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Is a second Great Depression coming?

By: Sam Brown | Wednesday, September 13, 2017

Readers of my articles know that I believe that the unprecedented high debt level in the US makes bankruptcy of both the government and the private sector unavoidable. For me the only question is whether it will be a soft bankruptcy via inflation or a hard bankruptcy via a termination of the debt servicing. The debt problem was discussed in an interview with former Fed chairman Alan Greenspan on the 13 December 2016. He was interviewed by Bloomberg's David Westin. I advise my distinguished readers to watch the video of this remarkable analysis of the debt issue, it is only five minutes long.

Westin asked Greenspan whether the US could grow its way out of the debt problem like the banks did in the 1980s with the Latin American debt crisis. "Could we do this with the US economy?". Greenspan's answer was short: "Not now." He went on to explain that the lack of productivity growth made this impossible. The US needed annual productivity growth of two per cent but only achieved under 0.5 per cent. This was a necessary condition to achieve real GDP growth of three to four per cent that the current administration needs to make the economy grow faster than the debt burden.

Greenspan saw the root of the debt problem in the growth rate of entitlements (pensions, healthcare etc.). This was eating into domestic savings that were needed to get investments going that produce productivity growth. Politicians did not want to touch the entitlement problem because any such move would be very unpopular with voters.

If the problem of an ever-growing debt burden cannot be resolved, then the next logical question is: When will the borrowing train run out of steam? Alan Greenspan pointed out that he doubted that the US could borrow much more from abroad. There were no domestic savings either because they were crowded out by entitlements. "Where do you go from there? I mean it is a nice idea to say well we build our way out of it. Good luck!" He pointed out that he expected a period of stagflation because of a shortage of labour and a rise in the rate of the money supply. Alan Greenspan did not say it but I assume that he expects the Federal Reserve to print the Federal Reserve Notes needed to pay the bills once borrowing becomes impossible since this is the only option left. This would point towards a soft bankruptcy scenario. It is here where I part ways with his analysis.

In a previous article "Will the Fed turn the US into a Mad Max world?" I expressed my fears that the stream of ever more borrowing will slow down considerably because borrowers run out of capacities to borrow. Not just in the US but globally. A global credit crisis can be triggered if the over indebted US consumer throws in the towel and defaults. Maybe as a result of hurricane damage, maybe because loan sharks charge him/her too much for an auto loan.

The experience of the past few years has shown that the trickledown effect of money printing is largely a myth and that the newly extracted "money" finds a new home at the wealthiest five per cent of the population. This implies that more money printing will do very little to bail out the weakest link of the economy, the remaining 95 per cent. The claim of a tight labour market is refuted by the poor wage increase figures. In last week's Productivity and Costs statistics, unit labour cost increases quarter on quarter were shown as being just 0.2 per cent. If labour was in high demand that figure would be far higher. The problem is that the official unemployment rate of 4.3 per cent is no indicator of unemployment but the result of an algorithm that spreads misinformation. The real unemployment rate could be higher than 20 per cent. A visit at might help.

Widespread bankruptcies among US consumers will lead to a credit contraction which in turn will lead to a reduction of the money supply. There are several polls that say that roughly half of all US households would not be able to pay for an unexpected $500 expense. This is borderline bankruptcy for me. An important development that has played out over more than a hundred years has received hardly any attention. It is the wealth redistribution function of the fiat currency system. It sucks the wealth out of nations and puts it into the pockets of a tiny number of extremely wealthy individuals. The same class of individuals who designed it in the first place. And this is how it works and how it pushes nations into utter destitution. The banking industry creates new currency with every loan it advances to customers. However, wealth cannot be created out of thin air or by punching a few numbers into a computer. Somebody's wealth will have to suffer in order to put wealth into the newly created currency. Suffer do all currency holders and the recipients of payments in this currency. In the case of the Dollar it is all Americans and foreign parties who depend on the value of the Federal Reserve Notes.

The super wealthy also suffer but they hold most of their wealth in financial assets that tend to overcompensate (just have a look at the all-time highs of the stock markets) for the inflationary effects of the newly created currency with rising values. They receive most of the new currency because they have the assets to borrow it. Whilst the "ordinary" 95 per cent never have enough wealth to finance more than the family home and a few luxuries, the super-rich borrow almost exclusively to invest in income generating assets. This means that over time more and more wealth flows into their pockets whilst the salaries, pensions and savings of the 95 per cent are destroyed by inflation. This wicked scheme is in operation in all nations on this planet, it is a truly global disease. Decades of looting have led to a situation where 62 individuals own half of the earth's wealth.

The problem is – you can only expropriate so much until the public wakes up because they are with their back against the wall. The wall of the poorhouse. The victims are now called populists by the mainstream media who make the utmost effort to disguise the reasons for the unrest. To flank their operations, generations of economists have been trained to explain to the public that you only need to tweak this or that and everything will be all right again. It won't. The system has been broken beyond repair by the extraordinary greed of the oligarchs. We are now at a point where the cost to squeeze more wealth out of impoverished nations becomes almost prohibitive. The halt of the borrowing train is the halt of the oligarch's wealth extraction scheme. The mechanics of this exploitation system are also stifled by the awakening of the public. The election campaign of Barack Obama should have raised some eyebrows. He won almost exclusively by repeating the word "CHANGE". Donald Trump promised the same. And both have and will betray the electorate because they are part of the "Swamp". You do not need an IQ of 200 to understand that elections are a charade and that the people of the so called Free World are nothing but serfs of a few trillionaires. In today's world, it does not matter what party you vote for – the oligarchs corrupt them all.

To summarise: The Greenspan scenario of stagflation will not happen because its assumptions are an illusion. The most likely scenario is a depression, worse than the one in the 1930s because the level of debt is unprecedented. The collapse of the economy will bring about a collapse of the credit of governments and of the fiat currencies. Their intrinsic value is zero. Our world of today is on its death bed and nobody knows what the new world will look like. The parallels with the past are clearly visible. The fraud, the daily market rigging and the complicity of governments, media, big business and finance. George Ohlsen and his band reflect this beautifully in their portrait of the spirit of 1929 in "I'm In The Market For You". Switch on your business TV and you may find that this is also the hymn of the actors in the theatre of eternal prosperity where everything is for sale.

By Sam Brown

Author: Sam Brown

Sam Brown

Sam is a private fund manager.

Copyright © 2016 Sam Brown