Free Learner

The Greater Depression is now

[The images I am including here are by the excellent photographer Harvey Finkle, who will likely take some of the iconic photos of this next Great Depression which is just beginning.]

Roughly 1 in 5 children in the United States lives below the poverty line.  In 2009, the poverty line for a family of four is $22,050.

Rising unemployment could push an additional 7.5 million to 10.3 million United States residents below the federal poverty line over the next two or three years....

[E]conomists say the total is sure to rise over the coming years, and if the... estimates hold true, the number of poor people could approach 47 million.  (New York Times 11/24/08)

From Seattle to Athens, Georgia, homeless advocacy groups and city agencies are reporting the most visible rise in homeless encampments in a generation.

Nearly 61 percent of local and state homeless coalitions say they've experienced a rise in homelessness since the foreclosure crisis began in 2007 (source).

The relatively tony city of Santa Barbara has given over a parking lot to people who sleep in cars and vans.

The city of Fresno is trying to manage several proliferating tent cities, including an encampment where people have made shelters out of scrap wood.

In Portland and Seattle, homeless advocacy groups have paired with nonprofits or faith-based groups to manage tent cities as outdoor shelters.

Other cities where tent cities have either appeared or expanded include include Chattanooga (Tenn.), San Diego, and Columbus, Ohio. (source)

 

And meanwhile, in America as across the planet, it’s economic devastation, near and far. Here in northern California I walk into a local plumbing store, a large place used by building contractors. There’s one other man in the store, buying a $5 plastic fitting....

Throw in the idled lumber yards, construction stores, paint suppliers, and building crews. Count in the car lots that are going out of business because the banks won’t finance car loans. Go to the lost auto assembly jobs. It tots up to job losses across America just in December and January of 1,175,000. And that’s an underestimate. Every president since Reagan, particularly Clinton, has jimmied the unemployment criteria to produce an undercount. The actual number for the two months is nearer one and three quarter million. The actual total unemployment rate, according to statistician John Williams, by pre-Reagan criteria, rose to 18 per cent in January. (source)

The worst unemployment rate seen during the first Great Depression was 25%, and we are at 18%.  Moreover, we have millions of homeless Americans and tens of millions who go without food in order to pay bills.  In my own state, a 93-year-old WWII vet froze to death in his home after the electric company shut off his power for non-payment (which is illegal, but they had their ways of getting around the letter of the law).  We're in bad shape, and I'm afraid we've only just entered a Depression which will last for years to come.

Just sign here

The idea that we have representative democracy at the federal level is utterly false for one simple reason:

The bills are so damned long, no member of Congress could possibly read them prior to the vote.

The stimulus bill was 1,071 pages long.  Among other things, it created a new federal bureaucracy that will collect all of our medical records and review them to make sure that the federal government approves of the treatment we're receiving from our doctors.  Gee, who knew that was in there??

Our members of Congress are a bunch of overpaid, bribed, corrupt, cocktail-party-attending Forest Gumps who vote how they're told to vote, on bills written entirely by lobbyists.

I have two words to describe this:  Banana.  Republic.

A glimpse into the abyss

The other day I posted that the US banking system had nearly imploded last September.  Here is a transcript of what Rep. Kanjorski (D-PA) actually said:

On Thursday [September 18, 2008] at about 11 o'clock in the morning, the Federal Reserve noticed a tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars was being drawn out in the matter of an hour or two.

The Treasury opened its window to help.  They pumped $105 billion dollars into the system and quickly realized that they could not stem the tide.  We were having an electronic run on the banks.  They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.  And that's what actually happened.  If they had not done that, their estimation was that by two o'clock that afternoon, five and a half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time about what would happen if that happened.  It would have been the end of our economic system and our political system as we know it.

Video is here.

This happened because of a general loss of confidence in money market accounts after a major money market fund was unable to return its investors' money in full.  Historically, money market accounts have been considered extremely safe.  That is, people thought so until September 16:

The credit crisis has taken a new and dangerous turn: Shares of a large money market mutual fund have "broken the buck" -- fallen below the standard $1 a share -- because of losses on IOUs from brokerage Lehman Bros. Holdings Inc.

The Reserve Primary Fund in New York, which had $65 billion in assets at the end of August, said it cut its share price to 97 cents....

The Reserve Primary Fund’s situation apparently was exacerbated as big investors have fled in the last two days, forcing the fund to sell other securities. Assets have dived by more than 60% since Sunday, Bloomberg News reported.

The fund, apparently seeking to dissuade other investors from leaving while it sorts out the situation with its Lehman IOUs, today said it would take up to seven days to meet investors’ redemption requests. Normally, money funds redeem investors’ shares immediately on request.

Notice that the US government, astonishingly, can simply shut down any category of banking transactions that it cares to.  They can halt money market transactions, and guess what?  They can halt savings and checking account transactions, as well.

We won't have runs on the bank in the way they did in the 1930s.  The new, modern run on the bank will involve hassles, limits on withdrawals, delays on withdrawals, the inability to withdraw money in cash (e.g. receiving only cashier's checks which must then be taken to some other bank), and so on.  The top 5 or 6 banks are widely acknowledged to be insolvent, and FDIC cannot bail them out, but nobody seems particularly worried.  They'll just limit how much we can take out in a given day or week.

So, if you're lucky enough to have a fair bit of savings and you'd like to retain your access to your own money, you may want to start looking around the house for a good place to stash it.  Society as we know it really can fall apart in an instant.

Down we go

Yesterday I heard an estimate that hyperinflation and dollar collapse would happen in 9 to 12 months.  This is the earliest estimate of dollar collapse that I've heard, and it may be too precipitous, but I don't think we're looking at more than a couple of years.  The safest policy would probably be to have your food, clothing, blankets, batteries, etc. in place within 6 months.

Jim Sinclair gave a great interview on GoldSeek radio in which he talked about the two kinds of inflation: "bubble" inflation and hyperinflation.  When most of us think of inflation, we're thinking of the "bubble" variety, which is far more common.  Maybe it's the dot com bubble, or the housing bubble, or the derivatives bubble-- but what happens is that wayyyy too much credit is given out, and because of all the cheap, easy credit, prices can just keep rising and people will keep on buying.  This kind of inflation is followed by the bursting of the bubble, tightening of credit, and (because there's no more easy money to be had) an obligatory fall in prices.

Hyperinflation results not from the "good times" of easy money and speculative bubbles, but from the bad times.  It typically begins during economic depression, and it is caused by two things: government money printing, and consequent loss of confidence in the currency.  Hyperinflation is a completely different animal.

In Michael Hudson's article The Financial Recovery Plan from Hell, he states that $9 trillion has already been given to Wall Street, and $2 trillion more has been promised, just this past Tuesday.  Some of this money may be, ostensibly, in the form of loans.  But these loans are "non-recourse" loans, meaning the only thing the banks lose if they don't give the money back is the collateral they put up.  But what was that collateral?  Oh, that's right... it was utterly worthless toxic paper.  Yeah, this money is never coming back.  We've printed $9 trillion and we will print $2 trillion more, and trillions more after that, all to be given to the banking system.

Meanwhile, the government is also going to need many trillions printed.  The US fiscal year begins October 1.  So far in fiscal year 2009, which began last October, we're a trillion dollars short.  That's a bigger shortfall than we had for the entire 2008 fiscal year, and we're only 4 months in.  A common estimate of the government shortfall for the 2009 year is $2.5 trillion, but it's looking to me like it might be $3 trillion. 

Normally, the way we get this money is by selling Treasuries to OPEC nations, China, Japan, etc.  However, we've bankrupted the OPEC nations by smashing the oil price, so they aren't buying.  China is no longer buying.  Japan is imploding and I can't imagine that they can continue buying, either.  One recent sale of Treasuries initially found no buyers, until some anonymous "indirect" bid came in to save the day and buy them up.  I highly suspect this anonymous buyer was a Cayman Islands bank account belonging to our own government.

The Fed has announced that they will be printing up money out of thin air, and using it to buy Treasuries.  This is a fancy way of making it seem like we're "borrowing" money in some usual, legitimate way, when it fact, we're just printing new dollars and using them to pay bills.  The technical term for printing money like this, which would be called "counterfeiting" if it was done by anyone but the Fed, is "quantitative easing."

Printing up money becomes a downward spiral.  People won't want to buy Treasuries because they know the value of the dollar is going to fall because of all the printing, which means that we will have to print more in order to buy our own Treasuries, which will make Treasuries less attractive....  And at the end of this downward spiral, the value of the dollar is a big fat zero.  I talked about what happens as a currency is being destroyed in Fire and ice.

Meanwhile, as we await the suddenly rising prices which signal the start of currency collapse, there's the regular old depression going on.  The real unemployment rate is 18%.  The state of California cannot make payments to counties, and now counties are threatening to refuse to pass along fees and taxes to the state.  We're losing well over half a million jobs per month.  The next wave of the housing crisis (the option ARM foreclosures) begins next month.  Commercial real estate prices are collapsing.  International shipping is declining because banks will no longer facilitate payments between vendors and buyers.  The cost of shipping a container along any of the typical trade routes (say, China to Los Angeles) has fallen by 94% (!!!) because of a lack of demand.  The major ports in southern California have seen traffic slow considerably.  If shipping continues to falter, it has to mean shortages of all kinds of things in the US, since we don't make anything here.  (A good idea for the stimulus bill would have been the creation of shoe factories.)

I haven't seen very much news of protests in the US, although in Europe there have been all kinds of protests, demonstrations, riots, violence, etc. related to the global financial meltdown.  For instance, the Icelandic parliament was trapped inside their capitol building for 2 days while crowds burned bonfires and banged pots outside.  We've had nothing so colorful over on our side of the pond, but I have sensed an increase in anger out here on the Internet, judging by blog posts and comments.  This angry guy keeps popping up on financial blogs that I visit (warning: lots and lots of profanity).  Even mainstream news articles now mention "populist anger" when discussing the bailouts.  I can't imagine that protests can be far off.

US banking system came within hours of collapse

According to one Congressman, the US experienced an electronic run on our banking system on [edited: September 18], in the midst of negotiations over the original $700 billion bailout bill.  You can listen to him describing the near-catastrophe starting at 2:20 in this YouTube clip.

The problem was that the rate of withdrawal of money was accelerating, and even after printing up $105 billion and injecting it into the system by 11am that morning, it was clear the Fed could not stem the tide.  They estimated that by 2pm as much as $5.5 trillion might have been withdrawn, totally bankrupting the banking system.  So, they shut down all money market transactions and the Treasury guaranteed money market accounts, and that did stem the tide.

Mind you, the UK banking system almost collapsed October 10.  The world went to the brink of economic shut-down, last September & October.  Scary.

Pippi the unschooler

I recently picked up Anya's copy of Pippi Longstocking, and was surprised at how subversive it is.  I particularly enjoyed this scene, in which two policemen come to take Pippi away to a children's home (they fail, of course):

"But don't you understand that you must go to school?"

"Why?"

"To learn things, of course."

"What sort of things?" asked Pippi.

"All sorts," said the policeman.  "Lots of useful things -- multiplication tables, for instance."

"I have got along fine without any pluttifikation tables for nine years," said Pippi, "and I guess I'll get along without it from now on, too."

"Yes, but just think how embarrassing it will be for you to be so ignorant.  Imagine when you grow up and somebody asks you what the capital of Portugal is and you can't answer!"

"Oh, I can answer all right," said Pippi.  "I'll answer like this: 'If you are so bound and determined to find out what the capital of Portugal is, then, for goodness' sakes, write directly to Portugal and ask.'"

"Yes, but don't you think that you would be sorry not to know it yourself?"

"Oh, probably," said Pippi.  "No doubt I should lie awake nights and wonder and wonder, 'What in the world is the capital of Portugal?'  But one can't be having fun all the time," she continued, bending over and standing on her hands for a change.  "For that matter, I've been in Lisbon with my papa," she added.

This reminds me-- some time back I read one mom's advice for homeschooled kids who are asked a random schooly question, such as "Who was the 16th President of the United States?"  They should, she recommended, simply say "I don't know, who?"  And when the schoolkid informs them of the answer, they should say "Well, now I know who the 16th President of the United States is, and I didn't have to go through 13 years of schooling to find out."