Predicting Worse Ahead from
America's Economic Crisis

Economist John Williams publishes the shadowstats.com electronic newsletter with updated sample data on his site. He calls government figures corrupted and unreliable because manipulative changes rigged them for political and market purposes. To correct them, he reverse-engineers GDP, employment, inflation, and other key data for greater reliability to subscribers.

On August 1, Williams called the "Current Economic Downturn (the) Worst Since (the) Great Depression." It began a year earlier than reported, triggered a systemic solvency crisis, and the effects of "a multiple-dip depression (are) far from over."

The July 31, 2009 national income accounts "confirmed that the US economy is in its worst economic contraction since the first downleg of the Great Depression, which was a double-dip" one like today's.

Intermittent upturns are common, like from spiked auto sales from the cash-for-clunkers program that borrowed future purchases for today's. "Yet, this downturn will continue to deteriorate, proving to be extremely protracted, extremely deep and particularly nonresponsive to traditional stimuli."

The economy suffers from deep structural problems related to household income. Consumers are over-indebted, can't borrow, and Washington's policies aren't helping them. Continued economic decline will follow. "The current depression is the second dip in a multiple-dip downturn that started in 1999 (and triggered) the systemic solvency crisis" that was visible by August 2007 but started in late 2006.

The worst lies ahead, the result of the "government's long-range insolvency and (dollar debasing that risks) hyperinflation during the next five years," and perhaps sooner in 2010. It will cause "a great depression of a magnitude never before seen in" America, disrupting all business and commerce and reverberating globally.

Williams defines deflation as a decrease in goods and services prices, generally from a money supply contraction. Inflation is the reverse. Hyperinflation debases the currency to near worthlessness. Officially, two or more consecutive declining quarters means recession, but better measures are protracted weakened production, employment, retail sales, construction, capital investment, and demand for durable goods among other factors.

A depression occurs when inflation-adjusted peak-to-trough contraction exceeds 10%, and a great depression when it's 25% or worse.

Today's economic downturn preceded the systemic solvency crisis after key data "hit cycle highs and began to weaken in late-2005 for housing and durable goods orders....early-2006 for nonfarm payrolls, (and) late-2006 for retail sales and industrial production, patterns more consistent with a late-2006" real recession onset. Gross Domestic Income (GDI) data confirms this analysis.

Its real growth peaked in Q 1 2006, and revised GDI data contracted in seven of the last nine quarters. "Revised GDP shows the sharpest annual decline in the history of the quarterly GDP series," suggesting a much deeper and protracted downturn than previously reported.

July 2009 marked the 19th consecutive month of contraction, "the longest downturn since the first downleg of the Great Depression." More recent GDP declines of 3.3% and 3.9% in Q 1 and Q 2 2009, "are the worst showings in the history of the quarterly GDP series" dating back to 1947-48. In 1946, a greater contraction occurred because of post-war production cutbacks, but it was short-term.

Today's most reliable economic indicators show the downturn is deepening, not abating as deceptive media accounts report. "The SGS (Shadow Government Statistics) alternative measure of GDP suggests (a) 5.9% contraction....versus the official year-to-year" 3.9% figure.

The official estimated annualized Q 2 2009 decline was 1% compared to SGS's figure "in excess of five-percent." Its alternative data show "deeper and more protracted recessions" than officially reported, suggesting a deepening crisis ahead.

The CBO's Grim Forecast

Even the conservative Congressional Budget Office sees a weaker economy ahead, contrary to most consensus views of a sustainable upturn. Its latest projections are as follows:

• for the next five years, economic weakness and lower demand will pressure workers with unemployment or underemployment;
• part-time work only will be available for millions wanting full-time jobs;
• low consumption will persist through 2014;
• unemployment benefits will be exhausted;
• households will be pressured to make mortgage payments, pay for health care, meet other obligations, and provide for their families at a time state and city budget crises force deep cuts in vital social services, not made up for by the federal government;
• tax revenues are down 17%, the sharpest decline since 1932;
• $600 billion in investment losses will result plus another $5.9 trillion in lost output through 2014; and
• the federal deficit will nearly double over the next 10 years to about $20 trillion.

In sum, CBO projects a more severe protracted downturn than it earlier forecast in January.

Troubled Times Ahead

On July 14, Egon von Greyerz, Founder and Managing Partner of Zurich-based Matterhorn Asset Management AG, specializing in precious metals and other investments, said "The Dark Years Are Here" and explained why.

Because of "the devastating effects of credit bubbles, government money printing (and) disastrous actions that governments are taking, (upcoming) tumultuous events will be life changing for most people in the world." They'll begin by year end, last for two to three years, then be followed by extended economic, political, and social upheaval, perhaps continuing for two decades.

Greyerz cites three main concerns:

• exploding unemployment and government deficits;
• trillions of unreported bank losses and worthless derivatives; and

• rising inflation, high interest rates, collapsed Treasury bond (and UK gilt) valuations resulting in more money creation, worthless paper, and a "perfect vicious circle (leading to) a hyperinflationary depression followed by the collapse of the dollar and British pound. 

America is hemorrhaging financially and economically. Reckless money creation achieved short-term hope, benefited Wall Street alone short-term, elevated world stock markets, and led some to believe the crisis was over when, in fact, it's worsening.

Aside from expected short-lived upturns, "every single sector of the real economy is deteriorating whether it is production, unemployment, corporate profits, real estate, credit defaults, construction, federal deficits, local government and state deficits etc."

We're in "the first phase of this tragic saga." Likely by year end, a second more serious one will start. Real unemployment now tops 20%. It hit 25% in the Great Depression with 35% of the nonfarm population out of work and desperate.

"It is our firm opinion that (US) non-farm unemployment levels will reach 35% at least....in the next few years" with all uncounted categories included.

Growing millions with no jobs, incomes, savings, or safety net protections will create "a disaster of unimaginable consequences that will affect the whole fabric of American society" to a degree far greater than in the Great Depression.

Growing unemployment now plagues Western and Eastern Europe as well, and by 2010 will more greatly affect most parts of the world, "including China, Asia and Africa. Never before has there been a global unemployment crisis affecting the world simultaneously." Ahead expect sharp drops in consumption and global trade leading to depression, poverty, "famine and social unrest."

Already, conditions are worse than in the 1930s, but the worst is yet to come. Expect:

• an extremely severe global depression in most countries with grave economic, political, and social consequences;
• social safety net protections will end;
• private and state pensions will likely collapse; and
• unemployment, poverty, homelessness, hunger, and famine will cause a protracted period of economic, political, social, and institutional upheaval.