The changes are likely to be wrenching.
The bigger the boom, the harder the fall.
Business Week

“It's increasingly evident to thoughtful persons that humanity has entered a period of unusual danger on multiple fronts. The months and years ahead may bring catastrophe through military conflagration, environmental disaster, economic collapse, or any combination of these,” writes Richard Mynick. If a person is paying attention to the news these days it’s not difficult to get the feeling that the world’s financial system is coming apart. The cascading effects of fraud, graft, waste and inflation are accelerating meaning the house of cards built on unlimited debt creation is coming tumbling down and the infamous plunge protective team is failing to stem the falling tide.

But despite the recent increases in anxiety, “nobody is stockpiling canned goods just yet, wrote the Boston Globe, which continued with, “The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end, much as they have since the Great Depression. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.” This of course could be the greatest illusion we have ever had meaning we are heading into a storm of uncharted dimensions.

Last week was a sign that the economy is headed toward the falls. Keep close watch on the canoe 100 yards ahead of you. If, without warning, it disappears, start paddling for the shore. Either shore. Fast.[ii]
Gary North

In financial terms we could say we are in for a hard landing but that would be an understatement. We have used the word crash in the title but how about deep freeze or financial paralysis to describe what is beginning to happen? “Financial institutions are holding all sorts of credit instruments that are impaired but are difficult to value, creating uncertainty and freezing new lending. Without more visibility, the economy and financial system risk freezing up as Japan’s did in the 1990s,” wrote Lawrence Summers, Harvard economics professor, recently in the Financial Times. Difficult to value is an obscure way of saying that many assets valued in the hundreds of billions to even trillions of dollars are worth less then fifty cents on the dollar with much of it valued all the way down to zero. Worse, much of the asset base of the financial system is losing value every month.

The Boston Globe continued, “But when the mortgage crisis broke last summer, it opened a window on something else: The existence of a huge wilderness of investments in the financial sector that are nearly impossible to track or measure, and which operate out of the view of both investors and regulators. It emerged that investment banks, hedge funds, and other financial players had issued, bought, and sold hundreds of billions of dollars' worth of esoteric securities backed in part by other securities, which in turn were backed by payments on high-risk mortgages. When borrowers began defaulting on their loans, two things happened. One, banks, pension funds, and other institutional investors began revealing that they owned huge quantities of these unusual new securities, called collateralized debt obligations, or CDOs. The banks began writing them off, causing the massive losses that have buffeted the country's best-known financial companies. And two, without a market for these securities, brokers stopped wanting to issue risky mortgages to new home buyers.”



Increasing numbers of homeowners are walking away from
their homes by choice: People that have otherwise had the
capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties.

I heard from someone who works in a large used car dealership and he said that today was the first time they ever had no appointments in the service department and that people were on edge, and not knowing why. This essay is about why and it is especially written for Americans. In reality though it is for everyone since globalization has been quite effective meaning we are all in the same boat to one degree or another. "We have experienced a major financial shock. We should expect a prolonged period of discomfort for individual banks and the financial system as a whole," Sir John Gieve, deputy governor of the Bank of England, said in a recent speech.

My conclusion: The international capital markets are at the edge of the abyss.
Gary North

I probably will wait to publish this essay on a really shockingly bad day. Last Tuesday was a bad one: Wall Street plunged driving the Dow Jones industrials down 370 points after investors saw an unexpected contraction in the service sector as evidence the economy is sinking into recession. It was the Dow's biggest percentage drop in almost a year. We are going to need bigger shocks then this before we fasten our collective seatbelts though the spending slowdown is happening and it’s a hard landing. People are slamming on the breaks and so are the banks.

I do not recall a single feature (front-page) story which called into question or predicted the obvious ruin which would inevitably result from 1) the lending bubble and 2) the housing bubble, nor did any major publication question whether the past seven years of "prosperity" created by this debt explosion was in fact a false prosperity.
Charles Hugh Smith

Patients who used to get their teeth whitened all the time now want to think about it a bit, reported Joi Freemont, a dentist in suburban Atlanta. The recession, which might have no visible bottom, is first seen in small things like teeth whitening and car maintenance. Wherever spending cuts take place it cuts into what is known as the velocity of money. A dollar not spent here is another dollar someone else does not get and spend themselves so the multiplication effect of currency velocity is great. It’s the same with bank deposits and the multiplying ability in giving banks the ability to create money to lend. Because money velocity can drop quickly contractions in borrowing (lending) and spending can lead to a sharp spiral downwards in economic activity.

That "mobilization" of your money is at the very heart of modern economics. Economic activity (or the lack thereof) is not about the level of interest rates. Ask Japan. It is not about government spending and deficits. Ask Japan. Economic activity is all about something called - "the velocity of money." You deposit $1000. The bank reserves $150 (15%) but can still lend out $850. Your cousin, Bob, borrows the $850 and buys an old, old truck. Sam, who sold the truck deposits the $850 in the bank. The bank must reserve $127.50 (15%) but can lend $722.50. Maria borrows that amount to buy something from Alice, who then re-deposits the money. By this process, your 1000 deposit could increase the money supply (and economic activity) of your little town by nearly $7000 - that's if everyone has a use for money and they borrow. That is the concept of the velocity of money. [iii]
John Mauldin

“The writedowns by U.S. banks are only symptomatic of the sickness affecting loans that have already been made. From that vantage point, the sickness is merely a pre-condition to a far more serious disease where the demand for new credit by consumers shuts down,” writes Mike Shedlock ““Large money center banks have virtually frozen their balance sheets, reluctant to lend even to good credit,” wrote Scott Anderson, a senior economist at Wells Fargo Economics. So much for money velocity!

A default by one of the big bond insurers could trigger a
meltdown in the credit-default swaps market, which could
lead to the implosion of trillions of dollars in derivatives bets.
Mike Whitney

“One has to realize that there is now a rising probability of a 'catastrophic' financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. That is why the Fed has thrown caution to the wind and taken a very aggressive approach to risk management.” (Nouriel Roubini EconoMonitor)

No one wants to be stuck with vaults full of rapidly depreciating dollars as the American economy hurtles towards the basement.

Whiney has his finger right on the pulse saying, “The pace of the economic contraction is breathtaking. This week's release of the Institute for Supply Management's Non-Manufacturing Index (ISM) was a shocker. It showed steep declines in all areas of the nation's service sector---including banks, travel companies, contractors, retail stores etc—The Business Activity Index, the New Orders Index, the Employment Index, and the Supplier Delivery Index have all contracted at a “historic” pace. Traffic to the shopping malls has slowed to a crawl. Retail shops had their worst January on record. Homeowners are hoarding their earnings to cover basic expenses and to make up for their lack of personal savings. The spending-spigot has been turned off. America's consumer culture is in full-retreat. The slowdown is here. It is now. We are likely to see the sharpest decline in consumer spending in US history. Bush's $150 billion will be too little too late.”

More than 60% of Florida banks have commercial real estate
loans worth more than 300% of their capital, a level that
automatically attracts more attention from examiners.
Wall Street Journal

I don’t want to break anyone’s bubble but the secret is Americans and particularly the American government just cannot afford a recession and it’s questionable whether the world’s financial system can survive it either. Americans do not have the money/savings to withstand a reduction in income. The average American consumer has hit a ‘debt saturation’ point. Lower rates will not act as an incentive to increase spending simply because people can’t and increasingly because they don’t want to. Consumers wrestling with high gas and food prices, a slumping housing market, an escalating credit crisis and a weakening job market are spending less. Janet Hoffman, managing partner of the consulting firm Accenture, said, "Consumers have exhausted all the avenues to get access to credit." But banking people like Edward Yingling, who is president and CEO of the American Bankers Association, a trade group representing banks across the nation, .are still reminding people that one of the great benefits of credit cards is that they can be used during periods of brief financial strain to help close spending gaps.

“It is true that Americans have increased their use of credit in recent months, and that credit card delinquencies have risen slightly,” Yingling says. There are people who are just hoping that because “the value and convenience of credit cards have become so commonplace that people now take them for granted,” they will continue to use them and spend enough to avoid a crushing recession.

But there are times such as ours, when the idea of borrowing for individuals and business alike becomes repulsive so spending plunges meaning that money created via debt creation stalls. Money stops being created. During other slowdowns saving carried people through, allowing them to keep spending until things turned around. Not now: the saving rate is already zero or negative and many people are just about tapped out on their numerous credit cards. It is incredible that there are so many people, especially Americans, who thought they could get away with this forever. Today though the mass media is still betting on the survivability of the house of cards that is the present international financial system.

Banks are spooked by all the people walking away from debt.

Americans used their homes as ATMs during the boom years. Those years are over and this month many well off homeowners are getting a hard lesson as banks are shutting down equity lines of credit. Several banks issued statements this week saying they were temporarily suspending withdrawals from open home equity lines out of concern that borrowers could owe more than the house is worth.[iv] That’s right, home values are crashing so banks don’t want to get caught with their pants down. They are running away from homeowners as their equity base collapses with falling market prices on their homes. This is just another shrinking corner of our economy and the beginning of the end of living our way via debt and financial manipulation.

There was a time when people felt bad not paying their debts, that time is gone. There is less and less respect for legal obligations when money is involved. The relatively puny price decline in home values to date has already
pushed home-loan delinquencies to their highest level in 20 years.

"We now see potential for another 25% to 30% downside over the next two years," says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide. This decline in home prices will wipe out the equity of millions of families who have bought homes since 2000. "A down market is getting baked into expectations," says Chris Flanagan, head of research in JPMorgan Chase's (JPM) asset-backed securities group. "People say: I'm not buying until prices are lower.'" He predicts prices will fall about 25%, bottoming in 2010. This is the classic profile of deflation and its psychology. Such a drop in home values will blow a hole in the balance sheets of banks and households, slicing more than $5 trillion off household wealth.

Goldman Sachs (GS) chief U.S. economist Jan Hatzius estimates that banks and other financial institutions will suffer about $200 billion in real estate losses and respond by cutting their lending by $2 trillion.[v]

“In defense of those of us who come to Earth as ambassadors of intergalactic goodwill from other planets, and those creatures native to this planet who are either a 9-year-old kid or has the intelligence of a 9-year-old kid, or both or all three, or more, I proudly say that we aggregated dimwits already know that a "trillion" is a hell of a lot of something,” writes Richard Daughty.[vi] Of course all these numbers above can get a lot worse. Ian Shepherdson of consulting firm High Frequency Economics, is looking for a 20% decline in prices from their peak but says 40% wouldn't shock him. "We've never been here before, so there's no road map," he says.

On September 16 1985, when the Commerce Department announced that the United States had become a debtor nation, the American Empire was as dead.

Gore Vidal

But no one told Clinton or Bush so we continued to flex our muscles and spend like there was no tomorrow. In an attempt to be bigger than God the American government has expanded beyond all reasonable limits and people all over the world are suffering for it. Perspective on the megalomania of the American government can be easily seen through a trip down memory lane. Uncle Sam was only spending about 90 billion dollars a year in 1960, which doubled to 190 billion in 1970, then up to 590 billion in 1980. By 1990 we hit the trillion dollar mark and by the year 2000 it was 1.9 trillion.[vii] Now Bush proposes a 3.1 trillion dollar budget only eight years later. That’s an increase of 1.2 trillion which is more than the entire budget in 1990. That’s an expansion of 36 times since 1960 meaning the budget of 1960 would pay for only 12 days of today’s present government, not adjusting for inflation. Amazing numbers to boggle anyone’s mind but these numbers are nothing compared to the derivative market, which is supposed to be around 500 trillion.

As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion. Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky - or if investors need to start selling them to cover other losses - that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.
Boston Globe

The Economist[viii] questioned whether credit derivatives are “clever ways to disperse risk, making the financial system safer, as their enthusiasts claim or are they ‘financial weapons of mass destruction,’ in Warren Buffett's phrase.” If liquidity falls throughout the system it is the derivative market that could take the biggest hit. Few people really understand the derivatives market and until they have been tested by a severe economic or financial downturn none of us really know whether they are a form of financial suicide or not. A year ago the Economist said such a test “is not something anyone should wish for.”

The Fed is taking the inflationary path but this will not
stop a real contraction, will not stop the deflation of
home values and the solvency of the world’s banks.

“For a while there, borrowing actually made the world richer, because both the cash received and the debt created functioned as money. It’s now clear that debt-as-money was not one of humanity’s better ideas. When the U.S. housing market—the source of all that mortgage-backed pseudo money—began to tank, hedge funds found out that an asset-backed bond wasn’t exactly the same thing as a stack of hundred dollar bills. The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that’s not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me?” wrote John Rubino.[ix]

And in the news today, Wall Street extending its steep slide from last week as investors reacted to news that American International Group Inc. may have more mortgage debt to write off. AIG, one of the 30 companies that make up the Dow, said in a regulatory filing it would need to alter the way it values its credit default swaps involving collateralized debt obligations. Credit default swaps are insurance policies against defaults, and CDOs are funds that contain slices of bonds, some of which are backed by mortgages. Credit Default Swaps (CDS) have fast become the dominant vehicle for trading credit risk.

This is in trillions.

Rubino continues saying, “No longer able to function as money, these instruments are being “repriced” (a slick little euphemism for “dumped for whatever anyone will pay”), which is causing a cascade failure of the many business models that depend on infinite liquidity. The effective global money supply is contracting at a double-digit rate, reversing out much of the past decade’s growth.”

Mark Sircus Ac., OMD
Director International Medical Veritas Association
[link to www.imva.info]
[link to www.magnesiumforlife.com]
[link to www.winningcancer.com]
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[link to www.opednews.com]

[ii] [link to www.lewrockwell.com]

[iii] [link to www.gold-eagle.com]

[iv] [link to nctimes.com]

[v] [link to www.businessweek.com]

[vi] [link to atimes.com]

[vii] [link to www.infoplease.com]

[viii] [link to www.economist.com]

[ix] [link to www.dollarcollapse.com]