Thursday, March 12, 2009

Hard Times Lie Ahead

Here is another well written missive from the comments section of my last post, I thought deserved more exposure.

From Anon on a California Mountain:

This is the worst economic downturn the USA has experienced in 80 years. Granted, we have many safety nets, systemic cushions and advanced living systems that could prevent the degree of physical hardship that existed in the 30's, but avoidance of those hardships is not necessarily guaranteed. This crash could conceivably turnout to be the worst in this country's history.

We've had huge debt destruction and there is more to come. Huge de-leveraging is and will continue to take place. Assets have fallen precipitously in value and will continue to do so. Prices haven't followed and when the finally do (by marking to market, etc.) this will be a significant deflationary phase.

From an economic standpoint, the core reason behind this downturn is a generational period of very poor policy choices.

Healthy, sustainable economic growth is SAVING induced. Savings leads to a buildup of capital and productive capacity.

The economic "growth" that we have experienced in these decades has been POLICY induced. This has created booms that are artificial (i.e.Monetary Policy: long term low interest rates; Tax Policy: favoring debt and spending over equity and saving; Regulation Policy: opaqueness, laxity and lack of oversight; Social Policy: home ownership regardless of affordability).These policies created artificial economic demand that could only be financed by debt (because savings/equity didn't exist).

As I've opined in an earlier post, this is not a recession within a business cycle. This is a structural collapse... a soft depression, which could become a brutal and hard depression; a tsunami of deflation and then of inflation.

The economy must be reinvented. It must retool: it has to absorb trillions in bad debt and then transition into new productive endeavors. It must create productive capacity for the 21st century (energy, health, food and water being key areas that need new technologies and expansion).

The politicians want to reflate the value of assets, incurring trillions of dollars of additional debt to create the demand to buy these assets. Basically this is debt begetting debt.

This government intervention might bring about a limited period of "recovery"; although it will again be artificially generated and thus false. Unfortunately, this intervention will ultimately stifle actual long term growth, innovation and creativity for years to come. Our future will be dire unless we reinvent or restructure our economy.

Our leaders haven't learned from the past. Most anyone with first hand experience of, and an astute understanding of the Great Depression is no longer with us to point out the dangers. Our current leaders will destroy the currency through inflation in an attempt to halt the natural correction that is attempting to purge our system of its mal-investments, excesses and errors.

As individuals we can separate ourselves from the current political mindset and herd mentality, and utilize our knowledge of history and basic economic principles to predict the coming conditions and trends and implement strategies to mitigate the coming destruction within our personal lives.


Darrell said...

Yes Jim he puts it very succinctly . . from that mountainside . . .

I find it just incredible, and even reprehensible, that we hear "what is politically correct" from policy makers and politicians who will not be as affected by the reality of what lies ahead.

Benny Bernanke explains that he basically sees a V recovery and we are on our way out of it now . . . "as we will see the figures of long term growth in the US economy in the second half of 2009" . . in a few months.

And for me to think that this is anything other than a small glitch . . silly me!! The continued policy led recovery that is structuring debt to chase bad debt is all we need apparently.

If I have a serious illness I want to be told about it. To what degree does it do me any benefit to try and get me optimistic about my health when the doctors know nothing will prevent it???

And the same mentality is global of course. Recently I saw the Thailand CEO of one of the (previously) most respected international commercial real estate firms explain that the Thailand real estate market would in no way be affected by this global downturn. It would be immune. It means Thailand is perhaps the safest haven on the planet according to him!!!! What a thought!! And while I was there, I was encouraged to hear their Oxford university economics graduate Prime Minister, PM Abhisit, break the news that he expected only a growth rate of maybe only 2% this year. Two weeks later (yesterday) he "hoped the economy would not decline by as much as 9% this year" as predicted by a major institution. What is 11% GDP amongst friends anyway . . .

Then we see the Dow rally 5% in one day (7 hours), and all the commentators are asking . . . is this the end of it all . . and are we at the start of a new bull market???

The person in the street has no idea what is going on . . they (we) are the ones that need to know more than any others . . as they will be the most affected.

At what stage are they, the majority, going to start to be realistic, and realise that all this is being done . . and being talked about, by those that will be least affected.

When are they going to start to realise that they will only have themselves to rely upon in such times, and so will their children.

The total interference of the natural free enterprise economic system which should purge inefficient business, and reward efficient businesses is being destroyed by the governemnt of the greatest free enterprise democratic system in the world.

How can socialist policy stand beside free enterprise??

No one learnt from Japan's experience which saw government intervention sustain the economic downturn of the early 90's by another decade or more, than would have otherwise been the case. It never full recovered because of that intervention.

Or have I just got it all wrong??? . . . I'll go listen to those policy makers now and find out . . .

Rob in NS said...

Here's a good quote.......

"The problem with socialism is that you eventually run out of other people's money."

..Margaret Thatcher


Jim in San Marcos said...

Hi Rob

I think your quote refers to step II. Here is the quote for step I

"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not." -Thomas Jefferson

It's the quote for step III that worries me.

dearieme said...

The democracy will cease to exist when you take away from those who are willing to work and give to those who would not." -Thomas Jefferson

That's awfully good from a "driver of negroes", eh?

Rob in NS said...


Does it go something like this....

Bolshevism has attacked the foundations of our whole human order, alike in State and society, the foundations of our conception of civilization, of our faith and of our morals: all alike are at stake.

excerpt from speech by

Adolf Hilter



Jim in San Marcos said...


I was thinking more along the lines of "Let them eat cake"

Ben Bernanke 1789

Rob in NS said...



I think you're on the mark seeing as Citigroup and GM seem to have for some reason started making money again. Maybe the Nuremburg ramble is speech IV or V.

Jim in San Marcos said...

Hi Darrell

Your post adds more to what Anon on California mountain discusses. It rather disturbing to see how this all fits together differently than our government suggest.

Rob in an earlier post suggested that this was just an attempt at preserving the wealth of the rich. A lot of people became rich because they save every penny for retirement. The only problem is that the banks are in the same situation as Barney Maddof.

I think we will start to see this cookie crumble with the fall of the Easter European banking system or maybe the collapse of the European Union within the next 60days.

The US wants to borrow a couple of Trillion dollars, who will loan it to them? Better yet, who has that much lying around?

Newspapers print news. They need the:Who, What, Why, When, and Where. All we are lacking is the "When." I feel we are not far from a major world headline. Being wrong about this would be a good thing!

Thank you for your comments.

Rob in NS said...

I'm putting my money on Poland being the place where it all comes apart for Europe

Jim in San Marcos said...

Hi Dearieme

Jefferson was a man of great intellect. He was a slave owner. He probably inherited most of them (I'm not offering that as an excuse). He ran into financial hardships from the war and died just about broke.

At the time he was outspoken, as being against slavery. I imagine being one of his slaves was better than being lower class white at the time. He educated his slaves. The logistics of feeding and clothing 187 slaves from birth to death was no small effort.

His bio in Wikipedia is quite an impressive read.

Slavery had been around for thousands of years, and before the 1600's it was not a racial item. I tend to think that the Africans captured and sold as slaves were possibly looked at as sub human because of a lack of education. The general white population of the time (which couldn't be accused of being intelligent), probably accepted that fact as a given.

Slavery was a sad state of affairs back then, but Jefferson could see the final outcome, he believed it had to change in the future..... It looks like he knew what he was talking about.

Thank you for your comments

Jim in San Marcos said...

Hi Rob

I wonder about Poland. The Eastern European countries borrowed the money and now they can't pay it back. The people they can't pay it back to, are in the European Common Market.

It's kind of like a swimming pool you can't make the payments on. What's the bank going to do, dig up the pool?

The real problem we are looking at in Europe, is nationalism. The Germans are saying, "Why bail out the lazy Italians." Whether the statement is true or not, you see the train of thought.

The Euro is toast. The individual governments can't tinker with it like we can here in the US or in the UK. Every country has to agree on what they do with the Eurodollar, and that is not going to be easy or even feasible to accomplish.

If they break and run, look for a slaughter.

That's my two cents along with yours. Citi Group could collapse and ruin all of our trepidations with something even worse.

Throw a log on the fire for me. Take care.

Rob in NS said...

The key thing about Poland is it is a EU member that still hasn't become part of euro zone. It could end up being the mother of all bailouts. I recall, it may have been you that wrote this, that most mortgages since ascension to EU, were written in Euros or Swiss Francs. You're 100% correct when you say that nationalism is the threat in Europe. The scary thing is if you look at a map it becomes apparent that Germany will not ignore this problem whether the Italians or French like it or not. As the Title for post says, "Hard Times Lie Ahead". Let's just hope we don't see history repeat itself.


Yophat said...

This is just the first leg down.

With every downsizing of asset value the debt leverage multiplies exponentially. Zillow stated at the end of Jan that $6.3 trillion in residential mortgage value had vaporized. A conservative average leverage ratio is 12:1. That's a $70 trillion hit to the system....and that is just residential mortgages.

The only way new money can enter the system without completely destroying the currency is by new debt. We have passed the tipping point in our ability to take on new debt as people, as a society, as a country.

This is the epitome of wealth destruction. Stand by for social chaos.

Anonymous said...

Who runs barter town?

Who runs barter town?!


AIM said...

What a ruse!

The only reason Citi, BofA, etc. are looking "good" now is because they've just changed their accounting methods, and the government is in collusion with them.

They've just postponed the inevitable for a wee bit longer. The sword of Damocles is still above us.

The Dow was on its way below 6,000. Being that the stock market is purely news driven, all it took was a little tinkering, a press release... and up goes the market.

Anyone other than a trader who follows or is concerned about the daily gyrations of the stock market is foolish. The only thing that matters and should be looked at are trends of various lengths... quarterly, annually, 3 4 & 5 year.
Anyone in the stock market now for an intermediate or long term basis is a nuts. Taxes, inflation, boomers pulling out money for retirement and the coming financial debacle will wipe the market out.


Jim in San Marcos said...


It's not what you think. When B of A was at 23, I shorted the hell out of it. Then the government started fooling around and the stock went to 28. I had enough reserves to cover the jump in price and I got out at 19. I stopped shorting stocks because of the government intervention. Now the stock is less than six dollars.

So if a piker like me shorts 100 share, I have to have a cash reserve with my broker to cover 50% of the purchase price. If I have the bare minimum to short and the stock increase in value $1,000 that day you have a margin call to cover or you are sold out.

That is what these spikes are. The stock pops up and the shorts get a margin call, and they have to buy back the stock, which means it goes even higher with your bid to buy to cover your short sale.

You can make money shorting a bear market, but they seldom go straight down. What looks like a sure thing can ruin you if you bet the farm. It doesn't mean you are wrong about the market direction, it just didn't happen the way you though it would.

I am still expecting to see a one day 2,000 point drop in the Dow. But as I alluded to earlier, with these fund managers, it's not their money so why sell? If they do, they are out of a job, so it could be a very slow burn to Dow 2000. Who wants to own something that drops in price consistently on a weekly basis?

So when the market opens Monday, the shorts have been burned. A short has to buy the stock back, a seller doesn't. Without the short seller buying back, to realize a profit, we could end up with "air pockets." That's where there are not bidders for stock being offered for sale. That is when prices really drop.

The next week could prove interesting, it is a triple witching Friday.

Jim in San Marcos said...

Hi Rob

Your quote "The key thing about Poland is it is a EU member that still hasn't become part of euro zone?"

It took a bit of googling to understand that. I assume you mean they are not using the EU currency.

That could be a good thing. I think that Italy, France and Greece wish they were in the same boat. On the news today, Germany was stating the the US was doing the wrong thing by expanding the money supply. It seems like not everyone has gone bananas. They are not about to print some Euros. But on the other hand, that pretty much kicks Italy France and Greece off of life support.

I haven't been following Poland, so my knowledge there is limited, keep me posted.

Rob in NS said...


Their national currency is dropping like a rock vis à vis the euro. Sort of a subprime type fiasco on steriods and apparently German bankers are on hook for a lot of it. That said you're right the EU is a mess.

I don't understand shorting real well maybe you could give a novice like me a primer so I'll be able to make some sense of what is happening right now. Looks to me like a full court press by someone. Also one of the head guys for Bank of China is making news again, could it be related?


ca said...

Jim --

Could you clarify the following, as I am unclear on one of the comments you made:

Are you expecting to see a 2000 point drop in one day on the DOW or the DOW at 2000? Or both?

Jim in San Marcos said...

Hi Rob

In order to short a stock, you borrow it from your stock broker. Investors that buy stock in a company through a brokerage, usually leave the stock in a "street named" account. They don't take delivery of the certificate. To order out a certificate takes about 30 days. You can't sell that stock until you have possession of the certificate. Because of that most people leave the stock in the brokers account "street named." It's the brokers job to keep track of who owns the stock.

The broker will loan you someone Else's shares to short if you keep 50% of the borrowed stock's present value in a margin account. You then sell the shares at say $20. If the stock drops to $5 and you buy the stock back and cover your short with the broker, you make $15 on each share shorted.

So if you shorted 100 shares of B of A at $20. You would put $1,000 in your brokers margin account and short the stock and they would deposit the $2,000 to your account. Later if you bought the stock back at $5 to cover your short,$500 would be deducted from your brokerage account. You would clear $1,500 on the deal.

Say the trade went the other way. Say the stock jumped up in price $10. Normally you would have to come up with an extra $500 to cover the margin requirements for shorting the stock. The broker in this case has another option. Your account has $2,000 from the short sale and $1,000 in margin reserves. They could at their option close out your position by going into the market and buying the stock back. If they purchased it at $32, not only have you lost your position, but now you owe them another $2 per share to cover their purchase price. The stock might then drop down to $15, but you have already been closed out.

The little guy like you and me has to come up with 50% of the stock value to short, which means that for every $100 we put up, we can short $200 of stock, 2 to 1 leverage. Thats not bad in a down market. It it pops up like it did last week you could have a hefty margin call.

The big boys (mutual funds etc) can get away with as little as 6% margin. Leverage at these levels can make for some wild swings.

You can also go long the market. You could buy 1,000 shares of GM through your broker with 50% cash and a stock broker loan for the other 50%. Broker loan rate is currently at 7.75% for us pikers and if the loan is a million or more, its 5.25%.

It's this leverage that can make the market swing erratically. The real unknown is the government changing the rules. I got fed up and I picked up my toys and went home.

Jim in San Marcos said...

Hi Ca

I think we could see a quick drop in the Dow of about 2,000 points. The current Dow divisor is at .1255 so that would be an actual dollar loss of about $250 for the 30 stocks in the Dow. The current value of the Dow 30 is about $906.

A Dow going down to a level of 2000 is far from the Great Depression drop where it went from a high of 381 down to a low of 41. Dow 1200 would give you the same pain threshold.

As more and more people find out that Barney Madoff was not a one time event, you are going to see more mattress stuffing which will drain Wall Street.

When the money making aspect drops out of the stock market, it will join real estate as a place not to be and that certainly hasn't happened yet.

AIM said...

These last few days could be the start of a nice big bear rally now.

The gov is trying to fool around with accounting rules now in an attempt to bail banks out. My customary response to our brilliant minds in govmt trying to deal with the national economy is... "Further attempts to hold off the inevitable day of reckoning. So pathetic."

The banks and others are refusing to face the fact of what the prices really are of their assets. Eventually they will have to sell them at the price the market wants (much much lower than they think and hope for). As if we have a climate in which these assets could ever appreciate again at any significant level.

Look for the valuations of stocks, real estate, bundled assets, etc. to keep on sliding downwards.

You got a house in Calif in a metropolitan area with a current value of 450k? Be prepared because it will be 350k in another year or two, and it may go even lower. As a real estate investor, appreciation is a word that I recently jettisoned from my lexicon. It is just about cash flow from rents and tax advantages now.

Mr. Market is a force to be reckoned with!

Anonymous said...

Jim, I’m still studying up on the FED. The FED is an inflationary engine that is run for the benefit of bankers. Bankers control the FED for the benefit of bankers. For the overwhelming majority of the years it has existed the FED has inflated the money supply through fractional reserve banking by allowing banks to create deposits ‘out of thin air’ through the process of lending. From the purchase of assets the FED increases the reserves of the banking system. Assuming an increase of reserves of $1,000,000 and a 10% reserve requirement, the banking system (all banks as a whole) can expand this $1,000,000 by an additional $9,000,000. This is done through the process of creating additional bank deposits as the banks make loans to customers and these loans give rise to further deposits in a ripple effect throughout the system. If the FED wants to contract the money supply the same mechanism works in reverse. However, for most of the years the FED has operated to increase the money supply, the currency has been devalued, and inflation has resulted. The whole system also gives the government an easy way to increase the national debt so that it can acquire the money that it loves to spend. The inflation that it has created has been a hidden tax on the American people.

I carefully read Murray Rothbard’s book “The Case Against the FED” on Fri. You can download a pdf here:

Yesterday and today I read his book “The Mystery of Banking” You can download a pdf here.

You can google Modern Money Mechanics by the Chicago FRB and download it at various places or download it here:

All three of these books agree on the mechanism the FED uses including the one the FED wrote. Murray Rothbard’s books explain the process in detail as well as giving a good short history of banking.

You can read a biography of Murray Rothbard here:

Something else that I believe that you would be interested in is the “The Bailout Reader”. It is a page on the Ludwig Von Mises Site that gives many links to articles of interest on the internet that are specifically about the bailout and current meltdown. You can go to that page here:

I am going to re-read both of these books this week before going on to other books about how our banking system works. I hope that you and others will do the same. We need a sound money and banking system. There seem to be some obvious problems with the one that we have. Fiat currency eventually becomes worthless. Maybe we have reached that point.