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U.S.
ECONOMIC REPORT CARD
this period? Is he making positive progress, staying the same-neutral or negatively loosing ground?” So what’s up? Simple questions don’t always have simple answers. It’s like having a knotted-up ball of kit string and you just want to know what’s hidden in the core. Simple enough. But the only way to get a truthful answer to ….. “What’s up with the economy?” …..is to undertake the tedious process of detangling all the knots until the core is finally exposed. Yes, I had my preconceived ideas of what I’d find …. and it was so. But, what came as a huge surprise was the DEGREE of the degeneration. Start with knot #1 and then go to knot #2. After being away for 22 years, I figured it was “about time” to re-visit my old hometown…. Toledo Ohio. Things had changed a lot…..a whole lot. Miles of surrounding farmland had sprouted condominium complexes and multi-story malls. Meanwhile, older, landmark buildings had been vaporized and replaced by parking lots. Once quiet, two-way roads that I remembered as going north and south, became supersonic highways going east and west. Lastly, the roads that I actually was still familiar with, had been changed to One-Way travel so that I couldn’t even go where I wanted to! The whole place had changed so much that I actually got very lost. Even worse, I completely lost my sense of direction. Anyhow, due to the preponderance of ever changing data, trying to figure out which direction the U. S. economy is actually heading can be similar to my Toledo experience ……it’s easy to get lost. One report says job creation is up and the next week we’re told that job creation is down. This is quickly followed by a third report telling us that the figures from the prior months have just been revised. But it doesn’t end there. So now you conclude, with tightly crossed fingers, that jobs must therefore be up, when a fourth report surfaces that says that no statistician actually counted any warm bodies! The reported changes resulted from application of the birth-death model. And finally, a last report says that un-employment claims, as opposed to job creation, are on the rise. So, what gives? Yes, we all know there is a dynamic economy out there. And we know that it is ever changing. But it’s relatively easily to lose your overall sense of direction. How to get un-lost Back in Toledo, just after dark, I found my way out to the edge of town….. city lights on one side and open farmland on the other. The problem was that I still had absolutely no idea which edge of town I was actually on. North, south, east or west? I got an idea, brought the car to a stop and got out. I decided to tune-out at all of the confusing inputs and just looked up into the night sky for the North Star. Walla! Once I located the North Star and connected that answer to the direction of the city lights, I quickly figured out where I basically was and which direction I needed to point the car to get back to my motel. Incidentally, my wife, having never been to Toledo, somehow got the idea that I had just taken her for a nice joy-ride around the whole town. Ssshhhh! You don’t need to tell. In a similar fashion, we can get un-lost and re-discern the overall direction of the economy, by simply re-assessing the big, known landmarks. So how do we do this? Knot #2. By filling out a detailed report card of what we know to be true. When I was in grade school, you not only got a report card with an “A” in math and a “B” in science, the teacher also reported on your “behavior” in a host of other areas: homework assignments, penmanship, personal hygiene and group interaction. Even your behavior on the school bus going to and from school was noted! You got dinged for tardiness, blasted for talking, and hammered even for NOT TALKING enough…. not good for a quiet kid like me that was trying my darnedest to hide! Pity the poor kid that got that “A” in math but was also in a fight on the playground. For a kid, report card time was often a dark and stressful re-occurrence . For the parent, the detailed report card cut through all “the smoke and mirrors” and answered the “what’s up” question. Because the U. S. Economy is such a huge and complex mechanism, I have attempted to net it down into 54 individual sectors that are either large or representative of clusters of smaller sectors.. With your help, we will attempt to accurately “grade” each of the individual sectors from your own personal observations and then let those answers tell us what the “non-smoke,” big-picture really means for the average American family….. Mr. and Mrs. Joe Schmoe Here is your assignment A. I’ll list the individual sectors, adding comments when necessary. To maintain consistency, I will always address the negative side. For example: Housing. Are we experiencing a slump (which is negative) or boom? You will then give each sector one of four grades: Un-decided….. I don’t know enough to say Positive …….sector has gotten better, improved Neutral ……on middle ground between getting better or worse, now treading water Negative …….sector has gotten worse, deteriorated Avoid opinions. If you don’t know the facts don’t attempt to give it a grade. This will benefit overall accuracy. B. Like a big ship at sea, the USS Economy is slow to turn and hard to maneuver. Yet subtle course and speed changes do become apparent after time. So, we will be looking at a rather wide time frame…… from 1-1-2000 until today (henceforth abbreviated 1-00). To refresh your memory, President Clinton has one year left in office, the NASDAQ was surging past 5,000 with a corresponding high level of dot.com interest and oil had advanced to $25 per barrel ….. having already risen from $15 in 1998. Our factories were humming, housing prices were cleared for takeoff and 9-11 hadn’t happened. C. For each area, you will to ask yourself, “What is the current established trend of that sector?” Here, the U.S. Dollar would make a good example. One day it might be down, but over the past 3 months it might be up. But the key question is, what would the overall, established trend of the past couple of years be telling us? D. When finished, tally your answers. Send me your report card summary (grapeorbit@sti.net), using this five step format. After one month, pending sufficient response, I will add an addendum to this article that reflects our collective report card results. 1. Your name (optional) 2. E-mail address (optional) 3. Your credentials (required) Your biography. In 35-50 words, why do you think you are qualify to be part of this report card team? 4. Your overall scores (required) Total number of Negatives and total number of Positives. (We will just ignore anything rated as Neutral and Un-decided because they don’t give us a powerful enough sense of economic direction.) 5. Personal comments (optional) in 200 words or less. So teachers, where’s your red pencil? It’s time you got started! 1. Agricultural and other “soft” commodity prices. While rising Ag prices are good for our farmers, they are bad (negative) for the overwhelming number of Schmoeville residents that have to pay the price. What trend are we experiencing? 2. Bankruptcy and foreclosure growth. An increase in both is an economic negative. What is now happening? 3. Base metal prices. Rising prices are negative. 4. Bond market. In their simplest terms, a bond is just a fancy IOU. Like “used “ cars, the bond market is a place where these “used” IOU’s are traded. The bond market is like a chair with 4 legs. If even one leg has weakened, the bond market becomes suspect. The 4 legs are: the value of the currency it is paid in, rising interest rates are negative, and the creditworthiness of the issuer, and a the relative number of IOU’s being written per population. So are things more sound or less sound (negative) in the bond market? 5. Buy-outs based in stock (as opposed to cash) and stock re-purchases based on debt. Are these deals on the increase? Thus, a negative. 6. Consumer confidence. Where is consumer confidence trending? 7. Consumer spending. Up? Down (negative) or staying the same? 8. Corporate spending - orders. This sector is highly influenced by their level of future business confidence. Are companies spending their money in preparation for expected future business expansion (positive), or are they indecisively sitting on cash (negative)? 9. Construction spending - commercial. Is the current trend toward more building or less (negative)? 10. Construction spending - governmental. Like the proverbial, 900 lb. gorilla, whatever it does will have a significant economic impact. Is it spending, conserving, or cutting back (negative). 11. Corporate debt - relative level and usage of debt monies. Are companies taking on more or less debt? Are they using it in positive ways to increase production and competitiveness? Or using debt in questionable endeavors with suspect long-term effect (negative)? 12. Corporate pension fund condition. Is the overall condition of pension funds growing stronger or weaker (negative)? 13. Corporate profits. What is the recent trend? 14. Credit and debt growth. What has been the experience of the past few years? (Rampant increases are negative.) 15. Crime. On the increase (negative) or decrease? One handy thermometer is prison population. 16. Defaults, bankruptcy, foreclosure and repudiation of debt. What trend is now taking place in the world of defaults, bankruptcy, foreclosures and the like? Increases are negative. 17. Dollar strength. A falling dollar is negative. 18. Energy costs. What is the recent trend in the price of oil, natural gas, coal and uranium? Higher energy prices are a tax on the entire economy. 19. Entitlement programs - and acceptance of. Since 1-00, has the level of social acceptance and the total bill for these programs increased (negative), stayed the same or decreased? 20. Executive compensation packages. “Minding the store” or “raiding the cookie jar?” 21. Freedom & privacy. An increase in freedom and privacy normally leads to a stronger economy. How are we doing? 22. Gambling, lotteries and their acceptance. Have “games of chance” and there public acceptance increased (negative) or diminished? 23. Gold price - anxiety indicator. Gold and anxiety move together. Are both going up (negative) or down? 24. Government deficits - fed, state, county, city. What is the trend in total debt levels for these entities? Needless to say, higher debt is a negative. 25. Government - regulation, interference & socialization of the free enterprise system. Anything that erects a hurdle, builds a roadblock or otherwise impedes the efficiency of the free enterprise system, will simultaneously slow the economy. It’s like driving your car with the emergency brake still partly on. Have these impediments increased (a negative) since 1-00? 26. Government speeches, statements, statistics…. believability. Because of the nature of the U.S. Economy, the government is our primary source of economic statistics. Has their reporting become more trusted or less trusted (negative)? 27. Home equity - relative level of. Home equity is the amount of cash that a homeowner would walk away with if he sold his house and paid off all the debts against the property. Rising equity is like putting more money in the bank. Falling is the opposite (negative). Which is happening? 28. Housing starts - residential construction. Are we building more, or building less (negative)? 29. Inflation - monetary. By strict definition, inflation is an increase in the volume of printing press money and credit relative to available goods. The usual result is a rise in prices. Are the Schmoe’s experiencing higher prices (negative) due to the excessive printing press money and credit creation? 30. Inflation - demand inducted. Higher prices are generally attributed to two sources: money-credit expansion (#29) and competitive demand for a limited supply of goods (think China and India.) Is the US economy presently experiencing demand induced inflation (a negative)? 31. Interest rates - long term. Rising rates are negative because they hurt more people than they help. 32. Interest rates - short term. In what direction are we moving? Rising is negative. 33. Job creation, employment and help wanted advertising. Is the total percentage of workers increasing or decreasing (negative)? 34. Leadership - government and media. As it presently stands, the two most powerful forces that are determining the future course of the nation are politicians and the media. Have they chosen a path of progress, prosperity and peace ….. or otherwise (negative)? 35. Lowering of credit and lending standards. In pendulum fashion, credit-lending standards can only range between two extremes. On one end, you must conclusively prove that you are so financially well-to-do, that you don’t really need the loan. At the other extreme, you only need to be able to set off a motion detector. …. A job, references, and past credit history are just un-necessary clutter on the application. What has been the predominate trend in lending standards over the last couple of years? (A lowering of standards is negative.) 36. Manufacturing health and Industrial plant usage. Humming factories are good. Boarded up factories are bad. How are things going? 37. Media spin-ability - and public gullibility level. Teachers, is this combined sector showing improvement or getting worse? 38. Money supply. At a 12% growth rate, the supply of money nearly doubles in 6 years. Will the buying power of Mr. Schmoe’s paycheck, pension or payments from Social Security double in that time? If he doesn’t keep up, then by definition, he’s falling behind. With more money creation a negative, what is the trend here? 39. Moral - ethical - spiritual compass. Moral and spiritual beliefs carry over into all aspects of life; including economics. History tells us that when a nation fears God and his divine retribution, they tend to walk a narrower line. When this bond is lost, the opposite becomes the norm. Have we been proceeding toward the narrower line or going in the opposite (negative) direction? 40. Percent of foreign money in US Bond and Stock Markets. The higher the percentage of foreign investment, the more vulnerable the overall economy becomes to hot exit money….think China and Mid-East oil money. Thus, a build-up in this area is negative. 41. Percent of US govt. tax dollars making interest payments. If larger percentages of each tax dollar are being used to just pay interest, it’s not a good sign. Is this happening? 42. Prosperity, when it is prolonged …. dulls the senses. This is true for individuals, families, communities, corporations and countries…. it is especially true in economics. We are all familiar with the good side of prosperity. But more accurately, when it is prolonged, it becomes a sinister, two-edged sword. Prosperity produces a cushion whereby we become More and Less. More: accommodating, compromising, complacent, indecisive, sloppy, free spending, and lazy. Less: careful, cautious, concerned, aggressive, energetic and hard working. For grade card purposes, are the above more-and-less conditions, more or less taking place? If they are, that’s a negative score. 43. Real estate prices - sales. Going up or down (negative)? 44. Savings rate. Saving will normally increase the savers future standard of living, just as borrowing will normally decrease it. What is the current trend? (Less savings are negative.) 45. Securitization of debt. Dividing, pooling, packaging, re-assigning, re-selling, and leveraging all manner of debt including: CDO’s, CDS’s, MBS’s, mortgages, second’s, interest only, sub primes, credit spreads, swaps, repurchase agreements, derivatives and synthetics. An increase in these practices is negative. 46. Service economy - health. Is this sector expanding, staying the same or deteriorating (negative)? 47. Size of government. Are Federal, State and Local governments growing (negative) or shrinking? 48. Stock market - inflation adjusted or measured in gold. If you measure a dead tree with an ever shortening yardstick wouldn’t the tree appear to be growing? So, where is the S&P 500 and the NASDAQ today compared to 1-00 in either inflation adjusted or gold terms? 49. Taxation - overall level. Like a forged sick-note explaining Schmoe Jr’s school absence on the day the circus came to town, this one could fool you if you’re not careful. To properly “grade” this area, you need to look at the level of direct taxation PLUS inflation. A “combined” tax increase is negative. 50. Thinking - long term versus short term. Which of the two are we doing more of? 51. Trade deficit. When does the trade deficit become “too much” and the consequences begin to “be felt?” It’s all a matter of tiptoeing up too and then just beyond the invisible balance point. For your grade card, are we moving toward the balance point (negative) or away? 52. Wages. What is the net effect on Joe Schmoe’s paycheck after factoring in raises on the one side and taxes and inflation on the other? 53. War. In purely economic terms, wars destroy wealth…. A negative. Dumb but necessary question: Are we at war? 54. World - economic conditions ….. What is the trend? OK teacher’s, stop here until you‘ve completed your report card. ……………………………….................................................................................................................. Suspicion suspected…. Are you beginning to see what I’m seeing? If you’ve followed my trail this far, just by working through the above exercise and being forced to take a serious look….one--sector--at--a--time, I suspect you’re starting to develop a slightly different view of the true health of the economy. Breaking the economy down into its understandable, KNOWN pieces, reveals a different but more understandable picture. What’s beginning to emerge is a pronounced preponderance of “negatives.” Something’s up. But what? Here’s how my report card came out. 3 un-decided, 2 positive, 8 neutral and 41 negative Three sectors were un-decided. Corporate spending - orders, Construction spending - governmental, and Corporate debt - relative level and usage of debt monies. Sorry, I just don’t know enough about those particular sectors to make a good call. Two sectors were positive. Construction spending - commercial. By most conventional measures, Commercial Construction Spending (CCS) is robust. But is it a leading or following indicator? I maintain that CCS is more a reflection of PAST consumer spending than a function of futuristic, crystal ball gazing. Past shoe sales, as opposed to projected shoe sales, carry much more weight in triggering a decision to build a new shoe store. Doesn’t it “fit” that CCS is in exact proportion and in direct response to PAST consumer spending? So, let’s not get overly excited with this pocket of strength. The tail doesn’t wag the dog. World - economic conditions. Without bothering to look too far under the surface, the world economy would appear to be humming along like a hive of bees dreaming about honey. I’m sure some small factory in Lower Slabovia just finished producing its sixty-sixth millionth pair of sneakers…. real, genuine economic growth. However, perhaps like never before in history, the world economy is ALSO being energized by the three additional suspects: rampant money printing, credit expansion and debt creation. But for now, even though this boom is taking place under a cloud of suspicion, I’ll give it the benefit of the doubt. Eight sectors were neutral. (However, in most of these cases, they have deteriorated from being positive on 1-00 and are poised to fall into the negative category.) Bond market. This is perhaps an ideal time to remind ourselves that we strive to avoid conjecture and opinion but instead seek only the known landmarks (facts.) The Bond market certainly isn’t getting healthier in part because interest rates are no longer showing a tendency to come down. So it’s playing hide-and-seek somewhere between neutral and negative. Not yet showing its true colors, I’ll error on the side of generosity. Consumer confidence. Herein, economists assign considerable value to an indicator that only “predicts” the PRESENT. It’s more a measure of what the consumer currently “believes to be true.” Do you see a problem? More truthfully, it’s just a composite of feelings and emotions with a sprinkling of facts to give it some degree of legitimacy. Consumers “feel good” and therefore have “confidence” that the Next Door Neighbor will continue to spend. Even Homer says, “D’oh!” In my darker moments, I think of it as nothing more than a media-consumer-brainwashing, success-o-meter. Consumer spending…..remains stubbornly neutral. But, where is the money actually coming from that Joe Schmoe is so freely spending? Out of his sock drawer or out of home equity? From big pay raises or big credit card balances? Doug Casey, "The problem with debt is that it artificially increases the standard of living. But when it is paid off, especially with interest, it reduces the standard of living in a very real way." Corporate profits….. while neutral, are largely dependent on interest rates, the ability to pass on cost increases, continued government deficits and un-sustainable consumer spending. Interest rates - long term. In 1942, they began a 39 year rise that lasted until 1981. Then, in the next cycle, they fell for 25 years. While currently stuck in no-mans land, it looks like the next mega-trend reversal is close at hand. Job creation, employment and help wanted advertising. If you still trust official statistics, job creation is approximately neutral. However, the underlying quality of jobs, unsustainable levels of construction employment and suspect government figures, put the future of this sector in doubt. Service economy - health “Appears” to be doing fine. But, what does sizzle look like? It looks like the mass of passengers on deck of the Titanic. As long as they stay in motion and keep streaming, swirling, darting and dashing about, they fuel the illusion of doing something meaningful to keep the (economic) ship afloat. But in the end, accomplish little. Why? Because the “service economy” is primarily the recipient of the “in-debtors” and thus find themselves nearer the end of the food chain. Wages. At the risk of being generous, and even though a change for the worse is in-the-wind, according to my stag-nat-o-meter, it looks like Joe’s net paycheck is slowly grinding lower. Objection! Objection! Hold on! Like a skydiver, we’re getting ready to leap out of an airplane to report on the 41 sectors that are experiencing freefall. Serious disagreements, different interpretations and opposing conclusions….. it’s the nature of making these calls! Lock five economists in a room and they won’t be able to decide the best place to go have lunch. Because we all see things differently, some will take issue with parts of my analysis. So rather than getting sidetracked by this potential distraction, I’d encourage you to remove any 5 sectors of your choosing and then CONSIDER WHAT REMAINS. We’ll look at them alphabetically and in groups. Agricultural and other “soft” commodity prices. Across the board, Ag prices are rising sharply. Bankruptcy and foreclosure growth.…is steadily rising. Remember when Bankruptcy was just a four letter word? Seldom experienced or talked about? Now it’s a growth industry. Dennis Wheeler, “The United States is on a collision course with reality. And reality doesn’t deal with chronic debtors very kindly.” Base metal prices.…are practically exploding…..a big negative for Joe Schmoe as these increases will ultimately take a bite out of his standard of living no matter which way he turns. Buy-outs based in stock (as opposed to cash) and stock re-purchases based on debt. These deals are on the increase and loudly saying, “We just don’t have the money to do what we want to do. So we’re going to cross our fingers and do it anyway.” It’s debt in disguise. Corporate pension fund condition. Like snow on a tree limb, they are growing weaker and breaking. Coalescence Solves Conundrum Most economists readily fall into the trap of only thinking in terms of “cause and effect.” After all, the formula works most of the time. Throw a raw egg straight up and it falls straight down on your head. (Overhead birds instinctively know this from birth.) Perhaps Mr. Greenspan erred when all of the “causes” were in place to “effect” higher interest rates….. but it didn’t immediately happen. Instead of digging deeper, Professor E. Rhoneous just reached into the desk and pulled out the rubber stamp ….“CONUNDRUM.” Like the multiple spices added to the spaghetti sauce, it takes TIME for each of them to COALESCE and bring about the very best taste. So, especially in economics, “effect” doesn‘t always happen overnight. Many examples come to my active mind. I confess…… I stay up late at night thinking about these kind of crazy things! Here’s three examples. One should strike your fancy. #1 Put your grandchild on a swing and apply X amount of force. Each time the child swings back to you, apply exactly the same amount of force. In due time, the child will be swinging high into the sky and they may start begging you to “slow down!” But you never-ever sped up! The collective forces had just accumulated (coalesced) over time. #2 When a 25 MPH wind blows across a very large body of water for one hour, the resulting headline might read. “Poor fishing on Friday.” But have that very same 25 MPH wind blow across that same body of water, from exactly the same direction ……but up the duration to three days, and the headline might read, “Storm surge, large breakers, localized flooding, significant property damage!” #3 In the movie, Pirates III, Captain Sparrow was inspired to overturn his own ship. He started by running from one side of the ship to the other….. back and forth… back and forth. In time his crew joined in. As they continued, what started as a gentle rocking motion, escalated into a full blown slamming of the ship from side to side until the whole ship literally turned upside down. Granted, this scene was part Hollywood, but there was also a real, genuine principle of physics at work here. I know this principle to be absolutely true from my own experience. I once saw a 300’ ocean-going, fuel-carrying, warship do almost exactly the same thing. She was gently resting at anchor in the tranquil waters of a protected bay on an absolutely calm, quiet, starlit night. There were no waves whatsoever. After a time, a very gentle, night breeze started blowing off the land creating a light chop across the water…..perhaps 3 or 4 inches high. The ship started to respond the “push” of each wavelet by slowly rocking from side to side. After about an hour, the accumulated forces caused the ship to start taking huge, crashing, side-to-side, 40 degree rolls. From ashore, the ship appeared to be in a life and death struggle with a violent undersea monster IN CALM WATER! What happened? It was just the work of Coalescence ….nothing more. Credit and debt growth. Credit is a gift hanging on a fish hook. There’s nothing inherently wrong with the gift, it’s what happen when you bit the hook. The fish that only nibbles, …….uses credit wisely,…… can safely grow fat. But the fish that bites down hard, ends up on the hook. Off the top, anytime you’re paying down debt so slowly that you’re barely reducing the principle, you probably being eaten alive by interest. Bill Bonner, "Everybody likes a credit boom. They all believe they have more money. This is the dirty little secret of modern central banking. It only works by stealth and fraud, silently debauching the currency so that people make mistakes. The businessman believes there is more demand for his products than there really is. The consumer believes he has more purchasing power than he really has. The lender believes the borrower is a better risk than he really is. All these mistaken judgments lead to spending, investing and lending .... which look for all the world like a bona-fide boom." Crime. There has been a sudden resurgence in serious crime over the past two years. Desperate people do desperate things in desperate times and as a result, prison populations are rising along with the seriousness of the crimes that put them there. Defaults, bankruptcy, foreclosure and repudiation of debt. The accumulated bad loans and sour deals must be purged from the books before the economy can even begin to make genuine, sustainable progress. In an odd twist of logic, because so much has been lent to the un-qualified…..things can’t start getting better until they’re done getting worse. In other words, we need to actually see an increase in defaults before improvement can finally take place….. a process that has just begun! Dollar strength. Since 1-00, a graph of the dollar looks like a slinky walking down a staircase. Dr. Franz Pick, “The destiny of the currency is and will be, the destiny of the country.” Depression or Recession … But which? Recession: A temporary decline in economic activity for two consecutive quarters. Depression: A protracted period of time in which the general standard of living in a country declines. The differences? The degree of “Longevity” and “Severity.” Somewhat like a prison honor farm. Where is the distinction between wandering away to answer the “call of nature” and an “escape attempt?” Further, Depression also introduces a third dimension …. “Breadth.” Longevity …..How long has the economic contraction been going on? For months or longer? Severity…. Are the economic setbacks mild and temporary or looking more entrenched? Breadth…. How widespread are the negatives? Regional or nationwide? Folks, it’s looking more like an escape all the time. Energy costs. Who can’t remember the bygone era of much lower energy bills? Entitlement programs - and acceptance of. Our culture is hesitant to say no to worthwhile programs that help those in real need; an attitude that hasn’t changed. You can “wish upon-a-star” but these bills, must in the end, be fully paid. Either taxes are raised, governments go further into debt or in the case of the Federal government, the money can be printed. Unfortunately, all of these options are a drag on the Schmoe standard of living. Executive compensation packages. People who work harder and produce more, should be duly compensate. No problem. But what does it say when people begin to put their own economic self interest far, far above the well being of their company, employees and their communities? Incidentally, a measurable counterpoint to self interest is a resurgence of voluntarism…. and it’s not happening. Freedom & privacy. Park your opinions and emotions at the door and consider. Pat-down security checkpoints, proliferation of security cameras and the Patriot act. When you see an armed soldier in front of the NYSE or look into the face of a rubber-gloved guy at the airport, are you experiencing Freedom or Security? Sorry, you can only pick one. Never before has our govt. been able to exert so much control and more easily operate in the "national interest." Internet quote from Goldilox, “Just as 100% freedom is found in chaos, 100% security is only found in complete subjugation.” Gambling, lotteries and their acceptance. J. Powell (former gambler), “Never play another man’s game.” Today’s gambling craze is an incomprehensible bubble unless you factor in its historical counterpart, the 1920’s Speakeasy. Joe may go to gambling establishment for the amenities, but you can “bet” the majority of his neighbors are flocking there to “win”. The idea of increasing your economic well being by “beating the house” is a loosing bet and produces a net increase in economic distress. Gold price - anxiety indicator. Aside from jewelry, rare coin collecting and purely investment purchases, exactly why are people now accumulating gold and silver? When you net down all the answers, the purchases and rising gold-silver price is directly proportional to the increasing level of anxiety. We’re already where? So, what apparent conclusion can we start to reach? It can all be crunched down into 13, ominous words. THE UNITED STATES IS ALREADY WELL INTO THE FIRST STAGES OF A DEPRESSION. Folks, it’s already here! Not because I say so but because the facts (the known landmarks) are telling us so. Footnote to history: We were already a few years into the 30’s Depression before the media even started using the “D” word. Government deficits - fed, state, county, city. Even without wars, the U.S. already had a giant deficit problem that will sink our ship. (If in doubt, check with David Walker, the U.S. Comptroller General.) But shooting wars leave giant holes in existing budgets…. even more so in un-balanced ones. When “Gulf War #1 came along, we at least PRETENDED to pay the bill by getting our partners to “chip in” while Congress “talked” of decreasing spending and raising taxes. But when Gulf War #2 came along, we even dropped the “pretending” part. A red survival flare crossed the night sky! (But few saw it.) It signaled that the floodgates of fiscal restraint had been blown completely off their hinges. So we’ve entered a “new era” in American history …. one of complete fiscal irresponsibility. Government - regulation, interference & socialization of the free enterprise system. Pervasive, relentless and voracious. A deep-rooted, scavenger, with tenacious, smothering, and suffocating growth characteristics .….how can these words describe a common plant and our government with equal accuracy? Welcome to the era of Kudzu government! Government
speeches, statements, statistics…. believability.
Like a stain in your favorite garment, it appears that anytime the
economy produces an intolerable statistic, it’s send back through the
re-con-fig-u-lator until it “comes out clean.” Home equity - relative level of…..is falling. It was in the neighborhood of 70% in the 90’s. Today the number is only around 52% Housing starts - residential construction…. Have taken up the exciting hobby of cliff diving. A Hybrid Depression Professor Phun Nominal will read a U.S. history book and become convinced that only deflationary depressions are possible. Since few sectors are now deflating, he will conclude that we couldn’t possibly be experiencing a depression. On the other hand, the more brilliant Professor Stu Pendous will read a U.S. and a German history book. He will conclude that depressions can be of either variety….deflationary or inflationary. Since the U.S. is presently somewhere in the middle …..experiencing some of each, he will conclude that we couldn’t possibly be in a depression. Oddly enough, we are now experiencing both inflation and deflation over a sustained period. Inflation in things that you normally pay for with cash (think gasoline) and deflation in things that you normally would buy on payments (think houses). So the Schmoe’s are getting both kinds of rottin’ candy AS THEIR OVERALL STANDARD OF LIVING CONTINUES TO DECREASE…. a hybrid depression (but a depression nonetheless.) Charles Caes, "History only repeats itself when all the variables are the same, ....and they rarely are." Inflation - monetary.….otherwise known as money printing …is up. Pick your favorite quote. Jim McKeever, “When a government creates extra money out of thin air, it is not using consistent weights and measures; it is therefore actually stealing from all of the people who have and use its currency.” David Ransom, “Inflation is the decline in purchasing power of a national currency.” Doug Casey, “Inflation is a slow-motion default.” Inflation - demand inducted. Only a person with a Roswell, New Mexico zip code would believe that we are not experiencing serious, demand induced, price increases. Interest rates - short term…. on the rise since 2004. Leadership - government and media. Has anyone else noticed the striking similarities between today’s leadership and that of Lt. Colonel George A. Custer? We’ve dodged the bullet so far …..haven’t we? Who hasn’t heard the well-worn line that our financial sins will eventually be paid by our children and grandchildren? But think for a minute. Just exactly how long have you been hearing this drivel? By my reckoning, it’s now coming up on two generations! Conclusion? D‘oh! The problems that were once relegated to the future are now moving center stage. Jim Puplava, "The longer a tend has been in place, the more time is required for investors to perceive that the trend has changed." Lowering of credit and lending standards. The only remaining way to get money faster and with less effort from a bank is with a mask and a gun. Professor Hegg Zackley reminds us that the worst of loans are made in the best of times. Manufacturing health and Industrial plant usage. You’re familiar this story. So why re-tell it? Making things in this country are on the way out. But then, where will the high wages and solid jobs come from to keep the economic ball rolling? Robert Prechter Jr., “Ultimately, manufacturing (or tangible production) supports all wealth.” Media spin-ability - and public gullibility level. From the media we’re told that a strong dollar is good because it makes imports cheaper. And that a weak dollar is also good because exports will increase. Next, an economic slow down is good because it reduces inflation pressure while a strong economy is good because it reduces un-employment. Next in line, higher gas prices are good for the oil companies that make up the S&P 500, and that falling prices are good for the consumer. Nextish, a down Stock Market is good because the market is getting a much-needed break and a market uptick is good because people are back to making money. ………………… For cryin’ out loud, wouldn’t even Professor Gold E’Lox realize that absolutely everything can’t be good? Instead of “black and white” journalism, we’re getting “white and white” or “good and gooder”. Too bad. Journalism can be one of the more noble professions. However, it’s unusually susceptible to corruption and only one step on a banana peel away from propaganda. But the buck doesn’t quite stop there. Isn’t Joe Schmoe’s gullibility level headed off the charts? How can we tell that he believes what the media is telling him? Because, not wanting to be thought a fool, people tend to only repeat things what they believe are true….. and Joe’s been retelling all. Money supply. Our own and the other primary governments of the world are find it easier to change the numbers on their currencies than switching into a cheap Halloween costume. It’s even easier to “print credit!” But if this was a genuine recipe for success, why aren’t history books filled with these examples? Because, there aren’t any. Ayn Rand, "We can evade reality, but we cannot evade the consequences of evading reality." Lighthouse Watch Some economists are already up in the lighthouses, looking far out to sea ……for the expected recession. However, their eyes could easily be fooled if they are “on alert” for the wrong thing. After 12 happy years of marriage, two things my wife had never experienced were seeing me without my moustache and meeting long-lost, Cousin Eddie face-to-face. I led her to believe that Eddie was finally going to visit, shaved the moustache, put on new clothes, slowed my speech and knocked on my own front door, suitcase in hand. You guessed it! 100% totally snowed! That approaching storm won’t be a recession, it will be a deepening of the depression. Instead of just looking OUT, shouldn’t the economists also be looking DOWN? If they did, they would see that since 1-00, the beach is deserted, their car is under water, and sharks are circling the lighthouse. What sharks? I’ve already listed 28, but there’s plenty more. Moral - ethical - spiritual compass. Routinely, “For better or worse” now comes with a footnote…. “*As long as it remains convenient for one or both parties.” Mother’s dream of giving their daughters a nice wedding. Now they can dream of giving them several nice weddings. No doubt, people are still passing through church doors in sufficient numbers. But in actual practice, we’re becoming more like “the Mafia church”……. “married there” and “buried there.” But come Monday morning, it’s business a usual. Percent of foreign money in US Bond and Stock Markets….is dangerously growing like never before. Percent of US govt. tax dollars making interest payments.… is higher than ever. H. Stein, "An unsustainable trend will not be sustained." Prosperity, when it is prolonged …. dulls the senses…. and our senses are now as dull as they can possibly get. On a 1 to 10 scale, we’re beyond 11. Doug Casey, "The longer good times continue, the less likely bad times seem …. but the truth is just the opposite. Real estate prices - sales. For most of Schmoeville, a home is a firmly-affixed, financial anchor. Problem is, if the anchor chain is too short and the tide rises too much during an economic storm, the ship gets pulled under. Presently, a rising tide of foreclosures, bankruptcies and the tightening of lending-credit standards is taking it’s toll. Some have are already been pulled under while the remainder now wonder, “Will I be next?” Why haven’t “They” caught on to the depression? Historically, the overall track record of economists is far worse than dismal. Fewer than 5% ever call a major economic turning point ahead of time. Examples abound. In 1982, fewer than five predicted the greatest stock boom in history, not one saw the DOW going above 5k and only a couple anticipated the 87’ slide. Weathermen and soothsayers do better. More recently, ever since day-one of the 17, consecutive Fed rate hikes that started in June of 2004, an army of them has marched in front of the TV cameras foretelling the lowering of interest rates. After three years of being 100% wrong, Rule #2 may have finally kicked in: “If you can wait long enough, most economic predictions will eventually come true.” Forget about the future, they doing good to predict the past with 20% accuracy. For example, for multi-decades, our nation experience almost zero inflation while on the gold standard. Yet, how many mainstream economists do you ever hear suggesting a return to that which worked? So, hold your breath or better still, be brave enough to look into your OWN crystal ball. Savings rate. Rather than looking at savings in the conventional way, more can be learned by flipping this coin. The current, negative saving rate for Joe Schmoe isn’t a red flag planted somewhere over the horizon, it’s an indicator of his immediate financial distress. My theory is simple. By lifelong, personal observation, at least 9 out of 10 wage earners routinely burn though 100% of their paycheck on a month to month basis…. we spend ALL that we are given ….no matter the size of the check. Dividing the 100%, my theory says that in normal times, roughly 85% goes to immediate, “legitimate needs.” A 10% “cushion” goes to things we think we need. And the remaining 5% to “savings.” There really isn’t anything “left over.” Sound familiar? What happens when the interest rate on Joe’s ARM, gasoline to get to work, utility bills and the price of corn flakes …. all “legitimate needs,” inch up? (Let’s not sidetrack talking debt.) The money has to come from somewhere? The only possibility is to cut back on the “cushion” ….. which, because of its subtle nature … won’t hardly be FELT or OBSERVED. And, cut his observable “savings.” Next comes subsequent rounds of price increases and the process repeats. Theoretically, this can only persist until 100% of his check goes to “legitimate needs” with zero “cushion” or “savings.” Walla! Today, Joe’s lack of savings is telling us that he’s nearly out of wiggle room. Going forward, his idea of “being prepared for a rainy day” will be consist of owning a decent raincoat. Securitization of debt. With ribbons and bows, you can fancy-up a tray of ordinary cucumbers all you like, but nothing can stop them from rotting the further they travel from the farm. Size of government. We already crossed the threshold where, for the first time, more Americans work in government than manufacturing. Stock market - inflation adjusted or measured in gold. Pure and simple, when measured in either inflation adjusted dollars or gold, the markets are considerably lower than 1-00 levels. If this is a depression……. shouldn’t it feel worse? When you slow down your car from 70 to 65, it doesn’t “feel” like a big deal does it? But the truth is, you ARE going slower. When the price of milk or gasoline goes up 10 cents a gallon or interest rates bump north, you’ve taken a pay cut. So, if the residents of Schmoeville have been forced to turn down the lights, heat, and air conditioning, drive less, work harder, and pay more …. Haven’t they have ALREADY experienced a lowering of living standards? So if your concerned that things don’t feel all that bad, …… just relax, kick back, enjoy yourself ….. things will get worse in due time ….and then you WILL feel it. Sir John Templeton says, “Bear markets start at a point of maximum optimism and bull markets start at the point of maximum pessimism.” Depressions are similar. But, no one “connects the dots” until the pain gets deep enough to be felt by many. Taxation - overall level. Yes, direct taxation has stayed about the same. But inflation is also a form of taxation. If you add together all the increases since 1-00, we are now paying considerably more tax. Thinking - long term versus short term. Today, examples of short term thinking abound: instant gratification, self-indulgence, irrational future expectations, reckless home equity extraction, adding to un-paid credit card balances, making demands on govt. without the means to pay, temporary pleasures like drugs, alcohol and gambling. Should we include tattoos, body piercing and un-wed mothers? George Benard Shaw, "A government which robs Peter to pay Paul can always depend on the support of Paul." Trade deficit. From foreign lands, they send Real and Valuable things like barrels of oil, tools and the shirt on our back. And in exchange, we send mountains of freshly printed IOU’s of ever-decreasing value. What could possibly motivate a foreigner to agree to such an obviously one-sided transaction? Who in their right mind would go for such a lame deal? Only two broad answers surface: Scenario A…. The Dumb. (Illogical, unlikely and thus dismissed.) Scenario B …. The Smart. Cagey individuals in positions of power that, for whatever un-knowable reason, find that this ridiculous scenario somehow works in their own best interest. (Dr. Richard Appel, “It is wise to expect an individual to act in a fashion that is in his own best interest.”) But, just as you can not prove the intended target when Billy the Brat threw that big rock toward your family pet AND the tin can, you can seldom prove why “the smart” would do such a dumb thing. The evidence and motives are too deeply hidden. (Take heart, God promises to sort out ALL the Scenario B’s.) So why dwell here? What can be proven by simple logic is: Do the involved, self-serving, foreign entities have Joe Schmoe’s best interests in mind? Joe who? Thus we can turn to the history books and observe that, although the timing of the end of these frauds is un-knowable, the outcome is knowable. The advantages to Joe have been so large and pervasive that once the music stops, the consequences must be correspondingly severe. War…. destroys wealth. This is easily observed on both sides of the equation. On one side, someone has to pay to build the bombs, the airplanes and the pilots that drop them. On the other side, someone has to pay to rebuild the house, restore the bridge and replace Elsie The Cow. Old Elsie once gave milk…..now she just draws flies. Putting aside the political and social considerations, common sense tells us that wars make anti-economic sense and we’re now deeply involved in two of them. Conclusion….. With 41 sectors going negative, we’ve crossed the threshold into depression. I would prefer to leave you with some comforting, happy-thoughts or profound words of wisdom. But under these troubling circumstances, only two things come to mind. The first is exceedingly trite. Knowing that we are in the earliest stages of a depression, prepare accordingly. Second, every year or so, re-do your report card. When you finally start to see a emerging pattern of positives, chances are things are getting ready to turn around. You’ll be among the very first to see the light, while those around are in deep darkness. Until we meet again, Douglas Kanarowski
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Info The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
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Attention
all observers of the U.S. Economy; professionals and serious-amateurs
alike. The school year has ended and now is the time for the teaching
staff to prepare a detailed report card for the pupil. You are the
teachers and the “student” is the U.S. Economy. The period of your
reporting will be from 1-1-2000 to today. The general question is,
“From your personal vantage point, how has the student performed
during
