Weekly Wanderings 10 December 2009
In this weeks musings…
· Meredith Whitney speaks
· Hyperinflation, according to John Williams
Meredith Whitney was the banking analyst who predicted the looming disaster in the banking system a couple of years ago.
Now (care of CNBC in the US) she’s sounding a warning again…..
Government ‘Out of Bullets’; Consumers in Trouble: WhitneyBy: Jeff Cox
The government is running out of ways to help the economy as the US faces major issues regarding credit and employment ahead, banking analyst Meredith Whitney told CNBC.
“I think they’re out of bullets,” Whitney said in an interview during which she reinforced remarks she made last month indicating she is strongly pessimistic about the prospects for recovery.
Primary among her concerns is the lack of credit access for consumers who she said are “getting kicked out of the financial system.” She said that will be the prevailing trend in 2010.
Despite being able to borrow at near-zero percent interest, banks are not taking that money and putting it back into the marketplace. The Federal Reserve said Monday that consumer lending dropped 1.7 percent on an annualized basis in October, the ninth straight monthly decline.
With consumer spending making up about 70 percent of gross domestic product, the inability of even credit-worthy consumers being able to be able to borrow could put a severe crimp in future growth.
“What’s so frustrating is you have an administration that is arguing such a populist (ideology) and not appreciating all the unintended consequences that the consumer and small businesses have far less credit,” Whitney said.
“You’re going to get a situation where you revert from a consumer standpoint,” she added, “where those that had bank accounts for the first time, credit cards for the first time, homes for the first time get kicked out of the system and then fall prey to real predatory lenders.”
The problems taken together also will pose difficulties for investors.
“I have 100 percent conviction that the consumer is not getting any better and there’s not more liquidity,” Whitney said. “So if everything touching the consumer is going to be represented in the S&P, then the S&P is going to be under pressure.”
The solution, she said, is for the government to take proactive steps that will give consumers more money to spend.
“I don’t think you can cut taxes enough to stimulate demand,” Whitney said. “For a 2010 prediction, which is so disturbing on so many levels to have so many Americans be kicked out of the financial system and the consequences both political and economic of that, it’s a real issue. You can’t get around it. This has never happened before in this country.”Video above: Meredith Whitney, CEO of the Meredith Whitney Advisory Group, shares her insight on the financial sector and the economy.
Over at King World News, Eric interviews John Williams of Shadowstats.com. We have mentioned John before in these pages – he does a great job of deconstructing the official US Government statistics, providing a much more accurate road map of the unemployment data, amongst many others. We summarize the contents of the interview below.
The financial crisis we have experienced over the last two years is but a precursor to a much more
severe hyperinflationary Great Depression, with a consequent debasement in the value of the US dollar and in fact a dislocation of the US financial system as a whole.
The average household has not been able to sustain its income with respect to the cost of living over time. Using the Government’s own figures, the average household income today is down 10-15% from the peak level in 1972.
This is a real economic problem because the economy is driven by consumer demand arising from increasing purchasing power – hence the requirement for continual borrowing.
John warned of a looming hyperinflation problem in 2005 – to be told by Government officials that this problem “was too far in the future to worry about”. However, the day of financial reckoning is now arriving, or about to arrive.
Government finances are in much worse shape than is commonly realized. Right now, the US Government has 75 trillion dollars NPV (5 x GDP) of unfunded liabilities. There is * no way * this can be paid. The consequent hyperinflation crisis will break within the next 5 years, and possibly within the next year.
The Federal Reserve is debasing the currency – printing money – without limit. This new money is not showing up in general circulation because the banks are not lending – they are using the money to prop up their own reserves and to play games with the Fed.
Despite this, commodity prices tell us what is happening. It is not an accident that gold is now priced at over $1100 per oz.
Up till now, the breakdown in the dollar has been orderly, but at some point the dam will break…
The steps you need to take are to acquire some physical gold and silver, and to diversify into currencies outside the dollar. The most important point is to preserve the purchasing power of the wealth you have – the investment opportunities afterwards will be extraordinary.
Over this period, owning gold and silver coins will be important, because they will be accepted without the need for assaying.
A hyperinflation would cause severe disruption in the food supply chain and in financial electronic systems. Readers are advised to prepare as for a natural disaster – to have dried and canned food supplies in storage, preferably enough for six months or longer.
A barter system will evolve as the dollar collapses. Make sure you have items such as miniature bottles of spirits that you can swap for other items.
You can use physical gold or silver to maintain the purchasing power of the dollars you put into it. This is a really important concept. Gold is not “worth $1130 dollars per ounce”; instead the dollar is worth 1/1130 th of 1 ounce of gold.
The number of unemployed workers in the US, in the broadest sense, is currently running around 22% - the greatest since World War 2. It could rise to as much as 35%, to match the Great Depression.
One last point – in a hyperinflation, cash would become in very short supply. Hence the need to have a supply of gold and silver coins, and bottles of Scotch.