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The 30 year US Treasury bond is below 4%, the 10 year US Treasury bond is below 3% and the 5 year US treasury bond is below 2%.  All incredibly low yields that are indicative of a major flight to safe haven assets (along with gold’s continued move upwards), no confidence in equities and lower interest rates across the board for savers.

This is a clear indication of deflation taking hold and it is a very dangerous sign for other asset classes, such as stocks, real estate, commodities and junk bonds.

The present situation is quite familiar.  Just look East to Japan and you’ll find the same deflationary winds have been blowing for close to 20 years now.  Easy money zero interest rate policy, a habit of hiding bad bank assets and an economy in decline after a massive real estate implosion all facilitated incredibly low bond yields.  Japan’s debt to GDP ratio is now 200%, and as the US ramps up its debt in response to our ailing economy the question becomes, “Why are we embarking down the same path of self-destruction?”

We are becoming Japan 2.0.  A once prosperous industrial economy that is attempting to stave off depression with shortsighted economic policy that amounts to nothing more than “kicking the can down the road” or pushing off our problems in to the future and by doing so making the problems we face larger and more threatening.  The only way out is to stop hiding our bad debt, start forcing insolvent institutions to close and let free market capitalism work (that is to say, let the bankrupt go bankrupt rather than having the tax payers’ foot the bill for their mistakes).

Otherwise we face many lost decades as a result of our policy makers’ reckless disregard for the future.

This is a good trend for the environment and a bad one for the global economy. China is showing signs that world consumption is easing and as such their manufacturing sector is feeling the blow.

On top of that when one examines the Chinese GDP, construction is over half of the entire domestic economy and the government is funding construction projects for vast cities that have no occupants.

By next year the Chinese debt will be 96% of their GDP. Something tells me Jim Chanos was right when he said China is a much worse bubble than Dubai

Not only is this beyond ridiculous pandering to Wall Street, but it illustrates to whom our government serves. No Freedom of Information Act disclosures from the SEC after the new “reform” law. No press coverage of future scandals with what should be public information. We fund these entities continued existence through the public’s money and yet we have no right to see what they have done wrong?

US Treasury Secretary Timothy Geithner dismissed fears of a double dip recession in an interview aired Sunday, but warned of a slow US recovery with the economy only gradually gaining strength.

Geithner was asked on NBC’s “Meet the Press” whether he thought the economy would dip back into recession before things got better.

“No, I don’t,” he answered.

What our Treasury Secretary is truly rejecting is reality. The economy has never been more fragile than it is today. All of the risk that existed in the private sector has been effectively transferred to the balance sheet of the US Treasury, Federal Reserve, Fannie Mae and Freddie Mac without fixing any of the underlying structural economic imbalances. Not only is a double dip likely, but at this stage it seems unavoidable.

Whether or not our leadership and central bankers publicly acknowledge this fact is irrelevant. The math speaks for itself. Near 10% U3 unemployment (close to 20% U6), deflationary pressures on credit markets, a tremendous overhang of real estate as defaults and foreclosures increase and a lack of any economic catalyst to revitalize our economy. This doesn’t even begin to mention the tremendous amount of debt the US government has taken on in order to facilitate the latest disastrous spending binge of stimulus, tax cuts and other measures that have proven costly and for the most part ineffective.

Running the US economy as though it were an enormous Ponzi scheme, much how George W. Bush ran it and Barack H. Obama continues to run it is not sustainable. Kicking the can down the road with band aid fixes on what has now become an ax wound is no longer effective. Domestic consumers account for 70% of US GDP and they simply don’t have the money to spend to keep it afloat.

The economy has not been saved from disaster with zero percent interest rates, bank bailouts, stimulus or tax breaks.  In fact, some economists and market speculators have argued that these measures made the economic crisis much costlier and protracted its eventual resolution.  We are experiencing major asset deflation.  It’s spreading across just about every investment class, from real estate to stocks, higher yielding currencies, riskier bonds and most commodities.

Don’t believe the hype

The degree of naivety necessary for our policy makers at the Fed at at the congress to believe that creating more debt to solve a debt-based crisis is only exceeded by that which we as a population are engaged in to believe that BP is actually capable of cleaning up this spill or at this point even addressing the leaking well.

It’s necessary to look beyond the nonsense being reported through the mainstream news outlets and see the situation for what it really is:

1. We have a tremendous amount of debt, close to 100% of GDP if you aren’t counting the outstanding liabilities of Fannie and Freddie, yet we’re continuing to spend more money borrowing against the future earnings of people who have not been born.
2. Our banking system is grossly insolvent.  These companies have so many illiquid, worthless assets that are leveraged to the hilt that if they ever had to mark to any reasonable market valuation they would implode and bring down their counterparties.
3. Unemployment is extremely high and the statistic is flawed because after someone stops receiving unemployment or if they are no longer looking for a job they are not counted.
4. A lot of risk from the private sector has been transferred to our government and yet the private sector is still in terrible shape.
5. The US has transformed from a industrial superpower to a consumption-oriented debt monster, which has, out of necessity transferred most of our industry overseas where cheaper labor, lower (if any) environmental standards and a dire lack of human rights prevail allowing products to be produced at an extreme discount.
6. Our real estate market, about $20 trillion dollars in size, is continuing to experience a massive contraction.  The real loss of wealth has already been trillions and as that continues it will create significant losses in consumer spending, which accounts for 70% of the US economy.
7. Housing numbers continue to disappoint, with May’s report being the worst in the statistic’s history.
8. Small businesses, the largest engine of growth and hiring in the US have been largely ignored by the tax breaks and stimulus programs, causing massive layoffs and many companies shutting their doors.
9. Let’s not forget that even FEMA acknowledges the BP disaster will cost trillions of dollars.  BP does not have trillions of dollars, so obviously that leaves us holding the bag.

The false recovery is over

After spending tens of trillions of dollars to save banks from themselves, record Wall Street bonuses, mergers that made banks a bigger risk than they ever were before and an incredible lobbying campaign to neuter Washington’s efforts to reign in the tail that wags the dog, we are seeing fractures in the supposed green shoots that were supposed to lead the way to a V-shaped recovery.

As we see deflationary pressures begin to take control of the markets once again, a new credit contraction looms.  One that again begins to wipe away asset value as a flight to safety resumes.  We’ve seen increasing strength in gold, US dollars and treasury bonds at the same time as an indication that a new panic is setting in.  Two year US treasury bonds set a new record low yield recently.

Derivatives are a ticking time bomb

The worldwide financial derivatives market is estimated at 600 trillion dollars, a mind boggling number (about ten times the world’s GDP). This should serve as a reminder of the funds required to keep this financial fraud going, a fraud that only sees the underlying real asset representing a fraction of this amount. What would the banksters in this derivatives game use to pay off their bets if things went sour?

If you guessed your hard earned money, then you are correct!  We’ve already seen it happen in the last few years and it’s prone to happen again.  If one were to attempt to coin a term for this it would be something along the lines of reverse Robin Hoodism, that is to say robbing from the poor to give to the rich.

Look towards Japan and Greece for answers

Japan is embroiled in a deflationary downward spiral triggered by a real estate crisis that occurred back in the 90s.  They never recovered because instead of acknowledging the problem and moving forward, their government and central bank did the opposite, allowing insolvent zombie banks to continue their existence, lowering interest rates and trying to outprint the amount of debt imploding.  Deja Vu?

Greece attempted to conceal a large amount of debt with the help of a familiar friend (or fiend if you prefer), Goldman Sachs.  It even worked long enough to get them in to the EU, but now that the problem has been exposed they have lost the confidence of their creditors.  Funny how creditors are the new masters and citizens are the new servants with governments merely acting as a proxy.  Debt peonage anyone?

U-turn necessary to avert cliff on the horizon

We must reverse course immediately before we drive in to disaster.  Reckless spending, corporate welfare, ineffective  stimulus and impotent economic policy are all forcing a void in our country’s future.  We are wasting time with measures that not only are completely ineffective, but they are creating a massive problem for all of us.

There is still time for us all to stand up and demand a fundamental change in direction.  Rather than spending, saving.  Instead of exporting jobs, keeping them at home.  Cut the demand for petroleum-based fuel by focusing more effort on domestic alternative energy sources.  Focus on restoring our natural resources and improving the environment rather than destroying it.  Stopping the de-industrialization of America and starting to compete again as a manufacturing superpower using renewable resources.  What we need is a vibrant, but sustainable economy that doesn’t experience the violent boom and bust cycles that promote poverty and currency value destruction.  It’s time to bring America back in to our hands.