The path to depression

Want to know what is really going on?

Investors are waking up. They are wiping the sleep from their eyes. Behold! No recovery.

Analysts and the commentariat are struggling to make sense of it. With record low mortgage rates, and after eight programs designed to boost up housing, for example, sales are still plummeting. July saw the biggest monthly drop in existing house sales since the Johnson Administration.

The supply of houses for sales is growing – thanks to record foreclosures. The demand is falling. Prices will come down too.

It’s a Great Recession, say some.

It’s not a recession, it’s a depression, says David Rosenberg.

It’s a “Contained Depression,” says one headline at Seeking Alpha.

The recession never ended, says another headline.

Stocks will sink to 5,000, says a headline at CNBC.

Bloomberg takes a more moderate tone:

“Durables, Housing Signal Recession Risk.”

But you, dear reader, you want to know what is really going on. So we will tell you.

We begin with a detail from yesterday’s news: credit card debt has dropped to its lowest level in eight years. This tells us that the de-leveraging of the private sector is real…and on-going. And as long as it lasts, you can forget about a “recovery.”

Instead, you should expect more on-again, off-again recession…with high unemployment, falling asset prices (stocks and real estate), weak sales and declining incomes.

This correction is a good thing. Consumers have too much debt. They’ll be better off when they get rid of half of it. But the feds want to fight this correction in the worst possible way. What’s the worst possible way? Adding more debt!

While the private sector de-leverages, the public sector leverages up. Eventually, this will have the result that everyone expects…bonds will crash, and the dollar will collapse…BUT PROBABLY ONLY AFTER PEOPLE STOP EXPECTING IT.

In the near term, the stock market is probably going down…it seems to be rolling over now. Yesterday, the Dow rose 19 points – a very weak bounce after so many down days.

When stocks go down, they will drag inflationary expectations. It will probably bring down stock markets in the emerging economies…possibly causing the Chinese economy to blow up…and bring falling commodities prices and deflation too. The idea of a “bond bubble” will disappear. People will see the “depression/Great Recession” as real…and permanent. They will try to protect themselves by buying US Treasury bonds. This will permit the feds to go further and further into debt.

Thus begins the world’s long day’s journey into night.

The US economy will become a Zombie Economy, with more and more activity dependent on government spending and government support. Banks are already Zombie Investors. Rather than lend to viable businesses that expand the world’s wealth, they borrow from the feds and lend the money back to them. We’ll see private investors become Zombie Investors too – putting nearly all their savings into US Treasury paper, just as the Japanese did.

The Dow will sink down towards 5,000. The feds will announce program after program to boost up the economy. Household savings rates will head to 10%. Unemployment will go to 12%…maybe 15%. Bond yields will collapse to new record lows. Ben Bernanke will threaten to drop money from helicopters…but as long as the US remains in an orderly decline, he will not dare to do it.

Eventually, the whole system will blow up in a spectacular fireball. But not until America’s investors are fully committed to US paper. Then, after having suffered huge losses in stocks and real estate, they can be finally ruined in what they thought were the safest investments in the world – dollar-based US Treasury bonds.

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