Standing on the edge of the economic cliff

I've spoken many times before about our deteriorating economy. Events over the past couple of weeks have pushed us closer than ever to the brink of a second, 'double-dip' recession, if not an outright depression. Consider these facts:

• The International Monetary Fund has drastically downgraded its economic forecasts for the USA and Europe.

The world economy has entered a "dangerous new phase," according to the chief economist of the International Monetary Fund. ... The IMF expects the U.S. economy to grow just 1.5 percent this year and 1.8 percent in 2012. That's down from its June forecast of 2.5 percent in 2011 and 2.7 percent next year.

• The US Federal Reserve announced a new intervention program today - and the stock market immediately tanked (with good reason).

The Federal Reserve did what investors expected Wednesday - it said it would buy Treasury bonds to help the economy. But stocks fell anyway. The reason? The Fed made it clear that it thinks a full economic recovery is years away.

• The majority of global business leaders are predicting another recession.
• The real underlying problems of the global economy have not been addressed.
  

What is really wrong with the global economy? The global bureaucracy. Decades of rising taxation, increasing regulation and persistent redistribution have fundamentally and structurally weakened the major economies of the world. Underneath the glittering razzmatazz of modern technology lies a society sapped of its capitalist juices. For decades, we’ve gnawed away at our capital stock.

• Regulations and red tape are strangling both the birth of new companies and industries, and the growth of existing ones.

The fiscal cancer has now reached the economy's skeleton, and is gnawing into its bones. As the inimitable Karl Denninger (who's been right on the money in his predictions for several years) put it today:

Are you prepared yet?

No?

Well I'm sorry, because it's too late now.

I mean really, honestly too late.

The market figured it out and it didn't take very long - in fact, it took less than an hour.

This latest distortion by The Fed has just destroyed the last bit of earnings power the banks had. It's gone. All to preserve the ponzi scheme in the Federal Government - the same Federal Government that just sent a bleat to Bernanke about tampering with the economy.

The very same legislators that will now do nothing about what was just done.

You got that? They will do nothing.

What did Bernanke's act tell us?

He burned the furniture for warmth today. He and the rest of the Fed cabal are done; this was the card that was known to do much more damage than it could ever help anyone - or anything. He burned the furniture to allow the Federal Government Ponzi to continue for one more year while utterly screwing the private lending industry of all sorts from banks on down.

There is no shortage of lendable money. There hasn't been since this entire mess began. The problem was that money was too easy, not too tight, and people ran into the wall on their ability to pay.

You cannot drink yourself sober.

The game is over folks.

There's more at the link. Bold, italic and underlined text are Mr. Denninger's emphasis.

Doug Casey put it even more strongly in an interview released today. I'm less pessimistic than he is . . . but perhaps I'm just more deluded (or too hopeful). I'm going to quote him at some length, to give you a worst-case scenario.

L: Doug, we talked a couple weeks ago about the US and global economies exiting the eye of the storm, and it seems thus far that you’re right on target. The eurozone is under extreme debt stress, the dollar is no better, and gold is back over $1,800 per ounce again – and has surpassed platinum again as well. People thought we were crazy when we wrote about $2,000 gold, but here we are, within kissing distance of it. Still, it sounds crazy to think this is just the beginning – too apocalyptic to believe. Are you sure there’s no way out?

Doug: Well, never say never. And I’m an eternal optimist. But as I’ve said before, even if friendly space aliens landed on the White House and gave us a magic technology that fed and housed everyone, the economic dislocation would still wreck the world as we know it. I truly can see no way out. Let me be completely clear about why. The West in general, but the US in particular, has been living way above its means for a long time. The proof for that statement is all the debt we’re awash in – federal, state, municipal, and individual. Debt is worse than living out of capital. It amounts to living out of anticipated future revenues – which may not even be there. It amounts to eating the seed corn.

L: Well, even if you could see a way out, the politicians would never do the right thing.

Doug: It’s worse than that, much worse. They can be counted on to do not just the wrong thing, but the opposite of the right thing. Everything the government is doing is making things worse – for instance, Obama’s idiotic $447 billion stimulus plan. It will extract that much productive capital from society and simply flush it down the cosmic toilet. But I’ll go further: Not only do I not see any way out – politically feasible or not – everything I know about economics tells me that it’s impossible for the global economy to get out of this intact. Important body parts are caught in the wringer; we are, therefore, going through the wringer.

L: And yet, the dollar is holding its own against the euro…

Doug: That’s just an illusion created by the race to the bottom; the euro is in even worse shape than the dollar. Italy – surprise, surprise – may not be able to enact the necessary austerity measures required for its bailout. Greece, Italy, Portugal, Spain, Ireland – all these governments are bankrupt. So is France. The euro is in terminal decline. So what does it mean that the USD is running neck and neck with it? It just means both are being debased at similar rates.

. . .

Doug: And it’s happening now. The Chinese have more US dollars than anybody else and are offloading those dollars anywhere they can, for instance in Africa, in exchange for real wealth – natural resources to fuel their future growth. This is a global trend today; we see deals around the world cutting the dollar out wherever possible, such as the one between the Iranians and the Argentines. It’s almost like barter. Nobody wants to use the paper of an unreliable third party, so the dollar has become the Old Maid card nobody wants to get stuck with.

L: I know you don’t like making predictions, but you’re the guru, so when do you think the game will wind down to the Old Maid card?

Doug: In five years the dollar will have lost its reserve status completely. It could be less – two or three. I hate to put such a near-term time frame on something that’s so momentous, but that’s the way I see it.

L: Because the debt is beyond paying?

Doug: The US government spends $1.5 trillion more than it takes in per year – that is, it’s adding that much more debt to the already unpayable national debt. Given this situation, the status quo is just about the best it could possibly be. But it’s unstable – and unsustainable. It will get much worse going forward. The US government admits to 9.1% unemployment, though if that number were calculated the way it was in the ‘80s it would be over 20%. When business failures increase, as we move back into the storm, the government will spend even more on welfare and bailouts. The politicians made a lot of noise about cutting a few trillion out of the federal budget, but that’s over a ten-year period and it’s loaded towards the end of the ten years. The supposed cuts are trivial and unlikely to actually be implemented two elections from now.

. . .

Doug: ... it’s important to understand that it’s not just the government that has a debt problem. Many of those voters the politicians must pander to have no savings and are one paycheck away from hunger – if they even have jobs. Americans are not alone in being burdened with an entitlement mentality – that’s why Europe is perhaps even more incapable of fixing its problems. It’s why Latin American governments make ever more economically suicidal policy decisions in the wake of protests and pressure from organized labor – but at least there’s no debt in Latin America, simply because no one will even lend them money.

People in many countries have been consuming more than they have been producing, and they feel they have a right to do so. They’ll be disabused of that feeling soon, and it’s going to be very ugly. But until then, no way will debt-ridden voters vote for politicians who promise to smash their cracked rice bowls. That’s why the Ron Paul campaign is of educational value only.

We have finally gone beyond the point of no return. There’s no way to avoid a gargantuan catastrophe – much worse than what happened in the 1930s and ‘40s. There are several ways this could play out, but the government always chooses the worst alternative, which in this case is the destruction of the US dollar. Its first priority is saving the US government, not the dollar, nor the interests of the people. The politicians will wind up destroying the productive parts of the economy to save the government; the parasite will kill the host. It’s a total disaster, with wide-ranging consequences, and it’s already happening.

Again, more at the link.

I truly hope and pray that Karl Denninger and Doug Casey are wrong this time . . . but I wouldn't bet money on it. Batten down the hatches and strap in tight, folks. I think it's going to be a bumpy, stormy ride. Also, read the post below about current security concerns. They're going to get worse as the economy does.

Peter