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"The Worst Case Scenario (Someone Has to Say It)


"The Worst Case Scenario (Someone Has to Say It)

by: Big Jake May 03, 2009
Source Seeking Alpha

"Since the economy began sliding downhill in late 2007, mainstream economic and market experts have consistently erred on the sunny side.

As late as June 2008, mainstream consensus held that the U.S. was heading for a "soft landing" and would avoid recession. Several months later, the slump was acknowledged to have started in January 2008, but we were supposed to see renewed growth by mid-2009, with unemployment peaking in the eight-to-nine percent range. A quick "shovel-ready" stimulus bag was supposed to set us back on the road to prosperity.

In January, recovery projections were pushed forward to late 2009. Today, the consensus is for a mid-2010 recovery, with unemployment peaking at just over 10 percent. Clearly, the mainstream has struggled to catch up to reality for well over one year. What are the chances that they finally have it right this time?

Moreover, the mainstream continues to see what is going on as a plain-vanilla recession that will be quelled with some on-the-fly monetary and fiscal tinkering. Washington, we are told, will pull us out of this slump-as soon as the masses can be enticed back to the shopping malls. Then things will return to how they were before. But what if the experts and politicians are wrong not only on their ever-changing recovery timeline, but also on the nature-nay, the very existence-of a recovery?

America's reigning political-economic ideology has demonstrably failed. Given that its government is obviously fumbling along without a clue, its foreign and domestic credit is tapped out, and its 300 million people are discovering that their hopes for continuous material improvement will never be met, could the U.S. be headed the way of the USSR?

Instead of a recovery as the mainstream envisions it, what if America permanently bankrupts, impoverishes, and marginalizes itself? What if its cherished institutions fail across the board? For example, what happens when the police realize that their under-funded pension plans cannot support a decent retirement? Will they stay honest, or will they opt to survive by any means necessary? These are questions that the mainstream does not even begin to contemplate.

In the interests of providing you with an alternate vision-something outside the mainstream-below are ten predictions for America through the year 2012. This is not boilerplate doom-saying. Rather, I am laying out in highly specific terms what will happen over the next three-odd years. Others have thrown around the term "Depression", but I am going to tell you precisely what it means for you, your investments, and your community.

When these predictions come true, I expect to be rewarded with a seven-figure consulting gig, a book contract, or a high-level position in whatever administration succeeds the doomed Obama team-that is, if anyone succeeds it at all.

Prediction one. The twenty-five-year equities bubble pops in 2009. U.S. and foreign equities markets will stop treading water and realign with economic reality. Stock prices will cease to reflect the "greater fool" mentality and will return to being a function of dividend yields, which have long been miserable. The S&P 500 will sink below 500. In a bid to stem the panic, the government will enforce periodic "stock market holidays", and will vastly expand the scope of its short-selling prohibitions-eventually banning short-selling altogether.

Prediction two. With public pension systems and tens of millions of 401k holders virtually wiped out-and with the Baby Boomers retiring en masse-there will be tremendous pressure on the government to get into the stock market in order to bid up prices.

Therefore, sometime in 2010, the Federal Reserve will create and loan out hundreds of billions of fresh dollars to the usual well-connected suspects, instructing them to buy up stocks on the public's behalf. This scheme will have a fancy but meaningless name-something like the "Taxpayer Assurance Equities Facility". It will have no effect other than to serve as buyer of last resort for capitulating smart-money types who want to get out of stocks entirely.

Prediction three. Millions of new retirees-including white-collar people with high expectations for a Golden Retirement-will be left virtually penniless. Thousands will starve or freeze to death in their own homes. Hundreds of thousands will find themselves evicted and homeless, or will have to move in with their less-than-enthusiastic children. Already strained by the rising tide of the working-age unemployed, state and local welfare services will be overwhelmed, and by 2012 will have largely collapsed and ceased to function in many parts of the country.

Prediction four. "Quantitative easing" will fail to restart previous patterns of lending and consumption. As the government sends out additional "rebate" checks and takes ever-more drastic measures to force banks to lend, hyperinflation could take hold. However, comprehensive debt relief via a devaluation of the dollar is even more likely. This would entail the government issuing one "new" dollar for some greater number of "old" dollars-thus reducing both debts and savings simultaneously. This would make for a clean slate a la Fight Club.

As there are many more debtors than savers in the U.S., the vast majority would support devaluation. The Chinese and other foreign holders of our bonds would be screaming mad, but unable to do anything. Every country that has not found a way out of dollar-denominated reserve assets by 2012 will see its reserves eliminated.

Prediction five. The government will stop pretending that it can finance continuous multi-trillion-dollar deficits on the private market. By late 2010, the sole buyers of new U.S. Treasury and agency bonds will be the Federal Reserve and a few derelict financial institutions under government control. This may or may not lead to hyperinflation. (See prediction four).

Prediction six. As the need for financial industry paper-pushers declines and people have less money to spend on lawyers and Starbucks (SBUX), unemployment will rise until the private sector has eliminated all of its excess capacity and superfluous or socially needless jobs. The government's narrow unemployment figure (U3) will rise into the high teens by late 2010. The government's broader unemployment figure (U6) will cease to be reported when it reaches 25 percent-it will simply be too embarrassing. Ultimately, one in three work-eligible Americans will be unemployed, underemployed, or never-employed (e.g. college grads permanently unable to find suitable work).

Prediction seven. With their pension dreams squashed, and their salaries frozen or cut, police and other local government workers will turn to wholesale corruption in order to survive. America's ideal of honest, courteous, and impartial cops, teachers, and small-time local functionaries will have come to an end.

Prediction eight. Commercial overcapacity will strike with a vengeance. By 2012, thousands of enclosed malls, strip malls, unfinished residential developments, motels, truck stops, distribution centers, middle-of-nowhere resorts and casinos, and small-city airports across America will turn into dilapidated, unwanted, and dangerous ghost towns. With no economic incentive for their maintenance or repair, they will crumble into overgrown, plywood-and-sheet-rock ruins.

Prediction nine. By the end of 2010, tens of millions of households will have fallen behind on their mortgages or stopped paying altogether. Many banks will be unable to process the massive volume of foreclosure paperwork, much less actually seize and resell the homes.

Devaluation (as mentioned in prediction four) could ease the situation for those mortgage holders still afloat, but it would also eliminate any incentive for most banks to stay in the mortgage business. In any case, the housing market in many parts of the country will lock up completely-nothing bought or sold.

With virtually no loans being made, even the government will finally acknowledge that most banks are fundamentally insolvent. A general bank run will only be averted through a roughly one trillion-dollar recapitalization of the FDIC, courtesy of new money from the Federal Reserve.

Prediction ten. As an economy is never independent of the society within which it functions, the next few paragraphs will focus on social and political factors. These factors will have as much of an impact on market and consumer confidence as any developments in the financial sector.

Whether rightly or not, President Obama, having come to power at the dawn of this crisis, will be blamed for it by over 50 percent of the population. He will be a one-term president. In response to his perceived socialization of America, there will be a swarm of secessionist and extremist activity, much of it violent. Militias and armed sects will be more prominent than in the early 1990s. Stand-off dramas, violent score-settlings, and going-out-with-a-bang attacks by laid-off workers and bankrupted investors-already a national plague-will become an everyday occurrence.

For both economic and social reasons, millions of immigrants and guest workers will return to their home countries, taking their assets and skills with them. The flow of skilled immigrants will slow to a trickle. Birth rates will plummet as families struggle with uncertainty and reduced (or no) income.

Property crime will explode as citizens bitter over their own shattered dreams attempt to comfort themselves by taking what is not theirs. Mutinies and desertions will proliferate in an increasingly demoralized, over-stretched military, especially when states can no longer provide the educational and other benefits promised to their National Guard troops.

There will be widespread tax collection issues, and a huge backlash against Federal and state bureaucrats who demand three-percent annual pay raises while private sector wages remain frozen or worse. In short, the "Tea Parties" of tomorrow will likely not be so restrained.

Finally, between now and 2012, we are likely to see another earth-shaking national embarrassment on the scale of the 9/11 attacks or Hurricane Katrina and its aftermath. This will demonstrate conclusively to all Americans that their government, even under a savior-figure like Obama, cannot, in fact, save them.

By 2012, there will be a general feeling that the nation is in immediate danger of blowing up or coming apart at the seams. This fear will be justified, given that the U.S. has always been held together by the promise of a continuously rising material standard of living-the famous "pursuit of happiness"-rather than any ethnic or religious ties. If that goes, so could everything else. We were lucky in the 1930s-we may not be so lucky again."

Disclosure: no positions relevant to this column. "


Entry #1,138


JAP69Comment by JAP69 - May 7, 2009, 1:15 pm
Back to the stone age.
Survival of the fittest.
emilygComment by emilyg - May 7, 2009, 1:53 pm
Thanks konane. Jap you're right.
konaneComment by konane - May 7, 2009, 2:22 pm
Thanks JAP, thanks Em!!!! We keep looking for a knight in shining armor, a hero to save us. We've put too much faith and power in the hands of others and look where it's gotten us. We ourselves collectively are he hero we're looking for, only we can pull ourselves out of the hole we've allowed others to dig and toss us in.
KaptainessComment by Kaptainess - May 7, 2009, 4:25 pm
I got a failing grade in college about 2 years ago because I didn't agree with my professor about the trade agreement; how it took too many good jobs from the US. I stated that the Government should have taken steps to insure that the people that were hit from the loss of jobs were retrained with a tax on the companies that went off shore with the jobs. He, the professor was very pro Republican and Big Business, and hated Unions for interfering in Big Business affairs. We would have it out in class, and my papers that I took so many days researching and preparing were ignored and lowered my GPA from a 4.0 to ---- I don't want to think of it.

We are a THIRD WORLD Country now, we don't make much, we are not educated enough anymore, we consume more than we produce. But the consumption will decrease in the next few years because we won't have the jobs to pay for it. We are on a downward slide, its not going to get any better unless the Bill to get rid of the private student loan program that the Feds use to funnel money. Its a waste of tax payer's money and a total rip off for the students.   

BUY AMERICAN - I know its hard. Made in China? I don't want to even think of using anything from China anymore. Not only are they taking all of our money and jobs, but the products are unsafe. Yes, its predicted that China will rule the US in the next decade. How do you like that? Read the book "The World is Flat'' by Tom Friedman and his other books, it takes you through the whole story and what is to come. I also make sure I watch Charlie Rose late at night, he has the most interesting people that knows what is going on in the world, again, its not pretty.

Doom? Gloom? Yes. But if we can turn it around, we better start NOW. Push the companies to bring back the jobs by TAXING THEM instead of giving tax breaks!!! Use that tax money to retrain workers and educate. We CAN do it!!

See? Now you see why I lost my GPA with that knuckle head professor! ROFL!!
konaneComment by konane - May 7, 2009, 5:08 pm
Thanks Kaptainess!! Ever read about Fair Tax which would eliminate ALL FEDERAL TAXES INCLUDING FICA which would also eliminate all loopholes and tax shelters from everything? It would be replaced by a tax at the checkout when something is purchased. Fair Tax would eliminate corporations and businesses the burden of collecting and keeping up with taxes. Lots of bookkeepers and IRS employees would be out of jobs but others have lost jobs because of current compliance costs.

FairTax.org   There would be a pre-bate to all persons below poverty level to reimburse them for any taxes they may have paid. Architects of this proposal said it would pave the way for international business to come to America ...... they don't now due to complexity of our tax system and compliance cost of dealing with it.

I'm ready for Fair Tax, way too tired of pea under shell of current over complex system.
konaneComment by konane - May 7, 2009, 5:25 pm
Additionally under Fair Tax, embedded taxes we already pay and are not aware of would be removed, bringing costs down by the amount of value added tax which would be collected at the time of purchase. Many like to misrepresent Fair Tax and say it would add tax to what we already pay, however costs of goods would be the same when implemented. We'd just know how much tax we're really paying which is what legislators don't want us to know. Additionally they don't want to give up heady control they have with our current taxation system.

Comment by bambini - May 7, 2009, 8:17 pm
Those horrible slums in India and Brazil where people are living in shacks on dirt floors.... there is not much of a difference between them and the tent cities popping up in the US.
konaneComment by konane - May 7, 2009, 8:28 pm
Yep they've carefully planned collapsing the US economy for about 50 years so that we can't fight them when they form the North American union combining Mexico, USA and Canada into one entity. Our sovereignty will be no more when that happens and the whole thing will be placed under UN control.
konaneComment by konane - May 7, 2009, 8:55 pm
Bambini, forgot to say thank you for your comments!!!
ThinkComment by Think - May 7, 2009, 9:51 pm
Does "International race to the bottum" sound familiar???

Anyway they forgot one prediction-
Shotgun justice will takeover with those able to buy 12 gauge double barrels buying them with plenty of ammo.
konaneComment by konane - May 7, 2009, 11:50 pm
Thanks Think!! Yes unfortunately does sound familiar, the anchor around our necks is our illustrious leaders we trusted to make laws in our best interest. Have read that seems to be happening.

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