With the U.S. facing unprecedented financial and economic challenges, I’m glad to let Mike Larson fill my shoes today. Mike’s invaluable analysis was right on target in the 2008-2009 financial crisis. He’s proving himself again in this turbulent year. I highly suggest you read this issue closely — and heed the warnings Mike gives you below. — Ron |
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The news out of Europe could not be more frightening:
Its debts are mounting as it bails out its most endangered states.
Its banks are stretched to the breaking point as they struggle to prepare for the default of member states they have loaned billions to.
Its most indebted nations are instituting severe austerity measures that take billions of euros out of the Union’s economy.
And now, Europe’s economy is stalling. Official data released this week confirms that GDP growth has plunged to its lowest rate in two years — a factor which can only choke off much of the tax revenues needed to pay back all those debts!
Just look at Greece. The country managed to get a $156 billion bailout in 2010, in part by promising to shrink its budget deficit.
But its deficit has instead surged by a third in just the first six months of this year alone. The culprit: Plunging tax revenue due to a deepening recession.
Then there’s Portugal. The country got its own $111 bailout. But the harsh austerity measures it required are leaving the economy in terrible shape, too.
The country’s own finance minister is projecting that GDP will shrink 2.3 percent in 2011 and 1.7 percent in 2012. Result: Tax revenue there will likely fall well short of expectations.
Germany is the largest economy in Europe — the growth engine of the European Monetary Union.
But Germany’s economy has hit the proverbial wall. Its GDP rose only 0.1 percent in April, May and June — a mere one-fifth as much as expected. Now, with its economy stalling, tax revenues can only plunge.
The trend is clear and could not be more disturbing: The sovereign debt crisis that at first struck only the PIIGS countries is now a contagion, threatening to crush the entire European Monetary Union.
Think That’s Serious?
Take a Look at the United States!
Our debts are mounting as Washington continues to spend money like there’s no tomorrow.
Our banks are stretched to the breaking point as they struggle to survive massive loan defaults.
Our most indebted states are instituting severe austerity measures that take billions of dollars out of the U.S. economy.
And now, America’s economy is stalling — a factor which can only choke out the tax revenues that are its lifeblood.
President Obama’s budget proposal from earlier this year assumed GDP growth of 2.7 percent in 2011. Then supposedly, GDP growth will accelerate to 3.6 percent in 2012 and 4.4 percent in 2013.
Now, though, it’s clear that the U.S. economy is slowing precipitously. We’re tumbling into a second recession already, just over two years after we technically emerged from the last one! And THAT will gut tax revenues just like the first great recession did!
Fact: In 2007, federal government revenue grew by 6.7 percent. But it then shrunk 1.7 percent in both 2008 and 2009. It wasn’t just federal revenue that imploded — and that continues to implode.
Reliable estimates suggest U.S. states are facing a cumulative funding gap between revenue and expenses of $527 billion from 2008 through 2013.
In October 2009, the Economic Cycle Research Institute’s weekly leading index was growing at a whopping 27.8 percent rate. But now that growth rate has contracted massively — down to an anemic 1.7 percent in early August. That’s just a hair from negative territory and it signals a sharp deceleration in the U.S. economy.
That’s not the only warning sign flashing red either. New home sales fell 1 percent in June after declining 0.6 percent a month earlier.
The S&P/Case-Shiller index of home prices also pointed to weakness, with prices down 4.5 percent from a year earlier. That was the biggest decline in 18 months.
Meanwhile, the ISM manufacturing index plunged to 50.9 in July from 55.3 in June, missing economists’ forecasts by a country mile. That was also the worst reading in two years.
Personal spending fell 0.2 percent in June, the first decline in almost two years. Incomes gained just 0.1 percent, the worst reading since last September. To top it all off, durable goods orders dropped 2.1 percent in June against expectations for a 0.3 percent rise.
Overall, GDP grew just 0.4 percent in the first quarter of this year, and 1.3 percent in the second quarter. How in holy heck are we going to get to 2.7 percent growth for the year, much less almost 4 percent the year after? Answer: We’re not! Not by a long shot!
One Massive Step Closer
to Financial Doomsday
So as we’ve seen so far in this series both Europe and the U.S. have followed the recipe for disaster that every failed economy in history has …
Our governments are spending all the tax revenues they receive …
They are borrowing every penny they can from citizens …
They are borrowing every penny they can from foreign investors …
Plus here in the States, our Fed has created trillions of dollars out of thin air to fight this crisis — and as a result, Washington just reported that wholesale price inflation is now raging at the annual rate of more than 7 percent …
And now with the cost of servicing their debt soaring into the stratosphere, their economies are slowing — a fact that can only cause tax revenues to shrink and debt to pile up faster!
If history teaches us anything, it’s that all of these steps are leading us inextricably to a monumental event that now threatens to trigger the ultimate financial doomsday — and plunge vast numbers of U.S. families into the nightmare of poverty, homelessness and hunger.
And please don’t forget: All of this is just the preamble to the ultimate catastrophe — the historic, world-changing event that will soon alter all of our lives forever. Be sure not to miss tomorrow’s issue of Money and Markets for more!
Best wishes,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 6 comments }
well done just bring the whole world down man. hi my name is steven and this the heavist thing ever man. long live heavy metal, surfing, and the dole dude. Smoking pot is only bad if you abuse the stuff I think same for nearly every drug legal or not. So may be we have been a little harsh on dealing with drug dealers sentences? comments anyone? Then you have religion and who says that muslims aren’t bad news anyone admit it? ‘Criminals’ seem to be the richest and least llikely to give a stuff about anything but there wallets V putin seems to have come from a KGB backgroun and Russia is one of the top rated countries in the world debt wise according to weiss ratings.
Wiess needs to do a thingon where federal moneys spent really to clear the of uncertainty about this whole thing.
religious education greedy fu===g pensioneers what other delirous things are going on?
Hello Mike. Yesterday I commented on your post in this series by noting that based on the GDP that our nation has never been wealthier. What I failed to also mention is that a significant portion of the real value added each year to the economy is not counted via the GDP. We are even richer than the capitalization of the GDP would indicate!
If Adam Smith and Joseph Schumpeter were alive today, they would likely point out that the power of innovation results in lower-priced goods that provide greater use value. They would probably use computer technology as a prime example. Since I am reading your post and writing this comment using that computer technology let’s take a look at this a little closer.
Assuming Wikipedia (http://en.wikipedia.org/wiki/FLOPS#Hardware_costs) is fairly accurate, it shows that the year I was born a giga-FLOP of computing power would have cost over a TRILLION dollars. In 1984, the year I got married, it was $15 million. Just 14 years ago in 1997 it cost $30,000 per giga-FLOP. Today the lowest price for a super computer is only $1.80. Consumer cpu’s do about 10-20 giga-FLOPs and cost about $5 per giga-FLOP.
According to the headers on this web site, Weiss is using the nginx web server. Although Apache enjoys the lion’s share of the web server space, both are Free Open Source Software (FOSS). If we were to add up all of the equivalent market value of the FOSS that is used globally — operating systems, servers, applications, everything — it would likely equal hundreds of billions of dollars annually. All of that is available to us and doesn’t show up in the GDP.
It should be clear that WE HAVE NEVER BEEN RICHER AS A NATION. Of course, if the distribution of wealth and income is horribly skewed, then that is another thing, huh?
For those of us who have some knowledge of past cycles, the clouds currently gathering are ominous. It is very difficult to envision the way ahead without profound modifications to the financial system which is unfortunately was the financial authorities are engages in right now. Worse, the models used to understand our economy are probably wrong, or at the very least skewed and will not help us get out of the current crisis.
As we plunge back into crisis, it looks more and more that our governments will react rather than lead for the simple reason that there is no vision or understand whatsoever of what they should do or worse what must be done is either impossible politically or practically now that we are so advanced on a path we should never have taken.
Maintaining artificial growth through government spending is not Keynesianism, certainly not in the long term. Ignoring the lessons of the 19C, to limit the growth of conglomerates, and of the 20C, Glass-steagal was a guaranty that we would repeat the mistakes of the past but it cannot be undone without major changes to our society and these can only come with a major crisis considering the inertia and entrenched interest
Let’s hope for the best but prepare for the worst.
America, and we Americans are doomed, and so too are Europe and the Europeans.
Hey, might as well make some money on it, eh Weiss? Uh…are you sure we’re going to be able to keep it, or to spend it, when so many others are losing theirs?
Noting Steve’s comments, above, does anyone give a “GigaFLOP” anyway?
The cycle of sovereign death – since time began
1. Governments are socialists bent, and think they are saviors for every human weakness. So they continuously sit in legislative assemblies for hundreds of years until they have outlawed or taxed everything.
2. The government legislations meddle in private affairs that they have no business being in.
3. To regulate these private affairs they build huge departments of people with pens and clip boards to harass the citizenry and businesses.
4. The legislations become impediments to new small enterprise, and, existing small enterprises find that they cannot cover the legislative costs with their smaller revenue streams– so they go out of business. The only survivors are the mega corporations who have the monololistic markets and can afford to hire compliance people.
5. The mega corporations are globally mobile and can take advantage of foreign wage arbitrage. This tends to cause unemployment in the high cost countries with legislative legacies as described in point #1.
6. In the highly legislated countries where governments grow to become a significant portion of the GDP, ever higher taxes are required to support the government. They can’t tax the citizenry enough without killing the economy, they can’t tax the corporation enough without corporate flight so they borrow and print the money needed to keep the people with pens and clip boards on the payroll.
7. The sovereign becomes fatally indebted and destroys its currency and it’s credit, then it all implodes.
This is the cycle. Russia is the poster child because it just speeded up the cycle with communist intrusion in private affairs, however, it is the template for the path of slow motion western governments.
Original poster of the cycles of governments – I forgot to also state the it was the intention of the founding father to not repeat the cycle, but current legislators have forgotten their history and don’t understand how today connects with the past.