BIS Warns U.S. Spurring on "Great Depression"

I failed to see this when it first broke, but the implications are frightening, especially given that nearly two months later, it seems the warnings are coming true.

The Bank for International Settlements, which is Switzerland's version of the Federal Reserve and where the Fed and other central banks go to get infusion of capital, is warning that there are a confluence of signs that point to a coming "great depression" in the U.S.

The BIS stated in June that loose monetary policy has fueled a dangerous credit bubble in the process of bursting.

In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.

And the BIS is only adding credibility to a swelling of expert screams that what's happening in the U.S. is only the beginning of financial armageddeon.

Here's an article regarding the views of a fund manager who fears the Fed will make the wrong moves in an effort to correct this unraveling.

“The big concern is that we expect to see a great depression or something worse in the US. At present, we might be facing a national bankruptcy in the US, which has USD 66 trillion in un-funded future liability. If they don’t hyper inflate the US, then you have a great credit crunch with all asset prices falling. If they decide to hyper inflate then everything can rise. One of the safest ways to play is by having reasonable positions in precious metals that are likely to rise in most of these scenarios.”

And even Jim Cramer, the over-exhuberant CNBC host, went screaming on the air last week that the fixed-income markets are already in financial "armageddon," and Fed Chairman Bernanke "doesn't have a clue" as to how bad it is. This is now very scary.



I guess the bright side is once we survive the soup lines and the shanty towns, maybe we too will become the next "Greatest Generation" like our Grandparents before us. We could certainly learn to use more monetary prudence.


[edit on 8/6/2007 by behindthescenes]

[edit on 8/6/2007 by behindthescenes]

How will anyone between the ages of 10-30 go through a depression? I am just curious, as with the baby boomer retirements, I would figure mass unemployment to be the least likely scenario. Theres just too many people leaving the workforce for this to be feasible. But of course I only have 6 economics courses under my belt so im not exactly informed on the subject.

Originally posted by WuTang
How will anyone between the ages of 10-30 go through a depression? I am just curious, as with the baby boomer retirements, I would figure mass unemployment to be the least likely scenario. Theres just too many people leaving the workforce for this to be feasible. But of course I only have 6 economics courses under my belt so im not exactly informed on the subject.

The Baby Boomer retirement is a long term affect of future employment. This is going to be a near- and mid-term crisis with massive layoffs affecting everyone.

Look, this whole issue is about liquidity and the expectations of what those who invested in interest bearing instruments like CDOs and mortgage-backed securities on down through real estate and even currencies, expected to receive from their investments. The money has become chilled, and the free-flow of money has been cut off. So, all those investments that were banking on a quick flip to bail the first round of investors out of the credit risk are now holding onto bags of paper that may end up not being worth the ink printed on them.

And then comes consumer confidence. With record housing defaults and people losing homes and being forced into bankruptcy, the economy will tailspin as the GDP contracts and consumers find only lint in the wallet. Remember, the recovery from the 2001 recession was driven by cheap credit and a resiliant consumer. Those two factors seem to be dying, and doing so quickly.

As the GDP shrinks, business slows, and slowing business means layoffs. Which feeds further economic slowing and further layoffs -- and as the dollar tumbles even more, it becomes expensive and nearly impossible for corporate America to borrow big bucks at reasonable rates to invest in hiring and expansion. Besides why would companies do so if the consumer market is in a spending ice age?

See how this all connects together and the affects echo outward in ever increasing rings of financial disaster?

I'll be the first to admit, I'm an extreme bear. So somewhere between my doom and gloom scenario and the bulls in The Fed who say that this correction is being contained and we should all continue to drink from the punch bowl will be the reality of our coming economy.

To me, I think a 1970's-style recession (where unemployment reached 8% nationally) would actually be a good result than what I really fear which is the 1930's depression on steriods.

Originally posted by WuTang
How will anyone between the ages of 10-30 go through a depression? I am just curious, as with the baby boomer retirements, I would figure mass unemployment to be the least likely scenario.

Also, Wu. Your scenario is based on the premise that the U.S. economy will be the preeminent power in the world going forward.

I say we're at real risk of being knocked off the world economic power pedestel by rising economic greats like the EU, OPEC nations and to a lesser extent Russia (which is flexing its energy dominance muscles) and China (which will be hurt by our fall).

That means future job recoveries will be tepid at best, and only a portion of the jobs enclaved by the boomer generation will be filled. On the one hand, there are less of us younger generation members to fill those places -- but my theory is that there will be less of a need to fill existing positions.

For instance, let's say a corporate giant like Coke has 100,000 on its payroll worldwide and 20% of those jobs (so 20,000) are filled with people 55 and older. After this downturn, I only foresee Coke needing to refill 5,000 of those posts, so we're talking about 80% attrition of past jobs.

This isn't scenitific, just a crude example of what I mean....