Great Depression Online Archive Issue:

Pounding on Inflation with a Jackhammer

Great Depression Online
Long Beach, CA
July 14, 2009

Inside This Issue You Will Discover…

*** Middle Class Debt is Breaking Down
*** Two Exploding Debt Bombs
*** Pounding on Inflation with a Jackhammer
*** And More

Middle Class Debt is Breaking Down

Things are ugly out there and middle class America is feeling it most.  The combination of excessive debt and rising unemployment has triggered a cascade of destruction through the economy like an exploding daisy chain across a battle field.

What’s happening is painfully simple.  As unemployment rises, the debt structure that sustained the middle class is breaking down.  The effects of rising unemployment show up in home foreclosures and bankruptcies.

The guy at the poverty level had nothing to lose to begin with.  And while the wealthy may have had their net worth brought down several notches, they won’t likely feel the effects of the flailing economy in their day to day lives.  But for the middle class, the guy that schleps and toils to pay the mortgage, several car payments, and college tuition...all it takes is a pink slip and several months without a paycheck and he’s filing for bankruptcy.

When unemployment was low, if you lost your job you could always find a new one.  Even during the last two recessions a little persistence or perhaps relocating to another region of the country was all it took to be back in the game.

~~~~~~Deflation Survival Guide~~~~~~

With you in mind, financial analyst Robert Prechter scoured thousands of pages of his warnings and teachings about deflation.  He then handpicked his most important deflation writings and compiled them into a special, unedited, 60-page Deflation Survival Guide.  If you haven’t yet given Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so.  Download Your 60-Page Deflation Survival Guide Now Free

~~~~~~~~~~~~~~~~~~~~~~~~~

But now there are no jobs to be had…anywhere.  Yet when it will end is anyone’s guess.

We suspect there are plenty of ticking time bombs out there still set to explode.  Colossal middle class debt and rising unemployment are just two of the many explosions.  Some have delayed fuses…like Option Arm and Alt-A home loan resets, which won’t peak until 2011.  And others, like commercial real estate and government budgets, are blowing up across the land…

Two Exploding Debt Bombs

If you haven’t heard, many state coffers are running empty as falling tax revenues fail to keep pace with spending.  In some states the coffers are beyond empty.  And here in the land of fruits and nuts they’re issuing payment in the form of IOUs.  We wish we were making this up…but we’re not.

In fact, California’s already issued 90,000 IOUs worth nearly $355 million.  But late last week, we got word that Wells Fargo, JPMorgan Chase, and Bank of America stopped accepting the IOUs after Friday.  You’d think this would force the ditherers in Sacramento to come together, make tough decisions, and cut the budget to be inline with the reduced revenue.  Alas, it hasn’t.

In regard to commercial real estate, Real Capital Analytics Inc. released a report on last Wednesday identifying 263 commercial properties valued at $4.5 billion – just in Los Angeles – that are in default, foreclosure or bankruptcy…a 133 percent increase from January.

“[Don] Walker,” senior vice president of Irvine-based John Burns Real Estate Consulting, reported the Los Angeles Times, “said the worst may be yet to come because commercial real estate numbers traditionally lag behind residential.  ‘We might be in the early stages of decline,’ he said.  ‘I don’t expect a turnaround until consumers regain confidence and the jobless numbers stop mounting.’”

We are, without a doubt, caught in the vortex of a deflationary spiral where…

Falling demand leads to falling prices, this in turn leads to debt defaults, bankruptcies, layoffs and wage reductions…which leads to more falling demand, falling prices, debt defaults, bankruptcies, layoffs and wage reductions, and thus more falling demand…

Regrettably, there will be many strip mall and office building ghost towns before this is over.

Pounding on Inflation with a Jackhammer

Here at the GDO we’ve contended all along that monetary and fiscal policies would lead to inflation.  On the monetary side, the Federal Reserve’s lending money to the Big Banks for practically free and is printing money to buy up government debt.  And on the fiscal side the government’s running a $1.8 trillion budget deficit for the 2009 fiscal year.

All this money, we believe, is bound to result in future inflation.

But the economy’s a bewildering enigma.  The more you try and figure it out…the more befuddling it becomes.

As the government’s flooded the financial system, the money’s trickled into the real economy like Los Angeles River ooze in July.  And what money has trickled into the real economy is quickly withdrawn by job losses, defaults, and bankruptcies.  In other words, deflation’s pounding on inflation with a jackhammer.

The stock market, despite yesterday’s euphoric buying, is also hinting at another sell off.  Should this happen it would be deflationary; not inflationary.

Still, we won’t throw in the towel just yet.  By our estimation, it’s only the sixth round of a twelve round heavyweight slugfest.  While for now, inflation seems to be down for the count.  When the economy begins to recover, which it eventually will…because it always does, inflation will return, its return will be swift, and its consequences will be relentless.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  In 2002, when Robert Prechter released a book called Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression, an eventual New York Times, Wall Street Journal and Amazon best-seller, the detractors were out in full force.  The elite financial community labeled Prechter – the 1980s “Guru of the Decade” – an outcast, a man preoccupied with the concerns of “small children.”  Experts from all schools of the economics profession said Prechter’s deflationary scenario was “utter nonsense,” and as likely to happen as “being eaten by piranhas.”  “It couldn’t happen!”  “It never will!” they guaranteed.  Yet…here it is.  Fortunately, Prechter’s handpicked his most important deflation writings and compiled them into a special, unedited, 60-page Deflation Survival Guide.  Download it Now for Free

 

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