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March 4, 2010

Double-Dip Recession Directly Ahead

By Richard Clark

An economy that moves its high productivity, high value-added jobs offshore is going nowhere but down. Except for the super-rich, there has been no growth in people's incomes for a decade. To substitute for the missing income growth, consumers took on more debt. That growth in consumer debt kept the economy going. However, most consumers have now reached their maximum debt load, and millions went beyond their limit.


(The first part of this report is based on email received from economics analyst Monty Agarwal via

If history teaches us anything, it's that when even ONE major government defaults on its debts, economic chaos follows. The crisis unfolds in four quick steps:

FIRST, since a sovereign debt default would inevitably cause ALL bonds to crash, investors stampede for the bond market exits, dumping as much as they can as fast as they can.

SECOND, as the bond market reels, interest rates skyrocket and credit tightens. The rates on 30-year fixed-rate mortgages, auto loans and other long-term debts soar. Rates tied to short-term money markets -- on credit cards and variable mortgages -- follow.

THIRD, consumers -- whose spending represents fully 70% of the economy -- snap their pocketbooks shut.

FOURTH, corporate earnings and stock prices crater. As the economy hits the skids, unemployment soars.

Clearly, these events would be the coup de grĂ¢ce to an economic recovery as fragile as this one is. And they would almost surely transform a Great Recession into a Great DOUBLE-DIP Recession, if not worse, plunging us into the second bear market in three years, lighting the fuse on a second explosion in unemployment, and triggering a second surge in personal and corporate bankruptcies.

Indeed, this disturbing scenario is already beginning to unfold before our very eyes -- not just in ONE major Western country, but in TEN of them!

We've known for some time that Italy and Ireland are at risk for default -- and just this week, we saw how investors' fears have caused them to begin dumping British pounds and gilts (bonds) like there's no tomorrow.

Plus, the soaring cost of Credit Default Swaps -- "insurance policies" that protect investors against default -- on the debt of Greece, Portugal, Romania, Lithuania, Latvia, Iceland and the Ukraine is a clear sign that investors believe they are also at elevated risk of default.

Put simply, it would only take ONE sovereign debt default to crush this anemic recovery, but no fewer than TEN major Western countries are now at risk!

What's more, no fewer than THREE powerful forecasting tools are confirming that a great bond market conflagration, stock market decline and double-dip recession are now on the horizon:


The cycles identified by the Foundation for the Study of Cycles have accurately anticipated nearly every major shift in market direction, in every major asset class, in advance ... for 39 years.

And now, as the Foundation's Research Director, Richard Mogey and I demonstrated in Nine Shocking New Forecasts for 2010-2012, the current cyclical analysis is confirming that a major new decline in the economy is coming later this year.

  • U.S. stocks will decline starting this year and continue falling in a zigzag pattern through 2012.
  • The U.S. dollar index may continue to firm somewhat as the European debt crisis drives investors into dollar-denominated investments. But then the greenback will collapse until late 2011 as the U.S. sovereign debt crisis runs its course.
  • Serving in its capacity as a global crisis hedge, gold will skyrocket FAR higher than $2,000 per ounce by the end of 2011.
  • Crippled by soaring interest rates due to the U.S. debt crisis, our economy will suffer a devastating double-dip recession in 2011.


If the rise of the Tea Party movement or the results of recent elections in Massachusetts mean anything at all, it's that many Americans are fighting mad. They're fed up with Washington's bailouts of failed bankers and CEOs, skyrocketing federal deficits and debts, out-of-control borrowing by the Treasury, mindless money-printing by the Federal Reserve, and now, the specter of higher taxes ahead.

So the handwriting is on the wall: With midterm Congressional elections only seven, short months away, any politician who votes for more of the same is practically begging to be thrown out of office.

That means the days of Washington bailouts and stimulus are numbered. And that, in turn, means that the momentary economic stability which that spending bought will soon come to an end.


Right now, the volatility indicators professional traders rely on -- in the bond market ... in currencies and more -- are signaling that the economic stability and investment trends most investors have depended on for the last year or so are coming to an end.

The smart money is now beginning to bet on major directional shifts in all major asset classes -- and on the recovery unraveling before our very eyes.


Writing at OpEdNews, former assistant secretary of the treasury and Wall Street Journal editor Paul Craig Roberts concurs: our economy is going down:

An economy that moves its high productivity, high value-added jobs offshore is going nowhere but down. Except for the super-rich, there has been no growth in people's incomes for a decade. To substitute for the missing income growth, consumers took on more debt. The growth in consumer debt kept the economy going. However, most consumers have now reached their maximum debt load, and millions went beyond their limit, resulting in foreclosures and lost homes.

There are no jobs to which people can be called back to work. The jobs have been given to the Chinese and Indians.

The economy is set for a "double-dip," that is, renewed decline. This, of course, means larger federal, state, and local budget deficits. The U.S. federal deficit is now so large that it can no longer be financed by the trade surpluses of China, Japan, and OPEC.

Currently the deficit is being financed by deterioration in the Federal Reserve's balance sheet. The Fed is creating new reserves for the banks (thus the surge in the monetary base) in exchange for the bank's toxic financial instruments. The banks are using the reserves to purchase Treasury debt instead of making new loans. This makes money for the banks, but does not grow the economy or create jobs for the millions of unemployed.

According to reports, recent auctions of Treasury debt have not gone well. China, America's biggest creditor, has reduced its participation and is even selling some of its existing holdings. Whenever all of a new Treasury debt offering is not taken, the Federal Reserve buys the remainder. This results in debt monetization. The Fed pays for the bonds by creating new checking accounts for the Treasury, in other words, by printing money.

On February 24, Fed chairman Ben Bernanke told Congress that the U.S. faced a serious debt crisis and that the Fed was not going to print money in order to pay the government's bills. In fact, Bernanke would have no choice but to print money.

Bernanke's warning to Congress is his way of adding Federal Reserve pressure to that of Wall Street and former Treasury Secretary Paulson for Congress to balance the budget by gutting Social Security and Medicare. In case you haven't noticed, no one in Washington or New York talks about cutting trillion dollar wars or trillion dollar handouts to rich bankers. They only talk about taking things away from little people. It is not the Bush/Cheney, Obama, neocon wars that are in the cross hairs; it is Social Security and Medicare.

Other Obama economic officials, such as White House economist Larry Summers, a former Treasury secretary, have called for a middle class tax increase. The problem with this "solution" is that a good part of the middle class is now jobless and homeless.

Money will have to be found somewhere if the Fed is to avoid printing it. During the Clinton administration a Treasury official proposed a 15-percent capital levy on all private pensions to make up for their tax deferral status. This idea didn't fly, but today a desperate government, which has wasted $3 trillion invading countries that pose no danger to the U.S. and wasted more trillions of dollars combating a crisis brought on by the government's failure to regulate the financial sector, is likely to steal people's pensions as well as to gut Social Security and Medicare.

The reason is that the dollar's role as reserve currency is at stake. If the Federal Reserve has to monetize the federal deficit, the world will turn its back on a rapidly depreciating dollar. The minute the dollar loses the reserve currency role, the U.S. can no longer pay its bills in its own currency, and its days as a superpower come to a sudden end. Wars can't then be financed, and Washington's pursuit of world hegemony will hit a brick wall.

Submitters Bio:

Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've always been more interested in political economics and what's going on behind the scenes in politics, than in mechanical engineering, and because of that I've rarely worked more than 8 months a year, devoting much of the rest of the year to reading and writing about that which interests me most.