US headed for a depression AND a currency collapse

The US headed for a depression AND a currency collapse. Americans will see their wealth wiped out as stocks and home values plunge, their cost of living soar as food and oil prices spike up, and their taxes increase as the government struggles to fund itself. To understand where the US is heading, we need to step back and take a look at the deep problems afflicting the US economy:

Problem #1: Dependence on Foreign Debt

Over the last few decades, foreigners have been buying up an increasingly large amount of US debt, propping up the dollar. The dollar enhanced buying power has allowed America to consume a disproportionate amount of the world's resources (i.e.: 50% of the world's oil). The inflows of foreign money into the dollar has been due to its status as the world's reserve currency and the desire of exporting nations to maintain a weak currencies. Unfortunately, the dollar has lost the attributes that established it as the world's reserve currency more than 60 years ago (we are no longer a creditor nation), and exporting nations incentive to subsidize the dollar is disappearing along with consumer spending. A collapse of the dollar is imminent as foreigners stop funding America's consumption binge.

Problem #2: Massive derivative bubble

With large amounts of money flowing into dollars and looking for investments, the US financial sector took on the role of selling debt to foreign investors. In the beginning, this involved making loans to Americans and then bundling those loans into complex financial instruments (CDOs, SIVs, ABSs, etc). However, as time went on and the inflows of foreign money into dollars increased, financial institutions became reckless in their efforts to manufacture AAA products. They made loans to subprime borrowers (subprime CDOs) and used financial wizardry to create securities out of thin air (synthetic CDOs). Towards the peak of this financial greed and insanity, banks added large amounts of leverage to their exotic investment products (subprime CDOs squared and CPDOs), and built complex, highly leveraged, off-balance sheet vehicles which funded themselves with short term debt (SPVs, VIEs and SiVs). Through financial engineering and the mispricing of risk, the value of derivatives now far, FAR exceeds the amount of real assets and economic resources in the US.

Problem #3: 55 trillion CDS market

In addition to the derivative bubble, financial institutions used leverage to sell insurance on an enormous amount of debt, creating today's 55 trillion CDS (credit default swaps) market. In order to deleverage and close out their positions, CDS issuers are being forced to buy back huge quantities of insurance, driving up the cost of insuring corporate debt. The higher premiums for CDS translate as higher loan rates for companies and governments.

Problem #4: Structurally unbalance economy

The strong dollar and easy credit conditions over the last two decades have warped US economy, making it structurally unbalance. Here are a few examples of how the US economy has become unsound:

a) Oversized financial sector. While packaging US debt into exotic vehicles for foreign investors, the financial sectors grew until it earned 27% of corporate America's total profits. As credit crisis causes our oversized financial sector disintegrates , it leaves a gapping whole in the economy.
b) Automakers dependent on cheap gas. Automakers are heavily invested in producing fuel guzzling cars and SUVs. When the dollar's collapse pushes oil back up over $100, a large part of America's automobile industry will shut down and cease to exists.
c) Leveraged Stock Buybacks. Taking advantage of low interest rates, companies like GE issued large amounts of debt (commercial paper or corporate bonds) to fund share buybacks to juice profits and prop up stock prices. These companies are now having to roll over all that debt in a tightening credit market while consumer spending goes off a cliff, and their odds of long term survival are not good.
d) Outsourced manufacturing. In order to cut costs, companies have outsourced large parts of their manufacturing operations to lower cost labor markets overseas. Unfortunately, as the dollar collapses, the cost of oversea labor will increase in dollar terms, dealing a crushing blow to companies whose primary market is in the US.

Without a continuously increasing inflow of foreign money to keep the dollar strong and interest rates low, the US economy will disintegrate.

Problem #5: Bankrupt consumer

The "resilient consumer" is dead. His wealth has been wiped out by deflating home and stock prices. Outsourcing and competition with cheap oversea labor have prevented his salary from keeping up with the cost of living. Tightening credit is limiting his ability to borrow, and his liability as a taxpayer has reached $516,348 per household. With hundreds of thousands in job cuts in the pipeline and America's middle class already sinking into poverty, consumer spending is heading over a cliff.


The Financial Apocalypse

As it becomes obvious that consumer spending will not to pick up and that US will never be able to repay its mountain of debts, investors will begin dumping dollars. The selling of dollar holdings to transfer the money to gold or other currencies will accelerate the collapse of US assets prices. With the deflationary/dollar collapse worsening, a large part of corporate America will become insolvent. Automakers are bankrupt at +5 dollar gas. Companies who outsourced their manufacturing and whose primary market is the US will face bankruptcy. Companies who used excessive amounts of debt for stock buybacks will go bankrupt. Financial institutions will be wiped out by the crashing value of the assets in their balance sheets. As a result of the massive economic dislocation, unemployment will soar. With the falling dollar, oil and food prices will move higher in US dollars despite slowing worldwide demand. I am not sure how the government will react to all these problems, but it will be hugely inflationary and it will accelerate the dollar's collapse…

I believe the US is on the verge of a downward spiral that will rapidly intensify into an economic collapse the likes of which has not been seen in modern economic history. I advise buying gold and keeping a close eye on the yield of long term treasuries. If the yield on the 10-year note goes up while stocks fall, it will be a sign that confidence in government debt and the dollar is failing.

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26 Responses to US headed for a depression AND a currency collapse

  1. Anonymous says:

    Doom and gloom post goblin time.

    It can't be that bad.

  2. Anonymous says:

    Unfortunately, it's probably that bad. It's interesting to read the remark "it can't be that bad", it seems a lot of people think that. It's likely just psychology at work, people can't believe, let alone accept, that we are probably going to experience a period of severe economic downturn, perhaps worse than the Great Depression. Eric deCarbonnel pointed this out in another great post on this website, we get the worst of it all: deflation of everything we own, and hyperinflation of everything we need. And that's really bad. See here:

    http://www.marketskeptics.com/2008/10/bankrupt-united-states-will-reverse.html

  3. Anonymous says:

    eric

    what are your thoughts on living in a country that's going through possibly a greater depression? with the socio-economic turmoil that will most likely accompany this scenario, i wonder how owning precious metals, which i own, will be of much benefit. perhaps a move to another country while the ship attempts to right itself.

  4. Anonymous says:

    If you can afford an overseas excursion, get out while you can. If a scenario like this plays out, expect food and fuel shortages, rioting, martial law, coups, suspension of the constitution etc. It's not going to be safe here. The government that emerges from this will not be the america we know now.

  5. "what are your thoughts on living in a country that's going through possibly a greater depression?"

    It is pretty scary. Right now, I am focusing more on how economic and market forces are going to play out in the near term. After the dollar collapse is confirmed, I will spend more time thinking about what it will mean for the Average American.

    "with the socio-economic turmoil that will most likely accompany this scenario, I wonder how owning precious metals, which I own, will be of much benefit."

    Owning precious metals will be of more benefit than owning anything else. As for "socio-economic turmoil", the only way to avoid that would be a move to another country. I am hoping that America society manages to hold it together despite the economic misery on the way.

    "perhaps a move to another country while the ship attempts to right itself."

    Keep that as an option. I hope America will hold it together enough so that won't be necessary, but you never know.

    "If you can afford an overseas excursion, get out while you can. If a scenario like this plays out, expect food and fuel shortages, rioting, martial law, coups, suspension of the constitution etc. It's not going to be safe here. The government that emerges from this will not be the America we know now."

    Maybe Mexico will start having an immigration problem instead of us. Seriously though, I have no idea how bad things will eventually get after the dollar collapses.

    -----

    I wanted to offer one ray of hope: a dollar collapse would mean the end of outsourcing. All the high paying manufacturing jobs that have been lost overseas will start to return to America. Assuming the country manages to hold it together, America's industrial sector which has been hurt for so long by the strong dollar will begin to recover, and we can eventually begin a new bull market based on real fundamentals and not foreign debt.

    Eric deCarbonnel

  6. Anonymous says:

    I looked at Chili and you could do alright there there is resources and stability

  7. Anonymous says:

    Volcanoes rather

  8. meltdown101 says:

    Economically, very sound reasoning. This was always inevitable as the manufacturing and consumer base was destroyed in the US. However, the thing that worries me is how it will play out on Nov 15th, when the ASIA-Europe group come over to deal with the US. The former have already had their meeting in Beijing recently and China and Taiwan have been publicly angry over the situation that US Financial miscreants have led the rest of the world to suffer. Will the US just Mea Culpa and pony up what's owed or will we see a compromise that leaves all parties reasonably satisfied. A new currency, a firesale of American debt at pennies on the dollar ? I would find it hard to believe that Uncle Sam, though on the ropes with a broken jaw would just throw in the towel. By the same token, it is also possible that the Robber barons might just be happy with the loot thay have accumulated already and , in calling it a day, leave their victims to suffer the consequences.

  9. William says:

    I'm curious how the Amero figures into all this. I read somewhere (whatreallyhappened.com, I believe) a report that 800 billion ameros were shipped to the Chinese Central Banks.

    If the scenario painted in the article comes to fruition, are we looking at a very real possibility of a North American Union (Canada, US, and Mexico), a la the EU?

  10. meltdown101 says:

    William, You can find it on my site at Some Interesting News

  11. Anonymous says:

    The establishment will censor everything, arrest everybody for standing up to protest, confiscate precious metals, setup work camps, and create a government debt slave taxation system.

  12. Anonymous says:

    Don`t think it will get worse?

    Check back in 2 or 3 or 4 or 5 years and then see how bad it is.

    2008 will seem like a dream in comparison.

  13. Daniel says:

    It's not going to be bad as in no food on the shelves and we will go back to bartering, however the dollar will lose a substantial amount of it's value. Also, it's been confirmed by many people who know what they're talking about that the living standards of Americans will have to drop significantly until it evens out with the rest of the world. It's just a matter of time, think about it. Globalization is here, and no matter who you elect, free market forces will continue to push for open borders! There isn't a way around it, you might be able to slow it down, but even that would be costly. Too many people are on this planet, they all want to work! There aren't enough jobs, even speciallized labor will be outsourced to people in India and China, they are willing to work for peanuts to do what people in America do for $100K/year. It's a transition which will take time, maybe a few decades, however there really is nothing good to look forward to in America in terms of a better life or rising living standards. I'm in America now, thinking of moving overseas. America is still the greatest country in the world, but it's like this, Would I rather live alright, and watch my living standards fall every year, or move somewhere with lower living standards but have them improved every year? Psychologically I like the latter. Plus it's gonna be painful when you see a bunch of people who thought they were rich realize that they really arent. Crime is gonna shoot up in this country in the next decade. It's not gonna be fun. Think of "Fun with Dick and Jane" without the funny parts.

  14. Anonymous says:

    Obviously Daniel you do not work in the Food industry.. To make your statement is ignorance..I have the job of distributing food to millions of consumers and teach in the local college classes to farmers on distribution in the US...

    1. We are totally dependent on a system for Food Distribution... this system requires credit and a sane outlook for businessmen and farmers to allocate capital in proper ways...

    2. Many gov't agencies do not know the damage they are doing to the system and in most instances do not care.

    3. Input cost are rising and the consumer is failing big time.. this is putting a tremendous strain on an already taxed system...

    When the system cracks by our overseas creditors demanding real resources to pay for their real resources then you will see the fallacy of your arguments...

    I will tell you one outcome that is for sure...by 2010 there will be mass starvation in the US...
    The depth of ignorance by the average person in the US of how food is grown and distributed is scary to say the least...

    One telling statistic.. if the Mexican worker did not harvest the local crops here in the Midwest the Farmer cannot find labor of any sort to do it and it would rot in the fields...

  15. Anonymous says:

    One other thing that needs to be addressed is that the work that is required to do the harvesting of food in the US is not some computer with a IPOD...

    When the FDA issued a false alarm on Tomatoes and Salmonella $150 million yes million dollars of Tomatoes were thrown away.. those individuals who depend on tomato crops..be them farmers distributors or resorters lost that money and it is not coming back.. most of those farmers just quit in disgust.. it wasn't even tomatoes that was the problem...

    That millions upon millions of acres of grain is grown in the US does not mean that we have a right to eat it.. Imagine the credit machine breaking down and interest rates going to 10-15% to get the foreign creditor to buy our treasuries..
    As a rational human being why would anyone think that that farmer sells to ADM then they sell to the Chinese for real cash they need to survive that the American who is in debt up to his eyeballs can force ADM who is owned by corporate types to give him the wheat...

    Just try and reason on if a country is in debt to the tune we are how we pay for real goods without making anything except weapons...Do you really think the Chinese, Russians, Iranians etc love us after what the American has done to the rest of the world..travel and you will find out..

  16. Anonymous says:

    A collapse is Inevitable.

    It's been planned for quite a while.

    Any HIGH IQs out there : Don't get yourself killed. Don't "protest". Don't count on The Common Man. Don't do anything but learn and read for YOURSELF.

    You can always get yourself out of Amerika. There isn't much to leave behind:

    TV. Ignorance. Stupidity.

  17. Daniel says:

    I'll admit that I don't work in the food industry.

    I just can't imagine or understand how mass starvation will take place in the U.S. Surely when the crap hits the fan, the IMF will work with Europe and Eastern countries to reorganize America, and give us loans to at least be able to feed ourselves.

    Look at past banktrupcies, usually savings are wiped out and the country takes out emergency loans. If anything, the U.S. still has a bunch of highways to sell to foreign buyers? No? In a worse case scenario can't America sell Alaska? (Just an example, they really shouldn't sell Alaska, there's a lot of oil there!).

    Also, I know how people abroad view Americans. If out politicians didn't view us in the same light, maybe we wouldn't be in this mess.

  18. "I will tell you one outcome that is for sure...by 2010 there will be mass starvation in the US..."

    I have to disagree on this one point. The US still has nuclear weapons and the world's strongest military (although weaken by an idiotic Iraq war). If North Korea can use its 6 nukes to blackmail the world for food, then the US can do it too. Also, China and other nations would be interested to sell us food in exchange for military secrets. Finally, it would be too dangerous for the world to allow a nation like the US to starve.

    So, while there might be civil unrest and high crime, I don't think widespread starvation is possible.

  19. Anonymous says:

    Look on the bright side everybody. America will no longer be the country with the most disgustingly obese people in it.

    Personally I'm investing in metals, precious and otherwise. Things like gold, brass, copper, and lead. The last 3 all come together in the form of ammunition, it's practically a steal. All jokes aside, if you wanna stick it out for the long haul in a hell hole, the most sound investments you can make are in food stocks and personal commodities. Rice, flour, canned goods, dehydrated foods, water tretment items, shelf stable items and foods, propane, fuels for camp stoves, start seasoning wood to burn now, TOILET PAPER. Worth more than gold when there isn't any of it. I've been in situations where I would have stabbed somebody for a roll of toilet paper. Here's a good link for this sort of stuff from a guy who lived through the mess in Sarajevo. The info is priceless.

    http://www.thepowerhour.com/news/items_disappearfirst.htm

  20. trisha says:

    You claim that, with the collapsing dollar, jobs will return from abroad and manufacturing will start up again... Where will the investment money come from? How will American companies afford to import all of the equipment/tooling necessary, since they are no longer made in the U.S.?

    You are laying out a dreadful short term future, while glossing over the longer term problems; nor have you accounted for the vast arsenal of weapons America has, and still will have. Might they not be used for blackmailing the international community into keeping the funds coming?

    Yes, America may go down, but it is a serious omission not to envisage that it might decide to take at least China (perhaps, Russia and India, too) down with it. With both economies starting over, like boxers who simultaneously deliver knock out punches, it becomes a simple race as to who gets to their feet first and claims the victory.

    I cannot believe that this strategy wouldn't be considered at the very least!

  21. Daniel says:

    The two main people who's judgement I trust on this matter is Jim Rogers, and Marc Faber. They have been dead right on everything that has happened, and it's in everyone's best interest to atleast youtube these people's names and hear what they have to say.

    There will not be a gigantic collapse or massive starvation because things like that only happen in Africa, because everyone knows that no one cares about black people. I'm not racist, i'm just realist. If anyone really cared, 30,000 people a day would not be dying from starvation as we speak.

    What I see for U.S. is this.
    1.Dollar loses reserve currency status.
    2.Long term yields rise substantially.
    3.Dollar is devalued to a fraction of it's worth over time.
    4.Inflation hits 20-30%, while the gov continues to tell us it's at 5%.
    5.Americans being made to live within their means.
    6.Tougher jobs, longer hours, lower pay.
    7.Living standards drop dramatically, everything in price goes up dramatically from heating costs, to food, and imports.
    8.Taxes rise dramatically.
    9.Crime rates jump!

    None of this will happpen over night, but it will happen. Globalization is here, and if you live in the developed world, it's gonna suck. There are too many smart people in poor countries like India and China who will create sophisticated mathematical models using stochastic calculus and even program them in some fancy computer language for much less than $120K a year (to use just one example). This is why people who live in developed part of the EU hate having eastern countries join. Because all the poor easterners go to the rich western countries and lower their standard of living, same with mexicans in this country. I mean no offense to the immigrants, they just want a better life for their own, which is completely reasonable.

  22. Anonymous says:

    Here is the scenario for starvation.

    1. We transport 87 billion pounds of food in the US each year... to do this we need the import of oil...
    2. Oil is going to be needed by every human being and to pay for it you need resources not paper.
    3. In debt people do not get a free pass and say I am sorry.. so give me some food...work produces food.
    4. When the financial collapse happens the individual who harvest process food will have to be paid in something that he can use to exist.
    5. When the worker who is not being paid enough to exist does not harvest or process there is no one who does this work or could do this work.
    6. The ones who have resources are not going to be generous to those who previously lorded it over them..
    7. In 1933 there were apples that fell to the ground in Washington for lack of funds to harvest. In Chicago there were lots of hungry children who were willing to buy the apples if they had funds..
    There was supply and there was demand what was lacking was funds.
    8. You cannot imagine or can you consider that evil still exist in this world. If that evil exist in people of large amount of resources they are not going to be soup lines like in 1933. The average American cannot grow or slaughter food he must have it brought to him and he pays for it.

    If the food chain is broken for lack of funds you cannot put the system back together again. Katrina showed this... when the system breaks it will not be what you have known before...

    Logical thinking is missing in today's average American...

    Every single thing eaten must have energy input to get it to a human. excepting wild things but they will be quickly gone...

    Energy inputs like hydrogen cells, wind energy, solar do not and cannot take the place of oil..when the debt derivative monster actually starts to affect real companies layoffs will begin in earnest and this will cascade.

    If you think that this country will come together then tell me 10 of your closest neighbors names and how much you spend time with them and how they react to change...I will bet not one of most Americans can do even one or two neighbors...

  23. Anonymous says:

    During the 1970's the economy was much worse than it is now. A lot of people were out of work, inflation was in double digits, a home loan was around 18-22%, and gold was soaring.

    I was certain the country would completely collapse. I bought a lot of guns, ammo and gold and moved to a rural area. I was able to produce all my own food and lived completely off the grid with solar panels and windmills. (This was almost 30 years ago) The country totally recovered and we had some of the best economic years ever.

    I moved back to the city, sold all the gold at a huge loss, and lived a more “normal” life. I’ve spent much time studying and considering the current situation. I feel we are headed for hyperinflation this time around. The national debt is so high it can never be paid back. The only way out for the federal government is to print money like there’s no tomorrow. By devaluing the dollar, the value of the debt goes away. Study the Weimar Republic of Germany. All bank accounts and pensions became zero. At the same time, all loans went to zero as well.

    This time around, I’m buying real estate, as much as I can get. Interest rates are low. If we have hyperinflation, I can raise the rents monthly or even weekly, while the loans on the properties go down in value eventually becoming nothing. You can’t rent gold.

    If I’m wrong and we have deflation, the property values will go down and so will rents.
    During the great depression, my grandfather owned a bunch of rental houses. When the tenants couldn’t pay the rent, he couldn’t pay the mortgages. The banks didn’t foreclose because they knew they wouldn’t be able to sell the houses or collect rents either. He eventually made a lot of money.

    It’s not easy to predict the future, but I’m betting on hyperinflation.

  24. Anonymous says:

    This is what happens when an unelected "President" helps another country attack America, and then blames it on innocent Arabs FOR that "Other Country."

    Once George W. Bush ordered torture for "country A" he more than broke God's laws, he joined Satan's army and American "Christians" are so mislead with lies that they couldn't see through his treason.

  25. While I think the food situation might become a problem, frankly, I am much more concerned about oil. 10 dollar gas (maybe in a year) would do more damage to our country than food shortages. This is the land of SUV, and outside a few major cities there is little if any public transportation. You can grow food in your backyard, but you can't grow fuel.

    If you don't have the money to drive to town 20 miles away, does it really matter if they have any food or not? What about heating your house when the fuel bill quadruples? Trust me on this, high oil/gas prices will be a much bigger problem then food.

  26. Liza Borgenson says:

    The government is screwing us. Period. Nothing to it! I recomend reading Sugar Shock.It'll be much better than the half truth the government tells.

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