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The US: A Long Economic Winter Ahead

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By Dr Rodrigue Tremblay

Economic Winters Ahead!

“A State divided into a small number of rich and a large number of poor will always develop a government manipulated by the rich to protect the amenities represented by their property.”:

Harold Laski (1893-1950), British political theorist, 1930

“Money becomes evil not when it is used to buy goods but when it is used to buy power… economic inequalities become evil when they are translated into political inequalities.”

Samuel Huntington (1927-2008), political scientist

“… if financial markets are skittish and don’t have confidence in a country’s fiscal soundness, that is also going to undermine our recovery.”

President Barack Obama, June 25, 2010

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius, and a lot of courage to move in the opposite direction.”

Albert Einstein (1879-1955) Physicist and Professor, Nobel Prize 1921

The bond market is telling us that there could be hard economic times ahead and that deflation, for the time being, is more of a threat than inflation. [] -Leading indicators [] are also pointing to possible economic weakness ahead. -The Euro zone [] is being pulled apart by the economic asymmetry of its members, the less productive among them (Greece, Spain, Ireland, Portugal and Italy) being unable to keep pace with the very productive German economy. -The U.S. money supply M3 [] is contracting. -The Chinese bubble [] is dangerously approaching the bursting point. -And, the deflation of debt [] all over the place threatens to plunge the world economy into a deflationary tailspin. —In this context, there is a good chance of a double-dip recession [] next year, in 2011.

Readers of this blog know where I stand on this issue. One year ago, on July 10, 2009, when everybody and his uncle was declaring the recession over and the return of business as usual, I wrote a piece announcing that my analysis was pointing out to ten years of economic hardship entitled We are in the Midst of the Great Baby-Boomers Economic Stagnation of 2007-2017” [] I wrote then that many observers think that ‘prosperity is around the corner’ and that this recession, like others since World War II, will end as soon as the stock market, as a leading indicator, recovers and people start spending again. This is a myopic view of the current economic big picture.”

Let us keep in mind that in May of 1930, President Herbert Hoover was also proclaiming that “the danger … is safely behind us.” This was ten years too early for such a declaration. Just as in the 1930s, the U.S. economy and many part of the world economy suffer from a debt overhang that usually takes at least ten years to correct. When overall debt is four times larger than the economy, as it is the case today and as it was close to being the case in the 1930s, a debt deflation becomes unavoidable.

Economic booms built on a mountain of debt, some of which is fraudulent and speculative debt, tend to end badly. The higher the debt mountain relative to the real economy, [] the more serious is the following economic meltdown. This is because an unsustainable debt level means that some of the investments and projects thus financed make no economic sense and no sufficient income can be forthcoming to service and repay the debts. The first consequence is excess capacity and falling asset prices. The second consequence is an unavoidable liquidation of debts and a debt deflation. The third consequence is economic stagnation.

The danger that accompanies a protracted period of debt-liquidation and debt deflation after a binge of over-indebtedness is well known in economics. In 1933, Yale economist Irving Fisher published his debt-deflation theory [] of economic depressions. The core of the theory is that over-indebtedness leads to deflation, which in turn leads to an economic contraction. Fisher summarizes the links between debt liquidation and economic contraction in nine interacting steps:

1- Debt liquidation leads to distress selling.

2- Contraction of deposit currency, as bank loans are paid off, and to a slowing down of the velocity of circulation of money.

3- A fall in the level of prices.

4- If the fall of prices is not interfered with by reflation or otherwise, this is followed by greater fall in the net worth of business, precipitating bankruptcies.

5- This leads to a like fall in profits.

6- A reduction in construction, output, trade and in employment of labor results.

7- Losses, bankruptcies and unemployment lead to pessimism and loss of confidence.

8- The result is hoarding and a contraction in bank credits, which contribute in slowing down even more the velocity of circulation of money.

9- The overall deflation causes a fall in the nominal or money interest rates accompanied by a rise in the real or commodity rates of interest as prices fall.

A similar self-reinforcing spiral-down of debt-deflation and economic contraction can be feared in the coming years as the level of debt to the economy goes from about four times the economy to a more manageable two times the economy. In other words, it should not take more than $1.50 or $2 of new debt and credit to generate one dollar of new output. When it takes more debt than that to generate new production, this is an indication that the economy is becoming over-leveraged with debt.

Judging by the pronouncements made by leaders at the recent G8 and G20 meetings [] in June, and their collective commitment to cut governments’ deficits in half by 2013, I don’t think that politicians fully understand the danger presently facing the world economy. In fact, any new shock hitting the world economy, economic or political, risks accelerating the collapse of the debt house of cards, with dire consequences for production and employment.

Austerity fiscal measures may raise government efficiency, but they are not what will cushion the real effects of the debt deflation. Both reflationary monetary policies and overall stabilization policies are needed, especially in the banking sector, in order to make sure that producers and employers are not frozen out of new bank credit.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal. He is the author of the book “The Code for Global Ethics.”

The bookThe Code for Global Ethics, Ten Humanist Principles”, by Dr. Rodrigue Tremblay, prefaced by Dr. Paul Kurtz, has just been released by Prometheus Books.

Please visit the book site at:

www.TheCodeForGlobalEthics.com/

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  1. Yasmeen Ali says:

    The author has forgot to mention the monies reaped from Afghanistan for heoin trade.Heoin production ,has grown 40 times in the past years . In 2007, Afghanistan supplied 93% of the world’s opium, according to the U.S. State Department. Illicit poppy production, meanwhile, brings $4 billion into Afghanistan,12 or more than half the country?s total economy of $7.5 billion, according to the United Nations Office of Drug Control (UNODC).Destroying the labs has always been an obvious option, but for years America refused to do so for political reasons. In 2001 the Taliban and bin Laden were estimated by the CIA to be earning up to 10 per cent of Afghanistan?s drug revenues, then estimated at between 6.5 and 10 billion U.S. dollars a year.
    Thanks in large part to the CIA-backed anti-Soviet campaign of the 1980s, Afghanistan today is a drug-corrupted or heroin-ravaged society from top to bottom. On an international index measuring corruption, Afghanistan ranks as #176 out of 180 countries. (Somalia is 180th).
    The truth is that since World War II the CIA, without establishment opposition, has become addicted to the use of assets who are drug-traffickers, and there is no reason to assume that they have begun to break this addiction. The devastating consequences of CIA use and protection of traffickers can be seen in the statistics of drug production, which increases where America intervenes, and also declines when American intervention ends.
    The point is: There are other “avenues”,huge ones of the US income that are being overlooked here.
    And I’ve not touched Iraq!
    YAA

  2. Charles says:

    I see food price inflation and price deflation of non-food consumer goods like cars.

  3. Zyklon-B says:

    Massive depopulation is the answer. Reduce human population by 98%, and then things will get better

  4. MorningStar says:

    Inflation/deflation and the the same again except for food and a few other necessities. Oh, and a lot more taxes and, as Obama says more ‘fees, not taxes’.

    Forget jobs….thanks to the govt. they have been sent overseas and, instead of cutting back on budgets, just be ready for more govt. spending and hiring.

  5. Those who view this coming Depression as a hiccup in the system ,brought on by too much debt . Are missing the actual
    under lying cause.
    Concerning USA the politicians deliberately outsources all of the Industry ,even paying the companies to move out of the country.
    Then they allow illegals to sprawl all over the country to further the demise of USA.
    they failed to protect their own industry.
    So no this is not a Hiccup that will blow over after 10 years of Depression. This is a permanent situation ,until such time as the politicians play a different tune.

  6. Maninthemirror says:

    If anyone believes that mass depopulation is the answer… reducing the number of humans in the belief that the survivors will prosper – then start with the man in the mirror… go forth – fertilize.

  7. Zyklon – why don’t you kill yourself – DEMON!

  8. Neil Kantor says:

    yes, Zyklon-B,,,,if you, as well as the Monster Prince Phillip, think DePOP is the answer I suggest we START with the DePoppers…step up and put your life where your mouth is….

    No,, this is NOT the answer,,it is the answer of people with no imagination, no creativity – only BRUTAL Cruelty in their Stone Cold Hearts. It would result in a world that no sane real human being would want to live in. There ARE people with REAL ANSWERS – see larouchepac.com for some real answers by people with real intelligence. The CRIMINAL ELITE (bankers, corps, and royalty) WANT you to think that DEPOP is the only answer.

  9. arkansascajun says:

    i see inflation in the cost of things you need to live and deflation i the cost of things not necessary.

  10. America goes to war over to protect her interests abroad yet will not lift a finger to promote growth and jobs at home. She exports her jobs which include high income positions. Does anyone care anymore? People vote for one of the two same results yet fail to realize that the solution is in you own hands. Vote with your wallet if you want change. It will be painful but support local businesses and dreams. Buy that loaf of bread from a local baker, enjoy the simple beauty of of communication with this vendor. Thank him for supporting your little league team. duplicate this process where ever you can. Challenge yourself. Turn off your TV for two day. Go to the library. Do you want quality of live or just MORE. If you can live with out your TV for one month I promise it will change your life forever. Don’t look for some magical solution to make everything perfect, again. Maybe it wasn’t perfect before – lies become truth if hear them long enough. Review your dreams and don’t look to others to supply them for you. Support goodness and reward kindness. Learn to love the simple things again :)

  11. I read somewhere that a large war may help the world out of this econimic mess…but, that’s crazy talk – right?

  12. Austerity fiscal measures may raise government efficiency, but they are not what will cushion the real effects of the debt deflation. Both reflationary monetary policies and overall stabilization policies are needed, especially in the banking sector, in order to make sure that producers and employers are not frozen out of new bank credit.

    these steps are precisely what hoover undertook in 1929-32; roosevelt in 1932-1940 (after campaigning that he would balanc the budget); reagon in 1981-3; bush 2 in 2007-2008; obama to infinity.

    such steps (bailing out banks, increasing spending/ debt) is precisely the WORST thing that can be done. soften the impact – yes – but the length and severity of the downturn will be longer and worse than if everyone had taken a deep breath and did what harding did in 1922-23 which was NOTHING. the downturn was fairly severe, but more importantly was quite short.

  13. Kerry Bindon says:

    It seems to me that with the current cosmic grand cross in the heavens above and the geminian comet, and the fact that this is now operative till june 2011, with a revisit next June…………….the seeds are now obvious…….taking the gulf as our first omen, the replacement of its CEO the second and the decapitation of the Obama type first adulated now revulsed ex leader of Oztralia Kevin Rudd…………Look for similar nine pins yo fall in a ascending cascade of divine deliverance………..thems my thoughts…
    Cheers all

  14. Yes you are all correct-yet the whole picture is clouded.Marc Faber the Gloom and Doom man is right that U.S. is going
    to be like soviet union.China is model for U.S..Norman Dodd
    in The Hidden World Agenda-You Tube and ’1/7 Syndrome of
    Control” You Tube presentation Lindsey Williams with John
    Coleman-The Committee of 300 Conspiracy-You Tube -and
    to top it off the Benjamin Freedman Speech-You Tube sum up
    the final solution of elite New World Order.

    1600 AD population of slaves will meet their wishes.We also have” Leo Zagami in the 2012 Armageddon”-You Tube which must be taken seriously.

    There is possibility of economic crash in Nov 2010?
    The dollar may be worth 10 cent on the dollar or have no value.War is ripe as solution.Iran target?

    Police-military trained for martial law containment.This will end U.S. Constitution-financial crash and war.

    This has been designed by elite to create NWO.The financial crisis is not accident-but by produced malice and intent.

    The North American Union conspiracy in the closet and exposed proves intent of open borders world wide.Crisis
    must exist for this to come to fruition.

    2012 DEC 21 and before in 2011 may begin show of alien
    kind.Planet X on course-Nibiru and earth change.All
    may be illusion.HAARP plays Moon Beam-Diamond Laser

    A new age of what dimensions.

    Walter E. Haas Search Yahoo-Google.com
    God Bless America

  15. Dr. Darrough says:

    “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months.”

    - Dr. Irving Fisher, speaking on October 17, 1929, a few weeks before the Great Crash.

    Fisher was wrong then and Tremblay is only parroting Krugman here.. They are both wrong now. They work to preserve the status quo.

    Mises was right in 1929 and Faber,. Ron Paul and the followers of the Austrian School are right now. More “stimulus” is like telling a bankrupt homeowner to take out a second mortgage.

    Whenever a pundit mentions the “double-dip” recession, that should be your first alarm. The only “recovery was” what the Wall Street banksters received.The “jobless recovery” is a media myth and so is the threat of deflation.

  16. GoneWithTheWind says:

    It could be a decade long economic depression. Prepare for the wrost and hope for the best. It is later then you think…

    • MorningStar says:

      Finallyl, someone looking at the big picture!! Oh yes, the ’29 depression went on for 12 yrs. & only stopped when America went to war.

      Forget about investing in gold/sivler & prepare for the long run. I tell everyone to invest in canned food. Silly? Maybe, but buy a can of canned beans for $1 today, with a 3 yr. expiration date, &then eat it in 2013 when the same can of beans is $3 (inflation coming soon). You save money & don’t have to pay captial gains.

      The times are going to get worse.

  17. Mike Forteman says:

    Ok all you Preppers let’s Begin!!!! TEOTWAWKI

  18. Tom Brown says:

    Money velocity is contracting, M-3 is contracting, individuals are deleveraging, businesses are not hiring, banks are not lending, real estate is still contracting, local and state governments are in deficits, tax revenues are declining, value of financial assets have declined, high unemployment rate, low capacity utilization, tax increases on the horizon, trade deficits, commercial loans in default. The stimulus package, cash for clunkers, home buyer tax credit were just salt and pepper on a near empty dinner plate. Add in the global austerity measures to economics of contacting federal, state and local fiscal budgets and it’s just a matter of time before the whole system spirals down further. The global resource burn rate will drop down to population maintenance level, with no growth and no significant change in resource ownership regardless of political changes. There is a second more severe financial contraction coming with a protracted sideways economy in population maintenance mode. The main street economy becomes more austere.

  19. When cabinet ministers in the British Government announce at a Press Conference that the UK is in debt because its borrowings exceed its ability to pay am I right in thinking that HM Government owes money to private international banking cartels that are essentially owned by a handful of oligarchs controlling fiat currencies? 
    Small though my knowledge is, can I deduce from this simplistic view we are living among hierarchies of power who for centuries have financed the civil administration, first of cities, then of city States, then of States, followed by Federations of States, out of their fortunes amassed by renting and leasing land and property to inhabitants who make business on their estates. According to 'Who Owns Britain' by Kevin Cahill ancient political power has been retained by secrecy – by forcing the civil governments to keep secret the financial accounts of the big names who accrue vast fortunes from land ownership . 
    If power has been retained by secret monarchical holdings throughout the economic development of the Industrialised World then the Lender could still be understood as the Landowner and the Debtor as the Government managing the land on their behalf by keeping the public in debt to them. All in secret. All covered by The Official Secrets Act, all held in confidence among high degree Masons who run Secret Societies awash with heraldic, aristocratic and oligarchic symbolism, who all wear the uniforms that Royal vassals have always worn – that show loyalty and fidelity in service to the Elite. 
    The public are kept amused by a flood of entertainment provided by other Royal Vassals – The Media and the Educationalists with the effect of keeping them totally in the dark about the true character and nature of their slavery to The Lender. 
    Now. What would Jesus Christ do in a situation like this. 
    He would turn over the tables of the money lenders and throw them out of God's House. God's house is the Earth and it belongs to ALL who dwell upon it. The Earth does not belong to just the servants of mammon, the lovers of money, and the makers of war. It belongs to a body politic that can bring these creatures of the dark to ACCOUNT for their sometimes demonic hostility towards the democratic process of change toward a new regime of power that is averse to ownership of labour by the few

  20. I have to admit that ths coming winter will also be a very long and difficult one considering the current economic situation. Even the
    <a href="http://fixedincome360.com/corporate-bond-market">corporate bond market</a>  market are in very bad conditions.
    Well, we'll have to wait and see what happens.
    http://fixedincome360.com/stock-market-collapse/

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