Author: Bart klein Ikink
Introduction
Most people do not realise how bad the economy really is. The mainstream media are associated with the government and corporate interests. Therefore they are not necessarily telling the truth, especially when the truth could disrupt the current social order.
Comparisons with the Great Depression tend to underestimate the real magnitude of the problem. The main differences between the Great Depression and the current economic situation are:
- Economic statistics are adjusted in such a way that the economic situation looks better than it really is.
- Oligarchic interests are running the affairs in Western world, especially in the United States. This has effectively ended what was left of democracy in the West.
- Markets were relatively free before and during the Great Depression, so market forces could correct imbalances. Now markets are manipulated and therefore markets cannot correct imbalances until the system breaks down completely.
- Before the Great Depression, people had more savings and government budgets were more balanced. Now many people and governments are deeply in debt.
- Derivative products may result in a meltdown of the financial system. During the Great Depression there were no derivative products.
- Before the Great Depression, living standards were relatively low compared to now, and less people were living in cities, so people could adapt more easily to the new situation. People in the US today are accustomed to a high standard of living, while they are deeply in debt. Social unrest is lurking.
Economic statistics are adjusted to hide the truth
Productivity gains often go together with job losses in productive sectors. Because most value is added in marketing and sales and not in manufacturing, closing down factories may result in higher productivity. Production can be outsourced to a low wage country. In such a situation factory workers are fired and only the marketing and sales people keep working for the company. The added value per employee in the company rises because less people "create" nearly the same "value".
Productivity gains can also be realised by wage increases for government employees, even though the output of the government employees does not change by raising their salaries. High paying jobs such as consultants and lawyers also "create" more "value" if they demand higher fees. Also professional traders have a high productivity. Their income is counted as productivity even though the result of their activities may sometimes be destroying investment capital of others. In this way productivity gains were realised in recent decades. The process of replacing production by activities that "create value" is often called a transition to the service economy.
Many countries have adjusted their way of measuring inflation several times. Practically all adjustments lowered the inflation reading. In this way politicians were able to confiscate the wealth of savers by printing money. Understating inflation also helped to keep pensions and benefits lower than they would otherwise have been if the inflation calculation was unchanged, because in many countries pensions and benefits track inflation. At first inflation was considered to be the change in money supply. Later on the definition of inflation became the change in the price level. In general prices rise less than money supply because there is economic growth. Economic growth means that more products and services become available, which has a lowering effect on prices.
The general price level is very difficult to measure because the following questions arise: Which products are relevant for the price level and how are additional features of a product to be taken into account? This created opportunities for hedonic price adjustments, such as the following: If memory and disk size of computers double every two years while their price does not change, computers become 30% cheaper each year. If 3% of investment and consumption in a country concerns computers, this does reduce inflation by 1% each year. A number of this kind of adjustments have been done, making price inflation in the US probably 3-5% lower compared to the method used before 1992.
Only money supply can be objectively measured and therefore changes in money supply are the only objective measure for
inflation possible.Economic growth is the change in all economic activity measured in the currency of the country adjusted for inflation. Understating inflation means therefore overstating economic growth. In the past decades inflation in the US probably was around 3-5% higher if it was measured the same way as it was done before. Economic growth would then have been around 3-5% lower each year. The United States probably had low or negative economic growth for nearly two decades if the methods of calculating statistics had not been changed.
Unemployment in the United States is far higher if it is measured the same way as it was done before 1992. The unemployment rate in the United States is near 20% in 2009 if excluded categories of workers are included. More information about the way statistics are used to make the US economy look better can be found at the Shadowstats.com site.
Oligarchs are running the affairs
The financial sector has captured the governments of the United States and Europe (see also: Atlantic - The Quiet Coup). This has effectively ended what was left of democracy in the West. It is clear that Western governments are now under corporate control. In the past decades politicians were bribed into reducing financial sector regulation. As a consequence of this, financial institutions were able to take on leveraged positions that at first produced high profits and now have to be bailed out.
The population is threatened by the prospect of the chaos that will result from the financial collapse. In this way people are forced to accept the bail outs and guarantees. The US government has committed over $20 trillion US Dollars to bailout activities and guarantees. In the same fashion governments in Europe have committed trillions of Euros to prop up the financial system. The American and European taxpayers will probably end up paying trillions of US Dollars and Euros in bailing out financial institutions.
The loose monetary policies in the United States of the past two decades created a reckless financial sector that was betting on government and central bank assistance in the form of reduced reserve requirements and lower interest rates. Now this does not work any more, so taxpayer money is used to keep the financial sector afloat. This will create even more moral hazard than the loose monetary policies did. In the future even more money will be needed to sustain the current financial system.
Markets are manipulated
Markets (such as stock markets, bond markets and commodity markets) are rigged to sustain the system and to serve special interests. The Working Group on Financial Markets (more commonly known as the Plunge Protection Team or PPT) is constantly monitoring markets and trying to influence markets. A description of the Working Group on Financial Markets can be found using the following link: Wikipedia - Working Group on Financial Markets.
For years carry trades have helped to sustain the imbalances in the global economy. Especially the Yen was used to buy the US Dollar and high yielding assets. In this way trade imbalances did not lead to an adaptation of currency rates to the underlying economic fundamentals. When markets cannot adapt to the underlying fundamentals, tensions build. In the end fundamentals rule the markets. Therefore postponing the inevitable only makes the process of adaptation more intense.
Jim Willie is an analyst who is trying to uncover the mechanics that are behind markets. Even though he is paranoid, his editorials give an insight in what the activities and motivations of dominant market players can be. If trillions of US Dollars and Euros are at stake, being paranoid like Jim Willie is a reasonable stance. He probably is right in many cases but this cannot be known for certain without inside information. His editorials can be found using the following link: www.321gold.com - Jim Willie CB archives.
People and governments are deeply in debt
In most Western economies debt expansion was the driver of growth in recent years. Debt expansion in the Western economies has reached the limit of possibilities. The system is crashing down. Only printing money outright on an unprecedented scale does barely keep the economy afloat. In the United States the amount of primary money M1 is rising rapidly after the financial crisis started (see picture above to the right). Government increase spending to end the recession.
Without fundamental changes to the economy of the Western nations, it is highly probable that the economies of the United States and Europe will remain in depression like conditions for the coming decades. If economic growth in the United States is still measured like it was before 1992, then the United States has already been in depression like conditions since 2001 (see picture below to the right). Martin Armstrong made an analysis of the coming depression which could last 23 to 26 years (see also: The Coming Great Depression - Martin Armstrong).
George Soros is expecting that the coming depression will be worse than the Great Depression (see also:
Reuters - Soros sees no bottom for world financial "collapse"). The
Great Depression ended in World War II. It is likely that the coming depression will last decades or will end in a major
war. However current weapons systems are far more destructive than in 1940, so World War III has the potential of ending
human civilisation.Derivatives
Derivative products may result in a meltdown of the financial system. Warren Buffet called those products "financial weapons of mass destruction". Many derivative products are not regulated. Derivatives are also not well understood even by the market participants using them. The total notational value of those products amounts to more than a thousand trillion US Dollars. On the losing side of the trades, losses on derivatives probably amount to tens of trillions of US Dollars.
It is not well understood which parties have taken on obligations that they cannot honour. Many parties have hedged their bets using other derivative products. If some parties cannot make good on their promises, a series of cascading defaults may occur and the financial system may cease to function.
When Lehman Brothers went down, such a situation occurred. Central banks and governments were able to avert a meltdown by committing trillions of US Dollars and Euros to bail outs and guarantees. However those guarantees cannot be withdrawn, because at that moment the meltdown will still happen. The end result of this will be that the value of the US Dollar drops significantly because the guarantees are an equivalent to printing money. The consequence will be high inflation and possibly hyperinflation in the United States. Also Europe will probably face significantly higher levels of inflation.
Social unrest is lurking
If the economy crashes, social structures may dissolve further. In cities social structures are already practically non-existent. Therefore big cities are especially vulnerable to riots and anarchy.
Most people do not realise that the United States is on the brink of collapse. Gerald Celente, the CEO of Trends Research Institute, is renowned for his accuracy in predicting future world and economic events. He predicts that by 2012 America will become an undeveloped nation, that there will be a revolution marked by food riots, squatter rebellions, tax revolts and job marches, and that holidays will be more about obtaining food, not gifts: Prisonplanet - Celente predicts revolution, food riots, tax rebellions by 2012.
The underlying reason for the collapse is that a transition to the service economy is in fact a transition to a third world economy. Production is often replaced by services that are not essential. When the economy starts a structural decline, this decline is reinforced by job losses in the service sector when people begin to cut expenses on non essential items.
The United States government is preparing for social unrest by creating legislation that makes it possible to implement martial law while bypassing the Constitution. For more information on this, you can use the following link: Sourcewatch.org - Establishing martial law in the United States.
The rest of the world
The world economy is heavily dependent on the expansion of debt in the United States. The Eurozone may unravel when the depression becomes more severe. Even though many emerging economies are heavily dependent on exports to the United States and Europe, they have better perspectives. Those countries have the option to spend more on domestic consumption because debt levels are relatively low.
Emerging economies have the best prospects in the coming decades. However if they do not make fundamental changes in their economies, they will face the same problems that the United States and Europe are facing now within five or six decades.