July 18, 2011

An Economist's Warning of a Coming U.S. Depression (Guest Post)

By Ilene

Excerpt from Stock World Weekly

Our bearish outlook heading into this week proved accurate as U.S. equities traded sharply lower. We caught a glimpse of “No Mo POMO” in action. Not surprisingly, without POMO money from the Federal Reserve propping up stocks, the market behaved poorly.

Financial economist and historian Dr. Michael Hudson was recently interviewed by Bonnie Faulkner on Guns N Butter.  When Ms. Faulkner asked his opinion of where the U.S. economy is headed, Mr. Hudson replied,
“The economy’s going under because Wall Street and investors realize that it’s a done deal. That Mr. Obama is going to succeed in pushing the economy much further into a depression.
We need the depression in order to cut living standards and labor by 30 percent. We need a depression in order just to lower the wages of America and to have an excuse....., the solution is going to be that the government is going to sell off its land, whatever is in the public domain.
The American government is going to look just like Greece and just like Ireland.... The government will sell whatever it has, the Postal Service, to essentially buyers who will now borrow the money from the banks making a huge new market for banks and investment bankers, in privatizing and cutting up what used to be the public domain and turning it over to the wealthiest 10 percent of the economy. 
So people realize yes, the class war’s back in business. We’re going into a depression. We’ll buy back all these stocks after they go but meanwhile, the game’s over. Let’s grab what we can and just bail out. And that’s what’s happening now.”
Ms. Faulkner: Would a U.S. default send interests rate soaring and if so, what would be the economic effect?

Mr. Hudson:
"...What does it matter if you default? No, it wouldn’t send interest rates soaring at all. It wouldn’t have any effect at all..... [Mr. Obama] He's going to go down as the man who brought on the depression that the Republicans never could have gotten away with."
As the clock ticks down to the impending August 2 deadline for lifting the debt ceiling, negotiations between the White House and Capitol Hill are growing increasingly tense. Lawmakers and the President attempt to arrive at a compromise that will inevitably satisfy no one.

President Obama, pushing for a combination of spending cuts and tax increases, reached out to the American public during his weekly radio and Internet address, declaring,
"We have to ask everyone to play their part because we are all part of the same country. We are all in this together.”
Obama has embraced some measures that members of his own party deeply oppose, including proposed reforms to Medicare, while the Republican opposition has taken a hard line against any tax increases.

Europe is facing its own challenges. The European Debt Crisis of the Twenty-first Century, “The Black Debt,” continued spreading across Europe like the plague.  Our modern era’s fiscal contagion may be less lethal, but it still threatens to tear apart the economic fabric of the Eurozone by unraveling a complex arrangement of debt owed between member nations and eroding confidence in the continued viability of the Euro as a currency.

The magnitude of the collateral damage to other countries is not known, but given the black box nature of the derivatives market, it is likely substantial.

In spite of all the tension, drama and political posturing on Capitol Hill, we currently believe that some kind of a deal will be worked out prior to August 2, and that it is highly unlikely that the U.S. will actually default on its debt obligations.

We remain moderately bullish on stocks for the long term, but bearish in the near term. Consequently, we are more likely to look for bearish trade ideas than bullish trade ideas early next week.

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[Note - This is an edited version by EconMatters from author's original post.]

About The Author - Ilene is the editor and affiliate director at Phil's Stock World with a fascination with the markets.  She also maintains a blog at Phil's Favorites.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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