Looming Economic Realities

Conditions show weakness, not improvement. Soft-land enthusiasts face rude awakening challenges. Later in 2012 and especially 2013, expect tougher times to reshape their outlook. They're always notoriously behind the curve.

Bad policy begets bad results. Force-fed austerity promises hard times getting nasty. In fall 2007, residential housing's reversal shaped events going forward.

Real estate kept overvalued markets safe. For most US households, it's their main discretionary income source. Its trajectory went straight up for years. Doing so formed a classic bubble. Eventually they all burst.

Real estate crashed and went straight down. Recovery is nowhere in sight. Hard times remain protracted. Main Street's been in Depression since 2008. Stability and economic growth are distant. Household and small business balance sheets contracted noticeably for over four years.

Belt-tightening reduced overall household debt to disposable income modestly from 135% in 2007 to 120% now. What happens going forward as economic weakness increases? Bipartisan support for $4 trillion in largely domestic cuts kicks in post-November when conditions can least tolerate them.

Obama administration policies have been spectacularly wrongheaded. Planned late year austerity when stimulus is needed will be disastrous. Inflation is much higher than reported. So is unemployment, growing poverty, and public pain.

At the same time, high food, energy, medical, transportation and other costs grow more unaffordable. Households with limited resources feel it most. 

Home prices haven't stabilized. Meaningful job creation is moribund. Solutions for issues this important aren't addressed. Rhetoric substitutes for sound policy.

Expect more wars instead of ending current ones. At the same time, homeland needs go begging. Europe's sovereign debt and banking crisis looms ominous. Standards of living in Western countries keep declining. No end of hardships continue.

China's property market began deflating. It's got a long way down to go. Its economy may prove much weaker than predicted. It has major unresolved problems.

Economic softness spread from Europe and America to Asia and Latin America. Chinese manufacturing is contracting. So is Brazil's.

Despite healthy corporate balance sheets, median OECD country public and private sector debt exceeds 400% of GDP. The OECD government debt to GDP ratio exceeds 100% for the first time post-WW II.

Unwinding excess will take years. Consumer spending will suffer. So will economic growth. Bad policies exacerbate hard times. Public pain generates instability. Strikes and angry protests continue. They'll grow and spread.

Boil over threatens. People take so much, then react disruptively. It's been ongoing for years but will intensify. Historically, political turmoil follows secular economic peaks. The harder and more protracted the fall, the more disorderly the reaction. 

Ahead expect the greatest in decades. Perhaps the most disruptive in modern times. 

Protracted reversals follow extreme excess. This one has a long way to go. Bad policy extends the timeframe. Imperial plans increase disruptiveness. Resources go for warmaking, not domestic needs. Greater suffering follows. The wild card is how much will people take before exploding. 

Day of reckoning time may be 2013. European governments toppled like tenpins. Obama or Romney in America hardly matters. Their agendas are similar on issues mattering most. 

Both support militarism, permanent wars, imperial dominance, corporate needs above public ones, painful austerity, and stiff crackdowns on resisters. Going forward, things look grim. Households least able to cope suffer most.

Key indicators point south. The Baltic Dry index historically indicates global economic activity. In May, it slumped about 10%. Future prospects look uncertain or troubled. Only about 20% of companies ventured outlooks. Of those, over half turned negative.

Headwinds overall are stiff. Durable goods orders show weakness. So does contracting production. New orders are down three consecutive months. Unfilled ones plunged. So did delivery time. Inventories hit a two month low. Prices paid collapsed to 5 from 22.5. It reflected the lowest read since July 2009.

Prices received also swung from 9.4 to -4.5, the lowest since last summer. Employment posted the largest monthly decline since May 2006. The workweek declined. Capex spending expectations hit their lowest level since September 2009.

Hiring shows no signs of recovering. Leading indicators sagged. The coincident to lagging ratio declined. It was down three of the past four months. The ratio is known for "leading the leader." It confirms likely downward GDP revisions. Going forward things look grim. 

In Europe they look worse. Greece is virtually bankrupt. Spain's economy is imploding. Retail sales plunged 9.8% year-over-year. They declined 22 consecutive months. The past year's result is the sharpest drop on record. 

What's implied going forward looks ominous. Spain's central bank governor Miguel Ordonez resigned. Word is he was forced out after serving six years. Eurozone economic confidence overall is down. 

So is US consumer confidence. During expansions, the historical average is 102. In recessions, it's 78. The latest read was 64.9, way below the norm. Employment was its grimmest part. It reflects people saying jobs are hard to get.

Financial advisor Martin Weiss believes "a new financial megashock" could happen any time. Potentially it looms greater than 2008 troubles. 

Market paralysis could follow. Trading could be frozen in "critical debt instruments such as bank CDs, commercial paper and even" sovereign debt.

Failures like Fannie Mae, Freddie Mac, AIG, Lehman Bros., Bear Stearns, and others could repeat. Potentially they could be worse. Radical government measures could be imposed. If similar to earlier ones, they won't work.

"The next big megashock is both quite predictable and virtually unstoppable!"

Analysts paying attention understand. Others suspect the worst. Europe is cratering in crisis. Media reports understate the severity. Sovereign debt is dangerously high. The world is awash in debt. Major banks are insolvent. Bailouts follow earlier ones.

Instead of confronting problems responsibly, policy makers keep repeating past mistakes.

An "explosive combination of extreme danger (and) complacency" exists. Current risks exceed 2008. Then, finance capital was troubled. "Today, entire nations are on the brink." Weakness shows up in New York, London, across Europe, and spreads globally.

In 2007, America's federal deficit was $161 billion. Currently, it exceeds $1.3 trillion.

In 2008, most troubled banking giants were American ones. Some still are like JPMorgan Chase and Bank of America. 

Today, European megabanks face serious problems. They include Banco Santander, Barclays, Crédit Agricole, Lloyds Bank, Royal Bank of Scotland, Société Générale, UniCredit SpA, and others.

Assets of European banking giants exceed those of all US commercial banks combined.

In 2008, governments had considerable firepower to confront crisis conditions. Today, everything tried brings "diminishing returns."

In 2008, governments met little public resistance. Currently, angry protests continue across Europe and America.

Before 2008, central banks "largely restrict(ed) their role to traditional" practices. Radical departure followed to no avail. Massive money creation brought no relief. Printing more won't help unless directed for economic growth, not banker balance sheets. 

Political rhetoric signals growth. Policies suggest otherwise.

Greece is most troubled of all. Sovereign debt costs above 7% signal danger. Athens pays four times that much. The more it borrows, the worse off it gets. Its debt is virtually worthless. Default is almost certain. Mass withdrawals intensify current problems.

Spain is nearly as troubled. Its economy exceeds Greece's fivefold. Greece is a side-show by comparison. Spain's Prime Minister Mariano Rajoy said "there will be no Spanish banking rescue." With over $1 trillion in deposits, enough resources don't exist to cover runs if they spread and grow.

At 510 basis points, Spanish/German 10-year yield spreads reached the highest level since the euro's inception.

At the same time, unemployment approaches 25%. For youths, it's 50% and worsening. Confidence in its banks cratered. Earlier in May, Bankia, Spain's fourth largest bank, was nationalized. Credit downgrades hit the entire sector. Expect other bank rescues to follow.

Austerity across Europe is still policy. Based on election results, support for it collapsed. Massive money printing won't help.

Progressive Radio News Hour regular Bob Chapman predicts it. G8 summit leaders discussed it. Fed QE III looks likely. Continued propping up of troubled banks is planned. At issue is for how long. It solved nothing earlier and won't now.

"ECB will take junk bonds and other vastly over-priced assets as collateral for loans to the Spanish, Greek and other European banks. This will offset an additional estimated $500 billion in new write-offs by bondholders of Greek debt."

If Greece leaves the euro, "contagion will spread overnight to Spain, Portugal, Ireland, and perhaps Italy."

Inflationary countermeasures are planned. Obama hopes to hold on through election. Fed and ECB assets "fall far short" of an estimated $4 trillion or more euro liability private banks face. 

Four and a half years into crisis conditions, they're worse off than ever. Recapitalizations solved nothing. They bought time for a greater day of reckoning.

At the same time, bank runs are hitting troubled EU economies. Greece noticeably is affected. Euro exit fears motivate people to transfer funds elsewhere. Spanish depositors are scared. They're doing the same thing.

Portugal, Ireland and Italy are vulnerable. Once outflows start, stopping them isn't easy. Potential runs in other countries could follow. It's similar to selling weak sovereign debt for safe havens.

Bank runs are especially pernicious. They can happen quickly and spread. The potential for financial crisis grows. Is it happening again? Only the fullness of time will tell.

In America, insider selling surged. Corporate stock buybacks fell to a three year low. None of this signals confidence.

In early May, JP Morgan's trading loss sent shock waves across Wall Street. The $2 billion announced reflects the tip of the iceberg. Expect much more to come. Other banks face similar risks.

JP Morgan was considered Wall Street's most stable bank. Now it's troubled. At issue is speculative excess. It's done because banking giants are considered too big to fail. The Bernanke put assures taxpayer bailouts if needed.

At the same time, lending across Europe contracted sharply. Doing so exacerbates recession conditions. Eurozone banks are deeply troubled. So are Britain's. 

America's economy has a 90% correlation with Europe. What affects the continent spreads contagion to US banks. Bank of America and Wells Fargo have serious problems. JP Morgan's losses show none of the giants are immune, and what hits them also harms smaller banks. They're more on their own. Many fail.

Troubled conditions now replicate 2008. Speculative excess continues unabated. Big bets gone bad trigger crises. JP Morgan sent a shock waves across Wall Street and Europe. Free money bailouts solved nothing. European banks are especially weak.

Responsible solutions aren't taken. Huge bad asset amounts infest bank balance sheets. Fiscal austerity combined with monetary madness makes economic conditions worse. 

Europe and America exacerbate each other's problems. Policy measures followed are similar. So are hard times getting harder.

Instead of nationalizing insolvent banks worth saving, letting others fail, and restructuring responsibly, past errors repeat with predictable results. At best they buy time. Eventually it runs out. 

The moment of truth may hit harder than anything felt so far. Ordinary people suffer most. What happened earlier may be prelude to grimmer than ever times ahead.