[DEBATE] : (Fwd) The crrrrash scenario

[Berend Schuitema]

Big Jake is deluding himself if he thinks that if his predictions come true,
he will score a $ million consultancy gig and/or a lucrative book write
contract! Berend

-----Original Message-----
From: debate-bounces at debate.kabissa.org
[mailto:debate-bounces at debate.kabissa.org] On Behalf Of Patrick Bond
Sent: 08 May 2009 05:28 PM
To: debate: SA discussion list
Subject: [DEBATE] : (Fwd) The crrrrash scenario

Financial Times

The Worst Case Scenario (Someone Has to Say It)
by: Big Jake May 03, 2009

Since the economy began sliding downhill in late 2007, mainstream economic
and market experts have consistently erred on the sunny side.

As late as June 2008, mainstream consensus held that the U.S. was heading
for a "soft landing" and would avoid recession. Several months later, the
slump was acknowledged to have started in January 2008, but we were supposed
to see renewed growth by mid-2009, with unemployment peaking in the
eight-to-nine percent range. A quick "shovel-ready" 
stimulus bag was supposed to set us back on the road to prosperity.

In January, recovery projections were pushed forward to late 2009. 
Today, the consensus is for a mid-2010 recovery, with unemployment peaking
at just over 10 percent. Clearly, the mainstream has struggled to catch up
to reality for well over one year. What are the chances that they finally
have it right this time?

Moreover, the mainstream continues to see what is going on as a
plain-vanilla recession that will be quelled with some on-the-fly monetary
and fiscal tinkering. Washington, we are told, will pull us out of this
slump-as soon as the masses can be enticed back to the shopping malls. Then
things will return to how they were before. But what if the experts and
politicians are wrong not only on their ever-changing recovery timeline, but
also on the nature-nay, the very existence-of a recovery?

America's reigning political-economic ideology has demonstrably failed. 
Given that its government is obviously fumbling along without a clue, its
foreign and domestic credit is tapped out, and its 300 million people are
discovering that their hopes for continuous material improvement will never
be met, could the U.S. be headed the way of the USSR?

Instead of a recovery as the mainstream envisions it, what if America
permanently bankrupts, impoverishes, and marginalizes itself? What if its
cherished institutions fail across the board? For example, what happens when
the police realize that their under-funded pension plans cannot support a
decent retirement? Will they stay honest, or will they opt to survive by any
means necessary? These are questions that the mainstream does not even begin
to contemplate.

In the interests of providing you with an alternate vision-something outside
the mainstream-below are ten predictions for America through the year 2012.
This is not boilerplate doom-saying. Rather, I am laying out in highly
specific terms what will happen over the next three-odd years. 
Others have thrown around the term "Depression", but I am going to tell you
precisely what it means for you, your investments, and your community.

When these predictions come true, I expect to be rewarded with a
seven-figure consulting gig, a book contract, or a high-level position in
whatever administration succeeds the doomed Obama team-that is, if anyone
succeeds it at all.

Prediction one. The twenty-five-year equities bubble pops in 2009. U.S. 
and foreign equities markets will stop treading water and realign with
economic reality. Stock prices will cease to reflect the "greater fool" 
mentality and will return to being a function of dividend yields, which have
long been miserable. The S&P 500 will sink below 500. In a bid to stem the
panic, the government will enforce periodic "stock market holidays", and
will vastly expand the scope of its short-selling prohibitions-eventually
banning short-selling altogether.

Prediction two. With public pension systems and tens of millions of 401k
holders virtually wiped out-and with the Baby Boomers retiring en
masse-there will be tremendous pressure on the government to get into the
stock market in order to bid up prices.

Therefore, sometime in 2010, the Federal Reserve will create and loan out
hundreds of billions of fresh dollars to the usual well-connected suspects,
instructing them to buy up stocks on the public's behalf. This scheme will
have a fancy but meaningless name-something like the "Taxpayer Assurance
Equities Facility". It will have no effect other than to serve as buyer of
last resort for capitulating smart-money types who want to get out of stocks
entirely.

Prediction three. Millions of new retirees-including white-collar people
with high expectations for a Golden Retirement-will be left virtually
penniless. Thousands will starve or freeze to death in their own homes. 
Hundreds of thousands will find themselves evicted and homeless, or will
have to move in with their less-than-enthusiastic children. Already strained
by the rising tide of the working-age unemployed, state and local welfare
services will be overwhelmed, and by 2012 will have largely collapsed and
ceased to function in many parts of the country.

Prediction four. "Quantitative easing" will fail to restart previous
patterns of lending and consumption. As the government sends out additional
"rebate" checks and takes ever-more drastic measures to force banks to lend,
hyperinflation could take hold. However, comprehensive debt relief via a
devaluation of the dollar is even more likely. This would entail the
government issuing one "new" dollar for some greater number of "old"
dollars-thus reducing both debts and savings simultaneously. This would make
for a clean slate a la Fight Club.

As there are many more debtors than savers in the U.S., the vast majority
would support devaluation. The Chinese and other foreign holders of our
bonds would be screaming mad, but unable to do anything. 
Every country that has not found a way out of dollar-denominated reserve
assets by 2012 will see its reserves eliminated.

Prediction five. The government will stop pretending that it can finance
continuous multi-trillion-dollar deficits on the private market. By late
2010, the sole buyers of new U.S. Treasury and agency bonds will be the
Federal Reserve and a few derelict financial institutions under government
control. This may or may not lead to hyperinflation. (See prediction four).

Prediction six. As the need for financial industry paper-pushers declines
and people have less money to spend on lawyers and Starbucks (SBUX),
unemployment will rise until the private sector has eliminated all of its
excess capacity and superfluous or socially needless jobs. 
The government's narrow unemployment figure (U3) will rise into the high
teens by late 2010. The government's broader unemployment figure (U6) will
cease to be reported when it reaches 25 percent-it will simply be too
embarrassing. Ultimately, one in three work-eligible Americans will be
unemployed, underemployed, or never-employed (e.g. college grads permanently
unable to find suitable work).

Prediction seven. With their pension dreams squashed, and their salaries
frozen or cut, police and other local government workers will turn to
wholesale corruption in order to survive. America's ideal of honest,
courteous, and impartial cops, teachers, and small-time local functionaries
will have come to an end.

Prediction eight. Commercial overcapacity will strike with a vengeance. 
By 2012, thousands of enclosed malls, strip malls, unfinished residential
developments, motels, truck stops, distribution centers, middle-of-nowhere
resorts and casinos, and small-city airports across America will turn into
dilapidated, unwanted, and dangerous ghost towns. 
With no economic incentive for their maintenance or repair, they will
crumble into overgrown, plywood-and-sheet-rock ruins.

Prediction nine. By the end of 2010, tens of millions of households will
have fallen behind on their mortgages or stopped paying altogether. Many
banks will be unable to process the massive volume of foreclosure paperwork,
much less actually seize and resell the homes.

Devaluation (as mentioned in prediction four) could ease the situation for
those mortgage holders still afloat, but it would also eliminate any
incentive for most banks to stay in the mortgage business. In any case, the
housing market in many parts of the country will lock up completely-nothing
bought or sold.

With virtually no loans being made, even the government will finally
acknowledge that most banks are fundamentally insolvent. A general bank run
will only be averted through a roughly one trillion-dollar recapitalization
of the FDIC, courtesy of new money from the Federal Reserve.

Prediction ten. As an economy is never independent of the society within
which it functions, the next few paragraphs will focus on social and
political factors. These factors will have as much of an impact on market
and consumer confidence as any developments in the financial sector.

Whether rightly or not, President Obama, having come to power at the dawn of
this crisis, will be blamed for it by over 50 percent of the population. He
will be a one-term president. In response to his perceived socialization of
America, there will be a swarm of secessionist and extremist activity, much
of it violent. Militias and armed sects will be more prominent than in the
early 1990s. Stand-off dramas, violent score-settlings, and
going-out-with-a-bang attacks by laid-off workers and bankrupted
investors-already a national plague-will become an everyday occurrence.

For both economic and social reasons, millions of immigrants and guest
workers will return to their home countries, taking their assets and skills
with them. The flow of skilled immigrants will slow to a trickle. 
Birth rates will plummet as families struggle with uncertainty and reduced
(or no) income.

Property crime will explode as citizens bitter over their own shattered
dreams attempt to comfort themselves by taking what is not theirs. 
Mutinies and desertions will proliferate in an increasingly demoralized,
over-stretched military, especially when states can no longer provide the
educational and other benefits promised to their National Guard troops.

There will be widespread tax collection issues, and a huge backlash against
Federal and state bureaucrats who demand three-percent annual pay raises
while private sector wages remain frozen or worse. In short, the "Tea
Parties" of tomorrow will likely not be so restrained.

Finally, between now and 2012, we are likely to see another earth-shaking
national embarrassment on the scale of the 9/11 attacks or Hurricane Katrina
and its aftermath. This will demonstrate conclusively to all Americans that
their government, even under a savior-figure like Obama, cannot, in fact,
save them.

By 2012, there will be a general feeling that the nation is in immediate
danger of blowing up or coming apart at the seams. This fear will be
justified, given that the U.S. has always been held together by the promise
of a continuously rising material standard of living-the famous "pursuit of
happiness"-rather than any ethnic or religious ties. If that goes, so could
everything else. We were lucky in the 1930s-we may not be so lucky again.