As the summer wears on and into the fall, housing prices will crash once again. Along with them, this time, durable goods will also crash. You'll see this reflected in the increasing number of "sales" at your local Wal-Mart and other retail stores. Formerly thriving strip malls will start to look like ghost towns, where they haven't already, and you will notice a increase of vacancies at your local shopping mall. Going into the mid-term election things will get bleak.

The elections make things a bit dicey, but I think it's safe to say regardless of the results, by the end of the year we will see another round of "stimulus" using borrowed funds. The size of the stimulus may be mitigated by how the elections are looking, or how they turned out (depending on the exact timing) but I'll give it a range of anywhere from $100 Billion to $600 Billion. It will be interesting to watch sales of treasury bonds after the stimulus is announced to see if there is any creaking in the hull yet. I predict that this round of bond sales will not fail, but will bring us precipitously closer to the point where they will. We may see yields start to spike, and that will be a dangerous sign if they do.

Europe is at least right now talking the talk of austerity. If they actually show they have the mettle to stick with it I predict a turnaround in the Euro and falling bond prices across Europe as investors start to look at the U.S. with a skeptical eye. However, this is a big IF. All the talk of austerity could be just that. Talk. Politicians are well known for saying the right thing at the right time to calm investors nerves. If it ends up showing itself to be just talk then I expect the scrutiny to stay on Europe while we dig ourselves an even deeper hole.

That's how I see it. We'll see what happens.

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In desperation, the German people turned to a party of thugs. Thugs who supported the "working man." Thugs who supported the downtrodden. Thugs who spoke of a great new Germany, created by the modern ideals of socialist economy, and ready to stand up to those who had imposed this burden. The creative minds of those thugs convinced their people that the Jews were to blame for their circumstances. By every right, it seems, those thugs believed this to be true. They didn't understand the economics of debt any more than people here do today. So to them, it was perfectly reasonable to believe that the blame lay with a peaceful, yet separate population that lived among them.

Today, in this country, a burden of debt is weighing down our economy. An economic philosophy largely ignored by our institutions of higher learning explains how this happens, but our "experts" are not familiar with this philosophy. Those who are have seen this situation coming. They warned of the dotcom boom and bust. They warned of the housing bust. Their warnings came true. And today their warnings are more dire than ever. Prevailing economic thought teaches us that we need to "stimulate" the economy to launch into true recovery. However, those who predicted our current predicament tell us that the root of the problem is debt. Stimulus creates more debt. And you can't solve a debt problem with more debt. Not unless your end goal is to go bust.

And that's exactly where we're headed. But going bust for a nation isn't the same thing as it is for an individual, or even a large corporation. When you or I go bust, we file bankruptcy, our creditors don't get paid, we have difficulty getting credit for a while, and our slate is wiped clean. For corporations it is similar. Most often pieces of the corporation are sold off to those that can make good use of it's components. But when a nation goes bust the whole society is left in limbo. Chaos ensues.

Today, across Europe, where the debt crises is even more advanced than it is here, public labor unions are organizing and executing protests against the austerity measures those governments are instituting to avoid economic collapse. Just as we have seen here recently with teachers unions in Illinois and New Jersey, student groups in California and others. These are the forces that are organizing today. They haven't created a scapegoat like the German thugs of the 20's and 30's yet. But the keyword is, yet. They are putting pressure on our nation and the nations of Europe to not cut back spending. They want the debt load to continue, regardless of whose back it's put upon. This debt can only lead to catastrophe.

And when catastrophe is realized and a nation goes bust, someone always rises from the ashes. History teaches us that it's usually those who are already organized. And of those who are organized, usually the most ruthless prevail.

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From Danny Hakim at the NY Times: New York Plan Makes Fund Both Borrower and Lender (ht jb)
Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.

And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.
Oh my ...

Really? How does that work? Can I borrow money from my savings account to make deposits in my savings account too?

Where does the madness end?

"Move along folks. There's nothing to see here"

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The Obama administration has warned that the new austerity drive could undercut economic recovery and has pressed the case that stronger countries, such as Germany, should not slam on the brakes. In a letter to G-20 colleagues, Treasury Secretary Timothy Geithner warned that budget cutting won’t work “unless we are able to strengthen confidence in the global recovery.”

What the New York Times needs to get is that Keynsian economics has failed. There is no recovery. The so-called stimulus has done nothing but prolong and deepen the economic pain our modern economy is only beginning to realize. We're replacing demand with debt. Debt that will have to be repaid. Debt that caused the problem in the first place. You can't solve a problem caused by debt with more debt.

The longer we cling to this pipe dream of recovery and the efficacy of stimulus, the longer and deeper this crisis will be. The New York Times is willfully blind to economic reality. They show their hand when they state, "nearly 1 in 10 are out of work," using the rosiest unemployment statistic around, which ignores those who have fallen off the unemployment rolls, stopped looking for work or accepted part time work in lieu of badly needed full time work.

The New York Times wants us to believe that it will all be better if we just stick to the plan. Follow their advice to all of our peril.

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The so-called "bailout" of Greece will soon be exposed as not really a bailout but rather an unfunded mess that cannot be funded. When that realization enters the investment consciousness I fully expect the equity and bond markets to undergo a cataclysmic upheaval far worse than Lehman Brothers, as there is literally nothing that can be done at that point beyond a default on the unpayable obligations and the resulting impact on balance sheets - which will render major financial institutions insolvent...

The inevitable consequences of this decision cannot be avoided. They can be and have been delayed for two years, but we can't prevent them from being manifested.

The nations that decide to do the right thing first will be the ones that emerge with their governments and societies more intact than the others. This does not mean pain avoidance, but it may well be the difference between lots of pain and loss of national sovereignty - or worse.

We looked at the socialist Utopia in Europe and pined for an enlightened government that would afford us the same laundry list of benefits. We said, "If they can do it, why can't we?" Well, as we are seeing now, they can't - and neither can we. The trouble is that the end game to this is not a matter of a little bit of time collecting unemployment and then ready for the high times again. It's much more serious than that. We're playing with history here. If you have never spent much time wondering what hungry people rioting in suburbia would look like, you may want to ponder it. And you may want to figure out what you might do to protect yourself if it happens.

I have seen no evidence that our government is willing to stop it.

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1. According to Mike Shedlock at Mish's Global Economic Trend Analysis, the most populous state in the nation wants to fund it's budget shortfalls with returnables. Seinfeld jokes aside, when are these jokers going to get it?

   Perez calls his plan "unique and creative approach." Governor Schwarzenegger called it "legal gymnastics." I call it "fiscal insanity".

2. David Hersanyi at Reason.com writes about the controversy surrounding Rand Paul's statements regarding the Civil Rights Act of 1964.

   I wonder if the mainstream media feels like it found a magic bullet to shoot down libertarian-type candidates by raising questions about their beliefs regarding legislation designed to control how citizens behave, when their behavior might not be politically correct. They're smart enough to know that 99% of the public has no idea what the specifics of the Civil Rights Act of 1964 stated, but that most listeners will equate such a statement with thinking that the politician is opposed to civil rights in general. The laughable part of this is that this demagoguery obscures the point that most mainstream politicians couldn't give a rat's rear end about civil rights and the politicians these questions are targeted to discredit would do far more to restore civil rights to this country than any of those crooked hacks currently in office ever would.

   Agree or not, shouldn't Americans armed with historical perspective be able to engage in constructive dialogue about the positive consequences—and some of the negative complexities—of legislation from 1964? (I know. Just kidding.)

   Some critics eagerly blasted "naive" libertarians, and others, like Washington Post columnist Eugene Robinson, used Paul's "extremist position" to wring their hands over the coming Republican crusade to overturn the Civil Rights Act—which fits neatly into an arching (and largely imagined) narrative that puts America squarely in the mid-1960s.

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1. Vox Day at World Net Daily writes about republican government, corruption and public unions.
   

   This goes well beyond ideology. Even the liberal media's standard bearer, the New York Times, was appalled to discover that New York is home to several ex-government employees who retired in their 30s whose pensions now pay them more than $100,000 a year. This is legal, contractual and totally unconscionable. No retired policeman can reasonably claim to have ever put his life on the line to the extent that a Marine Corps private making one-quarter as much while stationed in Afghanistan or Iraq does.

2. David Harsanyi at Reason.com has an interesting take on net neutrality.
   

   I know it sounds wonderfully fair. But the reality of net neutrality makes as much sense as mandating that tricycle riders have the same rights and privileges as cars and trucks on our roads—highway neutrality.

   The FCC promises it doesn't have any intention of controlling Internet content, only of making access fair. But empowered with the ability to regulate the flow of online traffic, it offers a semantic, not substantive, excuse for a power grab.

3. Here is an interesting little song by Tim Miller, inspired by a family that fell victim to predatory lending practices.
   
   
4. Karl Denninger at The Market Ticker talks about debt and the economy in Kuttner Has Been Lobotomized.

   We had the inflation. Punishing, cruel, ridiculous inflation. Yeah, I know, you don't think it happened because it was "only" a doubling of gasoline and diesel prices in a five year span (well, actually, it was closer to a tripling, but who's counting, right?)

   Of course this very same inflation showed up in other things, like houses and stock prices. This made people "feel rich", but in fact they were not, because their wages did not accelerate at anywhere close to the same rate, nor could they.

5. Mike Shedlock at Mish's Global Economic Trend Analysis writes today about commercial real estate foreclosures and rental property woes.
   

   Los Angeles City Councilman Richard Alarcon is a complete fool, unless of course he is pandering to voters, perpetually buying votes to get re-elected.

6. Radley Balko at Reason.com points out several lessons police and local governments (and even cable network A&E) might learn from the Detroit raid that resulted in the death of a little girl.
   

   With many of these shows, the police department gets veto power over what footage makes it on the air. So you won't be seeing footage of many mistaken raids. That said, A&E should air the footage of this raid to show that the violent tactics these shows repeatedly glamorize can and do have tragic consequences. If the network has any guts at all, it will make sure the same episode looks at the possibility that the presence of its own cameras contributed to the death of a little girl.

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Just take a look at those three articles linked above.

In the first story, a SWAT team entered into a home, shooting at dogs with bullets ricocheting about the house while a mother was reading a bed time story to her young son in an upstairs bedroom. Police were looking for marijuana, which is legal to possess in that community - but the "suspect" was believed to have a whole bunch, apparently. What was he charged with? Possession of drug paraphernalia. He paid a $300 fine. That was certainly worth putting innocent people in mortal danger.

In the second story another police SWAT team burst into a home in Detroit, Michigan - this time looking for a suspected murderer and shot a 7 year old girl sleeping on the living room couch. They say it was accidental. Evidence shows otherwise. Of course, a suspected murderer should be arrested, and it would be reasonable to presume such a suspect dangerous. It would also be reasonable to wait until the man tried to leave the home and arrest him on the street where it's less likely that you might kill little girls. This would be reasonable to presume if you believed that the police were on your side.

In the third story, police in New York City are downgrading violent crimes so crooked politicians can look better statistically and harassing peaceable citizens to meet quotas. If you believe that my use of the word harassment is an attempt to steer the perception of my readers, consider this excerpt:

Officers were instructed to arrest people for "blocking the sidewalk," for not possessing ID (even while just feet from their homes), even for no reason at all (cops were told to "articulate" a charge at a later time). The cops were told to make arrests even if they knew they'd be voiding the charge at the end of their shifts. As a sergeant implores in one recording, "Again, it's all about the numbers."

About those numbers: While only about one tenth of 1 percent of the stops yielded a gun (at present it's nearly impossible to legally carry a gun in New York), the practice has helped drive up the city's marijuana arrests from 4,000 in 1997 to 40,000 in 2007. Marijuana for personal use was actually decriminalized in New York during that period. But you still can't display your pot in public. So the police simply stop people, trick them into emptying their pockets, and then arrest them for displaying marijuana in public.

If you can think of a better word than harassment, please let me know. I can think of a few, but they aren't suitable for family reading.

Once upon a time I believed that police officers were friends of the community. They were what stood between you and the bad guys. They put their lives on the line to keep the community safe. Today I no longer view local law enforcement as offering this protection. In fact, a loved one asked me the other day if I thought it was a good idea to teach her young son that police officers are safe in case he gets lost in a public place. I wasn't sure what to tell her. One would like to think that police officer would be more trustworthy than an average citizen, but does putting on a badge and carrying a gun really bestow that upon a personality? I am inclined to think it does not. The stories above prove it.

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I've often heard people argue that taxation is not really coercion and there is nothing wrong with taking part of what someone produces for the good of everyone. Those of you out there sympathetic with that view, watch this video, and realize that real people are under pressure to pay these taxes for whatever reason. And those people in Pennsylvania are watching this ad on their televisions.

If you don't think that income taxes are coercive, think about what happens when you don't pay them. Who do they send to your house? Men. Men with guns. They know who you are.

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Look at what is happening in Greece right now. No one wants to lend them money and their treasury bonds are on par with war-torn Pakistan. Junk. But Greece, though important to the European economy and troublesome to the fate of the Euro, is not anywhere near the size player that the U.S. is in the world economy. You know the saying, the bigger they are...

I was concerned because I didn't see any scenario playing out where our beloved politicians would pull back the reigns before it was too late. I didn't see them mustering the political will to just say, "no". But now, I wonder, if it just might be happening. The housing subsidy, granting new home buyers up to $8000 in tax breaks for buying a new home and $6,500 for non-first-time-buyers, is actually coming to an end. The papers are now starting to warn of the impacts of expanding the stimulus. And Wall Street might just give the politicos the scapegoat they need to end the madness.

Even today, Ben Bernake said, “Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in remarks prepared for a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth -- and might even put the current economic recovery at risk."

So now, even members of the old guard are beginning to have their doubts as to the wisdom of the current course of action. I can no longer say that I would be entirely awestruck were I to start hearing the politicos and media cheerleaders start trumpeting the line that they need to get out of the way and let the mess the Wall Street banks made clean itself out of the system. Now, that said, I didn't say it wouldn't surprise me, and I don't think it will happen.

I expect that the stimulus will be pulled back for now. And the economy will screech to a grinding halt. Property prices will fall dramatically again (I'm guessing another 25% or so). The commercial real estate bubble, which has been sitting at it's apex will finally burst. People will stop buying things again (with the money they are saving by not paying their mortgages, having caught on to the fact that banks aren't foreclosing). Unemployment will soar again. Then the politicians will start shaking in their boots and start pumping the stimulus prime once again. If they're lucky, the mess in Europe will still be going on and the renewed acceleration in deficit spending won't detonate the U.S. treasuries market. Yet.

The trouble with all of this is that the current deficit spending and the future re-acceleration of it that I predict do nothing but delay the inevitable. There is a ton of misallocated investment out there that needs to fail so that its pieces can be put to productive use once again and the economy can actually recover. All of this stimulus has made it worse. The future stimulus I project will make it worse still.

What we have here are two options. One option is to stop the madness and take the medicine. The economy will fall dramatically for a little bit of time, I'd say between a year and two years, and then it will finally start to climb out of the gutter on a new and healthy footing. The other option is to continue the stimulus madness until the point where the world calls us on our debt and causes a complete system crash, marking an end of the American Empire and the kind of life we've all grown accustomed to.

Of course, while I present this as a dichotomy, there are shades of options between these two extremes. We could spend the next several decades stopping and starting stimulus programs to forestall the pain, hoping for some new magic internet 2.0 type technology which will employ millions of people in some new industry that doesn't currently exist, and grind away in the doldrums in the interim. It's possible that we could keep halting these borrowing spurts before the treasury markets decide to call bull. I don't think it's likely, but it is certainly possible.

The one thing I can say for certain is this supposed "recovery" our politicians are talking about right now is not happening. And it won't happen for a long way off.

"The future's so bright..."

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[Name of Bank] We have money to lend (and the will to lend it)

When a bank can say that it's ability to lend and will to lend separates it from other banks you have to know that things aren't going well.

Even in light of this, though, I have to say that it's probably fool hearty for banks to be lending right now, especially if they are writing mortgages. The housing market has taken quite a hit, to be certain. But one economist that predicted the housing crash in the first place says there is a very good chance that housing will crash again.

By transferring more underwater mortgage balances onto the public books, the plan puts taxpayers on the hook for further losses if housing prices continue to fall. Given the massive support for real estate already afforded by record-low interest rates and massive federal tax and policy incentives, there are very good reasons to believe that home prices will indeed collapse when these crutches are removed. Recent spikes in long-term interest rates warn of this prospect.

If these items aren't enough to make you wonder, perhaps this last item will. Remember all that talk in grade school about this being a free country? Well, it just got a little less free again. Due to a recent law, if you decide you want to put your money in a foreign bank to keep it safe from a falling economy, the IRS wants to know. And if the country you do your banking through has laws that prohibit such disclosures (like Switzerland) they are being ordered to close the accounts.

Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions - Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS.

Come, gather 'round people, wherever you roam, and admit that the waters around you have grown...

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Here's the bottom line:

• If you refuse to buy health insurance, you will be fined on a sliding scale that amounts to 2% of your AGI. So if you make $100,000 a year, you could be fined $2,000 for "refusing" to buy insurance.
• You cannot buy a catastrophic policy any more. The "cheapest" acceptable policy will cost somewhere around $15,000 for a single person, and over $20,000 for a family. This is, for most people, more than five times the maximum possible fine - each and every year. The law makes it effectively impossible to maintain an existing catastrophic policy as they "renew" every year, and should any change be made you are then forced to buy something "acceptable" in the law (or pay the fine.)
• When the "pre-existing condition" bar comes down you cannot be charged more or denied coverage due to pre-existing conditions.
• I fully expect 20-50% premium increases immediately, and for the next three years sequentially, in all existing policies. This is precisely what the banks did in front of the CARD act becoming effective, and it will happen here as well. That is the cause of the short-term rocket shot in the health-related stocks this morning

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Frustratingly, this legislation does not deal at all with the real reasons access to healthcare is a struggle for so many – the astronomical costs. If tort reform was seriously discussed, if the massive regulatory burden on healthcare was reduced and reformed, if the free market was allowed to function and apply downward pressure on healthcare costs as it does with everything else, perhaps people wouldn’t be so beholden to insurance companies in the first place. If costs were lowered, more people could simply pay for what they need out of pocket, as they were able to do before government got so involved. Instead, in the name of going after greedy insurance companies, the federal government is going to make people even more beholden to them by mandating that everyone buy their product! Hefty fines are due from anyone found to have committed the heinous crime of not being a customer of a health insurance company. We will need to hire some 16,500 new IRS agents to police compliance with all these new mandates and administer various fines. So in government terms, this is also a jobs bill. Never mind that this program is also likely to cost the private sector some 5 million jobs.

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That said, it will still be disastrous as it simply can't be afforded. It will undoubtedly cost much more than is projected and we undoubtedly cannot afford yet another huge entitlement program. I've yet to see exactly how it will be funded but I've heard hints at raised taxes, at least to corporations. In a time of economic contraction this cannot bode well for the economy at large. And the added debt will have its own consequences as well.

All in all, we Americans are getting what we deserve for continuing to elect Democrats and Republicans. It will be interesting, and probably painful, to see how it all plays out.

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The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.

This would be a major victory for the American people if it holds up. Personally, I don't think it will. I'm quite confident that our government will see clear that this never sees the light of day. One way or another.

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The ideas that begat this nation were born of the age of reason, by the collective yearning of men to be free from tyranny. Free from the coercive hands of the elite class of men, who all through time have forced their lessers into servitude, sometimes by economic circumstance, sometimes by the force of hands, sometimes by the threat of imprisonment. These men attempted to create a government, limited in size and scope, and strictly balanced in power, as they knew the nature of power is to feed on itself and grow. They were educated men, and they knew the tales of history well. Power always grows. And the power of the state is the opposite of freedom. Always. Every time.

Not even 250 years from the founding of this experiment in freedom, the nation it created is gasping for its final breath. In one sense, the experiment was a success. It created an incredibly prosperous nation, with an unprecedented expansion of the standard of living. Nowhere has the world in its history, ever seen an expansion of wealth so thorough, with benefits apparent through all strata of society. Yet in the end it has failed.

Its failure began when it first shed the limits of its Constitution, believing that increasing the power of the central government would allow it to more good for more people. But the lessons of history were lost. The notion that power breeds corruption was ignored. And as the central government amassed more power, it attracted the sharks of great wealth. The more power the central government had, the more it could do for those who were willing to purchase its representatives.

Until recently the depths of the corruption were doubted. Allegations of conspiracy were derided. But now the writing is on the wall. It's as plain as day for all to see. Great financial institutions, having gained control of purse strings of the nation, converted a nation of great production into a nation of great debt. Debt that these few select owned. And now that the people have been bled to their limit, they have written themselves a blank check from the national treasury, hopelessly burying the nation in debt. A debt it can't hope to ever repay. There is no possible way to explain this without the existence of corruption and conspiracy so pervasive that it flows through the system unchecked.

And now the end is upon us. The last great bastion of our freedom is dying an ugly death. Another monstrous law, thinly veiled under the guise of providing health care, but actually intended to raise yet more revenue from the American people. The country is drowning in debt as the Financial parasites feed on the Treasury and more money is needed to keep them going. Now Congress will take it directly from the people. What's worse, is that they will do it without even going through the charade of a vote. Power has grown to a point where the pretense of representation is no longer even attempted.

Once the land of the free and the home of the brave, America is now the land of the tired. And the bankers expect us to bow down to their new rule. They're not even trying to hide it anymore.

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(It)...will happen - an "unexpected" recognition of the reality that what is being done today both is unsustainable and won't work, but we will do nothing appropriate about any of it until we find ourselves well-off the cliff and furiously pedaling in the air like Wile-E-Coyote - and at that point it will be to late to avoid the ugly consequences.

Read the whole article here. It's well worth the time.

UPDATE:

It's been pointed out to me that while Denninger's post is very well to the point, the actual consequences of these things are not specifically articulated. If you read the Market Ticker, you'll note that he has gone into more detail in other articles, but still, it's worth pointing out here to save you the trouble of reading through hours of archives.

Water always finds its level. This works in the physical world as well as within economics. If there is a supply of a scarce resource, and a demand for it, some system must be used to distribute it. For most goods and services in the U.S. we use the price system. We use it because it works. It isn't always fair, but saying so is like me saying that my ruler isn't fair because it never tells me that I'm over 6 feet tall. Price is simply a measure of the supply of a scarce resource and the demand there is for it in the market place. The millions of people making transactions over that resource are what set the price. Charge too much for it and you'll have a surplus (note the empty seats at Ford Field circa 2008). Charge too little for it and you'll quickly run out. Try to sell your mint collection of bootleg Beatle's LP's for a buck a piece on Ebay and see what happens.

This all makes sense to most people. But then, we don't think of things like interest rates as being prices. The interest rate I pay on my mortgage is the price of borrowing the money I used to purchase my home. But we don't use a normal price system for setting interest rates. We use a bunch of powerful people in Washington who have set up a very complicated system to set interest rates where they want them. One key to how this system works is the continued expansion of bank credit. By this I mean that over time banks have to lend more and more money to keep this system working.

However, some very thoughtful people like Ludwig von Mises and F.A. von Hayek, quite a long time ago pointed out that if you use the expansion of bank credit to expand an economy you will create inflationary bubbles in that economy, which will, by definition, at some point burst. Over the past couple of years we have seen some very big bubbles burst. First with the housing market, and then within the banking system itself. Water is finding its level. These things we are borrowing money for are going back to their true value, and we are helpless to stop it.

If you look at the statistics lately, the one statistic that really stands out is what the Federal Reserve calls Z1. It is the total amount of money being lent in the economy. In a debt based system such as we have, Z1 is the real money supply. This has contracted by more than 10% over the past two years. A 10% contraction of money supply is the textbook definition of a depression. What is happening is banks are scaling back the amount of money they are lending.

Why?

Why are banks scaling this back? This is a point that seems lost on many economists, but seems fairly obvious to me. Banks are keeping large amounts of cash reserves on hand instead of lending the money out. I've heard the President and Treasury Secretary complain about this on the news. The reason is that the banks know they are in trouble. These banks own the paper on the loans that have been drawn to purchase many things (mostly houses) that are now worth much less than the loans given. Every time one of those loans goes bad, the bank is unable to recoup the difference and that money simply disappears as tribute to the economy gods. It goes "poof". So, in order to keep from going under, the banks are not lending money, lest their asset bases evaporate. Though, it's recently been pointed out that if these banks had to mark their assets at the true value of the properties they have mortgaged, there isn't one bank in the U.S. that would currently be solvent. This is a problem.

So, in a debt based economy with lending contracting, less "stuff" is being purchased. The government is trying to counterbalance this effect by borrowing a bunch of more money itself and pumping it in to the economy. The trouble is that this never works. Government doesn't spend money the way that you and I spend money. So when government pumps money into the economy it makes it look like demand for certain goods and services is higher than it actually is, and when the water finds its level again, the producers of those goods and services find that they have over-invested in production and the bubble bursts again.

Yet Washington continues to try. Now, finally, they are running into the final problem. They can put as much money out there that they want banks to lend and they want people to borrow, but people just don't want to borrow it. People are at their limits with debt. They are concerned about their jobs. They just don't want to borrow anymore.

The real trouble is just beginning. As the government borrows more and more money to fund its stimuli and the economy refuses to recover, the ability to pay it back will come severely into question. When investors in that debt (people that hold treasury securities) begin to doubt it will be paid back, they will begin to rush to cash those securities in. And then the government will be forced to inflate more to pay it back (see Weimar Republic, circa 1930) or they will default. If the government defaults on its loans, the currency will tank. The best case scenario is that this will cause imported goods (including oil) to shoot sky high. The worst case scenario is that no one will be willing to take dollars in payments, as it has become virtually worthless. In any of these cases what will result is catastrophic. It doesn't make sense to go to work if they can't pay you in anything of any value. If you can't get paid you can't eat. Then you have to find a way to survive.

What we have at risk here is a systemic crash. The falling of an empire. The end of the U.S.A. So, when you read Denninger's piece, you can see why he's so upset. You can see why he calls for jail sentences for the offending parties. This isn't just a slump we're talking about here. It's survival.

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An Open Letter to President Obama
by DON BOUDREAUX on MARCH 8, 2010
in HEALTH, PRICES, REALITY IS NOT OPTIONAL, SEEN AND UNSEEN
8 March 2010

Mr. Barack Obama
President, Executive Branch
United States Government
1600 Pennsylvania Ave., NW
Washington, DC 20500

Dear Mr. Obama:

CBS radio news this morning ran a clip of one of your recent speeches. In it, you criticize insurance companies because they “ration coverage … according to who can pay and who can’t.”

My first thought was “not exactly; coverage is rationed according to who pays and who doesn’t.” Ability to pay isn’t the same thing as actually paying, and what insurers care about is the latter. Many folks – especially young adults – have the ability to pay but choose not to do so. They get no coverage.

But further pondering of your point leads me to look beyond such nit-picking to see fascinating possibilities. Not only insurers, but all producers who greedily refuse to supply persons who don’t pay should be set aright. Now I’m sure that you don’t ration the supply of the books you write according to any criteria as sordid as requiring people actually to pay for them. But our society is full of people less enlightened than you.

For example, the typical worker rations his labor services according to who pays and who doesn’t. That must stop. Oh, and supermarkets! Every single one rations groceries according to who pays. Likewise with restaurants, clothing stores, home-builders, furniture makers, even lawyers! You name it, rationing is done according to who pays. Indeed, my own county government has been corrupted by this greedy attitude: if I don’t pay my taxes, the sheriff takes my house – effectively booting me out of the county merely because I didn’t pay for its services.

Preposterous!

I look forward to your changing this selfish and unfair system of rationing that for too long now has kept Americans impoverished.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

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