The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy by David Wiedemer, Robert A. Wiedemer, Cindy S. Spitzer Read Free Book Online
trillion would likely do the trick). But few people would support it. And, that tells you that they actually know more than they are saying—they know that printing lots of money will create inflation—otherwise, why not print $10 trillion right now? They know full well the dangers; they are just hoping beyond hope that somehow $2 trillion dollars won’t be dangerous and won’t cause future inflation.
Potential Triggers That Could Accelerate a Downtrend in the U.S. Economy
There are many possible situations that could accelerate a downturn in the economy. Some are more likely than others and some are less probable but are still possible, depending on unpredictable wildcard events. Potential triggers include:
Greece
China
Iran
The passage of time
Greece: Between a Rock and a Hard Place
Part of the bullish feeling in the stock market currently is a result of the “resolution” of the Greek crisis. Like the economic “recovery,” the Greek “resolution” is likely not for the long term. The Greek economy is still in serious trouble. Only an immediate default has been avoided through the bailout and another round of loans. More importantly, the spread of the Greek debt crisis to Spain and Italy has been temporarily stopped. As we have said all along, the Greek crisis is really a Spanish and Italian crisis. The European banking system can withstand a Greek default, but it can’t weather a Spanish and/or Italian default. So the ECB’s move to buy Spanish and Italian bonds with printed money and also to provide over 500 billion euros in loans to European banks in late 2011 (known as a long-term refinancing operation [LTRO]) and another 500 billion euros in March has helped keep the Greek problem from spreading to Italy and Spain in a catastrophic way.
But, fundamentally, the problem remains severe. Greece’s economy has continued to spiral down, with unemployment now over 22 percent, up from 7 percent in 2007. There is simply no way it can pay off or pay down its debt. Even optimistic projections show Greece’s debt to gross domestic product (GDP) ratio being at 120 percent eight years from now. Needless to say, those optimistic projections are likely to be very optimistic. The real numbers will probably be far worse.
This also shows a fundamental dilemma that many economies face, including the U.S. economy. Government austerity hurts growth. Lots of government borrowing helps economic growth, short term. If that is cut, the economy heads down. Now, if we weren’t in a bubble economy, the fundamental long-term drivers of real growth would ultimately help move the economy toward recovery. Argentina defaulted on its debt and, due to strong growth in the world economy, especially in the United States and China, its strong exports helped the Argentine economy to recover to a large degree. But if there are no fundamental drivers of growth and past growth was based on a rising bubble economy that has popped, then austerity simply becomes part of a vicious downward spiral. In the past decade, the Greek economy has been propelled by a rising bubble of debt that financed its spending. Now that debt bubble has popped and there is nothing to replace it to propel their economy. Plus, there is no strong growth in the European economy or the rest of the world to lift it up.
The situation in the United States is similar. Most of the growth from 2000 to 2010 was due to bubbles, not fundamental growth. So, once those bubbles have popped, there aren’t any growth drivers left. The lack of fundamental growth is evidenced in the job creation numbers. Between 2000 and 2010, there were zero net new jobs created. In fact, we actually lost about 200,000 jobs.
However, unlike Greece, we have the ability to create two more bubbles to help pull us out of trouble temporarily—the government debt and dollar bubbles. To the extent we try to reduce the government debt or dollar bubbles, our growth will fall. Hence, we are between a rock
Potential Triggers That Could Accelerate a Downtrend in the U.S. Economy
There are many possible situations that could accelerate a downturn in the economy. Some are more likely than others and some are less probable but are still possible, depending on unpredictable wildcard events. Potential triggers include:
Greece
China
Iran
The passage of time
Greece: Between a Rock and a Hard Place
Part of the bullish feeling in the stock market currently is a result of the “resolution” of the Greek crisis. Like the economic “recovery,” the Greek “resolution” is likely not for the long term. The Greek economy is still in serious trouble. Only an immediate default has been avoided through the bailout and another round of loans. More importantly, the spread of the Greek debt crisis to Spain and Italy has been temporarily stopped. As we have said all along, the Greek crisis is really a Spanish and Italian crisis. The European banking system can withstand a Greek default, but it can’t weather a Spanish and/or Italian default. So the ECB’s move to buy Spanish and Italian bonds with printed money and also to provide over 500 billion euros in loans to European banks in late 2011 (known as a long-term refinancing operation [LTRO]) and another 500 billion euros in March has helped keep the Greek problem from spreading to Italy and Spain in a catastrophic way.
But, fundamentally, the problem remains severe. Greece’s economy has continued to spiral down, with unemployment now over 22 percent, up from 7 percent in 2007. There is simply no way it can pay off or pay down its debt. Even optimistic projections show Greece’s debt to gross domestic product (GDP) ratio being at 120 percent eight years from now. Needless to say, those optimistic projections are likely to be very optimistic. The real numbers will probably be far worse.
This also shows a fundamental dilemma that many economies face, including the U.S. economy. Government austerity hurts growth. Lots of government borrowing helps economic growth, short term. If that is cut, the economy heads down. Now, if we weren’t in a bubble economy, the fundamental long-term drivers of real growth would ultimately help move the economy toward recovery. Argentina defaulted on its debt and, due to strong growth in the world economy, especially in the United States and China, its strong exports helped the Argentine economy to recover to a large degree. But if there are no fundamental drivers of growth and past growth was based on a rising bubble economy that has popped, then austerity simply becomes part of a vicious downward spiral. In the past decade, the Greek economy has been propelled by a rising bubble of debt that financed its spending. Now that debt bubble has popped and there is nothing to replace it to propel their economy. Plus, there is no strong growth in the European economy or the rest of the world to lift it up.
The situation in the United States is similar. Most of the growth from 2000 to 2010 was due to bubbles, not fundamental growth. So, once those bubbles have popped, there aren’t any growth drivers left. The lack of fundamental growth is evidenced in the job creation numbers. Between 2000 and 2010, there were zero net new jobs created. In fact, we actually lost about 200,000 jobs.
However, unlike Greece, we have the ability to create two more bubbles to help pull us out of trouble temporarily—the government debt and dollar bubbles. To the extent we try to reduce the government debt or dollar bubbles, our growth will fall. Hence, we are between a rock
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