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Friday, November 14, 2008

The US Depression

Christopher Laird had written an article called, “Tough Sledding Ahead, Surviving a Coming US Dollar Collapse”, on his site Prudentsquirrel.com. It was posted on the blogspot -- Economicrot.blogspot.com. Mr. Laird says that there are only 2-4 years before the US dollar collapses. He presented reasons why the dollar has been rallying, which were flight to cash during market liquidations, the hoarding of cash because businesses cannot roll over the short term credit they used for payrolls and ongoing operations, the usual end of the year cash surge for businesses and financial institutions, the flight to the US dollar for safety, and then finally, other national currencies adjusting to the slowing world economy, and the cooling of the once hot foreign markets. And, in addition, there has been a lot of money moving out of the “emerging” markets to the U.S.

He goes on to say that we are about to face two significant problems never seen before. The world is going to see a severe recession bordering on an economic depression, and the collapse of the US dollar. He says that what is holding the US dollar up in spite of the worsening US trade and budget deficits, which add up to around $1 trillion, is that the US economy was an exporter's dream customer-come-true. As long as we kept buying stuff, a lot of stuff, our trade partners would buy our debt, as well as buy up our assets.

Now that the consumer is tapped out, and in debt so much that they have to cut back on their own consumer purchases and binge buying addictions, foreign investors of the US dollar, and US Treasuries are likely rethinking if the dollar and Treasuries are good investments, or if they should be reconsidered as such. Mr. Laird states that, at that point, the US dollar will rapidly fall into a devaluation crisis. He predicts that the first crisis will be an economic depression, and the second will be the demise of the dollar, or at the very least, a severe devaluation likely around 70% or more (at first).

He claims that this depression would last 5 years, with unemployment reaching 20%.

He also discusses the crisis in China, and once their economy severely slows, to what he claims to be 8% growth, the country will experience political unrest and massive unemployment. The China Daily newspaper, dated October 20, 2008 read as follows:

“China's economy, one of the fastest-growing economies in the world and the biggest contributor to global growth, grew 9.9 percent year-on-year in the first three quarters of this year, according to official figures released on Monday, showing a trend of a slowdown amid the current global financial crisis.

In the third quarter, the gross domestic product (GDP) growth rate slowed down to 9 percent, the lowest in five years, from 10.6 percent in the first quarter, 10.1 percent for the second quarter and 10.4 percent in the first half of 2008.”


Mr. Laird says that China must add 15 million jobs per year merely to keep up with the population growth, since it has a total population of 1.3 billion. China continues to have 800 million poor, rural citizens trying to vet for the limited city jobs.

He does not feel that the economy will stop contracting. Without credit the world economies will continue to contract. Everything is credit based. The only other option is a pay-as-you-go system and businesses are not structured to operate in that way. Businesses are accustom to credit and if this way of doing business does not return quickly, a world economic depression will come. Mr. Laird does not feel that credit will becoming back.

This spells doom for the dollar. Lower interest rates, and the Bush economic stimulus package handed to the citizens did not work.

There are two critical problems leading to an economic depression, as explained by Mr. Laird. The first is deleveraging. It cannot be stopped. The financial bubble beginning in 1945 and, which has now ended in 2008 has been broken. He estimates that there is, at least, a $1000 trillion worth of world financial markets in the process of deleveraging. The biggest deleveraging comes from derivatives, which were basically bets. He writes that the Bank of International Settlements states that world derivatives amount to over $1000 trillion or $1 quadrillion in value!!!!!!

What has been handed out to slow the banking crisis is nothing when it has not opened up credit. And then, who will borrow under such uncertain conditions?

Mr. Laird has solutions. His first is to repeal Social Security and Medicare obligations. The second is debt forgiveness. By doing this, the world would recover, but he realistically sees this as never happening for many reasons. He foresees the two entitlements going bankrupt in 30 years, but in my opinion, 30 years is a long way away. A great deal of change will likely occur over that period of time to correct the weaknesses in these entitlement obligations.
I agree with Mr. Laird’s predictions, at some level, but I feel that if the Obama administration does not directly inject this economy with the right fixes, then what Mr. Laird predicts might actually happen! I have stated my fixes in previous posts, but will repeat them along with others.

The economy needs a major works and services Marshall Plan type of intervention. Many of our roads, bridges, schools, sewers, water delivery systems, public transportation network, airports and public buildings need repair and renovation. A priority list of the most needy projects must begin on January 21, 2009. Fallow agricultural lands, both in rural and urban areas need to be planted with “green” and healthy crops for people instead of livestock. Local planting and distribution needs to occur to help reduce fuel and shipping costs during in-season growing periods. Public transportation subsidies must go out to communities to increase ridership and reduce costs as a lure to commuters to ride public transportation to and from work.

The federal government needs to give grants and rent the roofs of homeowners, business owners, corporate owners, and public buildings to install solar panels that can connect into the existing energy grids all across the nation. When available, more wind generators should be built to also tap into the grid. A new and more efficient electric grid should be created.
The government, if they are to subsidize the auto industry, should mandate that any cash infusions would come at a cost. All corporations willing to take government tax dollars must allow for worker ownership stake in the companies. In addition, the downsizing of brands would likely be necessary, and merging all three American car companies into one reasonably sized auto manufacturer makes the most sense. The building of electric hybrids and full electric vehicles must be a requirement. Also, grants should be made available for individuals to convert their own gas vehicles into full electric cars. Also, force the oil and gas companies that hold land leases to either explore those sites, or give them up. It is believed that wind power generation machines could go up very quickly and hooked into the grid with little down time. 
(See our video library for electric conversions.) (Read Peter Morici.)

Dr. Peter Morici has written that the Chinese Yuan has been valued too low in relation to that nation's productivity. The Chinese have tried to keep their currency pegged close to the Dollar in order to keep their exports to the U.S. cheap. He feels that must be changed. That change would positively effect the U.S. trade deficit imbalance. 

Robert Kuttner supports some of these interventions, as well as “professionalizing” many jobs, which are not considered so, but are necessary for a society to function properly. By making training certificate programs mandatory for day care providers, nursing aides, nursing home care providers, and others it would increase their pay and level of competence.

And finally,there is a need to address a national type of health care program for all Americans, with the government taking ownership of all drug research and development, which would also include the patents on drugs. By doing so, the drug companies no longer can claim that the high price of drugs is due to research and develop. Drug companies would only be responsible for the manufacturing of the drugs. (Dr. Dean Baker explains this idea in further detail.)

All these interventions would reduce the trade deficit, put people back to work, allow for small businesses to blossom without the worry of family health care costs, and would create a new export market for new and advanced Green technology products. We would, once again, increase our industrialization from 17% of GDP, to higher percentages.

In addition, significant tax rate hikes would have to be raised on the top-tier income earners, just as it had been done during other times throughout the 20th century. For example, between 1936-1982 the rates ranged between 70 to 92%. Suspension of capital gains and inheritance taxes on the top-tier might also have to considered.  (Read Larry Beinhart.)

Another very important initiative required, which would improve our energy usage would be to develop greater energy efficiency and conservation technologies. This would allow us to use energy in a smarter way. Efficiency and conservation technologies would make the delivery and use of energy more effective. It could be looked at its lower end level, such as turning down the thermostat and turning off of lights, but at the higher end, it would be better engines, motors, switches, controls, electrical grids, etc.

I feel that the future would see a more stable, prosperous and secure nation with these initiatives. The debt would increase, of course, but the alternative would be much worse. There is no question that without these interventions, the nation would be destined for a long lasting depression. A recession cannot be avoided, but hopefully, it would be short-lived with interventions discussed here.

Thank you for reading,  jerry

2 comments:

oliviaharis said...

The Great Depression is often called a defining moment in the twentieth-century history of the United States. Its most lasting effect was a transformation of the role of the federal government in the economy. The long contraction and painfully slow recovery led many in the American population to accept and even call for a vastly expanded role for government, though most businesses resented the growing federal control of their activities.
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oliviaharis
word of mouth marketing

Carl Cimini said...

Great post Jerry,
I think your solutions and suggestions will come to pass. Yes unfortunately or fortunately depending on your point of view, the government will be involved in cleaning up the mess. Guidance is needed we seen what corporate greed has wrought.