Are We Heading for a Decade of 1970s-Style Stagflation?

by Charles Hugh Smith

Four key factors in the 1970s were very different from present conditions, and that argues against 1970s-style stagflation as a model fpr 2010-2020.

Sometimes history rhymes--but only for the first line. On the surface, there are reasons to anticipate a 1970s-style stagflation in the decade ahead: a stagnating economy beset by rising inflation.

Four fundamental factors that profoundly influenced the economy in the 1970-1980 period are not present today. As a result, we must be careful not to expect history to rhyme stanza after stanza.

1. Demographics: the Baby Boom came of age and started households en masse.Baby Boomers bought houses, cars, furniture, etc. for their new households, and started businesses which created even more demand.

In other words, the demographic macro-environment was one of strongly rising demand for goods, services and credit. Housing leaped not just in response to inflation but in response to strong organic demand from 78 million Baby Boomers.

The demographic trend is now reversed; the Boomers are saving money for retirement and shedding assets to fund their healthcare and the costs of no longer being productive (retired). Governments are having to channel huge sums from spending into their pension funds for retiring Boomers.

(Disclosure: I am 56 and thus a Boomer, and I do not expect to draw a dime of Social Security or Medicare.)

2. Imports were limited, giving domestic suppliers pricing power (the ability to pass on higher costs to consumers). It is rarely noted that the U.S. emerged from World War II with little competition as many of its global manufacturing competitors lay in ruins.

While Japan and Germany began exporting autos to the U.S. in the 60s, it wasn't until later in the 70s that Japanese goods offered serious pricing competition to domestic producers (anyone remember the Datsun B210?). This allowed domestic producers to pass rising input and labor costs to consumers, feeding the inflationary cycle.

Now many of the manufactured goods sold in the U.S. are made elsewhere, and the competitive environment is fierce; the only firms with pricing power are those with technologically "hot" goods like iPhones.

3. The quadrupling of oil prices rippled through the economy, raising costs for everything. Energy is a cost input to virtually every good and service, and the price jump of 1973 spread higher costs throughout the economy. As this raised prices, it was inflationary, and as it was in effect a new tax on the economy, it lowered demand and spending, causing stagnation.

In response to that 1970s increase in oil costs, the U.S. economy became more efficient in its use of petroleum, i.e. the amount of oil consumed to generate every dollar of GDP has fallen.

The big unknown in the decade ahead is the timing of Peak Oil, that is, when global supply falls irrevocably below baseline demand. As I have stated here many times, I believe we are in the "head-fake" stage when global Depression (oops, "Great Recession") is cutting demand so much that there is still enough surplus production to keep prices relatively low. As the output from supergiant fields falls, then all this surplus production will at best be replacing supply lost to depletion.

When Peak Oil kicks in, then $300/barrel will seem like a "fair price" and the shockwave to the U.S. economy will outstrip the 70s oil price shock by an order of magnitude because the low-hanging fruit of efficiencies have been picked.

But nobody knows when supply will fall irrevocably below demand, as geopolitics and physical supply are both causal factors.

4. Debt loads were low. The forced savings of the domestic workforce and Armed Forces during the War created a stupendous reserve of capital to fund new production capacity in the 1950s and 60s. Consumer debt was modest by today's standards, as was the Federal deficit. The nation reeled in shock when the Federal deficit hit a staggering $46 billion in the mid-70s --roughly $175 billion in today's dollars--a mere 11.6% of this year's $1.5 trillion Federal deficit.

So the debt load of the nation is much higher than in the 1970s, both private and public debt. More of the national income must be diverted to service that debt, depressing demand. New private borrowing is constrained by stagnant incomes and declining asset values. Higher taxes levied to fund unprecedented Federal deficit spending also reduces private demand and borrowing.

In other words, we won't be able to "borrow our way" out of asset deflation and gin up a "wealth effect" as occurred in the 1980s.

With three of the four conditions being reversed from the 1970s and the cost of oil in the decade ahead a big unknown, this suggests that the stagflation of that decade is not a good predictive model for the coming decade.

A special thank-you to Kevin D. and Jennifer M. for buying 10 copies of Survival+ from me to distribute to friends and colleagues.


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Incomes Decline, Debt Increases: Why the Credit Bubble Cannot Be Reflated

by Charles Hugh Smith

The "recipe" for "prosperity" in the past decade has been to leverage more debt as incomes stagnate for 80% of the populace. That "solution" is no longer possible.

My esteemed blogger colleague Edward Harrison, author of the Credit Writedown blog (link in my blog list), recently summarized the rotten core of the U.S. economy in his recent analysis, Three potential explanations for the continued fall in US savings rate:

At the heart of America's problems is an economic policy which is designed to keep wages down but consumption up. That necessarily means more bubbles, more debt, more wealth and income inequality, and consequently more strife and social unrest when the gravy train ends. You cannot expect to hollow out a country's manufacturing base, set up a bunch of McJobs to replace it, and still have consumers spend to support the economy. This is what we are now starting to realize.

Voila. This is why the Fed and Treasury's "recipe" for "renewed prosperity"-- leveraging more debt off stagnant or declining incomes--cannot succeed. Not only are incomes flat, but consumer collateral--home equity and financial wealth-- is off a staggering $10 trillion from 2005, even as the stock market has risen 75% off its March 2009 lows and housing in some regions has bounced (temporarily) off its 2009 lows.

The "trick" which worked in 2001-2003 was to drop interest rates to near-zero and eliminate any restrictions on borrowers. The policy "worked" in blowing the housing bubble, but with home equity at a pathetic 38% of real estate owned (and that includes the 30% of homes owned free and clear, without any mortgage debt at all) and financial wealth off $5 trillion, the collateral to back up renewed debt is gone.

It's not the loss of factory jobs per se which has hollowed out the nation's manufacturing base--it's the loss of entire ecologies of production.

Most factories in advanced economies are filled with robots, not thousands of humans; that's the only way it makes financial sense in a global economy. But some company manufactures the robots, and someone has to maintain them and program them, and other firms supply parts, software, machine tools, etc. The end-product factory is merely the most visible part of a complex web of suppliers, toolmakers, and expertise.

So when a production capacity leaves the country, it's not like certain trees got logged--it's like an entire ecology has been clearcut, leaving barren hardpan behind. It becomes very difficult to recreate that complex ecology and expertise.

There are many reasons why manufacturing has left the U.S., and wage arbitrage (labor is cheaper elsewhere) is certainly one reason. But we would be terribly remiss not to look at the perverse incentives built into the tax and regulatory structure of the U.S.--a system which punishes savers and rewards financial speculators, a system which puts roadblocks up to any production of real goods while encouraging government and healthcare as "growth industries," as if government and healthcare are not in effect taxes on productive capital and labor.

No wonder the stock market is rising: corporate profits are skyrocketing since companies can squeeze more work out of existing employees while reaping vast profits overseas. (I recently read that a grand total of $4 of each iPod stays in China, while the stupendous profits flow back to Apple in Cupertino.)

So U.S. global corporations aren't too worried about the decline in Americans' wages; they've been shifting their labor forces and sales overseas for decades. As long as the debt serfs keep taking on more debt and making the payments on past debt, then profits will remain high and the stock market--the Elites' chosen proxy for the U.S. economy--can keep rising, too, "proving" the U.S. economy is doing splendidly.

As I showed in Why We Keep Getting Poorer: High-Cost Housing (February 4, 2010) , median household income disguises the reality that the majority of income increases have been concentrated in the top 5% of households.

Bottom 20%
1975: $12,664
2001: $14,021
increase: $1,357
percentage increase from 1975: 10.7%

Middle 20% a.k.a. "the middle class"
1975: $39,807
2001: $51,538
increase: $11,731
percentage increase from 1975: 29.4%

Top 20%
1975: $91,848
2001: $159,644
increase: $67,796
percentage increase from 1975: 73.8%

Top 5% a.k.a. "the wealthy"
1975: $134,735
2001: $280,312
increase: $145,577
percentage increase from 1975: 108%

So if "prosperity" required ever-larger debt, and income and assets are falling, then what will support new debt? Nothing. No wonder the Federal government is borrowing and spending $1.5 trillion a year--80% of the populace is tapped out and can't borrow any more, and the prospects of their incomes and assets rising are bleak.


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The U.S. Status Quo: Unsustainable, Doomed and Danced Out

by Charles Hugh Smith

Socks which don't even last one day and 20% increases in Government fees are symptomatic of why the U.S. status quo is doomed.

Journalism avoids personal observation in favor of opinions from media-approved "experts," but sometimes experiential evidence offers more telling clues to the future than "expert/professional" models or projections.

The story of an Empire's inevitable decline might start with a single pair of socks.

The story begins and ends at Wal-Mart (last discussed here in The Wal-Mart Model of Self-Destruction: Lowest Prices, Always January 24, 2010). Our friends' Christmas gift was alas not to our needs or taste, so we returned the gift to Wal-Mart and received an in-store credit. Since my work socks were developing holes after years of service, we reckoned we could use the credit on new socks and a collander to replace the rusted piece of Chinese-manufactured junk we'd received as a gift from another friend.

The selection of standard white work socks was not large but there was a choice between a brand made in Central America and one which was made in the USA (assuming the labeling was accurate), so I bought the package made in the USA.

I went home, opened the package, pulled on a pair and went out to do the afternoon's light duties and a leisurely 1 kilometer walk to cap the day.

When I returned home and took off the socks, one had a large hole on the heel. The "made in USA" socks had not even lasted a full day.

As for the stainless steel collander (made in India), it too failed to perform its simple function; due to poor design, water did not flow through its tiny holes but sloshed around the lower steel band of the collander.

Both items will be returned and I am now hoping to use the Wal-Mart credit for corn flakes or equivalent simple food item which hopefully will not be defective/ useless.

I think I know what happened with the "made in USA" socks, and it's what I call the Tyranny of Price. Wal-Mart famously demands annual price reductions from its suppliers, regardless of any other conditions such as quality. The working presumption is that though you will lose money on each item sold to Wal-Wart, you will make it up on volume (that's a small-business joke; if you're losing money on each sale, then high volumes will simply bankrupt you faster.)

So Wal-Mart probably squeezed this supplier for additional price cuts, and the only way to retain the Wal-Mart account and not go bankrupt was to lower the quality of the thread and manufacture of the sock to the point that the heel wore out in approximately two hours of use.

Wal-Mart obviously didn't care and didn't check the quality of either item we purchased.

The real losers are U.S. consumers who have been conned into believing that "Low prices, always" is "cheaper" when in fact low quality is always costlier. The cost-per useage of my previous socks (purchased at Costco, locale of manufacture unknown) was on the order of fractions of one cent; the per use cost of the Wal-Mart sock was almost a dollar.

Since the collander could not perform its assigned task, it provided no use-value for even a single use. It was entirely worthless except as a piece of perforated metal.

Wal-Mart, and by extension, America, has a functional obsolescence problem.Selling defective, zero-quality goods, even those "made in USA," means that vast amounts of money spent by consumers is being squandered. Money wasted on socks which fall apart in one wearing means money was wasted on their manufacture, shipping, inventorying, sale and return, and the hapless consumer has either wasted their money or their time when forced to return the useless product to Wal-Mart for a credit.

Now there may be quality goods being offered for sale in Wal-Mart; I make no claim to a rigorous analysis, and would guess that there must be good-quality goods somewhere in the store. But it is certainly strking that the two products chosen more or less at random were both complete wastes of money and time.

Added together with millions of similarly defective/low-quality/useless goods, this is malinvestment on a vast scale.

Add in the granite countertops in millions of falling-apart McMansions, empty malls, vacant highrises, hundreds of needless "profit center" MRI machines, etc. and we have a nation which has misinvested trillions of dollars which are now lost to productive investment elsewhere.

No economy can recover from this scale of malinvestment. Borrowing trillions more to squander on Empire, real estate and "consumer spending" will not bring back the previously squandered trillions.

One other bit of personal experience: our dear city just jacked up the refuse collection fees it charges its residents another 20%, on top of the 20% increase it levied last year. 40% in about one year isn't "inflationary," at least statistically, though it certainly transfers hundreds of dollars a year from thousands of households into the coffers of city bureaucracies and union workers and their pension funds.

The second 20% increase was necessitated, it seems, because stripmined residents had responded to last year's 20% increase by reducing the size of their trash containers (fees are based on the volume of each container) and recycling more of their waste.

The ironies of this increase in recycling abound. The city claims its most cherished goal is to reduce the stream of landfill garbage, but when citizens did so then their reward is a 40% increase in their garbage collection fees.

You might think that a major reduction in trash by volume might require fewer workers or fewer hours to collect, but apparently no staffing cuts can be made anywhere in the city payroll.

Since residents have already moved to smaller bins, their options to evade the next 20% increase and the ones after that are limited to moving away or joining a tax rebellion which throws the current city management out the door.

Though we live in a state (California) which limits property tax increases to 1% per year, politicos and their various Masters and protected fiefdoms have evaded this limitation via "tyranny of the majority" measures passed by local residents who are always delighted to have someone else pay for further amenities and improvements.

Since residents who bought their homes decades ago--and there are many--pay very modest property taxes based on super-low valuations (also limited by Prop 13), a "tiny" tax increase based on a percentage of their low valuation adds little to their tax bills. And so they (and non-property owning residents) have been happy to pass every tax and every bond, though their enthusiasm for ever-more generous funding for the local politicos and their builder/developer allies seems to be waning slightly.

1% on a house valued at $90,000 on the tax assessment rolls is "only" $90 a year to do something worthy (rebuild the public pool, fund library improvements, etc.). But their young neighbor who paid $600,000 for a similar house next door faces a $600 increase--not trivial.

In this way, our property taxes have leaped from around $9,700 annually to $11,000 in just two years. Friends who bought near the top of the bubble pay an astronomical $15,000 to $18,000 annually. Their neighbors pay a third or less.

If increases of this magnitude are occurring in Prop 13-protected California, I shudder to think what increases lie ahead for those without any limitations on property tax increases.

If I have to read Paul Krugman or another Keynesian palaver on once more about how Californians pay such low taxes, I might suffer a serious loss of good humor.

Even as the Empire is beset by monstrous malinvestments in the homeland, $300/gallon gasoline at the end of the Imperial supply chain in Afghanistan, marginal returns on the trillions awarded to banks and "shovel-ready" pork projects, we also pay the hidden costs of the Tyranny of Price and the Tyranny of the Majority.

I know this might seem unbelievable, but I just did the research and can report that the bottom 60% of U.S. households (by income) pay about 1% of the Federal income taxeseffective tax rates (CBO). The top 10% pay roughly 2/3 and the top 20% pay 83%. While the top 1% has seen their effective tax rate decline, the 19% beneath them who pay the vast majority of taxes have not enjoyed any such reduction in burden. (Disclosure: my 2008 gross income was $30,713.)

It's awfully easy to shout "tax the rich!" but households making $100,000 on the Left and Right coasts don't feel wealthy, not when their property tax bill is $15,000. Yes, they could be renting, but rents are outrageous here, too.

So while the lower-income 60% get ripped off by low-quality "tyranny of price" goods and local government stripmining via speeding tickets and garbage collection fees, the top 20% are getting stripmined by myriad "tyranny of the majority" tax increases approved by recipients of State largesse who cannot face any possible reduction in their swag.

This culture-wide denial is partly fueled by what I term permanent adolescence inSurvival+: the inability to make the realistic assessments and tradeoffs required by adulthood.

Frequent contributor Harun I. recently made these observations about this deep societal immaturity/denial:

I had an interesting encounter with an middle school educator last weekend. She is nearing retirement and is worried about the talk of altering their benefits. I presented the argument that, while there may be a contract, there is no reasonable way of fulfilling it. By her body language I could tell she had no interest in the math, logic, or reality. She hopes that there will be an offer to buy them out before the worst hits.

Right then I understood that, in the same vein of "We are all Keynesians now", we are all interested persons now. While you and many bloggers write perfervidly about what must be done, there is no stomach for it amongst the masses. The greater than 60% of the population who are homeowners have no interest whatsoever in seeing their home values plummet. Workers, renters and homeowners care not to see their 401K's destroyed, their pensions bankrupted, etc. because they have no savings, no plan B, and face poverty if what must happen happens.

Was Chuck Prince being arrogant or merely stating reality on a much broader scale than was at first realized when he uttered these infamous words: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”?

For 90% or more of Americans and much of the developed western world the music has stopped but there is the mass delusion that, if we keep dancing, the fact that there is no music will not matter. However, refusing to submit to the rules of the game does not make you the winner.

There will be no concerted cry of havoc and unleashing of the dogs of deflation because, just as Wall Street, Main Street will see its interests destroyed. This administration and congress will be allowed to do whatever it wishes, and the public, like the deer in my earlier analogy, may grumble but will go about grazing with the hopes that they will not become a victim of the Great De-leveraging. In the post-industrial, exponential debt growth dependent economy, the fate of Main Street is shackled to that of Wall Street.

I am greatly saddened by this general attitude. I have served with and know that there are kids serving today that, without a nano-second of hesitation, would expose themselves in a firefight, risking everything they have, to aid a fallen comrade. Is this great nation still great with such pervasive moral cowardice?

Thank you, Harun, for these unvarnished assessments. I am reminded of the Beatles' song I, Me, Mine. Perhaps that will be the anthem of the next decade as everyone scrambles to protect their swag and perquisites at the expense of some other less politically adept group of citizens, until the entire system freezes up and the dancers suddenly notice the music stopped playing a long time ago.

Two new Readers Journal Essays:

The Inevitable Currency Collapse

Tilting at the Dragons' Memes (MS Word file)

from oilprice.com

The True Causes Underlying the Moscow Metro Bombings

Recommended by Michael Goodfellow:

The Collapse of Complex Business Models

Recommended by U. Doran:

Peak Oil and the Tipping Point for a Complex World (56 page PDF)


Poems by Jim S.

Millions, billions, trillions
Are really just
Omillions, Obillions, Otrillions

Vast-visioned America
Progressive to the end
Envisions all the way to Ozillions
Wheelbarrows-full for the minions

Moodys', Fitches, Standard and Poor
Triple AAA to BBB- evermore
Triple OAAA to OBBB
It's all inevitable, you see


Pakman ObamaGub-mint
Consumes Absolutely
ALL

Massive maw
Empty brain and stomach
IT comes, better run



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Deleveraging and the Futility of "Printing Money"

by Charles Hugh Smith

Base money supply of $2 trillion ("printed money") pales in comparison to the $38 trillion in private debt and the $11 trillion lost in the credit/housing bust.

Frequent contributor Harun I. recently made a comment which highlighted the futility of "printing money" to compensate for deleveraging and credit/asset destruction.

Harun referenced this chart from one of Mish's most compelling entries: Bernanke Wants to End Bank Reserve Requirements Completely: Does it Matter?

Here are Harun's observations:

With only 3.8% real money backing all the debt out there ($T in cash and $52T in debt), it would not take much to drain the system of physical money, and then what? To think of this another way, if 3.8% of the debt out there was paid in full and no lending took place, all existing real money would vanish and a whole lot of people would be holding the bag.

This is the dark side of leverage. And, this is why deflation is so feared. And this is why, in a deflation, cash is king (because it becomes scarce). As highly levered as the system is, the Fed could run the presses night and day and not make a dent.

Let's take just the private (non-governmental) debt of $38 trillion. So base money supply is $2 trillion, and the Federal Reserve "printed" another $2 trillion to buy $1.4 trillion U.S. mortgages (since no private investor was insane enough to do so) because otherwise there would be no market for U.S. mortgages. The Fed also pushed a couple hundred billion into goosing the stock markets via "providing liquidity" to "too big to fail" banks. (Private lending remains moribund.)

Now take a look at this chart I prepared from Bureau of Economic Analysis (BEA) data of the 2000-2008 period: the 2000 stock market bust and the housing bubble's inflation and deflation.

There are a number of striking data points revealed here:

1. As the housing bubble ramped up in the Greenspan "super-low interest rates" era, the dot-com stock market implosion of 2000-2002 erased a mere $1.6 trillion from household net worth (from $42.5T in 2000 to $40.9T in 2002).

2. From 2002 to 2007, household net worth rose by a dizzying $23 trillion. No wonder everyone felt flush; the "wealth effect" from real estate doubling or even tripling was unprecedented, and rising stock and bond markets added a few trillion as well.

3. As households added almost $2 trillion in net liabilities annually in 2005 and 2006, household savings went to near-zero or even negative. This was the result of the bubble-era mantra that "my house is my ATM cash machine, my savings account and my retirement." Indeed, trees can grow to the sky, and then up into the stratosphere....

4. A staggering $11 trillion in household net worth was lost from 2007 to 2008, and as housing has continued to fall, albeit at more modest rates, even as the stock market has "recovered" much of its 2008 losses, we can guesstimate that the losses are roughly unchanged in 2010.

5. As mortgage debt went negative in 2008, the savings rate skyrocketed. Few people seem to ponder the consequences of the U.S. household deleveraging on this scale, or the scale of this wealth destruction. Where U.S. households were borrowing and spending 10-15% of the U.S. GDP every year ($12-$13T GDP, $1.1T to $1.9T in net new liabilities each year), now they are borrowing essentially zero and actually paying down their mortgages (the natural result of making principal payments if one doesn't take on more debt).

To make matters "worse" for a "consumer" economy based on leveraging every last dollar into new debt/credit, households pulled $470 billion out of the leveraging/credit game in 2008 and socked it away as savings. While that's good for banks attempting to recapitalize, it's bad for banks and businesses which depend on households taking that $470 billion and leveraging that into trillions in new debt/spending.

Let's say the Fed "printed" $10 trillion and threw it into the economy. That doesn't quite replace the $11T in wealth which was destroyed in the "global financial crisis"/credit-housing bust of 2008. It is less than half the increase in net worth households experienced from 2002-2007, and it is less than half the expansion of debt in the entire U.S. economy, which doubled from $25T in 2000 to $52T in 2008.

I predict there is another $11 trillion in losses already in the pipeline. Here's a quick rundown of household wealth:

$33T in financial assets, of which $11T is equities (stock market) and the balance in bonds and other liquid business assets

$20 trillion in real estate and fixed business assets.

The housing market has another 30% decline baked in as values retrace to pre-bubble levels, so that's another $4-$5 trillion in wealth destruction ahead.

The stock market is at least 30% overvalued as it is "high" on global Central State deficit spending and an illusory "global recovery" created by that State spending, so reckon another $3-$4T in coming losses there.

As interest rates rise then existing long-term bonds will face stupendous losses in their market value, so let's estimate another $4-$5 trillion.

A glut of overcapacity globally will force the liquidation of many business assets which will be rendered effectively worthless (surplus factories, etc.), so let's reckon another $4T in losses in fixed and liquid business assets.

Oops, that's $15 trillion in losses. Even if I've overestimated a bit, that's still around $10-$12 trillion more in losses ahead, or a return to 2002 levels of $40T in net household worth.

If debt hadn't doubled since 2002, then that slide back down might not be so painful. But all that "free money" was leveraged into more debt.

So even if the Fed "prints" another $2 trillion, or $4 trillion or $6 trillion, that number is overwhelmed by the credit/debt/wealth that is being destroyed by deleveraging.

You want to create inflation? Then print $10 trillion and distribute it to the bottom 90% of U.S. households who collectively own a mere 7% of the nation's financial wealth. That might do it, but I'm not so sure even that would do much.

Households' "belief in the system has faded," to use a Survival+ phrase, meaning their belief in the current "prosperity" based on exponential credit expansion, governance by Financial power Elites partnered with a parasitic Savior State, and the status quo idea that "housing and stock markets are coming back, buy and hold for the long term," etc.

As I have noted before in When Belief in the System Fades, Stock Market Version (March 26, 2010), the American public is staying away from this "global stock market rally" in droves.

U.S. households are staying out of stocks, paying down debt and saving cash. That reflects their actionable belief system. They are rejecting the status quo's desperate pleas to borrow more, spend more and leverage themselves to the hilt once again.

Most pundits seriously underestimate the global overcapacity in manufactured goods. If Americans want another 10 million cars, 10 million sofas, 10 million TVs, or whatever other good you can name, China, the EU, Asia and the U.S. have so much overcapacity that any spurt of demand, no matter how gargantuan, could be met quite easily by production facilities that are already in place and currently idle.

So even if you print $10 trillion and give it away, people will use it to pay down debt and bolster savings; if you doubt this, please re-examine the chart above. Whatever goods they do buy will not rise in price because global overcapacity exceeds any possible spurt in demand.

Lastly, let's ask a question which is rarely ever asked: is buying more surplus consumer crap really the kind of "growth" we want or the kind that is sustainable?The second the consumer item moves off the lot or out of the store it immediately loses much of its value; due to massive overcapacity, "new" will be abundant and cheap until Peak Oil disrupts the entire global trade flow. Mercantilist economies like Japan, Chuna, and Germany (despite lip-service to "domestic demand") are like sharks: they either grow their exports or they die, just as sharks must swim forward or they expire.

Spending $10 trillion on more superfluous, rapidly depreciating consumer crap is actually a massive malinvestment, a stupendous diversion of capital from truly needed infrastructure and debt deleveraging.

But we all know the Fed isn't going to print $10 trillion and give it to U.S. households; it will print trillions and give it away to banks, in a futile attempt to recapitalize insolvent, fraudulent firms which should be forced into bankruptcy. The trillions of "free money" (courtesy of ZIRP, zero interest rate policy) will sit in the banks where it will fund speculations in stocks, bonds, commodities and foreign exchange. A trivial sum will be lent to insolvent consumers with much ballyhoo, and the consequences of deleveraging shoved forward one more election cycle (extend and pretend).

Those who expect this policy to create inflation will be disappointed; there is simply no way that this policy can create inflation, nor can it reinstill households' belief in the exponential credit expansion system.


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Debt Jubilee: $38 Trillion in Private U.S. Debt Is Wiped Clean

by Charles Hugh Smith

In our April Fool's entry, we announce that a debt Jubilee of biblical proportions has just wiped out all $38 trillion in U.S. private debt.

In a surprise move, the U.S. Government announced a "Debt Jubilee" based on the Old Testament of the Bible. All private debt in the U.S.--$38 trillion--has been written off by sweeping Federal legislation.

The overwhelming majority of Americans responded to the news with tears of joy as their vast burden of home mortgages, student loans, auto loans and credit card balances suddenly dropped to zero balances.

Later in the day, those Americans whose pension funds and 401K accounts had held mortgage-backed securities or other debt-based assets (Sallie Mae funds, etc.) were shocked to discover that the liquidation of the $38 trillion in debt also liquidated $38 trillion in assets.

While those with little to no assets cheered mightily at the "Christmas in April" gift, those who had counted on the income from the $38 trillion in assets wept bitter tears; many fortunes and retirement accounts were effectively wiped out.

"Progressives" cheered the fact that since 93% of the financial wealth of the nation is held by the top 20% of households, then the wealth destruction fell most heavily on the wealthiest households.

"Conservatives" mourned the arbitrary destruction of so much of the nation's capital even as they consoled themselves with the thought that the destruction of debt/assets was Biblically inspired.

But the happiest citizens were the bankers, who realized the destruction of the debt freed them from insolvency. Yesterday they were burdened with trillions of dollars in uncollectible bad debt which they'd held on their books fraudulently, with winks and nudges from Federal regulatory agencies.

But today, the debts are gone, as are the assets--but since their liabilities in the form of impaired debt far exceeded their actual assets, the bankers are beaming broadly, for it is a wish come true: tens of millions of Americans now own homes and other assets free and clear, meaning that the banks can now lend them new trillions based on that collateral, and rake in billions in fees and interest.

The consumer economy is also salivating at the happy thought that Americans can now borrow trillions anew and blow the money on fancy meals, sea cruises, speedboats, handbags and all the other "luxuries" which U.S. corporations have made elsewhere and then mark up 500% to sell to U.S. consumers.

Only the taxpayers are still on the hook for the government's own debt. Other nations might not look too kindly on being stiffed for trillions of dollars in Treasury and agency debt that they own.

Deleveraging the U.S. Economy (Special Report from Comstock Partners)

Over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to keep the economy afloat as the private deleveraging weights it down.

No more painful deleveraging, saving, or sacrifice; it's off to the spending-freely races again.

All in all it is a wonderful day; Americans have been saved from their excesses, banks have been saved from insolvency and all the multinationals and small businesses which depend on free-spending consumers are dancing in the streets: the American consumer is free again to extract all their equity and leverage their disposable income and spend, spend, spend on the finer things in life.

Only the owners of the gargantuan asset base which has been reduced to zero--those who have been ruined or seen their pensions decimated--only they do not cheer. But they are in the minority, and in the "democracy" of the Tyranny of the Majority (aided by the ever-present bankers, MSM shills and politicos), any government largesse is always applauded, always welcomed, always cheered and always supported at the ballot box, regardless of its consequences.

Happy April Fools Day!


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