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<http://leninology.blogspot.com/2007/05/second-great-depression.html>
"ARE WE HEADED FOR ANOTHER GREAT DEPRESSION?"
My talks with Elaine Meinel Supkis
Written by Mike Whitney
Thursday, 10 May 2007
by Mike Whitney
Question: I've been getting more and more e mail from people
who are worried that the policies of the Bush administration
will bring about a severe economic downturn or, perhaps,
even another Great Depression. Do you believe that the
problems in the real estate market, the falling dollar, the
massive current account deficit, or the shaky hedge fund
industry are likely to cause major meltdown?
Elaine Meinel Supkis: Great Depressions like the one that
hit in 1929 are very rare. They usually happen only after
two great empires exhaust their finances. WWI involved two
of the biggest industrial powers in a massive death-struggle
that didn't destroy their industries but wrecked their
currencies and beggared their workers. Russia was a major
empire but a minor industrial power so when the workers
there revolted, the loss of this sector's industrial base
had much less impact than the collapse of Germany's currency
and its huge war debts.
This chart is from one of my most dog-eared books, one of
the greatest works explaining relative power and why empires
collapse, 'The Rise And Fall Of The Great Powers' by Paul
Kennedy. The chart shows how England, the leading nation in
the world, supposedly the richest, spent the most money
during that grinding, depressing stalemate of a war.
Germany spent $3.9 billion less than England. Inflation
since 1913 has been ferocious. This probably would represent
well over several trillion dollars in today's currency.
Even today, no nation can take a financial hit that big and
stay solvent. Europe's industrial production fell 30% and
the US, fattened off of billions of dollars of loans to all
parties in Europe, lived high and mighty during the 1920's.
But with industrial production lagging, Europe spiralled
downwards. The US cheerfully gave everyone more and more
loans and the promise of being repaid was fantastic! Why,
these were basically AAA subprime loans. Then Germany
couldn't pay and kept asking for better terms. This was OK
with the US but not with bankrupt England or France. So they
demanded full payments and Germany defaulted. This triggered
the Great Depression. Even though the US was now the world's
largest manufacturing power, our currency was mostly for
home use so the British had to keep the pound strong. Trying
to do this made things worse.
And so it is today: our empire won't retreat from its
distant borders but these same borders are bankrupting us
for we never recovered from the Vietnam War, we literally
papered over the mess which remained and continues to poison
our nation. The military/industrial complex is not making us
rich, it is making us poorer. And the paper being laid over
all this is the same paper the Germans used in 1924 to paper
over their own bankruptcy: printed money.
When an empire does what we are doing today, society falls
apart. And if this happens, there is no easy way out.
Individuals can avoid the worst by avoiding debts but
outside of that simple thing, there is no other answer. Of
course, the true answer is a strong working class that
believes in unity and not underselling each other. Alas, the
USA has a long and tragic history of slavery. And the legacy
of this culture divides the nation and half loves slavery
and enables wretched working conditions and thinks the road
to wealth is via cheap labor.
Germany has an advantage here: their recent attempt at
slavery, the Nazi empire, was a total disaster and they
don't want a repeat. I only wish the USA felt the same way.
For no nation gets very rich for very long if the working
class is poor and can't work their way into the middle
class.
Question: Would you explain what is meant by "reserve
currency" and how it serves the greater political interests
of the United States? Do you think that preserving "dollar
hegemony" was an important part of the decision to go to war
with Iraq?
Elaine Meinel Supkis: It may sound trite but thinking about
great banking matters as if it is one's own bank account no
matter how small, works. Namely, it is dangerous for anyone
to live life where everything is juggled and there isn't a
penny to spare. Then something bad happens and boom. You go
bankrupt. This is why savings accounts matter and why
inflation is so deadly. No one in their right mind keeps a
savings account because it can't grow, it shrinks! The
Federal Reserve was set up to maintain a reserve funds that
supposedly wouldn't be touched by politicians. But alas,
this is a fiction. Just like your own bank account, if one
is married and sharing an account and one party keeps
raiding it and spending it on guns and cars or fur coats or
whatever, it runs out of funds and then something bad
happens like a hurricane hits, and the cupboard is bare.
In the case of empires, a way to gage solvency is, how big
is their own reserves compared to the size of these same
currency reserves held by potentially hostile rivals? In the
case of the USA, we send dollars out as fast as we can print
them. If too many people getting this flood of money, around
$800 billion a year now!!!!!! If they don't keep a big chunk
in bank vaults, the value of the dollar drops. So they keep
it in reserve, in case of a 'rainy day'. Like 9/11.
And if we think of these funds as boats, then China has
Noah's Ark, Japan has an aircraft carrier, Europe has a
holiday cruise liner, Russia has a very fancy yacht and the
USA has a rowboat made out of an old bathtub. That is
leaking.
China has $1.3 trillion in its reserves and is therefore,
King of the Mountain. Japan has $900 billion and is no
longer holding new currency so all the red ink in trade is
no longer staying away, it is floating back home to here, as
inflation. Europe has about $600 billion and Russia, $330
billion. The USA has only $66 billion and the numbers
released today by the Federal Reserve shows that number is
DROPPING. Yikes.
Question: President Bush has said that he intends to make
his tax cuts "permanent" even though they have produced
enormous deficits. At the same time the Federal Reserve has
kept interest rates below the real rate of inflation and
increased the money supply to approximately 10% per annum.
Are these policies designed to maintain a healthy economy
with a potential for strong growth or are they the means for
transferring wealth from working people to the "very rich"?
Elaine Meinel Supkis: How do they 'transfer' wealth? Through
unfair taxes. Under Reagan, American workers, worried about
the eventual baby boomer retirement event horizon, decided
to double taxes on Social Security. This pile of money was
instantly, less than a year later, leaped upon and devoured
by our corrupt government. They insantly gave unfair tax
cuts to the upper incomes and basically used SS excess funds
to pay for the government.
This worked OK until Bush took over. He and the GOP have run
up debts so high, they added half a trillion a year in red
ink and over the last six years, this is nearly $3 trillion
and our national debt stands at nearly $9 trillion. During
the last major money crisis, the 1972 collapse of the
Bretton Woods concord, we had a national debt of not even $1
trillion. We have not had 900% inflation so I would say,
this debt that the GOP rang up consisted of taking taxes out
of the hides of the working class and handing it on a golden
platter to the rich who, incidentally, buy bonds.
But no more! Today, the chief buyer of bonds is the Treasury
itself. Next is China!
Question: Will you explain how the inflationary policies of
the Federal Reserve are causing the stock market to soar and
what the potential dangers are for the global economic
system?
Elaine Meinel Supkis: Oh, that is so simple! In 2003,
interest rates were dropped to 1% despite inflation of +5%.
Instantly, the value of all assets shot upwards as bankers
moved money along as fast as possible since the Fed undercut
their own interest rates! So mortgages were below the rate
of inflation. But this didn't make enough money so banks and
other entities offered loans to bad risks who had to pay a
higher rate. As inflation rages, they need to give loans to
worse and worse customers who pay over 11% interest!
Alas, the fly in this ointment is exactly that: risky
customers can't pay back loans! They go bankrupt and
everyone acts like a good little domino and over they fall,
one after another. Right now,the crashing sound of dominoes
falling is like the hissing of waves on a distant shore but
it is rapidly approaching. We can certainly hear it coming.
Question: Last week, reports showed that US manufacturing
unexpectedly rose in March. However, the Financial Times
said that, "The rise in the ISM index is impossible to
square with either the regional surveys released over the
past few weeks or our medium-term yield-driven model. We
think it is quite likely that in their next iterations the
ISM will drop sharply." Do you think the government is
deliberately falsifying data on manufacturing to make the
economy look stronger than it really is? Could they be doing
this in areas as well, such as money supply, inflation,
employment, and GDP?
Elaine Meinel Supkis: Do alligators bite? Of course, they
lie all the time. Some things were sacred and they didn't
lie about them. The M3 data that shows how much money the
Fed prints as well as how much is in circulation, etc, just
last year, they announced, 'No one is really interested in
these numbers and they are too hard to compile.' Like a
drunken, gambling spouse declaring there is no need to
balance the check books or look into the bank accounts, so
it is here. Many people yelled about the M3 numbers being
suppressed but to no avail, of course.
Onwards! Since they are lying about basic bank accounting,
they have to lie about everything else or people will figure
out, something smells rotten in Denmark, DC.
They redrew the rules for figuring out inflation so it no
longer tracks inflation. This is so they can cheat retirees
and have fake interest rates and thus, steal from granny and
gramps and starve school children while lining their own
pockets.
Question: Do you believe that the extraordinary
"police-state" measures enacted by the Bush administration
(Patriot Act, Military Commissions Act, repeal of habeas
corpus, NSA "surveillance" of American citizens without
court order) are intended to address the threat of terrorism
or the social disorder that may arise in response to an
economic collapse?
E.M.S.: They planned this for a long, long time. Do note
that the 'war on drugs' was launched as we lost the Vietnam
War. Thanks to inflation and a collapsing currency as well
as a sudden hike in oil prices due to the US hitting the
Hubbert Oil Peak here in 1972, there was great unrest. I saw
some of this right up close. Once, when the lights went out
in NYC during a thunderstorm of all things, riots and
looting spread like wildfire. My community was nearly burned
to the ground and all the businesses destroyed.
This, the rulers fear a lot. But no number of police can
stop it if it happens. I have seen up close when a whole
city revolts. More than once, including in Europe in 1968.
The new, right wing French President will learn this the
hard way next year. There will be riots and insurrections
there.
Question: Can you explain - in simple "layman's" terms - the
effect of Japan's low interest "carry trade" on the U.S.
stock market? Is this practice inflating the value of
securities in foreign markets? What are the risks? How is it
affecting the euro?
E.M.S.: Europe lends money for more than 5% interest. So
does the USA now although the financiers are getting worried
about this and are egging on the Fed to lower rates back
down to 1%. This is pure insanity. Japan has near zero
inflation because they have decided to utterly destroy the
purchasing power of the people in Japan who are living worse
and worse off if they are below the top 20%. Many are now
homeless. It is pathetic. The world's #2 economic power
that holds the world's #2 FOREX reserves can't give pay
raises to anyone earning below $10 an hour because this will
'cause inflation' and so they get to live on the street and
starve. Great. Anyone can eliminate inflation by enslaving
the workers. Then they get cut out of the profits entirely
and can't buy things and thus, can't cause inflation!
This is the plan being readied for us! We get to live in
shanties while the rich live in palaces. And we won't buy
anything while they have a zillion servants earning
practically nothing. Sort of like England, circa 1914.
Bush and his gangsters hosted the Queen of England who loves
him because he is making her very rich via Carlyle. And the
royals of England didn't care if they starved their subjects
who lived like savages under the rule of the royals. We are
sliding backwards, not moving forwards here.
Question: Consumer spending is 70% of US- GDP, and yet,
workers wages have not kept pace with the real rate of
inflation. This has led to increased borrowing on the part
of the American consumer. Now that housing prices have
flattened out; consumers can no longer draw on their home
equity for their spending. This has resulted in a huge spike
in credit card spending. For example, "first-quarter profits
at MasterCard surged 70% to a record $214.9 million
following a 19% jump in transactions." (Peter Schiff) As the
weary American consumer is forced to curtail his spending,
GDP will shrink and foreign investment will dry up. Are we
likely to see "capital flight" from American markets or are
foreign investors still confident in America's resilience?
E.M.S.: In most places, housing prices are falling by 30%!
All the people who responded to ads about getting cheap
loans are now discovering they can't use their homes as ATM
machines and simply re-finance over and over again. The
house is supposed to be an asset: if you have to sell it to
pay bills or move because of a job situation, if the debt is
greater than the selling price, you go bankrupt. And this is
happening all over the place now. And it will impact on
buying. Last year, Americans took out half a trillion in
extra loans on the house! The surge in MasterCard (gads,
Snidely Whiplash!) charges is because banks are no longer
giving loans to people who are too deep in debt. The money
that flowed there is flowing into the stock market just like
it always does during the first half of an inflationary
binge.
The second half is when the stocks collapse like they did in
1974. Then we see a 5 year bear market. Housing markets
ALWAYS take 5+ years to recover from a bubble. But this last
bubble launched by 1% Fed interest rates will take 20 years
to recovery in most places.
Question: You have stated in your blog that the Federal
Reserve is "buying back its own debt". Would you explain how
this works and whether it is intended to confuse the public
about the real value of their currency?
(In your blog you say: "The US is the fulcrum for world
trade. As the yen goes down (the yuan is so low, even as it
gains, it is very minimal), the euro goes up. This is
crushing the dollar because the US is printing money like
mad to keep commerce flowing at home since it is bleeding
red ink in trade and in government spending. Most of the
bonds issued by our own government are bought by our own
government. The only entity to buy much of that on the open
market today is China. Japan is selling its hoard of US
bonds.)
E.M.S.: Yes, aside from forcing Social Security to buy
government bonds, the Treasury sells them to the Feds. This
is Peter selling to Paul who then gives it back to Peter
only it shrinks in value during this time. The Fed and
Treasury can play this game to infinity. The only country to
nearly reach that upper limit was Germany in 1924. They
added more and more zeros to the money they printed every
hour, day and night until they ran out of room on the bills.
Literally! Then they simply cancelled the money! Bang.
It was gone. Forever.
If no one stops us, we will do this just the same way.
Question: Wall Street reacts with wild enthusiasm every time
two mega-corporations merge. These mergers always seems to
generate boatloads of new credit from maximizing leverage
and "creative financing".. You say in your blog that this is
"also a sign of impending collapse. For every pfennig of
this is debt-loaded and is seeking a stable currency and
high interest rates." What do you think are the hidden
dangers of these mergers?
E.M.S.: That happened in Germany, too. Everyone merged as
money moved faster and faster and inflated more and more.
Bubbles inflate because currency inflates. They are one and
the same. And mergers are caused by money bubbles.
Question: What do you think the real rate of inflation is?
E.M.S.: Inflation is around 10% now. How do we know? The
Federal Reserve just demanded banks hold 10% of their
currency rather than rush it out the door. This reserve
ratio is always a good indicator of inflation. In China, it
was raised to 11% last week. Japan sets theirs at 0%, of
course. They are insane.
Question: Is there a chance that the dollar could collapse?
E.M.S.: I hate to say this but I have a whole book of dead
currencies my family has collected this last 180 years. From
1848 to today, in the USA, Germany, China, Japan, etc. Many
'pay the holder in gold' bonds. All worth something as
historic documents but all ended up being worthless. Hope
springs ever eternal and bad money is like winter: it always
is around the corner.
Question: In 1966, Alan Greenspan wrote an article called
"Gold and Economic Freedom" in which he described the events
leading up to the stock market crash of 1929 and the Great
Depression. In his essay he says:
"When business in the United States underwent a mild
contraction in 1927, the Federal Reserve created more paper
reserves in the hope of forestalling any possible bank
reserve shortage. More disastrous, however, was the Federal
Reserve's attempt to assist Great Britain who had been
losing gold to us because the Bank of England refused to
allow interest rates to rise when market forces dictated (it
was politically unpalatable). The reasoning of the
authorities involved was as follows: if the Federal Reserve
pumped excessive paper reserves into American banks,
interest rates in the United States would fall to a level
comparable with those in Great Britain; this would act to
stop Britain's gold loss and avoid the political
embarrassment of having to raise interest rates.
The "Fed" succeeded; it stopped the gold loss, but it nearly
destroyed the economies of the world, in the process. The
excess credit which the Fed pumped into the economy spilled
over into the stock market-triggering a fantastic
speculative boom. Belatedly, Federal Reserve officials
attempted to sop up the excess reserves and finally
succeeded in braking the boom. But it was too late: by 1929
the speculative imbalances had become so overwhelming that
the attempt precipitated a sharp retrenching and a
consequent demoralizing of business confidence. As a result,
the American economy collapsed. Great Britain fared even
worse, and rather than absorb the full consequences of her
previous folly, she abandoned the gold standard completely
in 1931, tearing asunder what remained of the fabric of
confidence and inducing a world-wide series of bank
failures. The world economies plunged into the Great
Depression of the 1930's."
Hasn't the Federal Reserve created similar "speculative
imbalances" today through its increases in the money supply,
its low interest rates, and the massive liquidity it pumped
into the housing bubble? And, haven't the deregulatory
policies of the Fed exacerbated our current account deficit
- -- forcing US exports to compete with countries that
artificially lower the prices of their manufactured goods by
manipulating their currencies?
If the economic policies of the Federal Reserve and the Bush
administration are deliberate, then how can we say that the
destruction of the dollar and the subsequent crushing of the
American middle class are accidental?
Greenspan's essay proves that he fully understood the
implications of "excess credit" and "excessive paper
reserves" and yet he persisted with the same destructive
policies for 6 years. So - Is the housing bubble merely the
"unintended consequence" of the Fed's policies or is it the
clearly calculated goal?
E.M.S.: Hahaha. The preacher telling us how to avoid the
evils of drug abuse and hanging out with prostitutes comes
to mind, doesn't it? The very moralists warning us about our
sins are usually the worst sinners.
I'll never forget Congress praising Greenspan and telling
him they should stuff him and use him as a scarecrow for
this would mean no one would ever question him about
finances! Well, I say, hang him high. He is a criminal. He
destroyed our economic might. Treason, it is! And all those
people who betrayed us in order to make a mighty empire on
our backs and bank accounts should be held accountable!
There is no excuse for this mess! It was fixable. But alas,
too many people are making too much money off of it the way
it is now and they won't stop no matter what. Just like
their latest imperial wars: endless.
I wish I could say something happy here but history is a
bitch who laughs at us all. We should listen to her.
Elaine Meinel Supkis (Bio) - Born at Yerkes Observatory,
grew up on many observatory mountains and secret government
testing grounds, burr under the saddle of the Real Rulers of
America since childhood, family black sheep with three bags
of wool, pulled down more than one politician in life,
winner of the "Struck by Lightning Indoors" award for most
hits in lifetime, three direct and seven glancing blows. Now
living on a mountain with horses and cats and dogs and
chickens and a husband. Yikes.
http://elainemeinelsupkis.typepad.com/daily_news/
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