Re: SC72

http://www.marketoracle.co.uk/Article5605.html

It's Always Darkest Before the Dawn...of a Economic Depression

..............Now the lesson here is that the unthinkable has occurred. We have expanded the money supply (and commensurate debt) more than 1000-fold in less than 40 years, yet no one really thinks that we have expanded economic growth and real wealth to anything near that level.

Rather, the excess money has resulted in a series of rotating inflationary bubbles. Bubbles in commodities, consumer prices, and wages are seen as bad, while inflation in stock and real estate assets are seen as good. But both are symptomatic of an unsustainable system doomed to failure, as Congressman Paul explains:

Ironically, in the past 35 years, we have benefitted from this very flawed system. Because the world accepted dollars as if they were gold, we only had to counterfeit more dollars, spend them overseas...and enjoy our unearned prosperity. Those who took our dollars and gave us goods and services were only two anxious to loan those dollars back to us. This allowed us to export our inflation and delay the consequences we are now starting to see. But it was never destined to last, and we now have to pay the piper....Printing dollars over long periods of time may not immediately push prices up -- yet in time it always does. Now we're seeing catch-up for past inflating of the money supply. As bad as it is today with $4 a gallon gasoline, this is just the beginning.

The days of highly-leveraged, borrowed investment speculation (especially if you want to short a government-protected asset) and" living la vita leveraged" for consumers are over. The credit contraction and deleveraging process is going to at the very least serve as a torturous economic headwind as the effects of 35 years of irresponsible financial behavior are unwound.

While Treasury Secretary Paulson and most in Congress are desperately looking to employ measures that prevent a systemic collapse of world financial markets, such tools will only serve to feed the beast and make the day of reckoning that much more devastating. Another development which distinguishes this crisis from others in years past is the lack of support shown by some free marketer Congressional leaders. I side with them and believe that we should be trying to starve the beast. This is going to get a lot worse. Kill this beast now. In the film The Sixth Day , clones are created to bring people back to life so they never die, but each time they come back with a congenital mutation that causes the contraction of each successive life span before cloning is required again. Toward the end of the movie the wife of the character played by Robert Duvall begs to be left to rest and not be reincarnated as a clone of herself. Likewise, some of these financial monstrosities should just be left to die.

Last week, Richard Fisher, head of the Dallas Federal Reserve Bank, "speaking solely in [his] own capacity," alerts us that "the unfunded liabilities from Medicare and Social Security...comes to $99.2 trillion over the infinite horizon. " Fisher goes on to warn:

This comes to $1.3 million per family of four - over 25 times the average household's income....No combination of tax hikes and spending cuts, though, will change the total borne by current and future generations....We know from centuries of evidence in countless economies, from ancient Rome to today's Zimbabwe, that running the printing press to pay off today's bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid.

Congressman Paul is a Republican and Richard Fisher was appointed by a Democrat. But both appear to be drinking from the same Texas tap water, however regarding the nefarious and inevitable effects of money printing and inflation. Maybe one day they will be able to bottle it up and persuade others to drink it. It appears that Fisher could be auditioning to team up with former Comptroller, David Walker, another "economic Paul Revere", to serve on Pete Peterson's team in an effort to save the Republic from economic disaster before it is too late.

A couple of weeks ago, William Poole, formerly of the St, Louis Fed warned that Fannie and Freddie were insolvent. These aren't the warnings of bombastic flamethrowers. These are former respected and responsible government officials who courageously dare to speak the truth!

So things are bad, but how bad? Nouriel Roubini, Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business, is now being recognized by the financial media for having correctly predicted many of the afflictions which currently ails our economy. He believes that:

This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk - and the collapse of many counterparties - will lead to a systemic collapse of this market.

This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices. This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.

While I agree with the devastating effects due to the harmful complex inter-linkages in the world financial markets and the negative feedback loops between the financial world and the real economy that Roubini cites above, I believe that the our fate will be much worse than Roubini's 12-18 months U-shaped recession, a prediction that already exceeds the most bearish forecast among the mainstream economists. As a Keynesian, Roubini believes that a deteriorating economy will lead to a large decrease in aggregate demand, resulting in much lower energy and other commodity prices. Keynesians do not place much weight in monetary supply concerns in their analysis. As an Austrian, I believe that much more commodity inflation has been baked into the cake, and rising commodity prices are more likely to have an effect on the length and intensity of the recession than the recession is likely to have an impact on commodity prices, at least initially. Furthermore, Keynesians believe that aggressive fiscal stimulus packages can be implemented in order to prevent any recession. And there's the rub.

While I expect the Keynesians to win out and for us to receive the biggest fiscal expansion of government, coupled with continued loose monetary policy, in the history of the world in order to limit the fallout of the economic collapse Roubini outlines above, I expect it to blow the budget through the roof to crash the dollar. There will be no starving of any beasts. There will only be the creation of bigger wealth-sucking leviathan bureaucracies. Other governments will reject our paper, painful as it might be for them initially, and the US dollar will lose its status as the world's reserve currency. Yields on US treasuries will soar. Other governments are inflating their currencies as well, so gold be the only real winner in this race to the bottom for fiat money.

Sadly, we will reject willfully accepting the consequences as paying the piper today in return for a road that will lead us down the path of unrecoverable ruin that will permanently harm our place in the world. The time to heed the warnings of Ron Paul is growing short:

I have for the past 35 years, expressed my grave concern for the future of America . The course we have taken over the past century has threatened our liberties, security, and prosperity. In spite of these long held concerns, I have days - growing more frequent all the time - when I'm convinced that time is now upon us - that some Big Events are about to occur. These fast approaching events will not go unnoticed. They will affect all of us. They will not be limited to just some areas of our country. The world economy and political system will share in the chaos about to be unleashed...................