Great Depression Online Archive Issue:

The Risks are Inherent

Great Depression Online
Long Beach, CA
December 09, 2008

Inside This Issue You Will Discover…

*** An Ever Illusive Obsession
*** A Long Slow Slog
*** The Risks are Inherent
*** And More

An Ever Illusive Obsession

Sometime around 1150 AD Bhaskara II, the 12th Century Indian mathematician, had a novel idea…a wheel that would run forever.  For he was a smart guy in his day.  In fact, he was the first to pencil out a solution to the quadratic equation.  And with a little brain sweat he figured he could get his wheel to work.

From the outset his idea seemed clever enough.  By over balancing a wheel with shifting weights that would slide into position further from the wheel’s center – where there’s greater torque – for the falling half of the wheel’s rotation and closer to the center for its rising half, Bhaskara II claimed the wheel would rotate in perpetuity. 

As it turned out, what Bhaskara II envisioned became the first known reference to what was later branded the perpetual motion machine.  And in the 18th and 19th Century, its invention became the ever illusive obsession of scientists. 

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Over the years, many perpetual motion machines have been designed; but none have been successful.  For the fantasy of a perpetual motion machine is the same fantasy of the structured debt financial system that has deteriorated in dramatic fashion – that it must somehow produce more than it consumes…it must somehow transfer out more than it takes in…it must somehow return more for less…

In other words, it must somehow give you something for nothing.

A Long Slow Slog

Job loss numbers for November were published last Friday and they were grimmer than grim.

“Employers axed 533,000 jobs last month,” reported the New York Times over the weekend, “the worst monthly loss since December 1974, bringing the number of lost jobs in the last year to 1.9 million.  Worse, two-thirds of the losses were in the past three months, a sign of an intensifying downturn and of more job cuts ahead.”

That means that between August 1st and November 30th about 1.3 million people have lost their jobs.  And for each job that’s lost there’s a corresponding income that’s also lost.  And as each income’s removed from the economy, more jobs are lost…in turn removing more incomes from the economy.

Here’s an example of this phenomenon…

“Joblessness and the threat of joblessness will depress already dismal consumer spending, which in turn will depress business investment, leading to higher unemployment.  Rising unemployment will also fuel more foreclosures, which will further destabilize the financial system and reinforce economic weakness.”

The “official” unemployment rate’s at 6.7 percent.  By this time next year it could reach double digits.  Unfortunately, before this downturn’s over, a lot of smart, able, and intelligent individuals will be out of a job. 

For some this will be the death nail.  But for many others, after an extended period of hardship they will reinvent and reemerge with a better life.  Getting from here to there, however, will be a long slow slog through adversity.

The Risks are Inherent

In the meantime, the Federal Government and the Federal Reserve are determined to prevent an economic depression no matter what the cost.  So far their efforts to stimulate things have yet to take hold.  Instead what’s developed may go down as the biggest bubble implosion in world history.

U.S. Government debt has long been considered the safest investment in the world.  And last week Fed Chairman Ben Bernanke stated that to provide liquidity – for the purpose of combating deflation – the Federal Reserve could buy long-dated Treasuries.  Subsequently, the 10-year Treasury note’s yield, which moves inversely to its price, rallied to the lowest it has been since the 1950’s.

In short, this market relationship will not be sustainable.

The provision of liquidity, in essence, is inflationary.  And in recognition of this Treasury yields should at some point increase; not decrease.

In this respect, the U.S. bond market’s nearing the cusp of what could be a dramatic and devastating sell off.

The risks are inherent.

And the ensuing destruction of capital will be overwhelming.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Many financial experts, including George Soros and Bill Gross are saying that we are facing the worst economic conditions since the Great Depression.  There is however a way you can protect yourself, your home and your assets starting today.  It’s all outlined in “The Insider’s Guide to Surviving the Recession.”  Learn all about it here: The Insider's Guide to Surviving the Recession.

 

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