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Why There Will Be No Recovery and Markets Will Trend Lower

hypocritexposer

Well-known member
With large continuing trade deficits, declining manufacturing and rising public debt, we cannot expect a recovery. Worse, we can expect economic conditions to deteriorate until we face the prospect of a total collapse in the United States economy. Here is why.

We all know that our trade deficits are through the roof. We import a great deal and we manufacture less and less to export. The services of our service economy are not really exportable like manufactured goods. The result of the continuing trade deficits is huge foreign debt to China and other countries. Well, so what, you might say. The answer is that until those deficits are substantially reduced, we can expect the recession to continue and actually get worse. That is, we cannot expect a recovery and we can expect the stock market to trend lower.

The problem is too many Keynesians are not paying attention to what Keynes said or indeed to what is going on. Consider this: in The General Theory of Employment Interest and Money, Keynes predicted what would happen to a country that allowed its trade deficits to persist:

[A] favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression.

As a young man, Keynes favored open free trade. However, from studying the real world, he came to realize that countries can gain an advantage by adopting strategies designed to develop trade surpluses. The problem is that countries that trade with such surplus countries themselves wind up running serious trade deficits. If and as those deficits continue, according to Keynes, they typically result in a persistent depression in the deficit countries. Aggregate demand is reduced because people have to finance and repay deficits related debt and eventually financial crises ensue which are caused by too much borrowing from abroad, according to Keynes. Sound familiar?

So how did we get to this point? A bit of history tells us. Keynes had a plan for what became the Bretton Woods system of institutions and trading rules after WW II. Both the IMF and the WTO were founded based upon Keynes’ advice, but not all of Keynes’ recommendations were adopted. One omission was crucial. The institutions and rules Keynes sought would have disallowed serious trade imbalances. There would have been very different requirements for trade surplus and trade deficit countries, not the one size fits all policies now applied by the IMF and WTO. Specifically, Keynes proposed institutions and trading rules that would have required trade surplus countries to take down their trade barriers, while it would let trade deficit countries use export subsidies and tariff barriers for a while to bring trade into balance.

Our big surplus trading partner, China, is doing exactly the opposite of what Keynes proposed surplus countries should be required to do, thereby seriously worsening the economic situation of the United States. China has dramatically increased large export oriented subsidies, created as many sub rosa import restrictions as it can, developed import licensing, delays for imports including much red tape, and is engaged in currency manipulation to keep the price of the renminbi down relative to the dollar. It is making our trade deficit and indebtedness to China greater and China’s trade surplus and IOUs from us larger. (Could it be that some smart Chinese Keynesians have figured out how to put China at the top of the world economic heap and have the United States sink into the sea, economically, all without firing a shot?)

In a nutshell, that is the historical backdrop to our present situation.

Others agree with the notion that until we correct our trade deficits and the growing debt attending them, the recession or an ensuing depression will persist and there is nothing we can do about it. William White, a former chief economist at the Bank for International Settlements, predicts the Great Recession won’t end because the world’s governments are not addressing the trade imbalances, which caused it.

Richard Duncan agrees and, worse, predicts the United States is likely headed for a “Fall of Rome” type of scenario, which he explained in a recent interview in Hong Kong. Before I address that, we need to consider who Richard Duncan is. He is a financial analyst and economist. Previously, he worked for both the International Monetary Fund and the World Bank in Washington DC as a Financial Sector Specialist. It is moderately rare to have a good economist also be a financial sector expert.

Duncan has an excellent track record in predicting economic events. In 1993, Duncan warned of the impending collapse of the Thai economy and the Thai stock market. That was four years before it all happened. Subsequently, in 2003, he wrote a book entitled, The Dollar Crisis: Causes, Consequences, Cures in which he argued that the persistent current account deficits of the U.S. were creating an unsustainable boom in global credit that was destined to break down and crash, resulting in a worldwide recession. He was correct there, too. Next, well before it became obvious to the rest of us and it happened, Duncan also accurately predicted the course of present day Fed policy, i.e., that the Fed would be forced to make massive loans to the banks and other financial institutions to keep them afloat and not have a major depression. One result that he foresaw from that would be a massive rise in federal debt. That is now a part of the basis for his present predictions about our future.

Duncan argues U.S. budget and trade deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that is likely to result in a major economic collapse. The U.S. has little chance of resolving its deteriorating financial position because trade deficits and internal debt continue to grow and the US manufacturing industry continues to shrink.

The bad news is, in the next 10 years, we're still not going to have fixed these problems, and as Keynes, White, Duncan and others argue, the recession or worse will persist. Instead of fixing our problems, we are only trying to prop up aggregate demand. For example, the federal budget deficit will total $1.6 trillion this year, while the combined budgetary shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office. The U.S. has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of U.S. debt has propped up the dollar and allowed a credit-fueled spending boom by the nation's consumers, according to Duncan.

U.S. workers are now likely to face more unemployment and declining wages and that may create a political backlash against free-trade policies, he said. The nation's jobless rate jumped to a 26-year high of 9.7 percent in August. As unemployment remains at or above 10 percent well into the foreseeable future and wages slip, it won't be long before Americans start voting for protectionism, Duncan said. That's going to be bad because protectionism will mean world trade will diminish and that will reduce overall global prosperity.

Once the U.S. debt burden becomes too large and the government can no longer sell the debt it needs to sell, the Federal Reserve will likely step in and monetize the debt, resulting eventually in high levels of inflation, Duncan explained in his interview.

The real problem at that point becomes the possible confluence of many adverse economic circumstances that can create the economic perfect storm. The high levels of inflation or hyperinflation, the continuing recession or worse, depression, continuing and likely growing unemployment, with ensuing protectionism, declining wages and reduced international trade, and public discontent and unrest will all likely lead the United States to great instability and to a point of “irreparable damage” and collapse -- “a kind of Fall of Rome scenario,” as Duncan and others of us see it. This prospect is too likely. Already, people at public meetings are shouting and behaving badly.

For those who don't know or recall, the fall of Rome was accompanied by high inflation, much hoarding of money (gold and coin), a fall in the velocity of circulation of money and high trade deficits with the eastern parts of the Empire and beyond. Some argue these were the real reasons Rome fell. Invading barbarians from the north simply took advantage of the economic decline and chaos they observed and helped it along by raids and stealing gold from the Roman treasury. What ensued was the Dark Ages where warring groups roamed the land stealing from each other and much more primitive forms of living arose.

We can certainly hope our situation in the United States does not come to this, but the elements are slipping slowly into place and too few seem to be noticing, much less having us do something about them.

Against this background of progressive declining economic conditions, it is not unreasonable to expect the stock market generally to drift lower steadily on a seasonally adjusted trend line, but perhaps gain a bit of a respite if the rate of inflation rises a little, the dollar slips and exports improve somewhat. Gold and precious metals, along with their mining stocks, could be expected to trend up significantly. The Dow at its present level, inching up toward 10,000, assumes a strong and quick recovery, but it is not going to happen that way and at some point a serious correction is inevitable.

It will take time for the realization of no real economic recovery to sink in and be realized in the stock market, but that realization will be aided if unemployment remains high or grows, and bad numbers on the economy and poor earnings continue to be reported. It would not surprise me, too, if there were no substantial recovery from any October or November correction. This is not a happy situation.

The question is what can be done to prevent this prospective situation. I will try to address that and a brief intellectual history of how we got here and why so many economists and others miss understanding what is happening in future articles.

Disclosure: DXD, QID, SDS, TWM

http://seekingalpha.com/article/163855-why-there-will-be-no-recovery-and-markets-will-trend-lower?source=email
 

MoGal

Well-known member
There won't be a recovery because TPTB want a north american union and amero currency. They don't care how many people suffer in the mean time as long as they get what they want.
 
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