banks to not only fully protect the deposits of faltering banking institutions, but to create an inexhaustible money supply in support of large credit providers. Bernanke believed this money supply would stop market loss and create conditions for new economic growth, with little consequence. Inflation, he felt, could be easily contained.

It is simple to see why 25 years later Bernanke was chosen to lead the Fed through the worst economic conditions in America since the 1930’s. Not because he would do everything right, but because he would do everything wrong.

Bernanke now has the very rare opportunity to “test” his faulty economic theories personally in real time, and the conglomeration of central bankers across the world would like nothing better than for him to do so. Bernanke’s theory that unyielding support for credit markets will somehow magically produce wealth creation is the key to a perfect storm in which hyperinflation is the ultimate and eventual result. The problem lies in the fact that regardless of how well capitalized banks and lenders are, this does nothing to change the fact that the average American is in no position to borrow. We are already in debt up to our necks and very few of us are tempted any longer by the proposition of burying ourselves further in the hole. This is why defaults on credit card debt have recently skyrocketed…

http://www.reuters.com/article/ousivMolt/idUSTRE58F42320090916

…and, why U.S. mortgage delinquencies have set new records:

http://www.reuters.com/article/newsOne/idUSTRE58K29E20090921

Bernanke’s efforts have done nothing to protect the foundation of our economy; the average American consumer and business owner. All he has accomplished is the rapid debasement of our currency, and this is by design (a design we will discuss shortly).

Unemployment

The unemployment rate continues to climb despite any stimulus efforts whatsoever. September’s numbers of 263,000 job losses stunned economists who were predicting losses of only around 180,000:

http://www.npr.org/templates/story/story.php?storyId=113426838

To put this in perspective, 260,000 people would make up the population of a medium-sized American city such as Orlando, Florida. Imagine that every month, a city the size of Orlando completely shuts down in the U.S. Where is Mickey Mouse going to temp after hitting dire straights? Like many currently unemployed, he is overqualified for the few jobs left available in today’s market.

Honest unemployment numbers have been carefully hidden from the public’s initial view by the Department of Labor. 9.8% is the current “official” figure, however, for one to know the true unemployment rate, one must first take into account the U-6, which measures the number of people who are still out of work but no longer receive unemployment benefits, and also those people who can only find part time work and still cannot sufficiently support themselves or their families:

http://blogs.wsj.com/economics/2009/07/02/broader-unemployment-rate-hit-165-in-june/

If one applies the U-6 to the “official” tally, unemployment is actually at around 17% to 20%.

This astounding level of joblessness is why I have been receiving reports from people who last year made salaries of $100,000 or more, but now are unemployed and desperately applying for jobs that pay $8 to $10 an hour just to survive. The middle class is being utterly destroyed by this recession, and we appear to be only at the beginning. I believe the sheer volume of jobless across the country will become very apparent in the next three months, and I predict the most dismal Christmas retail sales numbers in recent memory.

The signs are already visible…

In Social Security, the number of applicants has increased by 23% in one year alone because older workers who can no longer find jobs have opted to retire early. The fund is now strained and running out quickly:

http://www.msnbc.msn.com/id/33043206/

Because of loan defaults and bad investments, 98 banks have so far been declared insolvent and have been closed by the FDIC this year. Over 400 banks have been added to the FDIC’s “troubled list,” and the FDIC is already in the red, asking for financial assistance from the Treasury:

http://www.reuters.com/article/businessNews/idUSTRE57Q34M20090827

http://www.reuters.com/article/businessNews/idUSTRE58H34F20090918

The “Cash for Clunkers” program failed miserably, costing billions and supporting the auto industry for a mere month. U.S. auto sales tumbled 23% in September despite all stimulus efforts. The American consumer has lost all ability to purchase high ticket items:

http://www.reuters.com/article/newsOne/idUSTRE59066D20091002?pageNumber=1&virtualBrandChannel=0

While there are many reasons for these developments, including a weaker dollar, unemployment is the primary cause. It is possible that true unemployment could level off around 25% for a time, until the dollar begins its final drop and inflation kicks in. The loss of savings caused by a collapse in the dollar would be astronomical, and it is impossible to say how high unemployment could go in our 70% service based economy under such conditions.

The Stock Market Is At Least 30% Overpriced

The severity of unemployment and other factors have been consistently downplayed by mainstream economists and the private Federal Reserve, who for the past two months have been triumphantly declaring the recession to be “over.” An observation that apparently 80% of Americans disagree with:

http://calinsbrokers.wordpress.com/2009/09/22/american-pulse-4-in-5-americans-say-recession-not-over-healthcare-reform-more-socialist-than-capitalist/

They are playing a dangerous psychological game with the American public in an attempt to boost activity in the Dow by promoting a false sense of investor confidence. They have exaggerated the importance of minor and often meaningless economic data, such as the recent rise in the Institute for Supply Management’s service index, or the fact that Goldman Sachs just raised its rating on some major banks, to drive the Dow up over 45%. Such data can be easily manipulated or “spun” to give a positive impression on the economy where one is not warranted.

The sharp stock rally that has occurred over the past five months has blinded some people to the fundamentals of the market. Historically, wild record breaking spikes in stocks always occur during a bear market, and such spikes are often met with equally rapid drops. One way to tell whether this is about to occur involves examining whether or not stocks are “overpriced.” The best way to do this is to check the “P/E Ratio” (price/earnings) of an index, such as the S&P 500:

http://www.economicpopulist.org/content/ultimate-stock-market-suckers-rally

As you can see from the charts above, the S&P’s earnings have evaporated, while the value of its stocks have exploded. This juxtaposition makes little sense. The earnings of S&P companies are so low that they in no way warrant a stock value so high. This cannot go on forever. In fact, I doubt if this rally will last the winter.

Look for a large Dow correction very soon, followed by a minor increase in the dollar, and a minor drop in gold. This will be followed by developments which may startle main stream economists who will finally realize the rules they were used to no longer apply. Once people realize the stimulus has achieved nothing, the atmosphere will change dramatically.

China, The Middle East, And The Dollar

The dollar has suffered significant losses in the past few months, enough so that even former Fed Chief Alan Greenspan has openly talked about the possibility of severe inflation:

http://www.reuters.com/article/newsOne/idUSTRE5913TX20091002

Greenspan (who knows full well that the Fed has already incubated a hyperinflationary event for decades) warned that the private central bank must soon raise interest rates and cut off the money pump. What he fails to mention in his “warning”, is that we are now caught in a Catch 22. If the Fed cuts off its massive stimulus, the Dow will collapse and Banks like BOA which have been on life support all this time will go under. Treasury bond investment will tank, and America’s national debt will be unmanageable. If they don’t cut off the stimulus, China and other BRIC nations will drop the dollar as the world reserve currency, investment in Treasury bonds will still tank, and hyperinflation will commence. Either way, the dollar loses out, and so do we all.

I believe ‘phase 2’ of the collapse will involve international events which will place the U.S. between the proverbial “rock and a hard place,” and these events may involve the Middle East.

Iran’s recent announcement that they will no longer use the dollar for trade in Oil or anything else is just the beginning:

http://www.arabianbusiness.com/568241-tehran-dumps-dollar-for-euro

Gulf States have been talking about de-pegging from the U.S. Greenback since at least 2008:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKafZEdY2xF8&refer=home

And now the time appears to be ripe. Iran’s move may encourage other oil producing nations to follow suit, dropping the dollar in exchange for the Euro, or the IMF’s new world currency, the SDR (Special Drawing Rights).

http://www.reuters.com/article/newsOne/idUSTRE59507620091006

This event would send shockwaves across the U.S. The Federal Reserve would be forced into an open decision on whether or not to end the stimulus before other countries follow the lead of the Middle East. I believe they will, and when this happens, not only the Dow, but the dollar, will simultaneously collapse.

China has been moving slowly for years now towards a consumer based instead of export based economy, and has been carefully and quietly shoring up gold reserves as a hedge against their dollar investments:

China’s recent dumping of a significant portion of their U.S. Treasury Bonds shows that they are getting close to breaking from the Greenback, and their reliance on the U.S. consumer:

http://english.people.com.cn/90001/90780/91421/6734461.html

http://neithercorp.us/npress/?p=105

While foreign investment in long term U.S. Treasury bonds has faltered. Foreigners purchased $15.3 billion more assets than they sold in July, a steep decline from June, when they purchased $90.7 billion more than they sold:

http://finance.yahoo.com/news/Foreign-demand-for-longterm-apf-3387203957.html?x=0&sec=topStories&pos=7&asset=&ccode=

The Federal Reserve, in an attempt to prop up the Treasury bond market, has resorted to creating money out of thin air to purchase T-bonds. Essentially, the Fed is buying stock in its own currency in order to artificially prop up its value! The Fed now accounts for nearly 50% of all Treasury purchases:

http://www.zerohedge.com/article/federal-reserve-accounts-50-q2-treasury-purchases

It is hard to say who will be first to bring a major challenge to the dollar; China, or the Middle East, but it will certainly happen, and when it does, the greenback will lose an extensive portion of its value while gold and other commodities, including oil, will go through the roof. I see this issue being forced by the beginning of 2010, and playing out over the course of the entire year.

2010: The Year It All Happens?

It takes about a year for inflation to work its way through our economic system, and if most of the major stimulus occurred throughout 2009, then by the end of 2010, its effects should be widely visible. It would seem that 2010 is the year all the cards are laid on the table, and the American public will finally see the hand they have been dealt. There are many mitigating factors that could speed up events, such as war, pandemic, and numerous other unpleasantries, but as far as the mechanics of finance are concerned, the next year will be one for the history books.

Many people, sadly, have bought into the MSM talking points surrounding the recession/depression, misdirected towards trying to stave off the symptoms of the collapse, but not the root cause.

The housing bubble for instance, is often credited as the spark that ignited the financial wildfire, but it was just another branch of a far greater problem. The housing collapse made the effects of this root problem much more visible, revealing the true weakness of the American consumer, who for decades had driven the economy on the putrid fumes of pure debt. It revealed the obvious frail state, the brittle skeleton of the U.S. industrial foundation, and the poison inherent in a service based economy. It also showed the fraud that is the American banking system, and the great illusion of corporatism. But behind all of this, and the housing bubble itself, were the policies and activities of the private Federal Reserve, who has since 1913 consolidated power into the hands of central bankers and drained the wealth of the U.S. dry.

Central Banker’s “faith” is in the philosophy of globalism. They believe that one economy, one currency, one government, one all encompassing system, should not only be encouraged, but forced on the rest of us. To that end, the current economic collapse has been created, deliberately. It is no mistake that the IMF has introduced the SDR without a cap as a new world currency. It is no mistake that the Fed continues pumping money into an economy that is not improving. It is no mistake that other countries and central banks have been quietly storing gold.

The dollar is meant to die. The goal: a one world economic system based on the SDR and controlled by the IMF. American’s would never give up their sovereignty and agree to such a system unless they were desperate, and to make that happen, the Greenback must go. This is why hyperinflation is a certainty.

I now leave you with the stark words of a globalist:

“The powers of financial capitalism had (a) far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank…sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”

- Carroll Quigley, member of Council on Foreign Relations (CFR), mentor to Bill Clinton, quote from “Tragedy and Hope”, 1966

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