Economic Depression – Precisely Why and Approximately When

http://www.depression2.tv/nwo-2/archives/000121.html ^ | 11/09/2004 | Russ Randall

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Why Expect an Economic Depression? Imagine a herd of buffalo that was enticed by a persuasive Mr. “Buffeenspan” to graze in an easily accessible field of sweet weeds that had no food value. Although the activity was enjoyable, the energy they consumed to grasp and chew the weeds was greater than that gained from digesting them. Now thirsty, imagine next that Mr. Buffeenspan seduces the herd with a large sign having a beautiful oasis painted on it to follow him. Of course, the herd follows in an enthusiastic determined fashion having enjoyed the tasty weeds as a result of his initial guidance. After a journey they finally arrive at the destination oasis only to discover a small mud pit. From a weakened dehydrated state of exhaustion, the heard panics and runs away from Mr. Buffeenspan to follow an “Austrian” Buffalo that will lead them to a less convenient grassland near abundant water without the palm trees, knowing some will die along this now much longer journey. For fear of losing the herd Mr. Buffeenspan quickly paints a more beautiful, deeper oasis on a larger billboard asking the herd to stop the panic driven reversal-in-course and continue following him. That did not work, so finally, Mr. Buffeenspan quickly prints millions of dollars and, foregoing the aid of a helicopter at this juncture, spreads the freshly minted bills in a pathway that will encourage the herd to follow him.

Do we have a significant percentage of people employed in companies that would not be profitable under natural interest rate conditions (i.e. grazing in a field of weeds)? Do we have investors with financial and real estate equity assets who believe they are at fair valuations and will return 10-20% annual valuation increases into the future (i.e. the illusion of an oasis)? What should the herd do?

Most economics will argue recessions and depressions are caused by human or negative-shock aberrations (e.g. oil shock), which can be mitigated or prevented by means of “mechanical” monetary and fiscal intervention. The Austrians will argue just the opposite. Significant booms and busts are caused initially by excessive monetary expansion.

I would further suggest there are two clear human perception and behavior conditions that result from the excessive monetary expansion. Once extreme, they cannot be mitigated by monetary or government intervention means. First is aggregate asset overvaluation including equities, bonds (debt), and real estate. The investor’s belief is that his asset or real estate equity represents a perceived real “future stream of goods and services”. Second is that a significant percentage of work activity (behavior) is performed in “Market Unjustified” companies. These are companies that would not be profitable at “natural” interest rate levels. Regardless of asset values, interest rates, treasury spreads, derivative swap spreads, or any other financial instrument or metric, IF THE TWO BEHAVIOR AND PERCEPTION CONDITIONS NOTED ABOVE ARE AT EXTREME ABHORRENT LEVELS, THEY WILL RAPIDLY CORRECT at some point in time. They cannot be quietly diffused through any “mechanical” monetary means of inflation, deflation, or default.

We must search beneath the surface to understand what drives human behavior and fear in our economic world today. If we discover our work activity (behavior) is driven to areas for the wrong reasons on a large scale, and further, if we discover the “future stream of goods and services” that we are expecting to enjoy is largely an illusion, we become fearful and lose confidence in our governing system, our leadership, and ourselves. The more extreme these conditions become, the more severe will be the depression. Currently we exceed any level experienced during the past century in the noted areas.

We know: · Wealth is created by work; not by artificially suppressing interest rates and increasing bond and real estate perceived valuations, nor by rapidly expanding the money supply enabling Ponzi momentum schemes to inflate equities far beyond real valuations.

· There is financial peace of mind in those who believe they can depend upon a “future stream of goods and services” from financial and equity assets they possess. Equity valuations generally provide a “medium” piece of mind, since we are conditioned to expect volatility. Bond and real estate valuations generally provide “high” piece of mind, since we are conditioned to believe they are stable. Note: An illusion discovery on bonds and real estate would be very unsettling.

· A business enterprise cannot continue indefinitely losing money, unless it is subsidized.

What do we mean by work activity driven for the wrong reasons and what is the result?

Easy monetary policy and cooperative foreign central banks will incentivize people to start up companies or change investment strategies in existing companies such that they may lose money under natural interest rate conditions. Two stories illustrate the point:

Junior and the Boomers; a Misdirected Work Activity Once upon a time there was an island inhabited by a young Yuppie, “Junior”, and ten older men, the “Boomers,” nearing retirement. Junior wanted a $10,000,000 house, so he asked the Boomers to build it for him. The Boomers were discussing concerns about Junior’s ability to repay when suddenly “Godspan” spoke from the heavens and said interest rates are officially 0.1%. Elated, Junior quickly calculated that he could afford the house by paying an interest-only monthly mortgage of approx. $1,000, which he could readily afford. Concerned, the Boomers asked Godspan who was going to buy the mortgage-backed securities to fund Junior’s mansion. Godspan responded reassuringly not to worry…. “You would purchase the securities”. Once the house was completed they would each have bonds worth $1,000,000, thus they could all retire as millionaires. The Boomers expressed concern about the yield on the bonds. Godspan again reassured them not to worry…. Just look at the past 20 years…you will either gain in asset valuation, if interest rates drop, or gain income from higher yields, if interest rates rise. Either way you’ll be fine, if you just keep thinking long-term. Begrudgingly the Boomers agreed to buy the bonds. Keeping the vision of achieving millionaire status soon and having faith in the omnipotent Godspan motivated them.

A year later the Boomers had toiled and used their last bit of working-life energy to complete Junior’s mansion. Junior was ecstatic at closing. He gained ownership of the dream house that he could afford. The Boomers were giddy because they were all now millionaires…!

The next day one of the Boomers wanted to cash in his bond and spend some of his hard earned money. Much to his surprise there was no one interested in buying his $1,000,000 bond. He quickly learned that the $100 monthly stream of income was all that he was going to receive. Godspan was nowhere to be found. Godspan’s replacement, an Austrian economist, quickly calculated the real valuation of his $1,000,000 bond to be approx. $25,000 at market interest rates, and informed the bewildered Boomer that the difference of $975,000 was an illusion.

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http://www.depression2.tv/nwo-2/archives/000121.html

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I'm interested to see what some of you think about this report...

[Gibtx]

this is plane garbage... more bs from the left is falling crowd..

[The Hollywood Conservative]

I think its silly... And the tone is so glib as to diminish any thought of seriousness I might lend it.

[Petronski]

More proof we all need to buy gold. Gold! GOLD!!!

[woofie]

Its the end of the world ....again

[Clintonfatigued]

It makes valid points, even though I don't agree with everything it claims. It's correct that more fiscal prudence is needed across the board.

[Prolifeconservative]

Just another in a long list of "blah-blah-blah" opinions.

[Radioactive]

I've heard more gloom & doom in the last 35 years to last me a lifetime.

I don't pay much attention to the the "World is going to end" crowd because they have not been right yet.

[per loin]

Your analogy entirely misses the significance of buffalo sh*t.

[Doe Eyes]

More proof we all need to buy gold. Gold! GOLD!!!

I would say just gold, but certainly tangible assets instead of what could well become near worthless dollars.

[Cedric]

Not garbage: This guy's economic model has accurately predicted 13 out of the last 2 depressions!

[Mulder]

This economy is build on a house cards: massive debt at all levels.

It's still riding the wave of the manufacturing revolution of the mid 1900s, and the technological revolution of the 1980s and early 1990s. That won't last forever.

[stig]

The problem is it doesn't take into account that the boomer's own the house. They may take back a mortgage but if the economy is so bad that the house is now worth 25000, then bread is probably $0.25 a loaf. So they kick out junior and rent it to Mr. Upandcomer for $200 per month with that they can buy more than enough bread to feed themselves and live out the rest of their days on the planet.
Now if they leveraged themselves to build junior's house then it's called bankruptcy. We've already seen this happen before can anyone say Southwest real estate in the 80s?? The point is we survived that debacle. The Japanese survived the Tokyo real estate slow down. Does that mean that some people aren't hurting? No, you can always find someone who hit the market at the exact wrong time. But overall as a society we will survive. I think that's what the great depression taught the US. Since then we've survived the savings and loan debacle and the corporate accounting debacle. And thanks to George W. Bush we quietly fixed the corporate prescription drug scandal. So quietly most people don't even know we fixed it.
Is it fixed so well that the fix won't break? Again these big national problems always seem to rear their ugly heads every 5 - 10 years or so. But our economic system is more spread out. Many more checks and balances in it than back in the 1930s. Don't forget the savings and loan debacle cost George Bush 1 the presidency. The drag on the economy was so great that the recession it caused was used by the democrats to give Clinton the edge and give Perot a toe hold.

[CAWats]

Pure trash.

[You Dirty Rats]

The solution to the problem is more immigration so that there are people to change the bedpans of us Boomers when we're drooling.

[xcamel]

Change the weeds and oasis to bright green astroturf and vaporcorp.com and he has described the clinton years to a "T". and we not only survived it, we got smarter.

[Strategerist]

I would say just gold, but certainly tangible assets instead of what could well become near worthless dollars.

He was of course mocking the deranged rantings of goldbugs that have gone on about...well, as long as I can remember.

[ETERNAL WARMING]

The House of Cards will come tumbling down one of these days. Sadly, because of Outsourcing policies and trade deficits with every nation on earth, there will be nothing to pull us back out.

Scripture says of those days, "A piece of bread will buy a bag of gold."

[Centurion2000]

More proof we all need to buy gold. Gold! GOLD!!!

Like this guy ???

[Cedric]

I just read on an earlier thread that the Al Qaeda guys say they have a nuclear bomb and they're gonna nuke the U.S. If that's true {as I'm sure it must be (after all they wouldn't make-up something like that)} I hope they set-off the bomb just after the Depression hits.