| How bad the economy really is |
February 4, 2009 - December 21, 2011
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. Consequently most people are oblvious about what is happening [+]. Comparisons with the Great Depression tend to underestimate the real magnitude of the problem. This may seem overdone as the standard of living of most people has significantly increased over the last seventy years, but this and a number of other developments have made humanity increasingly vulnerable.
The main differences between the Great Depression and the current economic situation can be summarised as follows:
- 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.
The most important problem however is the accelerating consumption of natural resources. This will end in disaster because the size of the planet is finite. This issue was not relevant during the Great Depression.
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".
|
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. Lowering the inflation number 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% lower compared to the method used before 1992. Hedonic price adjustments make sense to statisticians compiling economic data but they are subjective and therefore prone to manipulation.
|
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% higher if it was measured the same way as it was done before. Economic growth would then have been around 3% 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 around 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 of John Williams. His work is controversial and most mainstream economists do not support his views [+]. However most main stream economists also did foresee the financial crisis. The lack of competence and critical view of many mainstream economists may be caused by the fact that they are financed by oligarchic interests like the Federal Reserve [+].
Oligarchs are running the affairs
The financial sector has captured the governments of the United States and Europe [+]. 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.
Behind the scenes operate the oligarchs who have increased their share of wealth over time by moving money around. The share of global wealth of the oligarchs has become so large that it has a significant impact on the world economy [+]. The oligarchs use the governments as a front operation to consolidate their power and to increase their profits.
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 [+].
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.
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. Only printing money outright on an unprecedented scale did 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). On top of that governments increased 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).
|
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 does not recover and the middle class slips into poverty, social structures may dissolve further. In cities social structures are already practically non-existent. Therefore big cities are especially vulnerable to anarchy. The current economic policy of money printing called quantative easing, together with climate change, will lead to significantly higher prices for necessities like food. Investors and speculators hedge against the rising prices by buying up commodities, making prices increase even further. Rising food prices will cause social unrest [+].
The economy of the United States is in a structural decline. Gerald Celente, the CEO of Trends Research Institute, who made some good predictions of future world and economic events, predicted in 2008 that America will become an undeveloped nation by 2012, 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 [+]. Paul B. Farell on Marketwatch also makes gloomy predictions, such as a decade from hell, on a regular basis [+]. Most people tend to ignore the warnings as long as they are not affected themselves.
The underlying reason for the collapse is that a transition to a service economy is a transition to a third world economy in disguise. Production is replaced by services that are not essential and the infrastructure is neglected. When the economy starts a significant decline, this decline will reinforced by job losses in the service sector when people begin to cut expenses on non essential items, and in this way the decline will become structural. Because of this the job market will not recover and wages will remain under pressure while prices will be on the rise [+].
The United States government is preparing for social unrest by creating legislation that makes it possible to implement martial law while bypassing the Constitution [+].
The future
The world economy is dependent on the expansion of debt. The main areas of crisis are Europe and the United States. The economy of the United States is on the brink of collapse. The Eurozone may unravel when the depression becomes more severe. Emerging economies, such as Brazil, Russia, India and China have better perspectives but they will also be affected by the debt crisis. Furthermore, the ecological crisis and a shortage of natural resources will also hurt the emerging economies. There is no alternative but to abandon the current system of exponential expansion.