The government and the experts are still denying the real mess we are in. They are saying this is nothing like the depression of the 1920s/30s because at that time unemployment went up to 25% and we are not experiencing anything of this magnitude now. They expect unemployment to go up only to about 7% and maybe 8% percent. Wrong again. While I hate to be a pessimist, when looking at everything taking place around us, all indications point to massive unemployment. All you have to do is read the news every day. Companies, even healthy companies, have begun layoffs due to lower revenues. The bulk of those jobs will not be returning.

The economy can’t and will not work itself out of this mess this time around. Another stimulus check will not change the outcome. Unlike in the past, there are just too many moving parts negatively impacting the financial health of our nation. Factories and businesses are going to be shrinking down to the level of business they will be conducting in the future. This level of business will be far less than what it was yesterday and today. In the process of carrying their restructuring, businesses will hand out countless pink-slips, sending a sizeable number of people from every segment of our society to the unemployment lines. As a consequence of this, unemployment will surpass all previously recorded rates of unemployment including those of the great depression.   

However, not every region of the country will experience the same pain. Some regions of the country will do better than others. Some regions will experience moments of chaos and diminishing/reduced services provided by local/state governments. The homeless population will become highly visible everywhere, with people begging for handouts at major intersections and highway exit points, and setting up portable shelters anywhere they can find overhead coverage. Crimes, particularly breaking and entering, and robberies will become uncontrollable, with the Police unable to bring the situation under control due to the high volume of reported incidents.

While businesses undergo deleveraging and shrinkage, commodities prices will hit new lows as demand for everything from oil to coffee  declines drastically in concert with the reduced level of production for things like automobiles, appliances, clothing  and food items.  For a period of time, this will result in lower prices, something we are already seeing at the gas pumps, the price of gold and the discounting of big ticket items to reduce inventories and begin restructuring in preparation for the new economy.    

Through this ordeal, we will experience a period of recession, (already deeply occurring in some parts of the country) deflation (already happening with some of the things we buy), and depression, followed by hyper-inflation that will eventually lead to stabilization of prices and markets. This entire process may take as little as five years to work through and as many as ten years. How long it ultimately takes depends on how fast the government institute new regulations and puts in place trip wires to warn of any possible over exuberance building up in the financial markets in the future. In addition the government will have to pump huge sums of money into rebuilding the decaying infrastructure of the country, in order to create jobs. It also depends on how quickly businesses learn to fully realize the consumer will not be returning to buy everything put in front of them anymore and that reduced business activities are here to stay.

When we come out of this at the other end, expect to pay a lot more for everything. Five to ten years from now our economy will closely resemble that of Europe and Japan today. We will be paying $7.00 to $8.00 for a gallon of gasoline and $1.50 to $2.00 for a regular postage stamp.

The home building industry will no longer be. Instead, they will switch to building houses, on demand. Meaning, construction of new houses will start once there is a ready buyer and once that buyer has gone through the rigorous process of obtaining the necessary loan, requiring some 25% to 30% down. Consequently, only a few of today’s home builders will remain in business. The majority of people will no longer afford to own a house.

We are not out of the woods yet.  Read my other postings regarding our current situation and where we are heading.  It is going to take many years for our economy to rise out of the ashes and dust and start moving forward in the right direction.  When it does, it will not be business as usual for Corporate America.  Corporations and businesses of every type will have undergone through a massive reinvention resulting from this crisis.   The credit markets, including Wall-Street, as we know them today will seize their current free-spirited business practices, turning back the clock somewhat.  Accountability will become the order of the day, with tightened lending requirements for individuals and more government regulations to preclude manipulators from intentionally or maliciously manipulating the stocks of company for their own personal gains.  Home prices, the engine that contributed greatly to influencing spending by home owners (by taking out home equity loans), thereby helping to keep the economy afloat during the past 6-7 years, will become relatively stabled and predictable, but we will not see home prices go through the roof as we did until 2006.  People will no longer be able to borrow for up to 125% of home value or get home loans without actually putting down 20-25 of appraised value.  To protect their investments, companies will have to get used to the idea of selling less and selling to people that can afford to pay.  The expansion by companies (glutting) with stores in many parts of the country within a few miles from one another will be reversed with many closures, in order to shrink their existing business models to meet the smaller demands of the future.

Some in the government are still talking about the possibility of a recession.  They just don’t get it.  Forget about recession, they need to start talking and preparing about how to combat the depression.  The $750 billion bailout is nothing but a drop in the bucket and small pocket change compared to the trillions it will eventually take to get us out of this mess.

I don’t know how much more evidence they need to figure this out.  Every day we read about records breaking declines such as those reported today:

"Mid-Atlantic regional factory activity crashed to an 18-year low in October, a survey showed on Thursday, adding to the grim toll the last month of credit turmoil has taken on the economy."

"The Philadelphia Federal Reserve Bank said its business activity index slumped unexpectedly hard to -37.5 in October from 3.8 in September. That was its lowest since October 1990."

"Big industry production plunged in September by the most since late 1974, largely reflecting fallout from hurricanes Gustav and Ike."  

"The Federal Reserve reported Thursday that production at the nation's factories, mines and utilities plunged 2.8 percent last month, on top of a 1 percent drop in August."

 The above is a reflection of what we can expect long into 2009, 2010 and possibly well beyond with more contraction and misery for everyone.

Please read the rest of the story: http://chaosinamerica.blogtownhall.com

All of the ingredients that contributed to the first great depression were once again mixed together to create the next great depression.  Seems we did not learn anything the first time around.  Easy money was the primary contributing factor that led to the great depression that started in 1929 and lasted into the late 1930s.

Installment credit/buying on credit was a huge problem in the 1920s as not many people took into consideration the future.  People bought everything from automobiles to furniture, appliances and luxury items they could not afford.  This was great for the economy and everything seemed to be going well.  Business was booming and companies were expanding and growing.  Americans were spending like never before (with money they did not have) on just about everything they could their hands on.   The roaring 1920s and the roaring late 1990s/2000s were falsely created by the extension of credit and escalating real estate prices and not by actual wealth or savings.  Just like in the 1920s the coming depression resulted from the collapse of the real estate market and tightening of consumer credit.  This led to a large number of businesses shutting down and massive bank failures.

As you have noticed, I am already referring to the coming second great depression as something we are experiencing.  We all need to be realistic about this.  We have gone beyond a recession and we are heading directly into a depression.   We can not wait for the experts, economists and Politicians to tell us that we are in a depression.  By the time they get around to figuring this out we’ll be coming out of it and heading into a third great depression.

As we move to deal with this developing depression, businesses are going to have to drastically change the way they sell their products to the public.  To survive and stay in business, they can not continue with their reliance on the extension of bad credit, with 0% percent or very little down, no payment for a year and even two years.  Businesses are going to have to become creative in other ways, while at the same time making sure their essential products are affordable and available to everyone.  Businesses are obviously in business to make a profit so they can grow and expand and as such they need to protect their investment by requiring a larger down payment, specifically if the purchase is for a house, car or an entertainment system.  To some degree the automobile industry started protecting some of its investments with the introduction of vehicle leases many years ago.  Automobile leases are based on the depreciation value, other fees and finance charges.  Leases usually require a large upfront payment and higher monthly payments.

If businesses adopt more stringent lending practices, Americans will be forced to save in order to come up with the down payment for the purchase of things we can not afford to pay cash.  This will also change us from a nation of borrowers and into a nation of savers.  To build real wealth when we buy appliances, cars or purchase a house, using actual money, if we take the money out of savings for the down payment we will then have an immediate ownership interest, instead of negative interest as it is currently the case with negative mortgage amortization (Negative amortization arises when the payment made by the borrower is less than the accrued interest and the difference is added to the loan balance).

A borrower’s ability to borrow and use credit should be predicated on a formula based on the available cash and investment on-hand, in addition to current salary and not just a credit score or salary alone.  Since we no longer have permanent employment or a good and reliable retirement system, this should also take into account the possibility the borrower may become unemployed for up to a year.  Credit limits on credit cards should not exceed a predetermined amount on all the credit cards held/offered to the individual.  Meaning, if it is determined that an individual should only have a $25K credit limit on all the credit cards combined, including department stores credit cards, then that individual should not be allowed to exceed this credit limit.  The question that needs to be answered is, if unemployed for a year, can the borrower still pay all the bills?  A person earning $100K annually should only be given credit card/department store credit not to exceed $10K and not in excess of $25K as it is currently the case.   Credit cards credit limits should not exceed 10% of income.

It is relatively easier for people to walk away from their homes (mortgages) and not pay their bills, because many bought properties, cars and expensive entertainment systems without having to put up a dime or very little.  The way some people see it, they have nothing or very little to lose by walking away from paying their bills.   

We do not want our grand children to go through a third great depression.   But just as we did not learn from the first great depression, I am certain we will not learn from the second one either.  Once we come out of this depression, it will be business as usual until the next one and greed will return all over again creating one bubble after another.  

Through all the financial turmoil, Wall Street failures and political turbulence coming out of Washington, no one is paying any attention to the terminal tumor spreading across the land like the plague.  Seems people in Washington and in the private sector are still in denial about the downward spiraling condition our country is facing.  A $700 billion bail-out or rescue is only but a tiny amount of what will eventually take to get this country back on track.  People are attaching a great deal of hope on this small sum of money.  Some think this will be the cure all medicine, while others are under the misguided believes the illness will cure by itself and the country should not spend any money to fix the problem.  A problem that will hit each and every American very hard if left unattended.

The financial survival and military strength of this country are both completely dependent on finding the right cure to the financial crisis.  Everyone is talking about a recovery.  I am sorry to say, there is none coming anytime soon.  The damage done this time around is by far more severe than people are willing to recognize.  The pain that we will all experience will be very much similar to the pain of the great depression.  The pain will be felt in every state, cities and towns across America.

Companies doing business in every segment of our economy will find it more difficult to sell their products with every passing day, leading to bankruptcies unlike anything we have ever witnessed.  I see factories shutting down, stores closing their doors, local governments reducing their level of service and workweek to save money in order to be able to pay their remaining employees.  Federal Government employees will also see massive Reduction in Force (RIF) and while unfortunate, rightly so, because as we all know the Federal Government has grown drastically during this decade.  The answer to everything in the Federal Government is always, we need more people and we need more money.  Instead of working with available resources to become more productive and efficient they resort to empire building.  But why should they be more productive or efficient when they don’t have to answer to shareholders and there is very little accountability to speak of?

The Federal Government is going to be faced with a situation of having to bail out other large companies and State Governments.  The overwhelming amount of money the treasury will have to print to cope with this crisis, will, further erode our buying power at home and abroad.  The outcome heading our way will be super-hyper inflation.  The price of everything from a cup of coffee to all of our daily essentials will skyrocket, thereby, adding more insult to injury to the great deal of financial distress and misery most Americans are already experiencing.  There is no escaping, everyone will be permanently impacted and will feel the pain.

When was the last time the government asked for our permission to use tax payer's money in Iraq or Afghanistan or any place else for that matter? Why does the government considers the use our money in those places to be appropriate but not appropriate to be used in the United States? 

Complicating our problems is greed.  The housing bubble was created by such greed.  Every bubble created during the past 20 years was the results of greed, either by a few individuals in the right place and job position (WorldCom & Enron), by individuals looking to make a quick dollar at the expense of others.  People or I should say greedy people who bought houses, not necessarily to live in them; some of them never did, with the hope of turning a quick profit created the current financial situation, along with many of those that took out home equity loans.  While on the other side of the equation, the bankers and mortgage lenders (with their own greed) fueled the appetite of the greedy people by providing them with no money down mortgages and not doing the necessary due diligence to make sure that borrowers could actually pay the money back.   Of course mortgage lenders and bankers made a ton of money as well in the process, due to their own greed.

Yet, on the other side of all the turbulence, there are people, intentionally instigating panic and fear, driving companies into bankruptcy, by spreading rumors and lies so they can make a quick profit from their downfall.  The government did take some action by stopping the shorting of hundreds of companies stocks, but only after the extensive un-reversible damage done to many companies.   However, this action is only temporary in nature and once it ends, the bad guys will be back at their game again.

Several weeks ago we experienced a few examples of this panic and fear impact.  The attack started with Lehman Brothers and the bad guys then set their eyes on Merrill Lynch to go after, forcing Merrill to hook- up with Bank of America.  Of course, the same bad guys have a list of companies to go after each time one fails.  Unfortunately for the average investor, we all ultimately pay the price for the greed of a few.  Some people have lost their entire life savings during the past 20 years while others have lost a great deal of money due to the action of those who instill panic and fear into the market place and our society.   Yes, the situation is not pretty, but our banking and financial system is not going to stop functioning tomorrow unless we allow the bad guys to continue negatively influencing the daily outcome of the stock market or of individually selected companies, through their manipulation of  financial instruments that are designed to offset losses when markets are heading down during the normal process.  Instead, they are using those instruments to pressure the market into the direction they want to assure them of a winning outcome in either direction.  

Put all of the above problems together, along with the lack of a compressive, for all medical healthcare system, and the problems the Social Security systems will be facing in a few years and what do you get? You get a country made up of homeless people, where the sick and poor will not be able to afford medical care, food or even a roof over their heads.  Unless something drastic is done to stop the ongoing downward spiral and decaying of our social/economic structure, I foresee a future where we will have to depend on the goodwill and handouts from other countries.  That's really a shame.  I hate seeing us like this.