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06/13/2007 Archived Entry: "The Tsunami of Credit"

I PREDICTED A RECESSION LAST OCTOBER.
Silver here. Specifically, I used the very strong correlation between inverted yield curves and recessions to predict that one would start "within 5-10 months." It's been nearly 8 months, and according to the Bureau of Economic Analysis (BEA) the economy grew at a 0.6% rate in the first quarter of 2007. That's pretty anemic, but unless the growth is negative, it's not a recession.

Was I wrong? After all, predictions are hard, especially about the future. But I'm not ready to turn in my crystal ball just yet.

First, there's two months to go in my prediction. Second, the BEA figures are backward looking; they won't know if a recession hits us in July or August until next December.

More importantly, I think we may be in a recession already.

Certainly my anecdotal evidence, gained from talking to friends and acquaintances, strangers I meet in my travels, and observing lots of closing businesses and neighbors losing jobs, suggests that times are hard, not good.

Surprise! The government figures regarding inflation and the economy are tissues of lies.

John Williams' Shadow Government Statistics paint a far different picture. Mr. Williams generally reports economic figures the old fashioned way, avoiding the many gimmicks introduced since the Reagan robbery of social security.

His figures show GDP growth is -2%, and we have been in a recession since the burst of the Greenspan dot-com bubble at the end of 2000. Consumer price inflation is above 10% and rising. (Nixon imposed wage and price controls in 1971 when price inflation rose above 4%.) M3, the broadest measure of the money supply, is rising at over 13% year-over-year.

What's that? The FED stopped reporting M3 in 2006, claiming it was too costly to produce. Mr. Williams, like all free market actors, is able to produce with very little effort what the bloated FED cannot, or does not want to do. Inflation of the supply of money is the root cause of price inflation, and the FED doesn't want too many people to pay attention to the men behind the curtains.

I believe the huge increase in M3 explains a lot about why we don't already have a full-blown, widely recognized depression. At the current rate of growth, an astonishing $1.4 trillion in new money is being created every year. The GDP is $13.6 trillion; adding 10% of that figure in brand new, created from thin air money to the economy increases GDP only 0.6%? Clearly we are losing ground.

The tsunami of credit and debt can hardly be called "money." Even MSM commentators have started referring to "liquidity." The current mania for mergers and acquisitions is a symptom of gargantuan quantities of newly created liquidity trying to find a place to rest.

Our money is nothing more than a consensual mass hallucination; it is used as money only because lots of people choose to believe that it IS money. But with 1,400,000,000,000 new hallucinations being created every year, over 44,000 every second, 24x7, the charade is quickly growing untenable.

If you are an investment banker or government contractor, and standing directly in front of the new money cannons, things look pretty good. If you are a worker, or heaven help you someone with dollars saved in a bank, you are being robbed. Every day your money is worth less, every day your standard of living is going down. It's been that way for a long time, and until we relearn some very old, very hard lessons, its going to stay that way.

I don't know if my prediction will come true. I'd be happy to be wrong. But I'm preparing for hard times ahead.

Posted by Silver @ 07:10 AM CST
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