Wednesday, September 22, 2010


I'm frustrated. My friends and family, for the most part, do not share my view of what is happening to our country. Sure, they're upset about the economy and many of them feel that Hopey the Clown is running some BS about an economic recovery; they're not blind, they can see that things are not getting better. But they don't truly see the danger.

My view is that we are now at the brink of a catastrophic collapse. An economic catastrophe of epic proportions. And no, I don't blame Hopey for all of it. This is a situation that has been building for more than two decades. Our current lifestyles have been built on policies of credit expansion which have led to an environment of false prosperity. We were headed for a cliff before Hopey took office, but his policies, along with Bernanke and The Fed, have guaranteed that we're going to drive off the cliff in spectacular fashion.

People talk of bubbles. There was the tech bubble of the late 90's and the real estate bubble of the 2000's. These bubbles were the manifestation of credit expansion policies; credit expansion was the air that blew up the bubbles. We've now reached the point of credit saturation (QE is the proof of that, though it will prove to be a futile attempt to let the air out slowly), and once the saturation point is reached, a contraction must follow. Credit contraction has another name, it's called "Deflation". Deflation and depression go hand in hand.

My view is that we have not had a recovery at all, but a delay of the inevitable. Yes, the stock market rallied from the lows of March 2009, but this was a correction of the initial decline, which was only a partial decline: the first wave down of the depression, which is occuring in a stair-step down fashion. Until we reach the recognition point, at which time things will accelerate downward at a pace that will shock everyone, hope will still surface and try to breathe. It's happening now.

If one looks at the mathematics of the debt, GDP, the housing market and the position of the banks in both commercial and residential real estate, there is no other conclusion one can reach about the outcome. The Fed can claim to have tools and weapons to combat deflation, but all they are doing is delaying the inevitable, and compounding the ultimate damage.

I'm frustrated because I have friends and family with a lot to lose, and when I talk to them about the situation, their eyes glaze over. Sure things are bad, they say, but the elections are coming up and we'll get this spending under control and we'll bounce back. They refuse to look at the underlying fundamentals. They have hope that things won't get that bad, and if they do, the .gov will somehow save us.

Hope is good in most cases. Hope can sustain you through tough times. But when hope turns into denial it can be devastating. Recently I was playing golf with a good friend, a very successful entreprenuer who has built up some sizeable wealth. I told him I think the lows of 2009 will be breached on the way to a much lower bottom. "Damn, I lost my ass in that last decline. I've gotten a lot of it back now, but damn, I hope you're wrong."

Hope is not a strategy, my friend.

Hope does not die easily, nor should it, but hope is treading dangerously close to denial. People have already forgotten the fear and confusion they felt in 2008, the near panic that rippled through the country and the world. Hope bounces back.

I've tried to help my friends and family see the big picture, but I've noticed that people walk away when I start talking about my view of the future, so I choose my moments with discretion.

And I'm not without hope myself. I have hope for a better future after we hit the bottom and rebuild. I think we'll be stronger for it, those of us who make it through to the end. I think manufacturing will come back to the US, we'll come up with new innovations that will be better for the population and the planet, we'll be leaner but hopefully smarter. Unfortunately, we have to hit bottom before we rebuild. The credit contraction must happen; the bad debt must be purged from the system before true capital formation can occur. It will be painful, and we cannot avoid it, but let's try to minimize the pain with intelligent monetary and economic policies.

I'm not going to beat my head on the wall any longer, but I'll still share my views when asked. And I'm sure that once the inevitable occurs, I'll have friends and family asking plenty of questions.