22 Reasons for Economic Collapse (Special Report)

by Jack Lee

The two primary ingredients for a depression are debt and fear – we have too much of both!.

The United States has been locked into massive debt accumulation from increasing under funded entitlements and mandates that go back 40 years or more. During this time, both the Democrats and Republicans were guilty of a failure to manage. Both feared addressing the enormous problems like social security and instead they ignored them. Nobody in Congress or the White House had the courage to advocate austerity because it might be unpopular with voters who had become too accustomed to getting “something for nothing” from government. Americans they thought, feared the pain of treatment too much! So, as absurd as it seems now our past leaders (and some of our current) were inclined to let this economic cancer go untreated.

Time is up! The Piper is here and he wants to be paid, but we’re broke. The pattern of spending has been far in excess of our revenues. We’re currently spending well over two billion dollars a day more than we take in! You must know this can’t be sustained. Our legislators certainly do, but the collective will to fix is STILL not there. They would have too make deep cuts and deal with 3rd rail issues that could cost them their next election. Self-preservation has dictated they stall on the fix as long as possible, but the days of stalling are over and we approach the day of reckoning. . . and brother are we in trouble!

We started the year at 9.7% unemployment and we’re now at 9.8% – this is progress? This is why we spent trillions?

It was thought by most Democrats currently in Congress that by extending the unemployment insurance benefits it would see us through the crisis, but they were wrong, woefully wrong. To extend unemployment benefits any longer is to spend more money we don’t have. (UPDATE: 12/06/10 Congress approves 13 more months for unemplyment benefits for nearly 10 million people) This has the effect of encouraging about a 30% of those on unemployment to not take a job, paying equal too or less than, their current unemployment benefits or so says a recent study.

“We are still in the middle of this crisis and there is more trouble ahead of us… If you don’t address the issues, you risk having a double-dip recession and one which is at least as severe as the first one.” Economist Mouriel Roubini

The situation in Europe is even worse thanks to a prolonged experiment with socialism that led to an even higher unemployment than the USA. Europe can’t easily reverse course with a bailout of a few trillion in Euro’s and a few cuts here and there. A true recovery across the pond will require drastic spending cuts, radically lower taxes, more personal savings and less restrictive government regulation so business can survive. Many of their old entitlement programs will simply have to go and this means the end of European style socialism as they know it.

Given the degree of overspending by imprudent nations their course change will happen either by a well thoughtout plan implemented under their tight control or no plan and no control and let fate be their rudder. Half measures won’t work when you are this far into the red. Unfortunately, we don’t see any good plans taking shape yet.

The trade unions in Greece are applying too much pressure on the government and every indication is Greece will eventually go back to spending money it doesn’t have until it implodes. The current crisis in Greece is threatening the Common Market unity, and this begs the question will the Euro even exist is another 3 or 4 years and what impact will it have on the global economy? It now looks like Spain could be the next nation headed for bankruptcy and looking for a massive bailout. Spain says no, but economist say its true. We’ll see.

“Dealing with a banking crisis was difficult enough, but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there’s no backstop.” Bank of England’s Governor, Mervyn King

Cuts alone can’t solve this problem. In fact, just cutting could easily bring on an immediate double dip recession. This is why we’ll need a thoughtful, comprehensive plan that includes tax reduction, less onerous government regulation on businesses, spending reductions of 10-30% for most fed programs and the complete elimination of wasteful fed programs, the shoring up retirement systems, increase in our personal savings and overall government must do everything it can to stop the job exodus, help the private sector save jobs, create new jobs and let us compete fairly in the global market place. Remember this: The less business there is, the less people who will be employed, and the less employment the less spending, less spending means less commerce and less income for everyone. This is economics 101.

We’ll have to do our part too, government can’t do it all for us. So, do what you can to get out of debt and reduce your expenses. Try to develop more income and this might sound over the top, but start storing up food and supplies. It couldn’t hurt. Too many of us start preparing once the disaster has arrived and if you wait that long this time you will be in serious trouble.

To get an idea of how rapidly the commercial real estate market is unraveling, just check out this chart. Double click on picture to expand it.

The situation is dire. We have borrowed so much that our national deficit is dangerously high and our currency is at risk of being devalued. It is completely out of balance with any notion of a gold standard. Our financial picture is akin to the perfect storm, we have a multitude of financial problems all coming due at a time when the U.S. national debt is experiencing exponential growth.

The debt is now over 13.9 trillion dollars (updated Dec. 2010) and it is rising at a rate of about 3.8 billion dollars per day. Imagine if you spent one dollar every single second of every single day, it would take you over 31,000 years just to spend one trillion dollars.

In 2007, Peter Schiff published a book called, Crash Proof: The Coming Economic Collapse. He predicted the collapse of the sub-prime mortgage market and he predicted that the collapse would spread to the general mortgage market and then become an economy-wide credit crisis. That’s exactly what happened.

In a more recent book, the same author says that the borrow-and-spend economy cannot be sustained, and that the U.S. may well be headed eventually for hyperinflation and economic collapse. He compares the U.S. economy to a “house of cards”–an economy built on a “phony foundation of debt-financed consumption”. The Little Book of Bull Moves in Bear Markets.

Arthur Laffer is warning us, the nation is headed to an economic collapse potentially in 2011. Laffer is one of the world’s top economists and he’s authored several popular books on economic theory including his latest, “Return to Prosperity: How America Can Regain Its Economic Superpower Status” Laffer was an adviser to the Reagan Administration during the 1980s and a member of the Economic Policy Advisory Board. His economic models have been proven to work and have withstood the test of time. Laffer is not a doom and gloomer and when says we’re in trouble – you better believe it.

This table lists how congress spends your money: (double click on picture to enlarge it.

We don’t know exactly how long it will take for an economic collapse to hit us, which is even more reason for us to act prudently and sooner than later. However, the collapse is almost an absolute certainty if we do nothing.

Here are some of the key warning signs that instilled fear in economists around the world:

1. The number of Americans who are declaring personal bankruptcy continues to shoot into the stratosphere. 1.41 million Americans filed for bankruptcy in 2009, which represented a 32 percent increase over 2008.

2. New study predicts that 5 million houses and condos will go through foreclosure over the next couple of years. If that actually happens, the impact on the U.S. economy would be enormous.

3. The U.S. Treasury Department has announced that foreign holdings of U.S. Treasury securities fell by 53 billion dollars in December, which was the biggest one month decline.

4. China is reducing its holdings of U.S. Treasuries by 34.2 billion dollars. If other nations follow suit we will have a devaluation of our dollar and hyperinflation.

5. Jobs are not forth coming despite bailouts thanks to capitol flight, heavy regulations and taxation or business. In some areas of the United States, unemployment is now at depression-era low levels. The mayor of Detroit estimates that the real unemployment rate in his city is now somewhere around 45 to 50 percent. His city is not alone. In California the unemployment rate is at 12.5 percent, the highest since records started being kept. Yet if we include the underemployment rate we reach an astonishing rate of 23 percent. “So goes California – so goes the nation.”

<6. High unemployment insurance taxes are discouraging small and mid-size companies from hiring more workers. According to the National Association of State Workforce Agencies, companies in at least 35 states will have to hand over even more in unemployment insurance taxes in 2010-11. This is one of the many factors holding back jobs creation.

7. U.S. commercial property values are down about 40 percent since 2007 and currently 18 percent of all office space in the United States is now sitting vacant and this is climbing. Real Estate is a leading economic indicator.

8. Despite low interest banks consumers are finding it hard to qualify for a loan. Banks have the jitters and many are hanging on by a thread. High bank foreclosure rates continue to remind banks the effects from their housing implosion is far from over, therefore banks are not inclined to make loans. The major banks are being instructed to hoard cash in preparation for the next financial crisis.

9. Under funding of pension plans: U.S. is facing a pension crisis of unprecedented magnitude. The majority of all pension funds in the United States, both public and private, are massively under funded. With millions of Baby Boomers now at or nearing retirement age, there is simply no way that all of these unfunded pension obligations are going to be met. Northwestern’s Kellogg School of Management recently calculated the collective unfunded pension liability for all 50 U.S. states for Forbes magazine at 3.2 trillion dollars.

10. Social Security and Medicare are both under funded. Social Security and Medicare will decimate U.S. government finances. The coming wave of retiring Baby Boomers is going to bankrupt the entire Social Security system unless something is done quickly.

11. It is being projected that the largest commercial real estate loan losses will be experienced in 2011 and the years following. Some analysts are estimating that losses from commercial real estate at U.S. banks alone could reach as high as 200 to 300 billion dollars. Home prices are more likely than not to see a further roll back, many analysts are projecting prices returning to 2000 levels.

12. The Federal Reserve Bank has overstepped its authority and loaned out 3 trillion of your tax dollars to many undeserving and unqualified entities. The Federal Reserve revealed the details of over 21,000 transactions stretching from December 2007 to July 2010 that totaled more than $3 trillion on Wednesday. Most of these transactions involved giant loans that were nearly interest-free from the Federal Reserve to some of the largest banks, financial institutions and corporations all over the world. In fact, it turns out that foreign banks and foreign corporations received a very large share of these bailouts. This was far beyond the scope of the Federal Reserve and its hard to imagine why, but not if you believe in the new world order theory.

13. Sometime in the middle of 2009 most Americans had spent down what little savings they had. A vast majority of Americans are now at zero net worth. Many of us are in debt for ten’s of thousands of dollars on homes worth much less than market value.

14. Bloomberg’s respected financial website says that 46 U.S. states are facing a “Greek style” financial crisis.

15. John P. Hussman, fund manager of Hussman Strategic Total Return and Hussman Strategic Growth, has issued a full-fledged warning: “Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.”

16. U.S. debtors owe nearly $1 trillion in credit card debt, and about $14 trillion in debt owed to other countries. Together, the U.S. and Britain owe about 40 percent of the total external debt of all the world’s nations. We are in no position to weather a further downturn in the economy.

17. The Bank of International Settlements said in its annual report that major banks on both sides of the Atlantic Ocean continue to remain “highly leveraged and still appear to be on life support”.

18. Deficit spending is accruing at the rate of 3.8BN a day.

19. Unemployment was at 9.7 at the beginning of the year, it’s now 9.8 despite the billions in bailouts. Some say the true rate is closer to 15% because of those who have fallen off the statistical rolls.

20. Gold is expected to hit a record high of $1500 an oz. by years end. Gold is directly tied to stock market jitters and the world economy.

21. Despite record low interest rates few people are borrowing. Professor Tim Congdon from International Monetary Research says, “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly.” Banks are still reeling from the housing implosion and they are preparing for the next wave of foreclosures, only the most secure loans are being made.

22. Tax increases: Federal, state and local tax rates are scheduled to rise quite sharply if we don’t extend the Bush tax cuts. But, even if we do extend them it only delays the inevitable without other drastic measures being employed. Democrats are determined to raise taxes and this means dividend tax will skyrocket from 15 percent to a whopping 39.6 percent, the capital gains tax will increase 25% and the estate tax will jump from zero to 55 percent. State and local governments are hard hit too and they too are looking to raise taxes, some will call them fees, assessments, bonds or whatever, but they will have the same effect on us.

“Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid.” Richard Russell, the famous author of the Dow Theory Letters,

Reality check: Nobody has a crystal ball on what is absolutely, positively going to happen in the global economy in the next 6 months much less the coming years. So much depends on how we manage the current crisis and of course those unforeseen events that include the law of unintended consequences. This is the chaos theory. Nothing in this world is ever going to be completely predictable because there are simply too many variables that change every day. However, we can make a pretty good educated guess based on our past history coupled to current events and statistical facts.

We’ll be updating this prognosis as world events change and that’s about as good as we can do. However, the current prognosis says, this time the train not only goes off the tracks, but off the cliff…unless we act. Current missteps and flawed policy says the U.S. is almost certain to face another great depression unless the President and Congress take immediate action to correct our course.

A parting thought: We’ve pointlessly and frivolously exhausted our resources trying to fight the Great Recession and that means we have few options to mitigate loss if we do plunge into depression. Therefore, we have every logical reason to expect, IF, we go there it’s going to be worse than 1929.