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Monday, December 29, 2014

Weak 2015 Economic X-ray - Welcome to 2015. Is this the year the bubble finally pops?

Happy New Year! Today's Rant departs from the norm a bit and contains more personal touches since it is the end of 2014. I'd like to thank everyone for their support of the Rant. -- Mike
Weak 2015 Economic X-ray
I've been dubbed "Mr. Doom and Gloom" by people who have listened to me talk economics over the years. Part of the reason is I'm usually far ahead of the curve. What is disturbing is some of those who have publicly laughed at me in the past are starting to come to my side of the economic outlook.
A prime example is Peter Schiff, CEO and chief global strategist for Euro Pacific Capital Inc. Schiff, a vociferous applauder of former Fed Chief Ben (BS) Bernanke's policies, suddenly switched sides in the past couple of weeks and began questioning both the alleged strength of the economy and the Fed's low interest policy.
Schiff said, "The economy is quite weak. If the economy is so strong why hasn't the Fed acted by raising interest rates? What are they afraid of?"
Those two questions have been a repeated topic of the Rant over the past five years. Over and over, in many different ways, the blatant manipulations of the numbers being produced by the government and the Fed on the economy have been picked apart and shown for the sham they really are in this arena.
While I welcome Schiff's bandwagon jump I have to ask him, "What took you so long to stop applauding and start computing?" Nothing has changed except Schiff's perception.
Schiff, in his December 27 interview, talked openly about the state of the economy after the government announced a unsubstantiated 5% increase. "However the stats are doctored up, they can't stop the true fragility of the economy from showing through nor can the dependence upon the continued printing press run of the Federal Reserve be hidden any longer."
Here's the problem with the Fed's spread sheet. At the end of 2007, the Fed had $1.5 trillion in circulation. It has added $3 trillion since then. It has also undertaken a massive bond-buying program to hide the depth and scope of the Federal debt. In Operation Twist, this quantitative easing has limited the scope of the debt service (interest) the federal government actually would owe if the Fed had not skewed the interest rate schedules (thus the Twist).
Instead of just under $230 billion in interest due every year, the government would owe a minimum of $687 billion each year just for interest on the outstanding debt if the Fed raised interest rates by a single point. This is what has Schiff worried now. Followers of the Rant were aware of this problem back in 2011 when it was first undertaken.
Schiff is now 'begging' for the recession to start. "Next year might be a recession without more QE programs. It is a recession that needs to happen. It'll be a blood bath for the markets but it has to happen."
All of a sudden this guy is no longer cheering but has switched sides completely.
What is laughable was the response old BS had within the hour of Schiff's interview. BS still adheres to the fiction the 2008 crisis would have been "much worse" without his actions. Yeah, and Little Red Riding Hood was never in danger from the wolf.
BS had a very salient point though. "There's plenty of evidence when the financial system collapses, the rest of the economy collapses as well," said BS.
In a way true but that statement is mostly false. When the financial system collapses the fiat the government has imposed collapses and the economy must rebuild without that support. What would have failed would have been the banks and the government. The economy, based on human needs and without the encumbrance of the fiat system, would have come back. It was what the colonists went through after kicking British rear ends back to England. An economy not built on British pounds (fiat) had to be engineered.
BS's actions did indeed cut short the crisis, but that action only delayed the inevitable. Sooner or later the debt-ridden fiat needs to be exorcised. By delaying the moment of truth, BS actually has made the problem worse.
We have Barack Obama's disastrous decisions coming into play this year. In 2015 the first penalties of Obamacare are going to be felt. In 2015 the second wave of reforms from Dodd-Frank will hit the economy. Neither of these actions would have seen the light of day if BS had kept the Fed from supporting a failing fiat.
Schiff now sees that.
He pointed to specific items like a weak purchasing manager index, an unstable housing market, poor workforce participation rate, overall slumping numbers in durable goods and a Christmas shopping season that fell flat. He talked about lack of movement in wages, declining household net worth and vastly increased consumer debt. He indicated the markets' rise is a bubble, covering a host of sins.
But in the final analysis he hit the nail. "It's all a bubble masquerading as a recovery."
Welcome to 2015. Is this the year the bubble finally pops?
"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of man."--Thomas Jefferson

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