Boom2Bust.com

“Get your facts first, then you can distort them as you please.”

-Samuel Langhorne Clemens aka Mark Twain (American humorist, writer, lecturer. 1835-1910)

From the Associated Press back on January 28, 2009:

Vice President Dick Cheney says that his boss, President George W. Bush, has no need to apologize to the American people for not doing more to head off the financial calamity, saying no one saw the crisis coming.

During an interview Thursday with The Associated Press in his West Wing office, Cheney defended the administration’s performance on an economy that is growing weaker daily and which recently collapsed in spectacular fashion. Cheney said that “nobody anywhere was smart enough to figure it out.’

Not true.

Actually, there were a few individuals who stepped forward and warned anyone who would listen that “something wicked this way comes.”

Back in May 2007, Christopher E. Hill, the creator and editor of Boom2Bust.com, wrote the following on this “Evidence” page:

Mr. Hill, an independent financial research analyst based in Chicago, believes that the United States is in the middle of a financial “minefield”— with no safe way out. Bubbles, which exist whenever an asset’s perceived or psychological value exceeds its real economic value, can be found in the U.S. Dollar, Stock Market, and Real Estate.

Some even argue we are experiencing the first worldwide bubble in history that covers ALL asset classes. Jeremy Grantham, chairman of Boston firm Grantham Mayo Van Otterloo and the man Vice President Dick Cheney and 2004 presidential candidate John Kerry have trusted with their money, wrote in a letter to shareholders in April 2007:

“From Indian antiquities to modern Chinese art, from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!”

Eventually, all bubbles burst and perceived values retreat back to their true economic values, causing financial chaos along the way. In addition to asset bubbles, astronomical levels of Consumer and Government Debt also threaten the U.S. economy.

Mr. Hill believes that all of these dangers are interdependent. Therefore, as with a minefield, a single detonation (in other words, the realization of one of the dangers) may set off a chain-reaction and bring about a financial crash in the United States the likes of which recent generations have never seen.

In fact, the editor suspects that the ongoing housing downturn may very well be the catalyst for the coming financial storm.

Remember When?

Two-and-a-half years on, Americans have witnessed a housing bust, subprime mortgage crisis, credit crunch, banking crisis, financial crisis, plummeting stock prices, shrinking retirement portfolios, declining net worth, rising unemployment, higher taxes and fees, cutbacks in government services, growing government deficits, an escalating national debt, rescues, bailouts, nationalizations, stimulus packages, massive government intervention, the end of free market capitalism— and a recession, which some call “The Great Recession.”

Did I miss anything?

As a result of this project, some have credited me with correctly calling the crash.

Regrettably, the turmoil of the past couple of years was merely a “shot across the bow.”

The U.S. financial crash I was talking about all the way back on Memorial Day Weekend 2007 has yet to take place.

As I suspected that summer, the bursting of the housing bubble sent destructive ripples throughout the U.S. economy and larger financial system. Predictably, the Bush administration, and then the Obama administration, in conjunction with the Federal Reserve, the nation’s central bank, have thrown everything— including the kitchen sink purchased for $50,000 from the government-approved vendor— at the crisis.

Take a look for yourself:

Source: Rock Creek Free Press

As of January 2010, CNN Money’s Bailout Tracker shows $11 trillion committed and $3 trillion already invested in the bailout.

Which is also putting an enormous amount of stress on the federal budget:

Source: CBO, White House Office of Management and Budget
Washington Post, March 21, 2009

According to a January 26, 2010, Congressional Budget Office “Director’s Blog” post:

Under current law, the federal fiscal outlook beyond this year is daunting: Projected deficits average about $600 billion per year over the 2011–2020 period…

From CBO projects, that if current laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year 2010. At 9.2 percent of gross domestic product (GDP), that deficit would be slightly smaller than the shortfall of 9.9 percent of GDP ($1.4 trillion) posted in 2009. Last year’s deficit was the largest as a share of GDP since the end of World War II, and the deficit expected for 2010 would be the second largest. Moreover, if legislation is enacted in the next several months that either boosts spending or reduces revenues, the 2010 deficit could equal or exceed last year’s shortfall.

Source: USGovernmentSpending.com

On July 20, 2009, Neil Barofsky, the special inspector general of the Troubled Asset Relief Program (TARP), revealed to a House committee:

As massive and as important as TARP is on its own, it is just one part of a much broader federal government effort to stabilize and support the financial system…

From programs involving large capital infusions into hundreds of banks and other financial institutions, to a mortgage modification program designed to modify millions of mortgages, to public-private partnerships using tens of billions of taxpayer dollars to purchase ‘toxic’ assets from banks, TARP has evolved into a program of unprecedented scope, scale, and complexity…

The total potential federal government support could reach up to 23.7 trillion dollars.

As of January 2010, CNN Money’s Stimulus Tracker shows $4.7 trillion has already been spent “stimulating” the U.S. economy.

“She Wants My… Stimulus PACKAGE”
WARNING! Language
YouTube Video Link

Now, one might try and argue our economic fortunes are turning around. After all, in January it was reported that the nation’s gross domestic product, the broadest measure of economic activity, rose at a 5.7% annual rate in the fourth quarter— the fastest pace in more than six years.

I’m glad to hear that. Really, I am.

But, as I’ve mentioned before in my posts, with all that “stimulus” forced into the system, should improved economic activity really be much of a surprise?

I fear we are seeing something not unlike a terminally-ill patient being bombarded with lots of drugs, who then appears to regain their vitality.

However, the bounce is only temporary, as the underlying cancer remains.

Pressing on, we have witnessed how the Bush and Obama administrations, under the guidance of the Fed, put that good ol’ “recession playbook” into action, thinking this was just one more run-of-the-mill recession, and that the country could spend its way out of the downturn and into a lasting recovery. While history will eventually show just how wrong they’ve been in diagnosing our ills, America is drowning in debt. Lots of it.

Source: Associated Press

Source: USGovernmentSpending.com

The financial position of the world’s largest debtor nation looks even more precarious when you take into consideration the trillions of dollars in entitlements, such as Medicare, Medicaid, and Social Security, that have been promised to American citizens by the politicians Washington.

Source: Peter G. Peterson Foundation

And don’t forget the increased costs associated with servicing all this new debt, which should prove to be a significant drag on the economy in the years to come. From that earlier January 26, 2010, Congressional Budget Office “Director’s Blog” post:

Those accumulating deficits will push federal debt held by the public to significantly higher levels. At the end of 2009, debt held by the public was $7.5 trillion, or 53 percent of GDP; by the end of 2020, debt is projected to climb to $15 trillion, or 67 percent of GDP. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket. CBO projects that the government’s annual spending on net interest will more than triple between 2010 and 2020 in nominal terms (from $207 billion to $723 billion) and will more than double as a share of GDP (from 1.4 percent to 3.2 percent).

“Starting in 2012, the cost of the debt as a percentage of GDP will explode from a mere 1.8 percent of GDP to more than 30 percent of GDP in 2082.”
Source: Veronique de Rugy, The American, December 4, 2009

Despite what Washington and the mainstream media keep telling us, the U.S. economy and larger financial system have hardly been “saved.”

Rather, all they’ve managed to do is “kick the can” down the road a little bit longer while making the financial “house of cards” even more unstable with all that new debt.

In the meantime, you can look forward to higher taxes/fees, less government services, and a lower standard of living.

Even worse, this increased instability comes at a time when there’s a pretty good chance of another economic downturn right around the corner.

Welcome to the “crash zone,” folks.

Now, there’s a strong argument to be made for a “double-dip” recession in the United States. Some say the economic “recovery” is only taking place because of all that stimulus being pumped into the system. Turn the stimulus spigot off anytime soon, as some believe the U.S. government and central bank would like to do ASAP, and you torpedo the recovery and potentially bring about the “double-dip” scenario.

Even without the “double-dip” recession, when the economy goes south again (and it inevitably will), Uncle Sam and the Fed won’t have many bullets left to fight a downturn.

I’ve already pointed out all the debt that’s been racked up in the form of bailouts, rescues, stimulus packages, etcetera. And the American public isn’t too keen on letting it get much bigger. Not to mention our overseas creditors. So don’t expect much help here.

The same goes for the Federal Reserve.

Source: Federal Reserve

And it doesn’t look like the American consumer will be riding to the economy’s rescue anytime soon. On January 29, 2010, MarketWatch reported on that month’s Reuters/University of Michigan consumer sentiment index:

“Consumers are overwhelmingly convinced that the worst is over but nonetheless expect stagnating income and job prospects rather than solid growth during the year ahead,” said Richard Curtin, head of consumer research at the university [of Michigan].

The survey points to 1.8% growth in consumer spending for 2010, which would be the slowest recovery in spending since World War II, Curtin said.

“Few consumers expect the unemployment rate to dip much below 10% even by the end of 2010. Persistently high joblessness as well as stagnating incomes will mean that consumers will remain cautious spenders, preferring to add to their savings and reserve funds,” he added.

Not exactly good news for an economy that depends more on consumption than producing/selling things.

Source: ChrisMartenson.com

Well, maybe it’s a good time to inflate one more asset bubble to get us out of this mess? Not really, says expert bubble-sniffer Jeremy Grantham. In his quarterly investment letter released in January 2010, he wrote:

Fed Blowing Third Bubble

Yet the Fed has been reckless in facilitating rapid asset booms in the tech and housing bubbles. As we know, the official policy remains to avoid trying to contain asset bubbles, but to ameliorate the pain of any setbacks should asset prices reverse course and collapse. Indeed, the Fed claims never to have been sure that bubbles even exist. Non-financial corporations and the Treasury were lucky that they went into the tech bubble in good financial shape and into the housing bubble in reasonable shape, except for the overstretched consumer.

Now, though, after our massive stimulus efforts, the Fed’s balance sheet is unrecognizably bad, and the government debt literally looks as if we have had a replay of World War II. The consumer, meanwhile, is approximately as badly leveraged as ever, which is to say the worst in history.

Given this, we would be well advised to avoid a third go around in the bubble forming and breaking business. Up until the last few months, I was counting on the Fed and the Administration to begin to get the point that low rates held too long promote asset bubbles, which are extremely dangerous to the economy and financial system. Now, however, the penny is dropping, and I realize the Fed is unwittingly willing to risk a third speculative phase, which is supremely dangerous this time because its arsenal now is almost empty.

Almost empty, for sure.

As the nation’s economic situation deteriorates without any domestic agents able to stop the carnage, I suspect Americans, and our overseas lenders, will experience a significant erosion in confidence. David M. Walker, the former Comptroller General of the United States (nation’s chief accountant) and former head of the U.S. Government Accountability Office (GAO), offers up the following scenario, which I happen to agree with. At a financial planning convention in June 2009, the President and CEO of The Peter G. Peterson Foundation told attendees:

This is not the big one. We will get through this. This is a recession; it is not a depression…

The real risk is the risk of a super subprime crisis is that [will] be associated with the loss of confidence in the ability of the federal government to get its financial house in order, a flight from U.S. government securities and the dollar by our foreign lenders, a dramatic decline in the dollar, a significant increase in interest rates and all the different adverse implications that would have on the budget, on the economy and for American families.

The collapse of the U.S. dollar is an idea shared by a number of “crash prophets” who correctly predicted the ongoing financial crisis America finds itself in. Peter Schiff, president of Euro Pacific Capital, appeared on CNBC’s “Fast Money” back in November 2008 and warned:

When this dollar stops rallying, it’s going to fall like a stone. That is the next major economic crisis we’re setting up. A major, major run on the dollar. And that’s going to have tremendous repercussions on our economy and our markets.

Schiff added in a January 2009 interview:

The politicians don’t want to listen to my advice, because my advice is that they get out of the way, and they let the recession run its course. That Americans have to have some discipline, on their spending and their consumption. That what we need in this country is more savings, and less borrowing. We need more production, and less consumption. But everything the government is doing now, all the economic stimuli, all the bailouts, they’re all designed to perpetuate the problem, to get us deeper into debt, and all they’re doing is throwing gasoline on a fire…

I think we’re on the verge of another major crisis, that’s far greater than the one the government is trying to deal with now, and that is the coming collapse in the value of the U.S. dollar. I think we’re going to have a run on our currency. I think the dollar is going to completely fall through the floor. And that’s going to unleash problems much greater than the ones we have now, because it’s going to send both interest rates, and consumer prices, up into the stratosphere in this country…

We are on a collision course for massive inflation.

Even some legislators see a dollar crash and higher inflation in the cards. Congressman Ron Paul appeared on FOX News’ “Glenn Beck Program” on July 14, 2009, and warned of a currency crisis and high inflation:

Glenn Beck: How much time do we have, Ron? How much time do we have to wake up?

Ron Paul: That is hard to say. Timing is really tough in Austrian economics. We know what the inevitable outcome will be, but I would guess it’s just a few more years. I would think the handwriting to be clearly on the wall before Obama finishes his first term.

Glenn Beck: Okay.

Ron Paul: Which means the next shoe is the crisis in the dollar, the value of the dollar, not just the financial system.

Glenn Beck: Okay.

Ron Paul: We will see high inflation rates soon.

On The Road To Zimbabwe?

While a currency collapse is serious in itself, the prospect of accompanying social upheaval must be taken into consideration as well. Marc Faber, the managing director of Marc Faber Ltd. who predicted the current crisis, said on the “Alex Jones Show” in June 2009 that Americans should be preparing themselves for social unrest down the road. The Swiss-born investment adviser predicted:

But, my view would be that within the next 5 to 10 years, when the public realizes that the economy does not improve, and possibly, in my opinion, actually deteriorate, and be faced with higher taxes, which may not be obvious but they will happen because of the large deficits, then at that stage I think there will be a social revolution.

Legendary investor Jim Rogers also warned of civil discord when he appeared on India’s NDTV Profit back in February 2009. Rogers, who moved his family from New York City to Singapore in the last couple of years, predicted:

I expect to see social unrest, civil unrest in the United States a couple of years from now. Yes, it’s changing the entire situation in the United States. The United States is the largest debtor in the history of the world. There is a dramatic sea change taking place. The world’s center is moving from the West to the East— to Asia. And many people have not figured this out yet. Especially people in the United States.

No, you’re going to see a lot of turmoil in the United States in the next 3, 4, 5 years.

Seattle, 1999

In closing, with every boom, comes the inevitable bust. Since the late nineties, we have witnessed a number of bubbles, which have subsequently popped. But rather than deal with the financial pain associated with these occasions, we’ve tried putting it off as long as we can, while eroding our nation’s financial health in the process. The next significant downturn (perhaps in the near future in the form of a double-dip recession) will be the tipping point, as our political and financial leaders are almost out of bullets.

Looking at the bigger picture, I am convinced that we are witnessing the decline of American hegemony, the curtain call for the “American Century” and a paradigm shift where the financial center of the world is moving away from the United States and the West in the same direction as the assets and money— the Asia-Pacific Region.

But don’t just take my word for all of this. On January 5, 2010, MarketWatch columnist Paul B. Farrell wrote:

So to all you optimists who plan to actively invest in 2010 because you accept that America’s “capitalism-without-morals” is working in spite of Wall Street’s quasi-criminal behavior: Here’s some dark-side input to factor into your investment equation for 2010 and beyond.

Listen closely to the words of our 12 “Dr. Dooms.” For a moment, take off your rose-colored glasses, step out of your denial, see the Great Depression 2 dead ahead, really look at the future our “Dr. Dooms” see in their “Doomsday Scenarios:”

1. Faber: The ‘American Empire’ has peaked, is on a decline

Hong Kong economist Marc Faber says “the average life span of the world’s greatest civilizations has been 200 years … Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent … overspends … costly wars … wealth inequity and social tensions increase; and society enters a secular decline.”

2. Grantham: Learned nothing, doomed to repeat past, only bigger

Money manager Jeremy Grantham warns that our irrational nightmare will repeat. A year ago we came dangerously close to the “Great Depression 2.” Unfortunately, we’ve “learned nothing … condemning ourselves to another serious financial crisis in the not too-distant future.”

We had our bear-market rally. Next, historical cycles plus our irrational behavior guarantees another, bigger global meltdown. We “learned nothing.”

3. Stiglitz: Wall Street creating short respite before next crash

Nobel economist Joseph Stiglitz recently warned: Unless Wall Street’s incentive system is drastically reformed, “the financial sector will only try to circumvent whatever new regulations we put in place. We will simply have a short respite before the next crisis.” Warning, nothing’s changed, it’s worse: Lobbyists run Obama, Congress and the Fed.

4. Johnson: Running out of time before Great Depression 2

Yes, “we’re running out of time … to prevent a true depression,” warns former IMF chief economist Simon Johnson. The “financial industry has effectively captured our government” and is “blocking essential reform,” and unless we break Wall Street’s “stranglehold” we will be unable prevent the Great Depression 2.

5. Ferguson: Fed’s easy money fuels new bubbles, meltdowns

In the 400-year history of the stock market “there has been a long succession of financial bubbles,” says financial historian Niall Ferguson. Who’s the culprit? The Fed: “Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks.”

Another bubble (and crash) is virtually certain, thanks to Washington’s $23.7 trillion explosion in debt, the Fed’s support for the $670 trillion shadow banking system and Wall Street lobbyists getting superrich thanks to Wall Street’s insatiable greed.

6. Taleb: Fed haunted by ghost of Greenspan’s failed Reaganomics

When Obama reappointed Bernanke, Nassim Taleb, risk-management professor and author of “The Black Swan,” warned of a new disaster: “The world has never, never been as fragile,” yet Obama reappoints an economist who “doesn’t even know he doesn’t understand how things work.” New proof? At last week’s American Economic Association, Bernanke was still shifting the blame: “The best response to the housing bubble would have been regulatory, not monetary.”

Wrong: He conveniently forgets he was advising Bush earlier, did nothing. Now Obama’s stuck with a Greenspan clone and an insane ideology focused solely on saving a failed banking system by flooding the world with inflated dollars guaranteed to trigger another meltdown

7. Soros: Dollar dead as a reserve currency, nest eggs dying

Billionaire investor George Soros’ “New Paradigm:” America’s 25-year “superboom … led to massive deregulation … blindly chasing free markets … unleashed excessive greed … created the dot-com and credit meltdowns” and a “shadow banking system” of derivatives.
“The system is broken. The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency,” warns Soros. “We’re now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.”

8. Hedgers: make billions shorting stupid politicians, bankers

Soros isn’t alone. Lots of hedge fund buddies made hundreds of millions and billions betting on the stupidity of Washington with the Fed’s cheap-money policies. Alpha magazine reports that four hedgers made more than $1 billion each in 2008. The top-25 “managers made $464 million each on average last year … a kingly sum, especially during a year of global recession, stock market wipeouts and vanishing wealth.”

9. Shiller: Dot-com, subprime meltdowns, ‘third episode’ next

Economist Robert Shiller a “Dr. Doom?” Remember a decade ago with “Irrational Exuberance?” Now he’s warning: “Bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they’re going to keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode, only this one will spread irrational pessimism and distrust — not exuberance.”

10. Kaufman: Irrationality replaced reason, science, technology

Henry Kaufman was Salomon’s chief economist and “Dr. Doom” for 24 years: “Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well, except when we use them to manage derivatives and hedge funds?”

Kaufman warns: “The computations were correct, but far too often the conclusions drawn from them were not.” Why? Selfish, myopic politicians and bankers.

11. Biggs: Sell everything, buy guns, food, head for the hills

In his 2008 bestseller “Wealth, War and Wisdom” former Morgan Stanley research guru Barton Biggs warns us to prepare for a “breakdown of civilization … Your safe haven must be self-sufficient and capable of growing some kind of food … It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc … A few rounds over the approaching brigands’ heads would probably be a compelling persuader that there are easier farms to pillage.” Biggs sounds like an anarchist militiaman.

12. Diamond: Nations ignore obvious till it’s too late, then collapse

The end will be swift. In our age of short-term consumerism and instant gratification, few hear the warnings of our favorite evolutionary biologist, Jared Diamond. Societies fail because they’re unprepared, will be in denial till it’s too late: “Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.”

The warnings were everywhere in 2008, but Greenspan, Bernanke and former Treasury Secretary Henry Paulson were in denial: It will happen again with Obama. Downstreaming problems will fail. Future bubbles get too big, crashes more deadly.

Despite all this gloom, I must stress that the coming scenario I envision is hardly apocalyptic.

Americans are a resilient people, and have weathered financial storms before.

Make no doubt, the turmoil will be much more painful than anything this country has experienced in quite some time.

Despite this, we will survive.

Our days of being THE global economic superpower will be long gone.

But, I suspect that in some ways our society and nation might be better off for it.

God Bless America,

Christopher E. Hill
Editor

Last Updated: 2/6/10