Economic Crisis in America: Mounting Household Debts, Threat to Pension Funds and Social Security

Economics / US Debt
Dec 15, 2010 - 10:53 AM

By: Bob_Chapman

The experts’ keep telling us how great shopping is this Christmas Season when only 17% of shoppers are using credit cards. That is a drop of 50% from last year, and the lowest usage in 27 years. We guess buyers have unloaded the cookie jar and pulled their savings from under the mattress. The consumer sentiment index has risen 2.6, but we will wait to see if attitudes turn into sales. Home buying intentions continue to fall as interest rates hit 4.66% for a 30-year fixed mortgage this past week, putting a further damper on future sales.

By many yardsticks it looks like the stock market is topping out again. If for no other negative fundamental or technical reason then the fact that all strategists are bullish. GS believes profits will rise 25%. We don’t, we see GDP growth at 2% in 2011 including a tax compromise and a net of $800 billion and the Feds addition of $1.7 trillion. This is what happened in the last stimulus effort. Besides from our point of view shares are already overpriced. The market will be helped by a relatively stable dollar due to the turmoil in Europe and Japan. As the year moves on we see an eventual weaker dollar in spite of sovereign credit problems in Europe reflected in the euro. As 2011 wears on the developing world will have inflation problems caused in part by imported dollar inflation. During the course of the year barriers will be erected as they have been in Brazil.

The Fed will continue to monetize, as the deflationary undertow remains strong. Money velocity will rise, as will inflation and the prices of gold and silver. In spite of dollar strength on a relative basis the struggle between the dollar and gold for mastery will be ongoing as the dollar loses the pitched battle versus gold for monetary supremacy. Underlying deflation will be aided by ever falling prices in residential and commercial real estate. Household de-leveraging will continue at a moderate pace as it has for the past 2-1/2 years. Personal savings are back down to 4%, a reflection of debt pay down.

If you were curious as to one of the reasons the market has held up, just go to what corporations have been doing with revenues, bond issuance and loans. They have bought back more than $368 billion of equity, but internally-generated funds are falling rapidly.

We don’t as yet see a double dip recession, but on the other hand wait until the public realizes that for another $2.5 trillion we are going to buy time and move sideways again. That was also the cost of QE1. The risks are again being papered over.

Wait until Americans realize that most states in the US are broke and radical changes are immediately ahead at these levels never mind what the federal government has to eventually cut. If it is any consolation, Europe is in the same fix. Is it any surprise then that nations want to commandeer pensions, as Argentina, Hungry and France have already done. Fifty percent of Americans feel they are worse off now then they were two years ago. Wait until 2012 ends, they’ll wish they were living on another planet. By that time we should be involved in another major war. That means they will be more concerned about dying than they will be about economic and financial issues. The elitists’ hope is that war will lead to forced world government. Two-thirds of Americans believe their nation is headed in the wrong direction and they are right. Their consensus and that of professions regarding tax cuts are correct. They do not favor full extension of tax cuts, but they know if they are terminated the economy will fall. That would take down most of the financial institutions and much of business and industry. The big question is when will they ever be prepared to face the music? Never we suppose, but it has to come anyway, even if by WWIII. Read history, it is all there. This has happened over and over again. Even if continued GDP growth will be only 2% for 2011, down from 3% in 2010. Unemployment via U3 is 9.8%. The best that could possibly be hoped for is 9.5%. The funds that are being spent under the tax package are for banking, Wall Street and corporate America, not for the Americans on main street. That would put U6 at 16-5/8% and real unemployment at 22-1/4%. Passage of a tax package will insure that government won’t drag the economy down between now and 9/30/11, the end of the fiscal year.

The stock market is overpriced and due for correction. The bond market is in the process of a correction. How far it will go remains to be seen. Commodities and gold and silver are in their respective bull markets. Some contend they have overreached. Commodities began their bull market in 1999 and gold and silver in 2000. Commodities are still a long way from their highs of 2-1/2 years ago. There is no way anyone who understands market history can say gold and silver are over priced, when one considers the price suppression by the “President’s Working Group on Financial Marketsâ€