Jan Paul

Understanding the Dollar's Reversal: Who Will Feel the Pain?

We can't tax or grow out of this and spending cuts are off the table.

That leaves devaluation of the dollar to get debt to a manageable level once rates begin to rise because interest on debt, according to the CBO will go up hundreds of percent.

I am reading 40% to 90% devaluation is expected with the FED hoping for 50% in a slow and gradual decline.

Thus, any rally in the dollar is not expected to last too long to risk the plans of the FED and with the major players (Goldman, JPM) able to manipulate things when they are given the OK, I have little faith in any very long rally.

However, they may try to keep the fall gradual by "punishing" those who get too far ahead in pushing the dollar down (carry trade or buying gold instead of bonds) and I put nothing out of the realm of possibility short term

Consumer-Driven Deflation? Not Even Close

On Dec 02 11:43 AM marctacoma wrote:

> Hey Paco
I believe yur spot on as usual. I do have a question though what about all the supposed bail out money? Only a small percentage of that has actually been injected into the system. (I believe somewhere in the neighborhood of 15%. ) So where is all this money the fed is printing being injected? Doesn't seem to be our systems.
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Correct, much of it went overseas. Also, much went into bank hands that then was used to buy bonds, equities and commodities (or bet on futures) instead of being lent to eventually drive up our prices if people could actually afford to take out the loans.

Even individuals who are reaping gains in the markets are moving money to gold, foreign ETF's, energy (Middle-east), and even moving businesses to emerging markets. That money is moving and it isn't moving here but, to other places that will eventually come back to haunt us. Millions are going to get hurt severely.

Consumer-Driven Deflation? Not Even Close

Quote:
According to Webster's New Universal Unabridged Dictionary published in 1983 the second definition of "inflation" after "the act of inflating or the condition of being inflated" is:

"An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand.

This definition includes some of the basic economics of inflation and would seem to indicate that inflation is not defined as the increase in prices but as the increase in the supply of money that causes the increase in prices i.e. inflation is a cause rather than an effect.
Webster's 2000 Definition of Inflation

However, The American Heritage® Dictionary of the English Language, Fourth Edition, Copyright © 2000 Published by Houghton Mifflin Company says:

Inflation:
2) A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

In this definition, inflation would appear to be the consequence or result (rising prices) rather than the cause.
Shifty Words

So between 1983 and 2000 the definition appears to have shifted from the cause to the result.
inflationdata.com/infl...
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In other words, when you don't like the definition, change it. Our FED and Government has done that for decades to make its policies seem sensible.

For example, by changing how CPI is reported (more than once) they are able to make GDP look positive when in the last 9 years we have only had one or two quarters of actually positive GDP growth. But, there is a downside to making GDP look better. Cost of living increases are kept lower making workers lose buying power. Seniors have been really hit hard by this.

quote:
Because Social Security payments are indexed to inflation, government statisticians suppress reported inflation, and thus their need to increase monthly SS checks, by arbitrarily eliminating from their calculations products that are rising too quickly in price. If they were adjusted for the true cost of living, today’s Social Security checks would be 70% higher and the Federal deficit would be exploding.

www.financialarmageddo...
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Virtually all that we hear from our government is false. It is all designed to let them get away with supporting the banksters and their flawed advice both parties get for monetary and economic policies. The money supply is flowing and driving up prices of equities, bonds, gold, oil, and other things so we do have rising prices and we have them in "bubbles" in some cases just like we did with housing.

Housing has to go down or wages rise and rising wages is not in the near term future. Millions of Americans are going to see their net worth destroyed because they are not moving their savings (if they have any) from sector to sector as the money supply moves from sector to sector or will move as things change globally with the global economy (up or down).

Import prices will rise if the global economy goes up even if we are in a major depression here. I just read an article where the percent drop in consumption by the U.S. has been exceeded in China by a rise in their consumption (thanks to stimulus programs there). That means that we are becoming less and less of an economic force in the world. This same things is going on all over Asia and other emerging markets as they trade more and more with each other and less with us.

The big problem we have is that, unlike Japan, we have the global currency. That has meant and still means we are exporting our inflation problems and causing other nations to see their prices rise. China is seeing this now as are other nations linked too strongly to the dollar. That was not the case with the yen and where most debt was bought internally while here we depend on sending hundreds of billions of dollars out to other nations that then buy our debt.

The CBO has projected interest on our debt will quadruple as we return to normal rates. That would make it ($800 billion by 2019) higher than anything in our current budget and we would literally have to borrow to pay interest if we can still get loans. No wonder the GAO says this is unsustainable and that we will lose our standard of living.

Consumer-Driven Deflation? Not Even Close

On Dec 02 10:11 AM hat_trick3 wrote:

> Jan,
>
> you and others just don't seem to get it. You talk of the real estate correction as "revaluation" as opposed to "devaluation" what difference does it make? The fact is just over two thirds of households in the U.S. are homeowners. nearly 25% have mortgages underwater, while the rest of have seen dramatic declines in value. In case you haven't heard, for the vast majority of households, their home is listed as their largest asset. The U.S. consumer borrowed heavily against this asset over the last decade, and now they can't going forward. Homeowners routinely withdrew well over $500B in "equity" every year for the last decade, where exaclty is this spending and resulting spiral going to come from?

Second, currently there is NO wage spiral happening, but just the opposite where employers have the upper hand in negotiating lower wages. Lastly, the bond market confirms there will be no inflation for years. and in case you haven't noticed, the bond market is never wrong.
=========================

First the bond market is in a bubble created by the FED, not bond buyers. Over 50% of the purchases are government related, either our government or other governments trying to keep us from defaulting or hyper-inflation to solve our debt problem. The FED bought toxic assets at higher than value prices so the banks would buy debt. We are giving them money to buy treasuries and bonds, not make loans but, we "say" we want them to lend.

You are 100% correct about home owners which is why we need to see home prices return to normal 3 time earnings. That means millions and millions of homeowners will never see their home worth what they paid but, that is what has to happen when a bubble bursts.

We have wage inflation. It just isn't here. It is in the emerging markets where even some textile prices on exports are starting to rise. Again, you can't look at what is happening here as the driving force. We are only 20-23% (we were 25%) of the global economy and it, not us will determine prices and wage inflation. We don't buy what our workers make and thus, their wages aren't what will drive prices on imports. It will be the shipping costs, regulation costs, worker's wages, raw material costs, in emerging markets that do make what we buy that will drive CPI.

We have 5% CPI, not what the government tells us. They try to keep us focused on what is going down because they have to justify inflation (money supply) to support the banks and the international financial system. Why?

Because if that international financial system implodes, many nation will go into depression even though that is what it will take to get the global economy back to normal. It has to be rebuilt but, the reforms that are needed would also cause a depression. We can delay this but, we can't avoid it. The U.S. just happens to be in worse shape because the American Consumer is in worse shape and not prepared for a depression.

Our own government accountants, before this crisis even hit, warned Congress four years in a row that our policies were unsustainable and that we would lose our standard of living. Yes! They actually, in writing, in their report to Congress said we would lose our standard of living and that again, was before this crisis even hit.

People just don't realize how bad things are and have been for decades as we have constantly delayed the reforms needed to get us off the path we are on.

I project that at some point, over 50% of the citizens will have less than adequate health care regardless of what is legislated because the government will not have the money to pay for it due to falling tax revenues and a lack of lenders. Printing the money won't help because we import a lot of our medicines, medical equipment and medical supplies. While in the hospital recently, I saw that latex gloves come from Malaysia, Taiwan, and China. A box of gloves that may cost $5 will probably cost $5,000 or $50,000.

Unemployment will be much worse than in the Great Depression and millions will be seeking jobs in other nations. Already we are seeing head-hunting agencies focusing more on getting people jobs overseas because there will be, according to the FED, "no new net jobs" here for five years.

We have the 2nd leg of the housing defaults coming in 2010-2011 and the cuts in local and state government spending will cause many more layoffs in both public employment and private sector employment where businesses sell asphalt, vehicles, office supplies, office equipment, contract services, etc. 10 states, some with very big economies are in deep budget trouble and will be for years.

I very much "get it." But, I look at this globally which is the only way to look at it if you are going to project what will happen and how you can have $100 bread at the same time you have 25% unemployment.

The global demand for food is going to keep rising and that will keep driving grain prices up in the coming years. Our global food stockpiles have been declining for most years. This very year may see food problems again due to the change in the Pacific Decadal Oscillation that went into its 30 year cool mode and devastated so many crops in Canada and that has created problems in our Midwest crop region.

Recently Budweiser came out with a Golden Wheat brew. That was not due to them wanting to do that. It was because of a rice problem and wheat being in a much better supply condition is being used to keep demand for rice by them lower. ("Budweiser is made with a large proportion (up to 80%) of rice in addition to hops and barley malt.").

Again, this is a global demand issue and it impacts even our beer produced here.

What is going on now is not deflation but, it is worse than deflation because we are so unprepared for it as a government and as consumers and as workers and retirees.

We are in the eye of a storm and the other side of this storm, whether in months or a couple years, will be much worse than what we are going through now. Also, it probably will involve other nations as well as the economic power from developed nations shifts to emerging markets. If not for them being the main producers of "cheap" products, we would already be seeing much higher prices.

If China appreciates their currency, we will see double digit increases in CPI for imports. All calling for China to appreciate their currency better be prepared for the downside of that as well as the small upside since we don't export that much that they need or can't now make.

Consumer-Driven Deflation? Not Even Close

On Dec 02 10:08 AM KDI wrote:

By implementing banana republic monetary policy! Zimbabwe had a nothing economy and managed to achieve hyperinflation by printing money to pay debt. Germany had a bombed out economy and still managed hyperinflation by printing money to pay debt. How many times to you need to have this experiment done over before you get it???
====================

Correct. You can easily have falling prices and inflation but, the prices will rise eventually. In Zimbabwe, a Big Mac went from dollars to millions of dollars in price and families had at least on member panning for gold to feed the family. With the price of bread too high to buy, they resorted to panning for 1/10 of one gram of gold for the bread and the stores set themselves up with scales and means to trade using gold for their goods.

Consumer-Driven Deflation? Not Even Close

The author is correct. The "definition" is money supply, not prices. The money multiplier and the velocity of money drive prices and that includes the willingness to borrow and lend and to spend but, inflation is money supply only.

We have been brainwashed for decades to think rising prices (CPI) is inflation when it is the result of it and there are often long lag factors between inflation and rising CPI.

But, we do have rising prices. What inflation can't control is where that money goes. The banks have been the recipients of the money supply and not just our banks but even other central banks in a scheme to hide monetizing of debt by Bernanke. They get accounting entries from our Central Bank that lets them buy our treasuries and bonds.

The Banks buy equities, futures, bonds, treasuries, and commodities, driving their prices up. Where the money isn't going is to the citizens who would then drive up prices on our daily purchases but, even there, we are at great risk of inflation.

There are 2.5 billion middle class consumers in the world holding back right now due to the global recessions. They also still have doubts about a "global recovery" and are saving and not spending as much as they would if they were confident the recovery would last.

They, not the U.S. consumer will drive prices up. The money supply (in the trade deficits) that reaches other nations will drive prices more than what reaches our consumers. We are not an economic island and inflation (money supply) from dollars is global and like a ticking time bomb.

So, while we have rising prices, we just don't have them where the average citizen thinks they should be to qualify. Yet, even there, Shadow Stats shows real CPI, calculated the way we did for a couple hundred years is closer to 5%, esp. for fuel and medical costs because we import so much and the devalued dollar (again, because of too much money) makes us have to pay more for many things we import, esp. energy related things.

Or biggest "higher price" items, however, are gold, bonds, and equities. How many times have you heard "there is no fundamental reason" for those prices to be where they are? Yet we have people saying that there are no rising prices from too much money supply.

Housing prices? Get real. We don't have devaluation as much as revaluation. The prices were so unreal that often they were 4,5,6 times earnings when normal price should be 3 times earnings. We are seeing home prices try to come back to reality, where the real value has a real price that is in line with income.

Yet the FED and our government is actually trying to keep home prices above what the average person should be willing to pay and still have enough income for basic needs and other discretionary spending. The GSE's are actually creating subprime loans with high default rates in this attempt, not to help us, but rather, to shore up bank balance sheets and keep their banksters that run our government puppets (both parties) well supplied with money and bonuses and power.

Some people getting loans from our government agencies will have 2/3 of their income going for debt service when normal should not be more than 1/3. When asked about the high default rate, Barney Frank justified it by saying the few that were helped was more important that the millions that end up in foreclosure or underwater struggling each month to make their payments by sacrificing other spending we need to create jobs. He said it was still "good policy" when it actually hurts jobs.

We have to stop thinking of the U.S. as an economic island when it comes to money supply and prices. We are part of a global economy and it, not us, will determine the majority of things that impact our lives. As long as the global economy is in a slump, we may have a continued lag in some prices in spite of inflation.

But, watch commodities, equities and gold if you want to see how that global economy is doing. I have serious doubts the global economy is doing that well. Too many nations are using "stimulus" to try and create a recovery and while that may lead to short term illusions of growth, the debt behind it may unwind in all later with either defaults on debt or hyper-inflation when gold would go to the sky in price as that "money supply" seeks a home (also some other hard assets).

Max Keiser: 'World Entering Phase Two of Global Economic Crisis'

Max may be right.

quote
Dec. 1 (Bloomberg) -- “I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.

market-ticker.denninge...
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Seriously, there are a quadrillion in derivatives out there. I don't think Dubai will be the trigger on them but, it is a sign that we are not out of trouble and probably in the "eye of the storm."

We still have yet to start really seeing the Alt-A and Option Arms start defaulting. In Las Vegas, not one foreclosure was made in the last month. Not because things are better but because the State said, find a way to work with the homeowner and don't foreclose. That may solve a few problems but, when you have less income than any sensible payment, you still can't make the payment.

Cities and states are cutting spending and that means more layoffs in the public employee sector but, also in all the private sector businesses that sell asphalt, office equipment, office supplies, vehicles, etc. to those governments. That means lower tax revenues and higher risk on the loans they have that are covered by derivatives.

Not one policy that got us in this mess has been changed. We now have the GSE's giving subprime loans to people who have bad credit and too much debt. We are seeing many nations holding this "eye of the storm" in place with continued stimulus spending and devaluation of currencies but, no solutions.

If Max Keiser were the only one sounding the alarm, it might be different but, several, like Faber and Celente are saying we have huge problems coming. Is he right on the money? Probably not and neither are the rest because there are global variables at play and timing is virtually impossible. But, the trends are in place and nothing is being done to change those trends of instability.

Remember, our own government accountants said these trends were unsustainable even before this crisis hit and that we face the loss of our standard of living. They are still saying that. Thus, the financial stability and our standard or living are still at risk and other nations are included in that risk.

The Fed Backed Itself into a Corner

The only way (unlikely to happen though) to have an independent and yet totally transparent central bank is to return to our constitutional roots.

We need an amendment to the Constitution defining the role and limits of the central bank and how it will be constantly audited by Congress (the only entity in the Constitution given monetary power).

Because the amendment, not Congress can change central bank policy, the only thing Congress could do is to make sure the amendment is being followed and replace any appointee to the central bank not following the Constitution's requirements for monetary policy. That removes the politicization aspect but, not the ability to audit and remove people who put their own agenda first.

Also, we would no longer need to pay interest on the money the central bank creates nor would we see "member banks" like the too big to fail banks, wagging the dog (Federal Reserve) who are required to hold 3% of their assets in Federal Reserve stock for which they get a 6% dividend.

Hey, who knows, we might even be able to appoint somebody to the central bank and Treasury that isn't from Goldman Sachs.

Show Me Economic Expansion, Chairman Bernanke

Few mention another 800 pound gorilla in the room. City and state governments that are just beginning to lay off and cut spending enough to really impact employment. It isn't just the government employees being laid off either.

Private sector companies sell asphalt, vehicles, office equipment, office supplies, service contracts, etc. to all levels of state government. These businesses will have to layoff people as the states and counties and cities continue to see tax revenues fall and spending needs rise for those unemployed.

Many banks can't lend if they are holding writedowns because at some point they have to be realized and their reserves aren't high enough and may never be high enough to cover what they are holding.

Add that consumers, most business, and even some cities can't borrow because of poor credit ratings or too much debt already being serviced by them.

This is not an "inventory recession," like all have been since WW II.
This is a "credit expansion collapse depression." Quite simply, that means individual, corporations, cities and states must deleverage until debt is at a manageable level when based on income whether that is paychecks, investment income, sales revenues, or tax revenues. That takes years in most cases to accomplish.

It is hard to pay down debt when wages and sales and tax revenues are still falling and more of what comes in has to go out for mandatory expenses.

Our main hope is that the global economic recovery is for real but, that is still debatable. Sales of autos are up in China but, not gasoline sales to any degree close to what auto sales are. Take a look at this video of the huge city China build that is sitting empty and you have to wonder if their stimulus ends, what happens to the global economy?

youtube.com/watch?...

The U.S. and literally the whole global economy is depending on China to lead the world out of this recession. If their hopes are dashed, then we are in even deeper trouble.

Here's Why Asia Must Eventually Ditch the Dollar

I think many seem to miss the point. It isn't that anybody wanted a new currency but that we forced the issue with our bad policies. The global currency should reflect the nation(s) that manufacture and export and in turn buy raw materials from the nations they export to.

That is no longer the U.S. and we are declining in that role each month more jobs go to emerging markets and investment dollars go to emerging markets and businesses relocate facilities in emerging market nations and each month we monetize more debt and each month we run over a trillion in deficits and each month we keep using the policies that got us in this mess over the last several decades.

That is why, I believe, the IMF and World Bank and yes, even China is supporting the SDR's that are growing in use and that even the U.S. has purchased some of and are one of the largest supporters of SDR's.

China has already, over 1/2 a dozen non-dollar trade deals and is constantly working on more. An Asian regional currency is no different than the regional currency recently established in S. America and the one scheduled for next year in Southern African nations. It is no different than the regional currency, the Euro and the use of regional currencies will probably continue to grow as they move away from using the dollar.

Iran, already sells its oil in Euro and Yen and the UAE nations are still working on a regional currency for them and have been for a couple of years.

It may take years but, even the President of the World Bank that the U.S. appoints says the reign of the dollar is coming to an end.

We brought this on ourselves and we forced the problem on other nations and now they are reacting to that.

Falling Dollar: Finally Front-Page News

mar
ket-ticker.denni
nger.net/archives/1500...

Well, Karl Denninger is digging again and what he found is really interesting. There are a couple short videos to set the stage on some FED purchases that are verified by the CUSP numbers as monetizing debt.

In the first case, last week's 7 yr bond sale has already seen the FED buy it back. Think of that. In less than a week they buy back about 1/2 of it. But, it gets worse with "agency" debt.

Thirty minutes after Fannie debt was sold, the FED bought it back.

Now, If Karl can dig this out, you can bet foreign governments that lend to us can, as well. This is total insanity. The full article is well worth the read.

Falling Dollar: Finally Front-Page News

First, we don't really know if the dollar is rising or falling when we use other falling currencies in the basket that it is measured against. The Euro is given 57% of the weight in the basket and Japan and the U.K. less as are the rest.

Euro 57.6%
Japanese yen 13.6%
Pound sterling 11.9%
Canadian dollar 9.1%
Swedish krona 4.2%
Swiss franc 3.6%
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Regarding weak dollar and exports. Oil and raw materials go up when the dollar is weak if the demand for them by emerging markets is growing. That means that once exporters sell the current inventory and buy more raw materials, they cost more, transporting them costs more, electricity costs more and shipping the exports to other nations goes up.

One comment said an equities sell-off would drive the dollar up and that is correct. If the global recovery is shown to be an illusion, then the dollar will rally until the real recovery is underway and then it will fall fast again. The world is currently betting the recovery is real and there are 2.5 billion people that control 2/3 of the global economy with the other 5 billion controlling the other 1/3.

This global rise in middle class consumers has been mostly in the last 10 years and it has change the economic power of the U.S. forever. It is the fact that prices haven't gone up that makes me wonder about that "global recovery." Those 2.5 billion aren't spending that much as indicated by the Baltic Dry Index.

However, don't set that aside in your investment decisions. Until that recovery is proven false, the 76% of the S&P companies that get at least some of their revenues from overseas (and that trend is growing at about a 36% rate as more companies send operations and even sales overseas) could keep our markets up even if they don't rise much after this rally (and possible correction of maybe 10% - much more if global recovery is false). This will continue to put pressure on the dollar.

Raising interest rates when employment isn't supposed to improve for years (Fed says "no net new jobs for five years") and the need to keep loan rates low is just talk unless they want to send us into a deep depression.

Do not focus on the U.S. economy or what our government does, much. It is the 2.5 billion people less our middle class consumer, and the trillions of dollars in other nation's hands that will determine our prices and value of the dollar. Our FED and government are no longer in control. That is why our administration is constantly making trips to other nations to beg and make concessions to get what support we do get from them.

Also, using our "large GDP" is not a good measuring tool since government spending can outweigh the other 3 items in the formula and create an illusion. Better to look at the fact that government spending for 2009 will be 61% of national income.

As the person from Germany pointed out, that is not sustainable and that is even what our GAO told Congress in their report when they warned we face the "sudden" loss of our standard of living and that was before this crisis even hit.

Yes, we could see the dollar rally but not one policy has been changed that made it weak to begin with. Only a crumbling global economy will help the dollar and if it does, things will get even worse here for jobs and tax revenues and deficit spending.

Insiders Confirm: Rally Is Fake, Economy Is 'Getting Worse'

About 76% of the S&P companies have foreign earnings and as I recall from the article I read on this, about 36% of total earnings are from overseas.

For all 3 months of the last quarter, the dollar was falling and thus, those earnings will be converted into devalued dollars. Even flat or slightly down earnings from overseas will look higher and could be "better than expected."

We won't know until the reports come out but, there is a chance this correction will end and the markets head higher but, that doesn't mean we are in a recovery.

To have a real recovery that can last years, we have to have the private sector growing, not government spending, to give us a positive GDP and that is not possible as we are using the same decades old policies that got into this debt expansion mess. With government spending 61% of national income, we can't grow out of this or tax out of it. The government has to cut spending but, if it does, that too, will cause a depression as 1 in 4 jobs are either directly or indirectly tied to government spending.

Think of the millions of jobs in private companies tied to supplying city, state and federal governments with paper, office equipment, maintenance supplies, power, cars, military equipment, etc. When the government cuts spending, the private sector has to start laying people off. But, if we don't cut it, we implode eventually, anyway. That may be in months or a couple years but, we are getting very close to that point.

The Economic Recovery That Isn't

For those who claim we would have had a global financial collapse and depression here, that is most likely very true. That is what was needed but, it is so painful we have delayed it. Now, some nations that were borderline may benefit from this delay but, all we did is postpone the inevitable here and benefit the "banksters" that got the global financial system in this mess.

Congress has been warned for years (before this crisis) in the GAO reports to it, that our policies are unsustainable (we still haven't changed them) and we face either gradual or "sudden" ... loss of our standard of living." In other testimony, Congress was basically told we can't grow or tax out of this. We have to cut spending and instead we are making this crisis even worse.

The crisis is not the high unemployment but, that the private sector can no longer support the amount of government we have even when we have positive GDP because too much of GDP now comes from government spending. Gov. spending is 61% of national income.

Thus, even if we get a positive GDP in the coming quarters, things are still getting worse each quarter the government isn't cutting spending so much that we are not only balanced in our budget but creating a positive account balance. Again, that is because the private sector is too small to support the government we have.

When real CPI data is used however, even a positive GDP may be false. For 8 years, using real CPI, we have only had a couple quarters of real GDP that was positive. Shadow Statistics is a private company used now, by many corporations to get real data because they can't trust government figures. Here in the "free" site for alternative data, you can see the statistics in charts, computed the way we use to compute them and compared to what the government is telling us.

www.shadowstats.com/al...
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The global economy and the 2.5 billion people who control 2/3 of the global economy may keep chugging along but, it will be for the most part, without the U.S.

For those who think ill of the doom and gloomers, remember they have to live in the same mess as the rest, whether they are better prepared for it or not. This is not about "betting against America" but being realistic if we are not only going to be better prepared, but know what we have to do to rebuild the nation better and stronger than it is after decades of bad policies.

We and Europe are still losing businesses for the emerging markets. We are seeing investment dollars leave the U.S. and Europe for emerging markets. We have not changed the policies that got us in this mess and again, it is impossible to tax or grow out of this. We have to cut spending and that will cause a very bad depression, too. Depression now or later. Those are the two choices we have.

Think about it. We have used bad policies for so many decades that now, even the reforms we need will cause a depression first before they start to make things better. That is the result of using debt inappropriately for growth. Clear back in 1968 we started borrowing $1 for each $1 of GDP growth and now it is infinity if you take out the illusion you have GDP growth from increasing debt even more so the government spending part of the GDP formula can override the negatives of the other 3 parts.

If you were to subtract "debt spending," from the GDP formula (which you should), you would find we have been in deep trouble for long time.

Consumer Debt Sets New Records - Again

www.financialsense.com...

That chart of total debt in the 30's and now, shows two things. One, it peaks after the recession starts. The other is that it takes years to unwind.

The reason it peaks late, I believe, is that people hope for a quick end and borrow for as long as they can (or gov. or corporations) "until they get back on their feet." But, time in a "credit recession" isn't on their side and it lasts longer than they can borrow.

I like that chart because it breaks down where the borrowing was taking place by sector of our society.

The article the following quote comes from is long but read it and you will know more than 98% of those in Congress about why this recession is so different and why so much of what they are trying to do doesn't seem to work.

quote
"Depressions marked by balance sheet compression
"Recessions are typically characterized by inventory cycles – 80% of the decline in GDP is typically due to the de-stocking in the manufacturing sector. Traditional policy stimulus almost always works to absorb the excess by stimulating domestic demand. Depressions often are marked by balance sheet compression and deleveraging: debt elimination, asset liquidation and rising savings rates. When the credit expansion reaches bubble proportions, the distance to the mean is longer and deeper. Unfortunately, as our former investment strategist Bob Farrell’s Rule #3 points out, excesses in one direction lead to excesses in the opposite direction."

The next day, I highlighted Ray Dalio’s version of this story because it takes a historical view and rightly emphasizes the debtor instead of the lender as the crux of the problem. Notice the part about printing money and devaluing the currency if the debt is in your own currency.

www.creditwritedowns.c...
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