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The 5 Stages of Collapse: Where Are We Currently?

Editor — Thu, 02 Feb 2012 18:30:28 +0000

In light of the unfolding global sovereign debt fiasco that has turned out to be less of a waterfall and more of an avalanche [than anticipated I present below a description of the 5 stages of collapse and discuss our preparedness. If you haven't read it yet, perhaps you should.] It has been read by 70,000+ people so far – and is still being read by an average of 1,500 people each month – on my site alone. Words: 2525

So says Dmitry Orlov (www.cluborlov.blogspot.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Orlov goes on to say, in part:

Elizabeth Kübler-Ross defined the five stages of coming to terms with grief and tragedy as:

denial,
anger,
bargaining,
depression and
acceptance,

and applied it quite successfully to various forms of catastrophic personal loss, such as death of a loved one, sudden end to one’s career, and so forth.

Applying the Kübler-Ross Model to Economic Collapse

Several thinkers, notably James Howard Kunstler and, more recently John Michael Greer, have pointed out that the Kübler-Ross model is also quite terrifyingly accurate in reflecting the process by which society as a whole (or at least the informed and thinking parts of it) is reconciling itself to the inevitability of a discontinuous future, with our institutions and life support systems undermined by a combination of:

resource depletion,
catastrophic climate change and
political impotence.

So far, [however,] little has been said specifically about the finer structure of these discontinuities. Instead, there is to be found a continuum of subjective judgments, ranging from “a severe and prolonged recession” (the prediction we most often read in the financial press), to Kunstler’s “Long Emergency,” to the ever-popular “Collapse of Western Civilization,” painted with an ever-wider brush-stroke.

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For those of us who have already gone through all of the emotional stages of reconciling ourselves to the prospect of social and economic upheaval, it might be helpful to have a more precise terminology that goes beyond such emotionally charged phrases.

Defining a taxonomy of collapses might prove to be more than just an intellectual exercise: based on our abilities and circumstances, some of us may be able to specifically plan for a certain stage of collapse as a temporary, or even permanent, stopping point. Even if society at the current stage of socioeconomic complexity will no longer be possible, and even if, as Tainter points in his “Collapse of Complex Societies,” there are circumstances in which collapse happens to be the correct adaptive response, it need not automatically cause a population crash, with the survivors disbanding into solitary, feral humans dispersed in the wilderness and subsisting miserably. Collapse can be conceived of as an orderly, organized retreat rather than a rout.

The collapse of the Soviet Union, for example, [did not deprive the population of] food, housing, medicine, or any of the other survival necessities. Many institutions, including the military, public utilities, and public transportation, continued to function throughout [the decline. Even though] there was much social dislocation and suffering, society as a whole did not collapse [and this] allowed the Soviet population to inadvertently achieve a greater level of collapse-preparedness than is currently possible in the United States…

Having given a lot of thought to both the differences and the similarities between the two superpowers – the one that has collapsed already, and the one that is collapsing as I write this – I feel ready to attempt a bold conjecture, and define five stages of collapse, to serve as mental milestones as we gauge our own collapse-preparedness and see what can be done to improve it.

Rather than tying each phase [of collapse] to a particular emotion, as in the Kübler-Ross model, the proposed taxonomy ties each of the five collapse stages to the breaching of a specific level of trust, or faith, in the status quo. Although each stage causes physical, observable changes in the environment, these can be gradual…

The 5 Stages of Collapse

Stage 1: Financial collapse. Faith in “business as usual” is lost. The future is no longer assumed [to] resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out, and access to capital is lost.

Stage 2: Commercial collapse. Faith that “the market shall provide” is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm.

Stage 3: Political collapse. Faith that “the government will take care of you” is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.

Stage 4: Social collapse. Faith that “your people will take care of you” is lost, as local social institutions, be they charities or other groups that rush in to fill the power vacuum run out of resources or fail through internal conflict.

Stage 5: Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for “kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity” (Turnbull, The Mountain People). Families disband and compete as individuals for scarce resources. The new motto becomes “May you die today so that I die tomorrow” (Solzhenitsyn, The Gulag Archipelago). There may even be some cannibalism.

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Although many people imagine collapse to be a sort of elevator that goes to the sub-basement (our Stage 5) no matter which button you push, no such automatic mechanism can be discerned. Rather, driving us all to Stage 5 will require that a concerted effort be made at each of the intervening stages. That all the players seem poised to make just such an effort may give this collapse the form a classical tragedy – a conscious but inexorable march to perdition…Let us sketch out this process.

Stage 1 (Financial) Collapse Scenarios

Stage 1 collapse, as we are are currently observing it, consists of two parts:

a part of the general population is forced to move, no longer able to afford the house they bought based on inflated assessments, forged income numbers, and foolish expectations of endless asset inflation. Since, technically, they should never have been allowed to buy these houses, and were only able to do so because of financial and political malfeasance, this is actually a healthy development.
men in expensive suits tossing bundles of suddenly worthless paper up in the air, ripping out their remaining hair, and (some of us might uncharitably hope) setting themselves on fire on the steps of the Federal Reserve. They, to express it in their own vernacular, “fucked up,” and so this is also just as it should be.

The government response to this could be to offer some helpful homilies about “the wages of sin” and to open a few soup kitchens and flop houses in a variety of locations including Wall Street. The message would be: “You former debt addicts and gamblers, as you say, ‘fucked up,’ and so this will really hurt for a long time. We will never let you anywhere near big money again. Get yourselves over to the soup kitchen, and bring your own bowl, because we don’t do dishes.” This would result in a stable Stage 1 collapse – the Second Great Depression.

However, this is unlikely, because in the U.S. the government happens to be debt addict and gambler number one. As individuals, we may have been as virtuous as we wished, but the government will have still run up exorbitant debts on our behalf. Every level of government, from local municipalities and authorities, which need the financial markets to finance their public works and public services, to the federal government, which relies on foreign investment to finance its endless wars, is addicted to public debt. They know they cannot stop borrowing, and so they will do anything they can to keep the game going for as long as possible.

About the only thing the government currently seems…fit to do is:

extend further credit to those in trouble,
set interest rates at far below inflation,
accept worthless bits of paper as collateral and
pump money into insolvent financial institutions.

This has the effect of diluting the dollar, further undermining its value, and will, in due course, lead to hyperinflation, which is bad enough in any economy, but is especially serious for one dominated by imports. As imports dry up and the associated parts of the economy shut down, we pass Stage 2: Commercial Collapse.

Stage 2 (Commercial) Collapse Scenarios

As businesses shut down, storefronts are boarded up and the population is left largely penniless and dependent on FEMA and charity for survival, the government may consider what to do next. It could, for example:

repatriate all foreign troops and set them to work on public works projects designed to directly help the population.
promote local economic self-sufficiency, by establishing community-supported agriculture programs, erecting renewable energy systems, and organizing and training local self-defence forces to maintain law and order.
order the Army Corps of Engineers to bulldoze buildings erected on former farmland around city centers, return the land to cultivation, and to construct high-density solar-heated housing in urban centers to resettle those who are displaced.
reduce homelessness by imposing a steep tax on vacant residential properties and funneling the proceeds into rent subsidies for the indigent.

With plenty of luck, such measures may be able to reverse the trend, eventually providing for a restoration of pre-Stage 2 conditions.

This may or may not be a good plan, but in any case it is rather unrealistic, because the United States, being so deeply in debt, will be forced to accede to the wishes of its foreign creditors, who own a lot of national assets (land, buildings, and businesses) and who would rather see a dependent American population slaving away working off their debt than a self-sufficient one, conveniently forgetting that they have mortgaged their children’s futures to pay for military fiascos, big houses, big cars, and flat-screen television sets.

A much more likely scenario, however, is that the federal government (knowing who butters their bread) will remain subservient to foreign financial interests and:

impose austerity conditions,
maintain law and order through draconian means, and
aide in the construction of foreign-owned factory towns and plantations.

As people start to think that having a government may not be such a good idea, conditions become ripe for Stage 3.

Stage 3 (Political) Collapse Scenarios

After a significant amount of bloodletting, much of the country becomes a no-go zone for the remaining authorities. Foreign creditors decide that their debts might not be repaid after all, cut their losses and depart in haste. The rest of the world decides to act as if there is no such place as The United States – because “nobody goes there any more”…

Stage 3 collapse can sometimes be avoided by the timely introduction of international peacekeepers and through the efforts of international humanitarian NGOs. In the aftermath of a Stage 2 collapse, domestic authorities are highly unlikely to have either the resources or the legitimacy, or even the will, to arrest the collapse dynamic and reconstitute themselves in a way that the population would accept.

As stage 3 collapse runs its course, the power vacuum left by the now defunct federal, state and local government is filled by a variety of new power structures. Remnants of former law enforcement and military, urban gangs, ethnic mafias, religious cults and wealthy property owners all attempt to build their little empires on the ruins of the big one, fighting each other over territory and access to resources. This is the age of Big Men: charismatic leaders, rabble-rousers, ruthless Macchiavelian princes and war lords. In the luckier places, they find it to their common advantage to pool their resources and amalgamate into some sort of legitimate local government, while in the rest their jostling for power leads to a spiral of conflict and open war.

Stage 4 (Social) Collapse Scenarios

Stage 4 collapse occurs when society becomes so disordered and impoverished that it can no longer support the Big Men, who become smaller and smaller, and eventually fade from view. Society fragments into extended families and small tribes of a dozen or so families, who find it advantageous to band together for mutual support and defense. This is the form of society that has existed over some 98.5% of humanity’s existence as a biological species, and can be said to be the bedrock of human existence. Humans can exist at this level of organization for thousands, perhaps millions of years. Most mammalian species go extinct after just a few million years, but, for all we know, Homo Sapiens still have a million or two left.

Stage 5 (Cultural) Collapse Scenarios

If pre-collapse society is too atomized, alienated and individualistic to form cohesive extended families and tribes, or if its physical environment becomes so disordered and impoverished that hunger and starvation become widespread, then Stage 5 collapse becomes likely. At this stage, a simpler biological imperative takes over, to preserve the life of the breeding couples. Families disband, the old are abandoned to their own devices, and children are only cared for up to age 3. All social unity is destroyed, and even the couples may disband for a time, preferring to forage on their own and refusing to share food. This is the state of society described by the anthropologist Colin Turnbull in his book The Mountain People. If society prior to Stage 5 collapse can be said to be the historical norm for humans, Stage 5 collapse brings humanity to the verge of physical extinction.

Conclusion

As we can easily imagine, the default is cascaded failure: each stage of collapse can easily lead to the next, perhaps even overlapping it. In Russia, the process was arrested just past Stage 3: there was considerable trouble with ethnic mafias and even some warlordism, but government authority won out in the end. In my other writings, I go into a lot of detail in describing the exact conditions that inadvertently made Russian society relatively collapse-proof. Here, I will simply say that these ingredients are not currently present in the United States.

(In light of the unfolding global sovereign debt fiasco, I have issued an update [which I urge you to read. In it I come to the conclusion that, after] almost four lost years of both government and finance betting on a future that cannot exist, doubling down every time they lose again, the Five Stages of Collapse was nothing but a nice theory.

The [actual] effect, I think, will be to compress financial and political collapse into a single chaotic episode. Commercial collapse will not be far behind, because global commerce is dependent on global finance, and once international credit locks up the tankers and the container ships won’t sail. Shortly thereafter it will be lights out.)

*http://cluborlov.blogspot.com/2008/02/five-stages-of-collapse.html

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Ground Level Insights Into the “China Condition”

Editor — Mon, 30 Jan 2012 05:24:15 +0000

I have a personal friend who spends months every year developing business opportunities in China and I find his ground level perspective unlike anything written elsewhere. If you really want to know what is transpiring there go no further than to read this insightful email on the “China condition” particularly as it compares with that of the U.S. and Europe. Words: 1320

Lorimer Wilson is editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds). The views and conclusions of the email below are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Below is Paul Gibson’s (www.optradis.com) email:

Good morning Lorimer,

Thank you for bringing Frank Holmes’ article “Heart of China Bull Beats Strong” to my attention. I totally agree with Mr. Holmes position but let me take this opportunity to add my on-the-ground observations, assessment and comments on the China condition and certain major differences between China and the U.S and Europe.

While there are challenges in China – you don’t see a transition from absolute socialism to probably the most capitalist country in the world in 20 years with sustained growth of 10% for well over a decade without going through some very drastic growing pains – the government in China is aware of many of the risks and is trying to address them. I think they will be successful, not because they are smarter than the rest of us but because, as Mr. Holmes points out, they have the resources to succeed.

Real Estate Reality

The real estate market is a perfect example of the difference between China and the U.S. or Europe.

The U.S. housing market was a bubble: To me when a bubble breaks it has catastrophic effects, destroying a market for years to come. That happened in the U.S. While there are some signs of a recovering housing market there, I have seen predictions that parts of the country will be substantially under water for 20 years or more. That was a bubble.

The Chinese housing market is only undergoing a correction: There may be 100,000s of apartments unoccupied but this is a country of 1.3 billion people, with 1 million people moving to the cities every month. That excess capacity can disappear very quickly. The numbers here are always astronomical and you have to keep that in mind when someone uses them to make a point, whether good or bad.

A bubble or a correction may be semantics, but it is important to investor sentiment. Dire predictions tend to be self fulfilling. Take Europe, I do not think the situation in Europe is unfixable but if we keep telling ourselves it is unfixable it will be unfixable. Investment is about trusting people to do good things with your money. If too many people talk like Gordon Chang then trust is lost and the whole system falls on its ass.

Shadow Banking System

There are always stories in China like the shadow banking system, and it is absolutely true that it wiped out much of the wealth of the “Chinese Jews” (investors from Wenzhou) but again there is a story behind it. They started out selling paper shoes to the Russians, they did not do well in the rain! They were basically crooks who made so much money they went legit, but they were still crooks at heart and the export squeeze in China caused liquidity issues for them, then the government tightened the credit rules and they turned to the shadow banking system (I love that term, it is so genteel). They were about as sophisticated investors as Tony Soprano would be. They got over extended, went to loan sharks and paid the price, sometimes dramatically.

Benefits of State Capitalism

You simply cannot compare China to the U.S. and Europe today. If you want to make those comparison then you must compare them when they go through their supercycles and even then the comparison breaks down.

There has never been a time in history when 1.3 billion people were on the verge of becoming significant consumers. When the U.S. went through that process the population was around 150 million or less (12% of China’s) and then there is India with another billion people about 20 years behind China and during those 20 years that population will surpass China’s. While the Gordon Chang’s of the world would no doubt predict that that will turn the world into a festering ball of slag, I believe it will foster a new age of innovation. It is already happening.

China is the world largest green house gas producer (while its energy consumption per person is 25% of the U.S.) but it is also the world largest consumer of U.S. developed, clean coal technology and generates more power from renewable energy sources than any other country in the world. I predict China will be the first country to embrace widespread electric vehicle use for one simple reason – private enterprise cannot build infrastructure! The ROI is just too long and too diverse. Private enterprise could never produce the U.S. interstate highway system or the railway system in Europe. The Chinese government will make the investment or more likely create the incentive for private investment in the infrastructure to support widespread use of electric vehicles. Meanwhile the U.S. will stay tied to gasoline, because no oil company is going to invest in charging stations that compete with selling gasoline and power companies have shown little interest in building them. Furthermore, most of them can barely keep up with peak demand from their current customers. I do not believe in state capitalism but there are times when it has its uses.

Americans Need to Take Risks Again

It blows me away that the U.S. is a nation of immigrants yet they are so myopic. I still find it hard to believe that the average American really thinks if they stop importing stuff from China that all their problems will go away. U.S. investors need to stop looking at computer trading models and go visit places like China and find out for themselves. Ok, that’s not practical, but they have to stop listening to Gordon Chang’s and grow a pair – or maybe it’s re-grow a pair. They need to start taking some risks again. Like the risks that created industrial giants like GE and GM or more recently companies like IBM and Cisco. I have deliberately not included companies like Facebook because I am too much the engineer to consider a company that is nothing more than a web site to be worth the billions that some people think it is. Corporations think of the world as a global marketplace and investors need to realize there is a world out there to invest in that will give them far greater returns than U.S. government bonds.

China has Great Investment Opportunities

I am not trying to whitewash over the issues in China. There are many risks and pot holes in the investment road in China and the unguided investor is far too likely to find the wrong investment and lose their shirt or more likely leave a lot of money on the table. The Chinese love foreign investors because they can give them 15% or 20% and they leave smiling, meanwhile the Chinese partner has doubled their investment on the side deals that invariably get done and the foreign investor didn’t not even know it was going on, much less get a piece of it.

Only time will tell who calls it right, but I don’t believe China is steaming towards an iceberg. I think the greatest opportunities are in the developing economies and I think China is by far the safest of those countries to put your money in.

Another too long email,

Paul

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Why Did the Baltic Dry Index Collapse? Here’s Why

Editor — Wed, 25 Jan 2012 02:23:17 +0000

The Baltic Dry Index is generally viewed as a leading indicator of global economic activity as dry bulk primarily consists of commodities such as building materials, coal, metallic ores and grain. My research, however, indicates that global manufacturing demand has very little to do with it but, rather, Chinese manufacturing demand – but not the actual level of manufacturing as measured by the CFLP Manufacturing PMI. [Let me explain.]

So says Prieur du Plessis (www.investmentpostcards.com) in edited excerpts from his original article* which is of such a nature that, as editor editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) I present a live hyperlink directly to the article rather than providing an edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

*http://www.investmentpostcards.com/2012/01/23/baltic-dry-index-%e2%80%93-sell-off-overdone/

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George Soros Predicts Economic Chaos/Conflict in Europe and Riots in the U.S.!

Editor — Tue, 24 Jan 2012 21:33:21 +0000

So says an article* posted at www.TheDailybell.com that I encourage you to read.

*http://www.thedailybell.com/3535/Soros-Threatens-Blood-on-the-Streets

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What Does QE Really Do – and NOT Do?

Editor — Tue, 24 Jan 2012 06:54:43 +0000

[As you know, earlier] this week the Federal Reserve…promised to keep short-term interest rates low through late 2014 … up from a previous pledge of 2013. Not only that, the Fed also said it would continue with its “Operation Twist” policy of selling shorter-term Treasuries and buying longer-term ones. The goal [is to] hold down long-term interest rates but what does QE really do – and not do? [Let me explain.] Words: 500

So says Mike Larson (www.moneyandmarkets.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Larson goes on to say, in part:

What is QE – REALLY?

QE is money printing by a country’s central bank – and…

it devalues the currency of the country doing the printing,
it erodes the purchasing power of the country’s citizens,
it inflates the price of commodities, making every gallon of gas you buy and many of the groceries you purchase more expensive,
it drives down the yield on virtually all of your savings vehicles, forcing you to scrounge for pennies in your couch cushions or take on huge risks to generate the same amount of income you made previously and
it artificially boosts the value of paper assets, including everything from junky bonds to stocks.

In other words, if you’re an average American, you get screwed, but if you’re a seven-figure-salary investment banker at Goldman Sachs, you hit paydirt. You can peddle more stocks and bonds, make a lot of money doing so, and maybe afford a new Ferrari or house in the Hamptons. Ain’t life grand?

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The fatal flaw of QE, though, at least in terms of its impact on the REAL economy, is those pesky side effects. Sure, QE temporarily juices stock prices but because it also drives up the cost of living, it drives down the disposable income of everyday citizens. Eventually prices rise so high that no one can afford them, and that’s when the economy collapses…

What to Do

Never mind that [QE] won’t work, at least if by “work,” you mean help the real economy. Fed policymakers like Ben Bernanke aren’t going to let the facts get in the way of a good story. They need to look like they’re not just sitting on their hands so they’re going to keep doing the same wrong things, expecting a different result.

The best way to protect yourself is to own some gold, own select fixed income investments that do NOT pose excessive risk, and own select stocks with solid fundamentals.

*http://www.moneyandmarkets.com/fed-pledges-low-rates-forever-what-it-means-48834?FIELD9=2

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Related Articles:

1. 2012: More Money-printing Leading to Accelerating Inflation, Rising Interest Rates & Then U.S. Debt Crisis! Got Gold?

Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660

2. IMF Begs Policymakers to Prevent World Economy From Falling into a 1930s-style Death Spiral!

3. Why More QE is Coming and What That Means for the Future Price of Gold

Most traders and some economists believe the Fed will step in with another round of Quantitative Easing (QE3) in the first half of 2012. This will pump up the stock market, particularly bank stocks, giving the impression that the US economy can’t be that bad, after all, [but in the process] debase the dollar and reduce purchasing power. [This, in turn, will result in higher]…inflation causing prudent investors to buy more gold. [Let me explain further what I see transpiring this quarter and why.] Words: 718

4. These 5 Apocalyptic Engines Causing Hyperbolic Growth in US Money Supply

I recently wrote an article showing how US True Money Supply (TMS) appeared to be growing at a hyperbolic rate [see here], and that gold was also on a hyperbolic course…Hyperbolic growth in the quantity of money ends with hyperinflation… [and] both TMS and the dollar price of gold are pointing to a hyperinflationary outcome. This article explains why this might be so. Words: 764

5. Economic System a Legal Ponzi Scheme on the Verge of Collapse!

Countries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable — or unwilling — to do anything about it. It is a global disaster that threatens the immediate future… [Let me explain.] Words: 1132

6. What is Money – Really – and Why Do We Need to Own Gold – Really?

Have you ever wondered what money really is [and why we need to own some gold as a result]? You’ll notice that everyone you read has a strong opinion , but who’s right? [Let look at the situation and see if we can come to an answer that we both can agree on.] Words: 3086

7. Egon von Greyerz Interview on Future QE, Hyperinflation and the Price of Gold

A final or total catastrophe of the currency system will occur as a result of unlimited money printing that will lead to hyperinflation. Stock markets will benefit temporarily from this QE [but we expect that the] markets will fall 90% against gold in the next few years. The correction in the precious metals [will] likely [soon] be over and we should see the metals going to new highs in 2012. Words: 450

IMF Begs Policymakers to Prevent World Economy From Falling into a 1930s-style Death Spiral!

Editor — Tue, 24 Jan 2012 04:48:35 +0000

The International Monetary Fund (IMF) painted a stark picture of the global economy this week slashing the outlook for world growth while forecasting a damaging recession in Europe that will leave no country, including Canada and the U.S., unscathed. The report stated that financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated and, as such, policymakers must immediately move forward together to save the world economy from falling into a 1930s-style death spiral because the longer corrective action is put off the worse it will actually get. Words: 640

So conveys an article written by Eric Lam (www.financialpost.com) which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Lam goes on to say, in part:

In its January World Economic Outlook update, the IMF cut its projection for global growth in 2012 to 3.3%, down 70 basis points from its forecast in September. The global economic body blamed this largely on a “mild recession” expected this year after the eurozone entered a “perilous new phase” toward the end of 2011.

Eurozone Outlook

The IMF now expects the eurozone to contract by 0.5% in 2012, a full 1.6-percentage-point cut from the September forecast, before returning to minimal growth of 0.8% in 2013.

Canadian Outlook

Canada, which has become a relative economic bright light thanks to a rigorous financial regulatory system, will not escape the wrath of a European implosion with the IMF now forecasting 1.7% growth in 2012, a 20-basis-point cut.

“Watch out for the links between commodity prices and Canada. That has been very important the past two years,” Mr. St-Arnaud said. The IMF has also scolded Canada for its excessive housing market in the past, even as the Bank of Canada continues to expect household balance sheets to widen.

American Outlook

The United States will fare slightly better, growing by 1.8% in 2012, unchanged from earlier predictions. While there have been glimmers of positivity in recent economic data from the U.S., a strong recovery from supply-chain disruptions after the Japanese earthquake, and stabilizing oil prices, these are not expected to be significant-enough developments to sustain momentum going forward.

Emerging Markets Outlook

Emerging markets are also expected to slow because of fallout from the euro crisis, with growth cut to 5.4% (down 70 basis points) including a 70-basis-point trim to 7.3% for developing Asia. China is expected to grow 8.2%, an 80-basis-point cut.

IMF Report Dire For Good Reason

The IMF Report said that:

“The current environment — characterized by fragile financial systems, high public deficits and debt, and interest rates close to the zero bound — provides fertile ground for self-perpetuating pessimism and the propagation of adverse shocks, the most critical of which is a worsening of the crisis in the euro area. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated.”

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Christine Lagarde, the IMF’s managing director, warned in a speech in Berlin earlier this week that the new forecasts, dour as they are, nevertheless assume a “constructive policy path that is by no means assured” and called on policymakers to save the world economy from falling into a 1930s-style death spiral going on to say:

“The longer we wait, the worse it will get. The only solution is to move forward together. Our collective economic future depends on it. Why did 2011 turn out so badly? Put simply, policymakers let an old wound fester, and in doing so made the situation worse. From this perspective, 2012 must be a year of healing.”

*http://business.financialpost.com/2012/01/24/imf-slashes-world-outlook/

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Related Articles:

1. Why Did the Baltic Dry Index Collapse? Here’s Why

2. George Soros Predicts Economic Chaos/Conflict in Europe and Riots in the U.S.!

3. Bank of Canada Report Suggests Economic Situation is Dire and Could Deteriorate Rapidly!

4. Where Is This Unprecedented Global Financial Crisis Headed? A Retrospective from Alf Field

5. News Flash! OECD: Decisive Action Required Quickly to Avoid Massive Economic Disruption, a Credit Crunch and a Global Recession

6. Canadian Government Claims “All’s Well” at Home but Calls Europe’s Debt Woes “Dire”

In a speech to the Canadian Club in Toronto this past week Canada’s Finance Minister Jim Flaherty urged European leaders to find a solution to their debt crisis as it has spread beyond the eurozone and into credit markets worldwide creating a “dire and pressing problem” that threatens the rest of the world with possible “social unrest and instability”. Words: 870

7. Canada’s “Misery Index” On The Rise – but Still Below the Misery in the U.S.

Canadians may wish to consider the underlying trends in inflation and unemployment before making major financial decisions. Recent unemployment data in Canada shows unemployment at 7.3% [vs. 9.0% in the U.S.] and inflation rising to an uncomfortable 3.2% [vs. 3.6% in the U.S. for a Misery Index of 10.5 vs. 13.6 in the U.S.]

Abandon Ship! Baltic Dry Index on the Rocks of a European Recession

Editor — Mon, 23 Jan 2012 22:13:51 +0000

So says Louis Basenese (www.wallstreetdaily.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Basenese goes on to say:

Simply [put, the Index]…tracks the precursors of economic output [and,] as such, provides a measurement of the volume of global trade at the earliest possible stage.

As you can see in the chart above, the Index is down 48.4% in the last month and it’s down 54.4% in the last three months. The culprit? Why, Europe, of course. You’ll recall that European sovereign debt fears spiked (again) last October – and that’s precisely when the Baltic Dry Index also began its descent. Coincidence? I think not.

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The obvious takeaway from today’s chart? Steer clear of companies that sell cyclical products exclusively in European markets and…avoid U.S. stocks with heavy European exposure. A recession is afoot in Europe, if not already underway.

* http://www.wallstreetdaily.com/2012/01/20/most-alarming-chart-all-week-2/

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Bank of Canada Report Suggests Economic Situation is Dire and Could Deteriorate Rapidly!

Editor — Mon, 23 Jan 2012 17:35:50 +0000

So says Chris Horlacher (www.MapleLeafMetals.ca) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Horlacher goes on to say, in part:

In the report the Bank of Canada (BoC) identified five major areas of risk facing the global economy, which are as follows:

1. Global Sovereign Debt

It’s somewhat telling that the BoC decided to list this first, as it illustrates just what a massive problem this is becoming.

The BoC’s economic outlook in all areas has been revised downwards significantly over the past six months. Europe is judged to be in a recession and recovery prospects in the USA look bleak. The report points out that, amazingly, Canadian bank stocks are still trading at 70% above their book value, whereas US, UK and Euro bank stocks are well below this level. The BoC states that this is due to investors placing higher confidence in Canada’s banking system, however when the facts presented in this report are examined you might well conclude…that much of the confidence is unfounded and could rapidly deteriorate as well.

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The report also confirms the statement made by many investment experts, such as Peter Schiff, that capital flight in to government debt is crowding out private investment [see chart below]. This is part of what is prolonging the depression. Instead of financing economic recovery through investment in new ventures, projects and economic reorganization, primary dealers are instead simply financing the growth of government. This only further dampens the private economy and forms the vicious cycle that is sure to keep the economy in a recession.

Tens of trillions have been invested in the debt of governments who are now facing massive budgetary and fiscal crises. An “adverse spiral” has been rated the principal threat to domestic financial stability and that this risk has already partly materialized. Incredibly, the BoC even considers the eventuality of the US dollar losing its reserve currency status.

“Until now, debt-service burdens in both [USA and Japan] of these countries have been held down by favourable borrowing conditions – stemming in part from structural factors such as the high level of liquidity in the market for US Treasuries, the role of the US dollar as the international reserve currency and high domestic savings in Japan. There remains, however, a small but significant risk that this advantage could be lost if investor confidence suffers from repeated failure to undertake the needed fiscal consolidation.”

Unfortunately, the BoC considers the numerous bailout and liquidity measures undertaken by central banks and the IMF to be “steps in the right direction” even though they specifically note that any relief that these measures provided was temporary at best and that the situation in Europe continues to deteriorate, with yields on sovereign debt moving sharply higher in a number of Eurozone members.

The chapter concludes that the debt crisis “can be resolved if policy-makers address the situation in a forceful manner… based on credible fiscal arrangements and enhanced governance.” In other words, even more government involvement in the financial system. This has already proven to be useless, as the BoC admitted in an earlier segment of this chapter so one has to ask why they believe that more of the same is necessary.

2. Economic Downturn in Advanced Economies

The BoC notes what everyone should now be aware of; global economic activity is slowing down markedly. Household and bank deleveraging is dragging the world economy deeper and deeper in to recession. Further downturns in advanced economies would have a substantial impact on Canadian businesses, households and financial institutions transmitted through bank losses and deteriorating credit quality. The BoC [further] notes that while some banks have increased their capital buffers other banks still have razor-thin cushions and high exposures to underperforming assets. The obvious conclusion we should reach from this is that there continues to be massive, systemic risks in the financial system that could send waves of destruction throughout the global economy.

There are also concerns over asset quality for the global banking sector. The report notes that the US real estate market is vulnerable to further deterioration and that stagnant wage growth is impairing the ability of borrowers to service their mortgage debt. A massive overhang in the supply of housing also persists. Banks have foreclosed on a large number of properties and are unable to liquidate them at what the banks call “reasonable prices”. However, a reasonable price would be one where buyers would be willing to buy. The fact that banks possess this huge stock of houses actually indicates that they’re asking unreasonable prices for them.

Non-performing loans in the UK and Eurozone are at nearly 7% of total loans and climbing. In the US these loans now represent about 2.3%, down from a high of about 3.5% in 2009, and in Canada it is at about 1% of total loans and showing a small decline since 2010. Despite Canada’s low levels, the BoC concludes that:

“If economic activity declines significantly, a growing number of Canadian households and businesses would experience financial difficulties, which would translate into an increase in loan losses at financial institutions. If banks curtail credit, this would trigger an adverse feedback loop through which declines in economic activity and stress in the financial system would reinforce each other.”

This statement mirrors what I had predicted in my article The Canadian Moral Hazard Corporation, where an economic downturn would impair the quality of mortgages, causing a string of defaults to ripple through the banking system, in turn necessitating massive bailouts and debt monetization by the BoC.

3. Global Imbalances

The report also notes that current account imbalances (trade surpluses and deficits) remain an important source of risk. These imbalances, and the lack of exchange rate flexibility that allows them to persist, have created a global economic configuration marked by unsustainable debt accumulation in some advanced economies that is counterbalanced by asset accumulation in some emerging-market economies. While the report doesn’t mention any specific names, it could not be clearer that they’re referring to China’s accumulation of trillions of US dollars and US treasuries. The Chinese renmimbi is being closely managed by the Central Bank of China at an exchange rate of 6.4 to the US dollar and has held it down for over a decade. In the 1980’s the renminbi was intentionally devalued against the dollar as China pursued their plan of creating an export-driven economy. This manipulation has ensured that the US dollar remained overvalued against the renminbi and the consequence of this has been US dollars being used to purchase Chinese goods at tremendous rates. While devaluing a nation’s currency against those of their trading partners has long been held as a way to stimulate exports, one has to wonder if forcing exporters to accept less than fair value for their products is really conducive to creating a healthy economy.

The BoC is concerned, and rightly so, that this imbalance could unwind in a rapid and disorderly way. This has been referred to as a “decoupling” scenario by many investment industry experts. Large and abrupt movements in the value of the renminbi would impose significant losses (and gains) on financial institutions worldwide. The BoC also stated that the reserve accumulation in surplus countries could distort the financial system of those countries, resulting in asset price bubbles. This is becoming apparent in China, as they have constructed entire cities that cannot be occupied at current prices. It appears that China, who has experienced year over year GDP growth in excess of 8% for many years, may be in for a correction very soon.

4. Low Interest Rate Environment in Major Advanced Economies

The report further notes that interest rates are at or near their all-time historic lows and that this is likely to persist. According to the BoC, “accommodative monetary policy is necessary to support the global economic recovery” and this is consistent with what we’ve heard coming out of the Federal Reserve. This simply isn’t the case though. The crisis was brought about by central banks setting interest rates lower than the market would bear so further suppression is unlikely to induce the necessary repairs. Here the BoC really displays that despite knowledge of the facts, it lacks the theory necessary to properly interpret them and they wind up making the wrong diagnosis and prescribe remedies sure to only further the harm done to the economy.

The BoC notes that low interest rates put pressures on institutional investors like pension and insurance funds. Low rates increase the actuarial value of their liabilities [see chart below] while simultaneously reducing the return on their assets. This can lead to excessive risk-taking by these institutions as they attempt to balance their assets and liabilities.

What the BoC doesn’t mention though, is the inflation risk brought about by low interest rates. Low rates stimulate increased borrowing, which in turn expands the monetary supply. The reason why banks became so highly leveraged to begin with was the endless supply of cheap credit from central banks. It’s unfortunate that this risk isn’t explored in the report because it represents a much greater, and more fundamental, issue facing the global economy. Realizing this also plants the seeds for recovery as it becomes obvious that what is needed is higher interest rates, which would stimulate retrenchment by banks and the liquidation of bad assets. Continuously low rates only prevent these imbalances from normalizing.

Unfortunately, a low interest rate environment is taken as a foregone conclusion and the BoC proposes measures that would further impair the ability of institutional investors to deal with the risks they face on an individual basis. Prescribed portfolios and the herding of capital in to more risky derivative products are suggested as a means of dealing with the risks produced by low interest rates.

5. Canadian Household Finances

The final risk begins by stating something that I have been saying…that “The rising indebtedness of Canadian households in recent years has increased the possibility that a significant proportion of households would be unable to make debt payments in the event of an adverse economic shock.” With all the other risks identified in the report, I would say that such a shock is now inevitable, the only question being at what time and from what direction it will arrive. The aggregate debt-to-income ratio is at a historic high and as of Q2 2011, now exceeds that of the USA and the UK [as can be seen in the chart below].

This is a good measure of leverage that illustrates the ability of borrowers to service their debts. Canadians are now in an even worse position to be able to do this than two economies that have been ravaged the most by recent economic events. The BoC expects that this ratio is going to continue to rise, further endangering the financial condition of Canadians and making them even more susceptible to financial shocks. While aggregate credit-to-GDP ratios have been declining, they still remain at or above levels seen during previous recessions in 1990 and 1981. Furthermore, the amount of mortgages in arrears is also elevated [as illustrated in the graph below].

The BoC points out that Canadians are especially vulnerable to two inter-related events; a significant decline in house prices and a sharp deterioration in labour market conditions. Since most mortgages are insured, a moderate fall in house prices could initiate a negative feedback loop with the real economy, destroying household net worth, access to credit and other factors. Never does the BoC consider how this would affect the finances of the Canadian Mortgage Housing Corporation, but as I predict, it would be severe as well. Housing prices are far higher, relative to incomes, than they were during the last housing bubble [as shown in the chart below] and so a decline at this point appears inevitable.

The baseline price-to-income ratio of housing appears to be around 3.0 and we are currently at about 4.8. Based on these facts we are looking at a potential overall decline of 35% or more in average real housing prices. The BoC performed a stress test based on various assumptions about income growth, debt accumulation, unemployment and interest rates. They project that a 3-percentage point rise in the rate of unemployment, coupled with a six-week increase in the average duration of unemployment would double the proportion of loans in arrears from 0.65% to 1.3%. Based on my own analysis of the CMHC, if all those loans in arrears went in to default (which is the next step), it would nearly wipe out all of the capital of the CMHC. Also remember that bureaucracies are notorious for under-estimating adverse economic consequences and so the events simulated by the BoC could even be considered a best-case scenario. It is quite likely that the shock will be much, much worse.

Conclusions

The report is replete with facts and observations suggesting that Canada is in a dire economic situation that could rapidly deteriorate, with consequences being felt by every Canadian. Unfortunately it appears that they have failed to see the real destabilizing force behind all of the imbalances present in our system. It is the low interest rate environment, produced by the BoC itself that has led us to the precipice.

While it is clear that those at the BoC have access to all of the necessary facts, they lack the understanding needed to prescribe real solutions to our problems and as a consequence they are likely to persist for much longer than they need to. Furthermore, the report confirms my fear that in the face of a real downturn the BoC will not be able to resist the urge to intervene and will only wind up compounding the damage that has already been done.

The BoC continues to view itself as a benevolent planner rather than acknowledge its own role as a source of risk. They will continue to interpret events in their own favour and use them to justify further intervention in the market, which is just throwing gasoline on the fire.

*http://www.mapleleafmetals.ca/index.php/news/danger-ahead-bank-of-canada/

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1. Debt-to-GDP Ratio of 10 Largest Economies

Canada has the lowest total debt-to-GDP ratio of the world’s 10 largest economies (Australia is 2nd best, Germany 3rd and the U.S 4th) while the U.K. and Japan are 9th and 10th but when such debt is broken down by sectors the findings are quite different. Let’s take a look. Words: 800

2. Invest in Canada and Generate Emerging Market Returns – Without the Risks

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3. Americans & Canadians Not Included in Top 10 of Nationalities With Highest Average Wealth per Adult – Here’s Who Is

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4. Canada’s “Misery Index” On The Rise – but Still Below the Misery in the U.S.

5. How the Wealth of Canadians, Americans, Brits and Aussies Compare

Countries differ greatly in the levels and pattern of wealth holdings…In this article…we highlight those of Canada, the United States, the United Kingdom and Australia. [Take a look at the results of our extensive research.] Words: 1314

6. Ian Campbell’s Commentary: Canada’s Many Economic Advantages Make it #1 – Here’s Why

Canada’s size, political structure, and culture will enable it to – properly governed – be more resilient to world economic problems than any other developed country. [For one thing] we don’t have the extent of political polarization that… [is currently the case] in Washington…and now exacerbated to new levels in these difficult economic times – and that will, in my view, cause the U.S. to continue down an increasingly rocky economic road. [Below I put forth Canada's economic advantages and disadvantages.] Words: 1026

These 5 Apocalyptic Engines Causing Hyperbolic Growth in US Money Supply

Editor — Sat, 14 Jan 2012 05:33:01 +0000

I recently wrote an article showing how the U.S. True Money Supply (TMS) appeared to be growing at a hyperbolic rate [see here], and that gold was also on a hyperbolic course…Hyperbolic growth in the quantity of money ends with hyperinflation… [and] both TMS and the dollar price of gold are pointing to a hyperinflationary outcome. This article explains why this might be so. Words: 764

So says Alasdair Macleod (www.FinanceAndEconomics.org) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Macleod goes on to say, in part:

There are five apocalyptic engines pushing the growth in US money supply:

the government’s budget deficit,
the government’s debt trap,
the financial condition of the banks,
the delusion of Keynesian solutions and, lastly,
simple compounding arithmetic.

1. The U.S. government collects only 55c in taxes for every dollar spent. It is relying on economic recovery to reduce welfare payments and increase tax revenue to close the gap. This prospect is receding and establishment economists advise against cutting government spending.

2. The US government’s debt trap is concealed by the exceptionally low interest cost of funding. The only reason this cost is not higher is the Fed maintains a zero interest rate policy. However, as surely as night follows day, price inflation will start rising as monetary inflation feeds through, forcing the Fed to allow interest rates to rise long before any economic recovery occurs. The rise in interest costs will escalate the budget deficit, which will be financed, directly or indirectly by further monetary expansion.

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3. The banks’ balance sheets are considerably weaker than stated, because of unrealised losses on assets, loan collateral and write-downs on their own debt. Real estate collateral write-downs alone probably exceed bank equity of $1,400bn. On an honest analysis the US commercial banks are collectively bankrupt. To simply survive the banks have no alternative other than to reduce loan exposure while requiring continuing monetary support from the Fed.

4. Keynesian economists, aware of the banks’ difficulties are terrified of bank credit contraction. For this reason, the macroeconomic establishment strongly promotes the expansion of narrow money to buy off a deflationary depression.

5. As the purchasing power of the dollar falls - the result of past monetary expansion – [even] more dollars have to be issued to cover increased government costs. Past inflation becomes a compounding factor behind price rises.

Conclusion

Essentially, money will be printed at an accelerating rate to buy time rather than face the three realities of:

government default,
an over-indebted private sector and
a bankrupt banking system.

The Keynesians are belatedly aware of the dangers and see no alternative to printing as much money as is required to defer these problems. The monetarists in the central banks are hesitant, torn between Keynesian fears of outright deflation and worries about the rate of monetary expansion so far. [Nevertheless], the history of monetary inflation confirms that once it enters a hyperbolic phase, it is almost impossible to stop. Armchair critics have derided the stupidity of central banks and economists in past hyperinflations, such as in Weimar Germany, Argentina and Zimbabwe.

The truth is that when hyperinflation has become visible at the price level, it has already gone past the point of no return at the monetary level.

*http://www.24hgold.com/english/news-gold-silver-gold-price-set-for-hyperbolic-increase.aspx?contributor=Alasdair+Macleod&article=3749038912G10020&redirect=False

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3. Why Hyperinflation is Not Likely – Let Alone Imminent

The National Inflation Association (NIA) has just posted an article* which makes a number of interesting arguments for the advent of hyperinflation and, while I agree with the conclusion that we could potentially face such an event, I see it as just one of a few possible outcomes. Let me comment on the specific points in the NIA article. Words: 1666

4. Continuing High Unemployment = More Money Printing = Higher Gold & Silver Prices

The Federal Reserve has a dual mandate set by Congress of maximum employment and stable prices. During Chairman Bernanke’s most recent press conference he indicated that the Federal Reserve has done a better job of maintaining price stability while falling short of fostering maximum employment. [As such,] we believe the Federal Reserve will continue to increase the monetary base and weaken the dollar as long as unemployment remains elevated. While the economy (measured by real GDP) and the unemployment rate have not benefited from a substantial increase in the monetary base, the price of gold and silver have benefited from money printing. We believe this statement is quite important for monetary policy and for investors. [Let us explain further.] Words: 388

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Question: What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks? Answer: An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. [Let me explain further.] Words: 1049

2012: Is This How U.S. Financial Crisis Will Unfold Later This Year?

Editor — Sat, 31 Dec 2011 07:59:58 +0000

As economic and political matters become more desperate in the U.S., so will what the government considers acceptable. If a debt default cannot be engineered via continuous inflation as the Fed’s current money-printing is attempting to do, it will occur via a direct repudiation of obligations or a quasi-surreptitious one such the hypothetical one I present in this article. Here is… a look (not a prediction) at a series of not improbable events that could develop [and which] would change our economic world overnight [ - and your financial well-being too]. Words: 1365

So said Monty Pelerin (pseudonym) (www.EconomicNoise.com) in edited excerpts from an earlier article* which became the most highly read article to appear on www.munKNEE.com in 2011.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) edited the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Pelerin goes on to say, in part:

If just some of the following situations occur in 2012:

1. Official unemployment numbers approach 14% with unofficial estimates of unemployment ranging from 30 -35% – with no signs of a turnaround in employment.

2. The Dow-Jones average hovers around 4,500.

3. Official GDP declines for four consecutive quarters. Independent analysts estimate the true numbers have been declining for two years.

4. Tax collections continue to drop while Federal spending accelerates. The deficit is expected to exceed $3 Trillion. Federal debt exceeds $16 Trillion.

5. The rate of foreclosures double from the previous high…

6. Personal and corporate bankruptcies reach levels thought impossible.

7. Major companies leave or announce intentions of leaving the U.S. [in record numbers] to avoid confiscatory taxes and regulations.

8. College students, unable to find jobs, emigrate to more favorable economies.

9. California, Illinois and several other states plus thousand of municipalities are in bankruptcy court with many states and municipalities using IOUs for payments.

10. Welfare and unemployment checks are two months behind on average.

11. Social Security checks and Medicare reimbursements are delayed.

12. Some private pension funds reduce their payments by 10 – 25%.

13. Hospitals and doctors refuse to see Medicare patients until Federal reimbursements, already eight months behind schedule, are paid.

14. Public unions across the country are on strike. Large areas are without teachers, police, firemen or hospital staff.

15. Food stamps are rejected at grocery stores because of slow reimbursement and government default risk.

16. Martial law has been imposed in several cities to counter rioting and looting.

17. Isolated runs on banks have occurred. Many withdraw funds from the banking system in fear of its collapse with mattress-stuffing considered less risky than zero interest returns from banks.

18. The dollar is being rejected by local merchants around the world.

19. The price of oil is priced in a weighted basket of currencies of which only 20% represents dollars.

20. Foreign disinvestment in Treasuries has been accelerating as a result of trade wars, concerns of default and the desperate need for funding at home.

21. Gold is selling at $2,800 per ounce.

22. The economy continues to deteriorate despite QE on a scale not even Paul Krugman would have recommended.

23. Treasury and toxic asset purchases have swelled the Fed’s balance sheet from $800 billion in 2008 to $6 Trillion.

24. The deflationary spiral continues despite incredible money-creation.

25. Banks continue to add more excess reserves.

26. Creditworthy borrowers refuse to borrow.

[Bottom line:] People and businesses everywhere have hunkered down, waiting for the next shoe to drop.

… then I can just imagine what might hypothetically unfold politically and what possible (likely?) emergency measures might be imposed to remedy the situation, as follows:

The President of the United States Joe Biden (in office for six months after former President Obama resigned “to spend more time with his family”) appears, along with Treasury Secretary Chris Dodd and Fed Chairman Barney Frank, and issues the following short, terse message:

“The Federal Government, as a result of our national economic emergency, has passed new legislation which will:

recall all U.S. dollars effective immediately
replace U.S. dollars with new currency known as the JohnLawDollar
exchange each old dollar for three JohnLawDollars i. e. 1 for 3
automatically convert all amounts in checking accounts and savings accounts by 10AM tomorow
require all currency in circulation domestically be taken to a bank and converted at the new exchange rate into the new JohnLawDollar within the next 48 hours. Dollars in foreign countries will have 72 hours to convert
All old dollars will be unredeemable and no longer legal tender after the deadlines
All future contractual obligations will be honored in JohnLawDollars.

This action is necessary in order to revive our economy from a downturn nearly as severe as the Great Depression.

Your new dollars are triple what your old dollars were. With your larger amount of money, we encourage you to go out and buy stuff, lots of it. Your cooperation will revive the economy.”

The Intented Solution – and Reality – of Such an Emergency Measure

[Such an] announcement [would] represent a (undeclared) U.S. default on 67% of its contractual obligations – including Treasuries, Social Security, Medicare and welfare payments [effectively reducing] all debt…by 2/3rds. The debt problem (public and private) is what is killing the economy [and] with one short proclamation [as put forth above,] the debt problem [would be] reduced dramatically.

Tripling the money supply would eventually triple prices and wages. Home prices would soar while mortgage obligations would remain fixed and payable out of incomes that would be three times what they are now. The government would have cut its obligations dramatically and be able to pay its bills.

The government’s gain would come at the expense of Social Security, Medicare and welfare recipients. Borrowers would gain only what lenders lose…There would be no net value added. Every gain would be someone else’s loss. Only the amounts “stolen” from foreign investors might be claimed to help the U.S. The rest would be nothing more than a redistribution of wealth.

The Likelihood of Such An Emergency Measure

Many believe that the government would never do such a thing. The reality is that this has been their proposed solution for the past couple of years. It is exactly the policy they have tried to implement. There are only two differences between the current policy and the hypothetical one – effectiveness and timing.

Fed Chair Ben Bernanke has clearly been trying to inflate the economy. He and other supposed experts regard inflation as the way out. It is only Mr. Bernanke’s ineffectiveness as to why we don’t have inflation. The hypothetical measure [outlined above] is nothing more than the preferred strategy compressed in time. The effects, other than timing, would be identical. Lew Rockwell’s thief analogy is appropriate. What is the difference between a thief that breaks into your house every night and steals a little versus the one who backs up a moving truck and takes everything? Eventually you end up with an empty house. Only the timing differs.

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As economic and political matters become more desperate, so will what the government considers acceptable. If a debt default cannot be engineered via continuous inflation, it will occur via a direct repudiation of obligations or a quasi-surreptitious one like the hypothetical one presented. Viewed from this perspective, I don’t think such a move or something approximating it is out of the question.

The political class’ survival is at stake. Eventually anything that extends their rule will be tried. It is not concern for you or the economy that is driving policy, but the preservation of power of an increasingly wounded power elite. Their survival is now driving policy. Unfortunately what benefits them is generally harmful for the economy.

It is improbable that Bernanke’s strategy will gain enough traction, i.e., inflation fast enough…[and, as such,] a home-run somewhat like the one discussed becomes more likely. It will be a surprise when it comes.

Conclusion

Nothing discussed here or tried by the Administration will solve the economic problems of the country. What I have suggested is what I think could happen. It is not to be confused with good economic policy. Both the hypothetical measure and the more conventional inflationary strategy will lead to hyperinflation…

Protect yourself, your family and your wealth in that order. Do not expect any help from Washington. The political class is not your friend, especially when their survival is at stake.

*http://www.economicnoise.com/2010/08/10/desperate-economic-action-ahead/

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10. Remedies to Fiscal Gap Guarantee Hyperinflation!

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11. Coming Hyperinflation Will Make You A Billionaire By 2020!

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12. News Flash! The Fed Has Declared That It MUST Create Inflation! Got Gold?

In… September’s Federal Open Market Committee minutes, the Fed officially announced that … “Unless … underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider it appropriate to take action soon” and take “… possible steps to affect inflation expectations.” That’s Fed-speak for a MANDATE TO CREATE INFLATION! Words: 694

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