[GJM] URGENT! The Second Great Depression

Thu Feb 22 16:00:16 MST 2007

Dear Friends,  

As many of you know, after earning a six-figure income in 1989 - 1990 as a
real estate broker, I found myself homeless and living on the streets in the
back of my car for the better part of the next year.  I lost my home when
the mortgage exceeded the value of the property when prices slid to a low,
and I had gone through my six month's savings.  As a single woman and
completely dependent upon real estate sales for an income, there was no "job
market" or any place else to turn for support and I was not about to become
part of "the system".  

What is coming up in this next scenario appears 10 times worse than what I,
and thousands of others went through back then.  But from my experience as a
"homeless person" I would like to share with you, in a later post, some
survival techniques that helped me get through this challenging time, and,
as well explore together, as co-learner's. what we can do to help those less
fortunate through the times ahead.  You may think as I did that "this can
never happen to me" --
but there I was, out on the street with no place to turn. 

Yet . . .   

All in all, looking back, this was perhaps the best time of my life, because
out of this experience evolved a new value system that serves me far better
than the one I had; and I am far happier even though I live on far less. 

Thanks to Paul at Global Net News for this article. 

with love to everyone. 

marguerite  

 The Second Great Depression 
(To change your settings or unsubscribe please go to 
http://lists.riseup.net/www/info/globalnetnews-summary) 

The Second Great Depression 
http://www.informationclearinghouse.info/article17145.htm 
By Mike Whitney 

“The US economy is in danger of a recession that will prove unusually long
and severe. By any measure it is in far worse shape than in 2001-02 and the
unraveling of the housing bubble is clearly at hand. It seems that the
continuous buoyancy of the financial markets is again deluding many people
about the gravity of the economic situation.” Dr. Kurt Richebacher 

02/21/07 "ICH" -- -- This week’s data on the sagging real estate market
leaves no doubt that the housing bubble is quickly crashing to earth and
that hard times are on the way. “The slump in home prices from the end of
2005 to the end of 2006 was the biggest year over year drop since the
National Association of Realtors started keeping track in 1982.” (New York
Times) The Commerce Dept announced that the construction of new homes fell
in January by a whopping 14.3%. Prices fell in half of the nation’s major
markets and “existing home sales declined in 40 states”. Arizona, Florida,
California, and Virginia have seen precipitous drops in sales. The Commerce
Department also reported that “the number of vacant homes increased by 34%
in 2006 to 2.1 million at the end of the year, nearly double the long-term
vacancy rate.” (Marketwatch) 

The bottom line is that inventories are up, sales are down, profits are
eroding, and the building industry is facing a steady downturn well into the
foreseeable future. 

The ripple effects of the housing crash will be felt throughout the overall
economy; shrinking GDP, slowing consumer spending and putting more workers
in the growing unemployment lines. 

Congress is now looking into the shabby lending practices that shoehorned
millions of people into homes that they clearly cannot afford. But their
efforts will have no affect on the loans that are already in place. $1
trillion in ARMs (Adjustable Rate Mortgages) are due to reset in 2007 which
guarantees that millions of over-leveraged homeowners will default on their
mortgages putting pressure on the banks and sending the economy into a
tailspin. We are at the beginning of a major shake-up and there’s going to
be a lot more blood on the tracks before things settle down. 

The banks and mortgage lenders are scrambling for creative ways to keep
people in their homes but the subprime market is already teetering and
foreclosures are on the rise. 

There’s no doubt now, that Fed chairman Alan Greenspan’s plan to pump
zillions of dollars into the system via “low interest rates” has created the
biggest monster-bubble of all time and set the stage for a deep economic
retrenchment. Greenspan’s inflationary policies were designed to expand the
“wealth gap” and create greater economic polarization between the classes.
By the time the housing bubble deflates, millions of working class Americans
will be left to pay off loans that are considerably higher than the current
value of their home. This will inevitably create deeper societal divisions
and, very likely, a permanent underclass of mortgage-slaves. 

A shrewd economist and student of history like Greenspan knew exactly what
the consequences of his low interest rates would be. The trap was set to
lure in unsuspecting borrowers who felt they could augment their stagnant
wages by joining the housing gold rush. It was a great way to mask a
deteriorating economy by expanding personal debt. 

The meltdown in housing will soon be felt in the stock market which appears
to be lagging the real estate market by about 6 months. Soon, reality will
set in on Wall Street just as it has in the housing sector and the “loose
money” that Greenspan generated with his mighty printing press will flee to
foreign shores. 

It looks as though this may already be happening even though the stock
market is still flying high. On Friday, the government reported that net
capital inflows reversed from the requisite $70 billion to AN OUTFLOW OF $11
BILLION! 

The current account deficit (which includes the trade deficit) is running at
roughly $800 billion per year, which means that the US must attract about
$70 billion per month of foreign investment (US Treasuries or securities) to
compensate for America’s extravagant spending. When foreign investment
falters, as it did in December, it puts downward pressure on the greenback
to make up for the imbalance. Everbank’s Chuck Butler put it like this: 

“Not only did the buying stop in December by foreigners in December, but the
outflows were huge! Domestic investors increased their buying of long-term
overseas securities from $37 billion to a record $46 billion. This is a
classic illustration of ‘lack of funding’. So, the question I asked the desk
was
 ‘Why isn’t the euro skyrocketing?’” 

Why, indeed? Why would central banks hold onto their flaccid greenbacks when
the foundation which keeps it propped up has been removed? 

The answer is complex but, in essence, the rest of the world has loaned the
US a pair of crutches to bolster the wobbly dollar while they prepare for
the eventual meltdown. China and Japan are currently hold over $1.7 trillion
in US currency and US-based assets and can hardly afford to have the ground
cut out from below the dollar. 

There are, however, limits to the “generosity of strangers” and foreign
banks will undoubtedly be pressed to take more extreme measures as it
becomes apparent that Team Bush plans to produce as much red ink as humanly
possible. 

December’s figures indicate that foreign investment is drying up and the
world is no longer eager to purchase America’s lavish debt. The only thing
the Federal Reserve can do is raise interest rates to attract foreign
capital or let the dollar fall in value. The problem, of course, is that if
the Fed raises rates, the real estate market will collapse even faster which
will strangle consumer spending and shrivel GDP. In other words, we are at
the brink of two separate but related crises; an economic crisis and a
currency crisis. That means that the unsuspecting American people are likely
to be ground between the two mill-wheels of hyperinflation and shrinking
growth. 

In real terms, the economy is already in recession. The growth numbers are
regularly massaged by the Commerce Department to put a smiley face on an
underperforming economy. Industrial output continues to flag (In January it
was down by another .5%) while millions good paying factory jobs are being
air-mailed to China where labor is a mere fraction of the cost in the USA.
Also, automobile inventories are up while factory production is in freefall.

In addition, new jobless claims soared to 357,000 in the week ending
February 10. 44,000 more desperate workers have been given their pink slips
so they can join the huddled masses in Bush’s Weimar Dystopia. 

December’s net capital inflows are a grim snapshot of the looming disaster
ahead. As the housing bubble loses steam, maxxed-out American consumers will
face increasing job losses and mounting debt. At the same time, foreign
investment will move to more promising markets in Asia and Europe causing a
steep rise in interest rates. This is bound to be a stunning blow to the
banks which are low on reserves ($44 billion) but have generated $4.5
trillion in shaky mortgage debt in the last 6 years. 

It’s all bad news. The global liquidity bubble is limping towards the reef
and when it hits it’ll send shock-waves through the global economic system. 

Is it any wonder why the foreign central banks are so skittish about dumping
the dollar? No one really relishes the idea of a quick slide into a global
recession followed by years of agonizing recovery. 

Maybe that’s why Secretary of Treasury Hank Paulson has reassembled the
Plunge Protection Team and installed a hotline to his Chinese counterpart so
he can quickly respond to sudden gyrations in the stock market or a
freefalling greenback; two of the calamities he could be facing in the very
near future. 

Greenspan has successfully piloted the nation into virtual insolvency. In
fact, the parallels between our present situation and the period preceding
the Great Depression are striking. Just as massive debt was accumulating in
the market from the purchase of stocks “on margin”, so too, mortgage debt
between 2000 and 2006 soared from $4.8 trillion to $9.5 trillion. In both
cases the “wealth effect” spawned a spending spree which looked like growth
but was really the steady, insidious expansion of debt which generated
economic activity. In both periods wages were either flat or declining and
the gap between rich and working class was growing more extreme by the year.
As Paul Alexander Gusmorino said in his article, “Main Causes of the Great
Depression”:

"Many factors played a role in bringing about the depression; however, the
main cause for the Great Depression was the combination of the greatly
unequal distribution of wealth throughout the 1920's, and the extensive
stock market speculation that took place during the latter part that same
decade". 

The same factors are at work today except that the speculation is in real
estate rather than stocks. Just as in the 1920’s the equity bubble was not
created by wages keeping pace with productivity (the healthy formula for
growth) but by the expansion of personal debt. Also, one could buy stocks
without the money to purchase them, just as one can buy a $600,000 or $700
000 house today with zero-down and no monthly payment on the principle for
years to come. The current account deficit ($800 billion) could also weigh
heavily in any economic shake-up that may be forthcoming. Bob Chapman of The
International Forecaster made this shocking calculation about America’s
out-of-control trade deficit: 

"US debt was up 10.1% to $4.085 trillion and accounts for 58.8% of all the
credit issued globally last year. That means the US expanded credit at a
much faster rate than the economy grew. This was borrowing to maintain a
higher standard of living and attempt to pay for it tomorrow." 

Think about that; the US sucked up nearly 60% of ALL GLOBAL CREDIT in one
year alone. That is truly astonishing. 

There are many similarities between the pre-Depression era and our own. Paul
Alexander Gusmorino says: 

"The Great Depression was the worst economic slump ever in U.S. history, and
one which spread to virtually all of the industrialized world. The
depression began in late 1929 and lasted for about a decade....The excessive
speculation in the late 1920's kept the stock market artificially high, but
eventually lead to large market crashes. These market crashes, combined with
the misdistribution of wealth, caused the American economy to capsize. 

(The income disparity) between the rich and the middle class grew throughout
the 1920's. While the disposable income per capita rose 9% from 1920 to 1929
 those with income within the top 1% enjoyed a stupendous 75% increase in
per capita disposable income
A major reason for this large and growing gap
between the rich and the working-class people was the increased
manufacturing output throughout this period. From 1923-1929 the average
output per worker increased 32% in manufacturing8. During that same period
of time average wages for manufacturing jobs increased only 8% (This
ultimately causes a decrease in demand and leads to growth in credit
spending) 

The federal government also contributed to the growing gap between the rich
and middle-class. Calvin Coolidge's (pro business) administration passed the
Revenue Act of 1926, which reduced federal income and inheritance taxes
dramatically
(At the same time) the Supreme Court ruled minimum-wage
legislation unconstitutional. 

The bottom three quarters of the population had an aggregate income of less
than 45% of the combined national income; while the top 25% of the
population took in more than 55% of the national income...Between 1925 and
1929 the total credit more than doubled from $1.38 billion to around $3
billion”. (Just like now, the growing wage gap has spawned massive
speculative bubbles as well as a steady up-tick in credit spending. Wage
stagnation forces workers to seek other opportunities for getting ahead.
When wages fail to keep pace with productivity then demand naturally
decreases and business begins to flag. The only way to spur more buying is
by easing interest rates or expanding personal credit, and that is when
equity bubbles begin to appear. That's what happened to the stock market
before 1929 as well as to the real estate market in 2007. The availability
of credit has kept the housing market afloat but, ultimately, the result
will be the same. 

On Monday October 21, 1929, the over-valued stock market began its downward
plunge. It managed a brief mid-week comeback, but 7 days later on Black
Tuesday it plummeted again; 16 million shares were dumped and there were no
buyers. 

The game was over. 

Confidence evaporated overnight. People stopped buying on credit, the
bubble-economy collapsed, and the mighty locomotive for growth, the American
consumer, hobbled into the Great Depression. Tariffs were thrown up,
foreigners stopped buying American goods; banks closed, business went bust,
and unemployment skyrocketed. Tens years later the country was still reeling
from the implosion. 

Now, 77 years later, Greenspan has led us sheep-like to the same precipice.
The economic dilemma we’re facing could have been avoided if the expansion
of personal credit had been curtailed by prudent monetary policy at the
Federal Reserve and if wealth was more evenly distributed as it was in the
‘60s and ‘70s. But that’s not the case; so we’re headed for hard times. 