The Real Deal

A recent letter to SurvivalBlog.com shows that at least one person out there has his or her head screwed on mostly right. The conclusions, unfortunately as is typical on that site, run toward the 'get your guns' mentality. However, the honest and intelligent observations are worth quoting at length.

The economy has taken a dramatic turn for the worse for many Americans. Hundreds of pages could be written to describe how it happened and who did it. While many individuals and households have had the financial resources and good fortune which will allow them to weather economic uncertainty, many will simply not be able to maintain their standard of living. Many two income households are now one income households and that income may have decreased due to companies cutting back on work hours. This situation has been occurring for many Americans for many many months, forcing people to assess what is important and downgrade their lifestyle. The time to make hard decisions has arrived, and will dramatically alter the lives of many for years.

People who relied on spouses to pay the bills are now paying the bills. Those who have relied on savings and unemployment benefits to maintain their standard of living are now faced with the reality that those resources are exhausted. Bills are not being paid. Healthcare premiums are not being paid. Automobile and household maintenance is being neglected which will create costlier repairs down the road. Simply put:

• You might have to stop making your car payment and save those payments up to buy a used car. The car you currently have financed will be repossessed.
• You might have to stop paying your mortgage and save those payments up to move into an apartment.
• You might have to give up your healthcare, your magazine subscription, your club membership, your vacation plans, your charitable donations, your cell phone, your internet access or home phone service, your lawn care service, your financial support that you provide to friends and family who are having financial problems themselves, and many more expenditures not listed here.
• You might have to contact an attorney to discuss bankruptcy.
• You might have to sell off your possessions and assets.
• You might have to move in with other families, friends, relatives, or shelters provided by the government or charitable organizations.
• You may come to realize that what you thought was valuable and important to you has no value or significance at all.

Basic human needs will become the biggest priority in your life after you shed the things that have merely brought comfort and convenience to you. You may be forced to downscale your lifestyle so dramatically that it will cause you to question your own intelligence and hindsight for not planning for such a life changing event.

We have a few comments to make on these observations. First, in light of how little access to emergency funds American (among other) households have as mentioned in yesterday's post, deferring maintenance on houses and cars is a species of financial brinkmanship that will not only require "costlier repairs down the road," but quite possibly become the 'straw that breaks the camel's back' of the impaired household finances.

As for having a car, our addition would be that you may find yourself needing to set up a living situation that doesn't require you to own a car - either sharing a car with a relative or friend, or walking and/or using public transit.

As these strategies for downward mobility become increasingly utilised, they will cause GDP to decline. Not only will demand for goods and services shrink, but the informal market (yard sales, thrift stores, eBay, etc.) will become flooded with cheap, liquidated stuff. We expect this strategy to be employed eventually by a majority of the population as the Depression runs its course and cascading failure undermines the economic system.

We find it a sad commentary on the state of 'the Press' that such an honest report can only be found in a 'fringe blog' and beyond that, as a letter. The Ministry of Truth does seem to have a lockdown on the situation. Telling information can be found, however, if you look for it. According to a recent Gallup poll, November year-over-year consumer spending is down 20%. This is a knock-your-socks-off, the-economy-is-in-a-Depression-folks number if there ever was one. The report qualifies its information as "self-reported" but even so, it seems a heck of lot more reliable to us than the bogus recovery spiel coming out of the Ministry of Truth.

Pathetically, the Gallup commentary states: "On a national level, the spending new normal suggests slower economic growth than otherwise might be expected in the years ahead." Let's take a look at 'economic growth' in the USA at present.

According to the Bureau of Economic Analysis, the growth rate is 2.8% in the third quarter of 2009. Consumer spending allegedly increased 2.9%. In order for the approximately -25% gleaned from Gallup data and the official +2.9% to reconcile, households would have to wildly increase their spending for housing (hard to do in the face of lower rents, skipped mortgage payments, and household formation gone into reverse), professional services (bankruptcy lawyers, anyone?), and so forth. Frankly, we don't think such a reconciliation is possible, and we smell a R-A-T.

The Unexpected Weakness of the Recovery

Our title today comes from a phrase ripped out of context from a recent Wall Street Journal article. The article itself is not important, but the assumption of the phrase was just too rich for us to pass by uncommented upon.

As discussed copiously elsewhere, a propaganda campaign of gargantuan proportions has been unleashed upon the world's populace. The term perception management sums it up nicely. The basic idea is that if people are confident, they will consume. If people will consume, there will be 'work' to do. It is an effort to restore society and the economy to the defined norm of 'the way things were until about two years ago.' Whatever an individual sees or experiences to the contrary (especially unemployment and homelessness), is to be disregarded in favour of the consumerist paradigm.

Almost everything you read or hear will be attempting to reinforce the notion that the recent (and thankfully over) financial and economic crisis was just a bump in the road to ever greater prosperity.

Whether there is a vast conspiracy orchestrated by the Ministry of Truth, or whether it is merely the unconscious coordination of wishful thinking is immaterial. This informational miasma is deadly and if one wants to make it through the Depression without being too battered, one had best learn to recognise the disinformation, not get sucked in, and think straight instead.

The unhappy reality is the Depression is still on and it is going to get worse - a lot worse. Incomes are still falling. It doesn't matter that stocks are recovering or house prices in Australia are hitting new highs. In terms of purchasing power, aggregate incomes are going to be falling for a long time and everyone had better get used to that fact. Tragically, the more the truth is evaded (whether deliberately or otherwise), the worse off everyone will be.

Inflation Coming Soon?

We hold up USA Today as the ultimate sign of what is not, in fact happening. If the rag says to do one thing, we know it's a bad idea; if it says that something is happening, we know it isn't. Which is, as an aside, how we expect to know the bottom of the 2007 Depression is in: USA Today will be screaming that the end is near and everyone is going to die... metaphorically speaking.

That is all a bit arch, of course, but you get the idea. As a for-profit company of popular persuasion, USA Today and other information sources have to amend what they publish in order to maintain mass appeal. The public at large does not want to read or hear especially gloomy news, which is probably why our Depression Gazette will never hit the big time. USA Today, as long as enough people feel it provides the desired style and quality of information, will continue to limp along.

Limping along, however, does not make what the company prints actually accurate. And in that vein, we present this article from USA Today, which spews some very impressive fallacies about the nature of inflation. We recommend reading the article with popcorn, as it is quite a laugh, but we'll take on some of the most egregious errors.

"If inflation does hit, it won't be this year, barring a major jump in oil prices or a drastic change in government philosophy." We wonder how oil prices cause inflation. Additionally, according to ShadowStats.com, the Federal Reserve is printing physical money (i.e. growth in the M1 Money Supply) with abandon. That trend is about as iron-clad a guarantee of inflation, at some point in the future, as one can get. Indeed, the USA Today writer himself writes "The ultimate cause of inflation is an unwarranted increase in the money supply."

"...Unemployment... [is] 9.4% now and widely expected to break above 10% this year."Again according to ShadowStats.com, unemployment is cooking at well over 20% and rising sharply. We personally expect to see 25% unemployment be a reality sometime very soon, if that level has not been hit already. That's not to say that particular non-fact is necessarily the writer's fault, though: it's an artifact of the purposefully inaccurate and under-reporting nature of Government statistics.

The best part, though, was this:

If you're worried about inflation rearing its ugly head soon, relax... You don't get inflation in an economy that's as slack as this one... Inflation just isn't going to happen in this economy.

"A lot of the worries about immediate inflation are examples of financial illiteracy," says David Wyss, chief economist for Standard & Poor's. "You won't get inflation until the economy gets back, and that's at least five years out."... To get to inflation... you need a humming economy, and the [U.S.] economy is barely breathing.

Oh, where do we start, dear Reader? How do we assail such a monument to stupidity? To say that inflation cannot happen except in a 'humming economy' is like saying... oh gods, we don't know! Words fail us utterly!

So instead, we would like to take a trip to reality for a moment and provide an example: Zimbabwe. Zimbabwe's economy has not been truly 'humming' since it was a colony of the British Crown (pre-1965). In fact, it has been in negative 'humming' since 2000 (source), and official unemployment in the nation is now a horrifying 94%. Yet this nation is experiencing an inflation rate so high it is effectively meaningless: 231 million percent annualised. It is lunacy - or perhaps misinformation - to say that inflation requires a 'humming economy' to take place. Zimbabwe is chilling proof of the total untruth of such an assertion.

These errors we've expounded upon, plus a few more, are shockingly out of character with the rest of the article, which is fairly sober and accurate. The writer seems to be going out of his way to drive home his fallacious definition of inflation, and we can only wonder why. Whatever the case, though, we take this as a sign for the contrarians: inflation this way comes. And soon.

Cranking Up the Disinformation Machine

It is perhaps inevitable that, when the order which society has become accustomed to enjoying is under attack, the change is derided as something nonsensical. Such a derision is reactive; the argument against the change is flimsy and fallacious, but it can be attractive for one who does not wish the greater order in one's life to change a jot.

As can be expected, those news organs which sell their wares to the general public can be fully expected to say what the public wants to hear. We're certain the public enjoys hearing what they want to hear, but that does not change the situation: the 'news' which is consumed is disinformation. Not only does it not say what is going on in the world, but it typically conveys the precise opposite.

This piece from Forbes is perhaps a perfect gem of disinformation. It is thankfully filed as an opinion piece, but that does not excuse the self-justifying information and wishful thinking that Joel Kotkin indulges. We will shred his article specifically on the Curmudgeon Report, but here we would like to look at this phenomenon of derision in a general sense.

We have no doubt that disinformation will become increasingly prevalent in the coming years, especially as the 2007 Depression deepens. The sources of the disinformation will probably cease being 'commentary,' and start becoming formal news. Government information agencies are already fairly fanciful, but out-and-out fallacy is not out of the question by any means.

Simply put, we have a suspicion that the normal sources for news and information are likely going to become unreliable. The will for self-deception of the majority of people is a powerful thing, and any for-profit news agencies (or public services, for that matter) are unlikely to publish that which does not 'sell.'

Such prevalence of disinformation is going to make investing, choosing jobs, relocating to new cities, and countless other activities extremely difficult. The best one will be able to hope for is to learn how to gather raw data on a subject, and then synthesise it to make useful information upon which decisions can be based. Those who wish to thrive must become independent from many things, and this includes independence from the wishful-thinking disinformation trap.

The Severity of the Situation

Recently an aid to the Saudi Arabian oil ministry stated oil demand may fall 23% to 45%. This is a startlingly candid figure coming from a rather conservative and secretive organisation. If oil demand is falling that much, economic activity as a whole is pretty much falling on par, and the 2007 Depression will become more like Great Depression II, if not the Greatest Depression Ever.

On the other hand, Saudi Arabia is known for its disinformation campaigns. All the while oil was rising from $30 a barrel to $140, Saudi Arabia said "we have plenty of oil at lower prices, it's just that no one wants to buy it." The present situation could be that the Saudis are now recognising the long-predicted collapse of their oil production is now imminent. What better way to cover up their declining production potential than to say "no one wants it."

This in itself would be bad news, of course. It would be more evidence of the certainty of peak oil, and the tremendous difficulty that would present to the world's economies.

A halving of income for citizens of the 'Developed Countries' may well be baked into the cake by now - whether the drop in oil production is cause or effect. It is not a pretty thought, but it would be best to plan for some pretty tough times ahead. Most predictions from mainstream media should be discounted, as they will be attempting not to sound alarmist. Pollyannish advice such as "it's never been a better time to buy real estate," or "the current recession is a bump in the road to greater prosperity" should be seen as a quick route to financial suicide.

The growth paradigm of the past few centuries is over. While up until recently, recession and depression were interruptions of chronic growth; for the foreseeable future, spurts of growth and recovery will be interruptions of chronic collapse. This is quite a change, and at first few will be able to wrap their heads around it. It will turn a lot of rules of thumb upside down.

We are not saying all is doom and gloom. As long as people have the liberty to innovate, the world will adjust to a new (and possibly better) way of doing things. It is possible to live quite well on a 'low throughput' diet. Thrift, conservation, invention and efficiency can deliver a good life on a low budget. On that you can bank.