Seven Deadly Cracks and The False Recovery

Photo Credit to Surat Lozowick

Today the Dow Jones Industrial Average reached its highest point of the year.  It is also at the highest point since its complete collapse in late 2009 when it bottomed near 6600. As I post this the Dow is up to 11,525 and it may very well close higher by the end of the day’s trading.

For the last week the television has been abuzz with “good news” for our economic future.

Some of the reasons given I have heard are…

  • The republican gains in the recent election
  • The compromise on the “tax cuts”
  • Consumer spending is up
  • The banks are making deals and opening up capital
  • People who didn’t lose jobs are no longer afraid to spend and borrow

The reality is there are tiny flecks of truth in all of this.  The big problem with our current recovery is that it is nothing but an illusion driven by a public relations campaign!  None of the items above actually can correct the real reasons behind our economic turmoil, some of the major  issues are…

There are more reasons of course but the above 7 are the seven deadly cracks in the current economic outlook.  Now despite a massive PR campaign by Washington and Wall Street there has been zero improvement in any of the core issues that created the collapse in the first place.  On top of this the Federal Reserve is printing money hand over fist in the form of quantitative easing and doing all it can to attempt to jump start inflation.   The reality is inflation is already hitting us on many of our daily needs like gas, food and electricity.  Much of which the government is leaving out of the official inflation numbers.

Inflation is coming though and in my view it will make things better.  What!  Did I just say inflation will make things better, I did, but the next part is critical, it will only get “better” for a time and the result will be a larger deeper collapse.

To understand the pending collapse we must first understand how inflation can create the illusion of recovery.  Sine we naturally view inflation negatively this can be difficult for many of us to see but the theory is quite simple.   During a down turn companies lay off any non critical employees (dead weight) and stock pile cash.  They also rake suppliers to cut their costs on production, importation, outsourcing, etc.  Since times are tough the supply chains capitulate feeling fortunate to have any business at all.

Companies that survive the first 1-2 years of a downturn become very strong, weaken competitors and emerge as truly solid companies.  This is a great case for true capitalism, unfortunately we don’t have true capitalism so this is only the first part of the equation.   While this is all occurring the Fed is continually pumping money into the economy as is the government with “stimulus spending” to try to “jump start things”.    This is classic Keynesianism.  In the Keynesian system all spending is good and all growth is good and despite many weaknesses on some levels it works.  Well it works just like giving a skid row bum a credit card works, a week later he looks great but a year later he is worse off then ever.

This is what is occurring now, the inflation is finally kicking in, prices are really rising and the strong companies have leaned out costs and are now more profitable then ever.  The talking heads are also correct in stating that American’s that have not lost jobs are now spending more then anytime since the down turn started, many of them are also flush with cash and low on debt.  When the downturn started many people “woke up”, paid debts and cut spending but those who have skated through are now switching over to the “can’t happen to me camp”.  This has all happened before in many cycles of boom and bust in our past.

So why is this time different, well, because the seven deadly cracks will not be repaired by any of these things.  Unemployment may drop a point or two but the banks can’t fix their true insolvency.  There is no way that more than half of our states can avoid what can only be called a bankruptcy, of course it won’t be called that by the press.  Over 1.2 million more foreclosures are expected in the next year on top of more than 2 million that have already occurred.  That is 3 plus million homes on the market and 3 plus million families that won’t be “qualified” to get a mortgage for a very long time.    I don’t think most people get that you really need to double the foreclosure number to understand its real effect.  It isn’t just another home on the market, it also another buyer out of the market.

The rest of the deadly cracks are just as real and just as deadly.  So what this means is government spending and the Fed’s policy of inflation at all costs will work for a time, it also means the better they work, the worse the eventual crash.   It will go something like this, the Dow will in early 2011 cross the 12,000 threshold a meaningless but very psychological number.   Boosted by growth in revenue and unwillingness to pay excessive taxes on it many of the surviving companies will look to expand and begin hiring, not a ton but some.  This will drop the unemployment number by say a point perhaps at best two points.  People will become abuzz with confidence even more than right now and spending will get stupid again.

All of this will create true inflation and the Fed won’t be able to contract things as fast as it expanded them, we will see published inflation in the neighborhood of 2-3% with actual inflation near or over double digits.  No one except the poor and retired (fixed income) will care.   Most of the general population (sheep) will think good times are on the way back and begin to spend and borrow even more.  Again this cycle has created boom in bust ever since the days of the first U.S. Central Bank.  Only this time the nation, its people, its states and its banks are all essentially bankrupt.

Don’t ask me to put a date on this but somewhere in the utopia of a recovery one of the seven cracks will begin to fully crumble.  My guess is it will be a state or two at first that cuts retirement for state workers and ushers in a form of austerity.   If you think Ireland having issues drops our stock market wait until it is California and New York.  Once the damn springs a few leaks momentum builds.  Our creditors (The U.K., Japan, China, etc.) will slow down buying our bonds and require higher interest to buy any at all, a few banks will begin to fail and in the end the crash of 2008-2009 will look like the “good old days”.

Unlike many people I won’t sit here and tell you it will happen by x month of x year, the truth is I don’t know how long this illusion and PR campaign can be maintained.  I am not sure how dim the American people have become and how long they will let their bets ride the second time around.    What I will tell you is this, when everyone says the recession is over, protect everything you have for at that point the beginning of the spiral will have just begun.

So why should you trust my analysis on this?  Well because I was stating that this would be exactly what would occur in July and August of 2008 before the initial downturn even occurred.  This is one of those things I certainly do not want to be right about, unfortunately I believe that my analysis is absolutely correct.  It has flown in the face of every professional on both sides of the issue.    The conventional wisdom was that no crash was coming and when it did come that there was nothing to really worry about, it would all get better and life would go on as normal.    On the other side the likes of Schiff and Celente  (both of whom I highly respect by the way) were sure this was the big one, an abyss from which would could not ever hope to recover.

We are now entering one of the most dangerous times in our history in my view.  My suggestion is to cautiously use the false recovery we are entering to prepare for the day of reckoning that surely is coming.  Just remember when that guy on T.V. says we are out of the woods, he was probably the same idiot that told you there was nothing to worry about right before the first collapse.

9 comments to Seven Deadly Cracks and The False Recovery

  • Jack, another right-on-target analysis of the situation. The (big) business I am in is showing strong signs on the upside, for the reasons you state. We got leaner and smarter and the healthy companies in our customer base are buying again in a surge. (They’d rather upgrade their systems and hire consultants than hire employees, in our case.)

    We are definitely living on borrowed time, however. There are no politically-acceptable cures to the seven deadly cracks (a genius description). The Democrats and Republicans are simply two rival gangs of train robbers fighting over who gets to rob the train. The train is barreling along at top speed, we’re all on it, and up around the bend the bridge is out.

  • [...] authored an article yesterday you can read at The Real Truth About Money called “Seven Deadly Cracks and The False Recovery“.  I didn’t want to do this episode today so close to Christmas but I can’t get [...]

  • From the wikipedia entry: “In 2010 Austerity was named as the word of the year by Merrian-Webster.”

    What does that tell us?

  • Jack is right on target with this article. We are not out of the woods yet. We are just entering the deadly cycle of an economic collapse and begining a roller coster ride of economic ups and downs. However we will have to endure more downs than ups from this point on. The only thing we can due is to stay frosty and prepare ourselves and our family’s for our uncertain future.

  • Great article very thoughtful and provocative…It will take several years for the full impact of the current administration’s reactions to the previous administration’s legacy. It will be a scary future to be sure. I wouldn’t say “damn springs” but the hint of condemnation of what has happened and what is to come is appropriate if only subconscious! You can’t continue to spend and provide monies to people who need to change their behavior immediately…in the long run either money has true value or it becomes merely a part of the problem. Is paper money much more than a ponzi scheme at the grandest level? We the people no longer own real estate either. We merely rent it from the government in the form of real estate taxes…pay or lose it…

  • Trent Rock

    This is what is occurring now, the inflation is finally kicking in, prices are really rising and the strong companies have leaned out costs and are now more profitable then ever.
    Inflation is finally kicking in huh?

    The Consumer Price Index for All Urban Consumers (CPI-U) increased
    0.4 percent in January on a seasonally adjusted basis, the U.S.
    Bureau of Labor Statistics reported today. Over the last 12 months,
    the all items index increased 1.6 percent before seasonal adjustment.

    That is the BLS stated CPI
    What do you think the “real” CPI is for Jan 2001?
    And how did you come up with the figure?

    Just trying to figure why I should buy a book about macroeconomic issues from you…….

  • ModernSurvival

    @Trent Rock,

    You can believe the numbers from the CPI or you can look at the prices of things you buy each day. If you don’t think there is currently any inflation, discussing this with you is probably pointless.

    We have been told there is no inflation and low inflation for a long time. Tell a single mom who has to use a calculator to shop there is currently no inflation and see what answer you get to that.

    Now I wonder if you have a clue about what this site is all about. I don’t sell any books, I do advertise a few written by Ron Paul and others that are available on the open market like Amazon.

    I have ONE BOOK here I have authored, it is free you just download it and it isn’t about macro economics, it is about the monetary system and how money is created in the current system.

  • I do not think there is inflation. I do look at the prices of the things I buy each day. It’s about in line with the .5% the govt tells me :)
    You can use other indexes like Timmed Mean PCE Inflation Rate
    The result isn’t that much different than the “regular CPI”

    Do you think there are regional inflation differences?
    That is, prices might be more stable where I live than where you live?

    Is the govt not reporting TRUE inflation rates a conspiracy theory?
    Or is it they just used flawed methodologies?

    Your free book would not load up for me (PDF version)
    I tried finding your name
    But could not
    I’m curious if your are an economist, a blogger, investment banker, Thurston B. Howell IV, a Kruggerand dealer? ;)
    In other words, why should I listen to what YOU think how MONEY works?
    Instead of known economists like Krugman, Becker, Manikiw, Thoma, etc.
    I don’t pay much attention to Ron Paul or the whole abolish the FED/return to the gold standard
    I know he is popular with The Austrian School, though
    I believe some things about The Austrian School
    Like praxeology
    Not necessarily their theory on the business cycles (credit/debt cycle)
    That is just one of the business cycle THEORIES
    It’s not been proven as fact..IMHO

    Anyways, I listen to your podcast one of these days
    Do you take call ins!?? hheheheheh
    I stumbled upon this site because I am kind of a prepper and this site comes up high on the survivalist sites lists
    And I think one of my FaceBook friends “recommend” your FB page
    I’m prepping more for earthquakes and forest fires (I live in southern California) than I am for The Coming Hyper-Inflation

    I think inflation for 2011 will be about 3-5%
    The consensus among economists is 1-3% (last I looked)
    Consumers Turning Into Inflation Hawks
    And I’m hesitant to say consensus among economists!..lol
    That is an oxymoron :)
    What say you?
    Give me a number (govt reported..even though I know you don’t believe the data). any number. I could be 1% or 20% or 100% or anything in between
    I know you can’t give me a general date on when The Hyper Inflation will arrive
    None of the economic doomsdayers/preppers will give me that answer
    They just say “it will arrive sometime”
    Which works out good for your claims of “I saw it coming” (The Great Recession)
    If there is hyper inflation in 10 years, you can claim your economic forecasting skills are stellar, right? :)

    There was one significant factor in greater prediction success, however, and that was cognitive style: “foxes” who know a little about many things do better than “hedgehogs” who know a lot about one area of expertise. Low scorers, Tetlock wrote, were “thinkers who ‘know one big thing,’ aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who ‘do not get it,’ and express considerable confidence that they are already pretty proficient forecasters.” High scorers in the study were “thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible ‘ad hocery’ that require stitching together diverse sources of information, and are rather diffident about their own forecasting prowess.”
    Financial Flimflam: Why Economic Experts’ Predictions Fail

  • [...] will be be the Political force we can be? Thoughts? References: Great reference for economy: Seven Deadly Cracks and The False Recovery | The Real Truth About Money Nullify and what other states are doing: Arizona Senate Passes Bill To Let State Nullify Federal [...]

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