The coming global debt-driven depression

Reality begins to set in, which inspires panic. Frantic selling across various speculative assets brings prices drastically lower. Retirements and pensions wiped out. Paper investments made effectively worthless. Sound like a repeat of 2008-2009?

The American Nightmare

This horrifying scenario is coming to fruition not because the economy is dipping back in to recession — the fact is without the bailouts, deficit spending and stick saves by the Fed, we’ve been in a depression since late 2008. All of the papering over fraud was about kicking the can down the road rather than fixing the underlying economic, fiscal and monetary imbalances.

Zero interest rate policy combined with reckless fiscal measures have sealed the fate of the US markets and the greater global economy. By implementing such a robust framework without fixing any of the underlying problems on bank balance sheets, in various governments forward debt loads or in household debt we are now looking at repeating the kind of volatility we saw in late 2008 to early 2009, but worse yet there are far greater consequences to a significant economic dislocation. Consequences that were entirely avoidable had the authorities, corporate leaders, banking executives and individual households of the world looked at deleveraging more aggressively and taking the bitter pill that is a brief, but sharp depression so that the excess could be cleared out in favor of rebuilding a more stable and sustainable economy.

Past the Point of No Returns

Now we’re nearing the cliff. The drop-off that is a near mathematical certainty given that many countries governments are reaching their upward debt limit (that is to say no party but their respective central banks are willing to buy their debt). This includes the US, Japan and much of Europe — countries that were once economic superpowers are being reduced to beggar thy neighbor debtors, hat in hand, begging for handouts.

The demographic issues in these areas may differ, but the fundamental economic, monetary and fiscal problems are all too similar. Persistent high unemployment, a highly leveraged financial sector, households that are swimming in debt (with the exception of perhaps Japan) and stock markets that are losing a decade+ in any form of gains.

Worse yet, the forecasts being foisted upon the public are overly optimistic, full of fluffy economic growth predictions that are impossible to achieve. That means that the growth which was necessary to service debt burdens and keep the overly extended economies of the world lurching forward will not occur and thus leaves a much more dire scenario. One of sovereign debt defaults, crashing stock markets, currency crises and an atmosphere of higher unemployment and more civil unrest.

Caution: Debt-Driven Depression Ahead

Let’s look towards the possible future by examining one country that’s already where many will be in the coming months and years ahead. Greece’s stock market is down 85% from its peak, their 1 year government bonds are trading at an absurd yield of about 97% and there is talk of a full scale default as early as this weekend. The Greek people have been protesting, rioting and the unemployment rate by modest measures is 16%. This is a depression, not a recession. While the media is largely ignoring the severity of the crisis, those within Greece are all too familiar with the situation. One that has the potential to become significantly worse before any improvements may happen.

All of the bailouts for Greece have only managed to make the situation worse, because they piled on debt Greece could not pay off while forcing Greece to sell off the few productive assets it has to foreign parties. The combination of these factors ensure a severe economic contraction.

Much of the rest of Europe, with perhaps the exception of Germany, Norway, Finland, Switzerland and Sweden, face the same dilemma: too much debt, too little economic growth. In the United States we face the same crisis, which has only been temporarily offset by the dollar’s reserve currency status — a privilege we may not enjoy for much longer here given the incompetent and dangerous monetary policies of the Federal Reserve. By Bill Gross’ measurement the United States has $75 trillion in unfunded liabilities. That is approximately a 500% debt-to-GDP ratio (over twice that of Japan). Some even say Gross’ measurement is too conservative and the number could be closer to $100 trillion in unfunded liabilities. The fact remains that there is no mathematical or economic scenario where this debt becomes serviceable or sustainable.

The problem is simple, though the solution has been muddled by short-sighted piecemeal bailout attempts. A debt crisis cannot be solved by piling on more debt. It is impossible to achieve economic equilibrium by bailing out corporations that do not know how to manage risk properly. Consumers, who account for 70% of US GDP, are being largely ignored and yet are experiencing significant harm from this crisis. Instead these insolvent banks need to be unwound, brought through bankruptcy and their speculative subsidiaries and divisions need to be completely separated and spun off from their depository and lending functions. We learned this lesson from the Great Depression, but somehow forgot it in the last decade as banks were once again allowed to recklessly speculate with money they did not have.

Modern Banking Is Anything But

Let us remember that banks should really only function as a basic utility for depositing funds and matching those that wish to lend money with those that are seeking interest on savings. That is the vary essential function of a bank. The speculative gambling that occurs on Wall Street has no place in conventional banking and it should never have been allowed to re-join the conventional banking industry.

Those who intentionally defrauded their clients, the government and employed criminal tactics to profit should be indicted, prosecuted and hopefully incarcerated for their crimes against society. Those reckless, greedy and immoral enough to bring down the entire world economy so that they can profit from its artificial rise and subsequent demise are the true threats to a prosperous future. So long as they remain in power we will not see any trust return to the markets nor shall we see any glimpse of true economic recovery. After all, if the rule of law breaks down, there is not much left to keep people from essentially avoiding the entire gulag casino that Wall Street has become.

We must unite around the world and demand that the crooks are prosecuted, the insolvent banks are unwound and that we, the people are not robbed blind to continue to fund these morally and financially bankrupt institutions. It is the only way that we can begin to move forward and start to rebuild our respective countries.

24 trillion ways to break the bank

The crisis in the United States is reaching a silent boiling point in the struggle between the citizenry and the largest banks.  Revealed today in a story breaking across various news agencies, the United States has potentially indebted itself by nearly $24 trillion dollars through various bail out programs since 2007.  This is effectively bankrupting our entire country and if allowed to continue will ruin any chance of a sustainable recovery.  We are already on the heels of a major change in how we live, work and save money.

Debtor nation

If this amount of debt is incurred on a federal level it is twice our GDP.  That is completely out of bounds with any kind of spending plan that is sensible.  It puts the creditors of our nation in to a very difficult position, because they understand we’re debasing the world’s reserve currency to buy our way out of a financial catastrophe instead of facing the pain and making constructive changes.  These $24T in financial commitments could literally strangle our nation’s economy for decades.

Some things never change

Wall Street is back to its old tricks.  Goldman is making “record profits” amid a crisis where its competition conveniently perished under the watch of former CEO Hank Paulson as Treasury Secretary.  Now Morgan Stanley is repackaging subprime mortgage debt as AAA while JP Morgan, Barclays and others are leasing supertankers full of crude oil.  All of these actions are benefiting the banks at the expense of tax payer dollars that provided the cushion so that these companies could continue to sustain their existence.

Time to wake up

Most of the time people turn off the TV, put down the newspaper or close their browser when they encounter the intentionally dull financial news.  They want to focus on the here and now, not projections of profit or bailout recapitalization.  It’s understandable that in a functional society people would have the luxury of ignoring the banking system because they have some implicit trust, a notion of safety, about where their money sleeps.  This relationship should no longer be taken for granted and the institutions holding the dollars we cherish as our future savings may be participating in the largest, most sophisticated power and money grab the world has ever seen.

Non-Farm Employment Change -533k

Today’s non-farm employment change was nearly twice as bad as consensus expectations and the worst in 34 years, slamming futures on all major US indexes sharply lower.  This economic data confirms that the US economy is in a deep recession and puts in jeopardy the consensus GDP estimate of -4%.  We may see a number as bad as -8% on the next quarterly GDP report because of the massive contraction in employment and ISM data.

Should the negative sentiment continue, this sell off could push markets much lower.  Futures are hovering at support levels and could be pushed significantly lower at open.  Watch this market closely today.  The price action will be extremely important in determining the next likely move.

Citigroup and US government discuss bail out

Once again we find ourselves in the midst of a panic. After a long series of financial firms getting bailed out because of poor risk management and greed, now Citigroup prepares to receive tax payer funds in the amount of $100B or more. Pandit, Citigroup’s CEO, has been unable to restore confidence or restructure the international banking giant’s numerous units to restore stability, let alone profitability.

Even after numerous capital injections, receiving TARP funds and having access to all of the Federal Reserve programs, Citigroup is unable to stay afloat on its own.

There is a problem, though. Citigroup is incredibly interconnected. More than Lehman, AIG, Washington Mutual, Bear Stearns, etc. If they fail it could have a cataclysmic effect on the world financial system.

With Citigroup’s shares trading below $4 on Friday, the company is in dire trouble. Down over 90% from its high a year ago with no way to restore confidence. The stock plunge has created enough of a panic to break the 2002-2003 technical support level of 776 on the S&P 500.

Bailing out Citigroup will likely be more expensive than all the other bail outs combined. It is the fifth largest US bank and has over a trillion dollars in assets, many of which are defunct. Other firms have offered to step in, but only if the US government buys all the bad debt.

What’s next? Expect more business failures and the S&P to trade down to 600 and possibly 450. Those are the next major levels of chart support. This will be the worst recession the US has seen in at least 50 years.