Monday, May 25, 2009

Cycle Question Digs into the Roots…

Reader Chris wrote in with a link to the following Hoye article and asked a terrific question:
“Nate, in reading the following article, it's amazing how prior depressions to include the big recession in 1982 occurred every 50+ years right on cue. Besides excessive credit, do you have any idea, what would cause this (possible depression) to deviate from prior cycles?”
Terrific question! But, the question is making the assumption that deep recessions actually occur at regular 50 year intervals… so, once we understand how cycles and history actually work, THEN we can answer the question, “what would cause this (possible depression) to deviate from prior cycles?”

So, this is going to be a very long post, but I think Hoye’s article is good enough and filled with enough good history that it is best read in its entirety. Anyone wishing to understand what’s happening MUST take the time to study the cycle farther back in time than the Great Depression! This is surely one of Bernanke’s greatest failures, it is a failure among business schools to teach, and it is a failure of government to work to towards a proper understanding of economic cycles and activities via SCIENTIFIC METHOD to create models that actually work.

Great Depressions Are So Methodical

Address to the Spring Dinner Meeting of the Committee for Monetary Research and Education (CMRE)

May 14, 2009


One of the features of a great boom is the excitement of shared convictions about eternal prosperity. One of the features of the consequent contraction is bewilderment about how suddenly the bust arrived. Beyond those directly hit, the establishment becomes perplexed by the loss of liquidity and wonders where the money went.

With the 1980s crash in oil and property deals, a hearing run by offended politicians asked a particularly aggressive Oklahoma banker about "just where did the money go?". And as the Wall Street Journal faithfully reported "We spent it on wine, women and song – the rest we just pissed away."

As flippant as this may be, it is accurate and could be suitable in any example in any century. Fortunately, for consistency in any century, there is the classic definition of inflation that it is an "inordinate expansion of credit". In the 1930s, Keynes in a number of letters to the Fed twisted this around to mean that inflation was simply rising prices that had very little to do with central bank manipulations.

Fortunately, Keynes is not around to provide official confusion to the description that deflation is an inordinate contraction in credit. Relentless credit deflation started in 2007, and this implacable force has been part of every long depression.

Clearly, the title of this address puts me firmly in the bear camp. Just as clearly, the possibility of another great depression is highly controversial, particularly when such magnificent efforts are being made to restore the prosperity of a financial mania, which have always been ephemeral.

Perhaps my credentials should be reviewed. Everything I needed to know about the markets I learned on the old and notorious Vancouver Stock Exchange. For example, in a world of extravagant claims from big government, big academe and big Wall Street the old definition of a promotion is useful: "In the beginning the promoter has the vision and the public has the money. At the end of the promotion the public has the vision and the promoter has the money."

In 2006 to 2007 the public had the vision that policymakers could depreciate the dollar forever and were positioned accordingly. And for a moment the promoters looked brilliant as everyone thought they were wealthy. Moreover, as with any promotion the bigger it is – the bigger the crash.

There are two failures going on. The most obvious is in the financial markets and the other is in interventionist economics. The latter failure is in theory as well as in practice, and can be described as the greatest intellectual failure since the Vatican insisted that the solar system revolved around the earth, more particularly, Rome. Too many still believe that the financial world revolves around the Federal Open Market Committee.

Last year's disaster fit the pattern of the 1929 fall crash with remarkable fidelity. Such a crash was obvious and as the train wreck in the credit markets continued through the summer of 2008 the Fed continued its recklessness. But with some marketing skills, the objective of "stimulus" changed from keeping the boom going to the absurd notion that bailing out one insolvency, Bear Stearns, would revive the boom. As usual with a bubble, it was not just one bank that had been imprudent – most had been.

The establishment missing this recurring event was bad enough but there is another clanger and that is the hopeless notion of a national economy. Even in ancient times, Cicero knew that the prosperity of Rome was vulnerable to the credit conditions in the Middle East. In this regard, Mother Nature has again been providing some harsh lessons, and history suggests she and Mister Margin will ultimately be successful in teaching markets 101 to many policymakers.

In the meantime, coming out of the classic fall crash orthodox investments such as commodities, stocks and bonds were expected to rebound out until April-May. Until this hooked up, the typical GDP forecast was tentative in looking for the recovery to begin "by mid-2010”, but our "model" needed forecasts of the recovery starting much sooner. Then, thanks to the "Green Shoots" that began to appear with the rebound in March, confidence was gradually restored in high places such that the miracle of recovery would happen sooner. The higher the stock market gets the more popular this idea becomes.

And this gets us to another lesson from the old Vancouver Stock Exchange. "So long as the price is going up – the public can believe the most absurd story." This has been the best explanation of why Wall Street, the supposed bastion of capitalism, focused on every utterance from central planners in a central bank. Then when the price breaks, the vision disappears along with liquidity.

The next phase of the contraction has been expected to start after mid-year. For most participants, post-bubble bear markets have been sudden and severe. The 1929 example ran for three years and the post 1873 example lasted for five years. The latter has been the best guide for our recent mania and its bust, but this will be expanded in a few minutes as it is worth reviewing the excuses offered by many in not anticipating that short-dated interest rates as well as gold would plunge in a classic fall crash. This was the pattern with the 1929 and 1873 crashes and knowledge of such a plunge in short rates should have ended conventional wisdom that a Fed rate cut would have prevented crashes from 1929 to 2008.

The quickest sign of a gold bug forecast going wrong is "Conspiracy!". With their latest disappointment Wall Street strategists described it as a "Black Swan" event, and therefore unpredictable. That has been a cheap out as each transition from boom to bust has been methodical. Others called it a "Minsky Moment". Minsky accurately described the mechanism of a crash, but being a Keynesian he also wrote that "apt intervention" could keep the economy on a successful path.

Actually, financial conditions reached the perfect "Keynesian Moment". As we all know, Keynes said "If you save five shillings you put a man out of work for a day." As part of the greatest mania in history the savings rate plunged to zero – Keynesian perfection had finally been accomplished. Many in the street, but only a few economists, knew this was dangerous. Econometric modelers, who still believe in the powers of regression equations, have long had their out, which has been "Exogenous", and in one memorable paper of 1983 there was "Super-Exogenity". This arrived in May 2007 when the yield curve reversed from inverted to steepening. Our research expected it to occur around June. By July of that fateful year, there was enough deterioration to conclude that "This is the biggest train wreck in financial history". It is not over.

Although crashes are grisly events, they share a common response from the establishment. No matter how shocking, bloody, expensive, ruinous or just plain shattering a crash is – within a week, there is no one in the street who didn't see it coming. As ironical as this is, there is a critical link from the stock market to the economy.

On the usual business cycle, the peak in stock speculation typically leads the peak in the economy by about a year. On the previous example, stocks set their high in March 2000, and the NBER set the start of that recession in March 2001. Using their determination this has been the case for most cycles back to 1854. But, at the conclusion of each great bubble in financial and tangible assets things change from normal. The failure in the financial markets and the economy beginning in 2007 have been virtually simultaneous. As we all know, in 1929 the Dow made its high in September and the recession started in August. In 1873 the bear started in September, and the recession in October. This time around, the stock market high was in October 2007 and this recession started in December of 2007. Close enough to fit the post-bubble model, with implications that financial history is now in the early stages of another Great Depression.

This melancholy event is being confirmed by the behaviour of politicians and policymakers. After swanning around claiming credit for the boom politicians panic and then find scapegoats. Remember the "Goldilocks" celebration of perfect management of interest rates, money supply and the economy. Well, all five great bubbles from the first in 1720 to the infamous 1929 have been accompanied by such boasting, followed by what can best be described as frenzies of recriminatory regulation. If the political path continues – protectionism – will follow.

One of the worst such examples was called, in real time, the Tariff of Abominations. But, this is enough of dismal events and it is time to turn to irony for amusement and enlightenment. The clash between the establishment and financial history is rich with irony. Beyond that, financial history, itself, should be considered as an impartial "due diligence" on every grand scheme promoted during a financial mania by the private sector as well as by policymakers. Let's use a good old fashioned term – policymakers have been financial adventurers.

One of the richest ironies occurred with the 1873 mania and its collapse. With typical strains developing in the credit markets during a speculative summer, the leading New York newspaper editorialized:

“but while the Secretary of the Treasury plays the role of banker for the entire United States it is difficult to conceive of any condition of circumstances which he cannot control. Power has been centralized in him to an extent not enjoyed by the Governor of the Bank of England. He can issue the paper representatives of gold, and count it as much as the yellow metal itself. [He has] a greater influence than is possessed by all the banking institutions of New York.”

In so many words, because the treasury secretary was outstanding and had the benefit of unlimited issue of a fiat currency – nothing could go wrong. But it did; the initial bear market lasted for five years and the initial recession ran a year longer. The pattern of severe recessions and poor recoveries continued such that in 1884 leading economists began to call it "The Great Depression", that endured from the 1873 bubble until 1895. An index of farm land value in England fell almost every year from 1873 to 1895. Of course, academic economists were fascinated and for a couple of decades wondered how such a dislocation could have happened, or even worse, discussed how it could have been prevented. Ironically, this debate continued until as late as 1939 when another Great Depression was belatedly discovered.

Naturally the long depression was blamed upon the old and unstable Treasury System, and at the height of the "Roaring Twenties" John Moody summed it up with:

"The Federal Reserve Law has demonstrated its thorough practicality, and thus secured the general confidence of the business interests. The breeder of financial panics, the National Banking Law, which had been a menace to American progress for two decades, has now been replaced by a modern scientific system which embodies an elastic currency and an orderly control of money markets."

The probability of a depression has been discussed in the media. It seems that both sides have yet to provide adequate research, with the establishment's response limited to a classic non sequitur. "This is nothing like the Great Depression, where we had 25% unemployment". That was just the most recent example and sound research would compare unemployment numbers from the first year after the crash. In 1930 the number was around 8%, and in noting that there could be some difference in methodology today's number is an 8 percenter.

Will it get to 25 percent? This remains to be seen, but unemployment in the private sector will be the worst since the last great depression.

By way of a wrap we will take it from the top. In late 2007, Gregory Mankiw, boasted that the US had a "dream team" of economists as advisors, and as with all claims at the top of six previous bubbles "Nothing could go wrong". And even if things went only a little wrong there were the "safety nets" that Krugman claimed would prevent serious deterioration. Our view on Keynesian safety nets has always been that in a bust they would be about as useless as a hardhat in a crowbar storm.

In the post-1929 bust policymakers were realistic enough to know that the boom caused the bust. The SEC was established to prevent another hazardous 1929 mania. Also, one of the promoters of the SEC boasted that the SEC would put a "Cop at the corner of Wall and Broad Streets". Without much doubt the SEC has failed to live up to its billing. The discovery of malfeasance always accompanies the discovery of malinvestment.

Of course, the other act passed to prevent another 1929 mania was Glass-Steagal, which separated commercial banking from the evils of Wall Street. This was taken off the books in 1999 as too many banks were participating in the high-tech frenzy.

Has this happened before? I'm glad I asked the question. With the financial violence of the South Sea Company in 1720, the House of Commons passed the "Anti-Bubble" Act, which was taken off the books in 1771 – just in time for the full expression of the 1772 bubble. As with the climax of the 1720 bubble the Great Depression ran for some twenty years. This was also the case for the bubbles that blew out in 1825, 1873, and 1929.

This ominous sequence of financial excess and consequent disaster brings us to 2007, which will soon have the connotation of "1929", as the world experiences the sixth Great Depression. Quite likely, the only offsetting event could be the collapse of interventionist policymaking, that would eventually be seen as a blessing.

The title of this address, "Great Depressions Are So Methodical" is intended to be ironical, but some may be startled by the audacity of the statement. Actually it is the conclusion that anyone would make after a thorough review of market history. The real audacity is in the claims of charismatic economists that their personal revelations can provide one continuous throb of happy motoring. As Hayek said – Keynes, as a young scholar, was absolutely ignorant of financial or economic history. Only someone who was ineffably ignorant of financial history would claim that it can arbitrarily be altered.

The next Oscar in audacity goes to Paul Samuelson, who, in the 1960s, boasted that the business recession had been eliminated. Right!

Another such example was recently provided by Gregory Mankiw when he condemned the “old” Fed with "When you look at the mistakes of the 1920s and 1930s, they were clearly amateurish." Any impartial review of market history would conclude that the "Roaring Twenties" and the contraction was the way financial history works, after all it was the fifth such example. It is worth recalling that at the height of the 1929 mania John Moody had condemned the old Treasury System while reciting that the new Fed was the perfect instrument of policy.

Mankiw then bragged "It is hard to imagine that happening again – we understand the business cycle better".

The Harvard professor topped this late in 2007 with: "The truth is that Fed governors, together with their crack staff of Ph.D economists, are as close to an economic dream team as we are ever likely to see."

Now it is time to get into the way Great Depressions have worked. All six have started with soaring prices for tangible and financial assets that, typically, run against an inverted yield curve for some 12 to 16 months.

Then when the curve reverses to steepening it is the most critical indicator that the credit contraction is starting. This time around, the sixteen-month count ran to June 2007 and the curve reversed by the end of May. Our presentations in that fateful month stated that the greatest train wreck in the history of credit had begun. Deterioration through July prompted the advice that most bank stocks were a nice "widows and orphans" short.

Beyond the raw power of speculation, one of the key features is each mania has been accompanied by a remarkable decline in real long interest rates, sometimes to zero, and sometimes to minus. In our case the decline was to around minus 1.5% in January and the increase so far has been 5 percentage points. In five previous examples, the typical increase has been twelve percentage points, which has been Mother Nature's way of correcting untempered expansion of credit. And - in our times, untempered policymaking.

Lower-grade corporate bonds, have already suffered an increase of some 25 percentage points, which suggests that the 12 point potential for treasuries is possible.

There is another important distinction. At the peak of a great bubble, the stock market peaks virtually with the business cycle. In 1873, the stock market blew out in September and the recession started in that October. As noted above, a fiat currency with the potential of unlimited issue was not proof against yet another Great Depression. In 1929 stocks peaked in September and the economy peaked in August. This time around stocks set their high in October, 2007 and according to the NBER, the recession started in that December.

Since 1937 the average length of recession has been ten months, with six in the order of 8 months. This one has run for 17 months, which breaks a long-standing pattern. Following 1873, the initial recession lasted 65 months, and following 1929, it ran for 43 months. NBER data starts in 1854 and these were the longest recessions, with no others in this league. This one has the potential of being a long one.

This is a lot of history, but what is happening in the markets right now? Well, then the Green Shoots have finally encompassed chairman Bernanke. On May 5, Bernanke observed that the "broad rally in equity prices" is indicating that "economic activity will pick up later in the year."

At the height of a similar rebound to April-May of 1930, Barron's wrote:

“It is thus apparent that the public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which current earnings are again being discounted indicate that it will be difficult to quench the fires of stock-market enthusiasm for long.”

Prompted by an animated stock rally, the Harvard Economic Society, but with more gravitas, concluded that it "augured" a recovery by late in the year. As we all know this did not last and what we should understand is that it is the dynamics of a crash that sets up the exciting rebound. Not policymakers.

Let's look at a classic fall crash, which we expected. The pattern is interesting. The 1929 crash amounted to 48%. The decline to the low in November 2008 was 47%, and within this the hit to October 27 amounted to 42%. In 1929 the initial plunge amounted to 40% to October 29.

The rebound was to November 4, in both examples, with 2008 gaining 17% and 1929 gaining 12%. The final slump into each November was 22% and 23%. Is it important to identify it as 1929 or 2008?

Our "historical" model expected the crash and the rebound, as well as the nature of the establishment's utterances. Another usual event is a frenzy of recriminatory regulation – all supposedly new, but delivered without knowing that their counterparts over the centuries have made the same futile gestures.

Ironically, today's excitement in the markets and convictions in policymaking circles are important steps on the path to a great depression. As disconcerting as this may be, it is worth reviewing another cliché of policymaking, which is the notion that lowering administered rates will restore the momentum of a boom. Massive declines in short rates, such as Treasury Bills have only occurred in a post-bubble crash. In 1873 the senior bank rate plunged from 9% to 2.5%, as the stock market crashed. In the 1929 example the fed discount rate plunged from 6% to 1.5%, as the stock market crashed.

This is getting a little heavy. Not so long ago, but in another world, financially speaking, when an economist would change a forecast on GDP from 3 % to 3.25% it was only done to display a sense of humor. Now policy wonks seriously debate whether the Fed target rate should be zero or a quarter of one percent (that’s 0% to 0.25%). It is patently absurd to debate what the rate should be or whether it would have any effect on financial history.

It won't, because we are in a world of financial violence that is not random, and not due to the Fed not making the perfectly-timed rate cut. Instead it is due to a natural accumulation of private speculation, as well as a chronic experiment in policy by financial adventurers – to accurately use a Victorian term.

There are some early terms to describe the sudden loss of liquidity that marks the end of a bubble. In the 1561 crash Gresham wrote the “Credit cannot be obtained – even on double collateral.”.

Another term goes back to the 1600s when Amsterdam was the commercial and financial center of the world. The Dutch described the good times as associated with "easy" credit and the consequence as "diseased" credit. I'm sure that all in this room would agree with the accuracy of the latter description. Diseased credit.

What can be done about it? Nothing – since the 1500s the literature is complete with many comments that someone, or some agency can set interest rates – either high or low depending upon the personal concerns of the writer.

Misselden in the 1618 to 1622 crash earnestly believed that throwing credit at a credit contraction would make it go away. Despite all this history, Keynes and his disciples cannot be accused of plagiarism.

What's next?

Virtually, all of the "good stuff" likely to be revived into May is being accomplished. This includes investments such as commodities, junk-bonds and stocks, as well as positive statements from the establishment. Both technical and sentiment measures on the stock market are at "tilt" levels.

Because it is up at the right time, the conclusion is that the down will come in on time as well. This would be the next step on the path towards another Great Depression.

Of course, there is no guarantee that events will continue on the path. But, then there is no guarantee that it won't. Best to consider the odds.


While that was an excellent article, let’s go back and revisit Chris’s question, “Nate, in reading the following article, it's amazing how prior depressions to include the big recession in 1982 occurred every 50+ years right on cue. Besides excessive credit, do you have any idea, what would cause this (possible depression) to deviate from prior cycles?”

My first comment is that big recessions do recur, but the cycle is closer to every 51.6 years as Martin Armstrong has defined by doing a very thorough study of history. What happens is that the economy alternates on this timeframe between “private” and “public” waves. We have just exited a private wave and are now experiencing a return to the “public” wave. This is now very obvious if you view current events… it was not so obvious just two or three years ago.

There are many economic waves traveling through time… like all waves, their effects can be additive or subtractive. Martin Armstrong has identified waves on the 8.6 day, week, month, and year timeframe. There is a 37.33 week and YEAR cycle (1980 to 2007…), a 51.6 year cycle, a 72 year cycle, and a 224 year “nation changing” cycle. These cycles are occurring within one another – Armstrong has written much on these cycles, someday they will be modeled and understood better, perhaps then they can be manipulated or altered but we are certainly NOT at that degree of understanding as of yet.

So, what could cause us to deviate from the cycle and to presumably avoid a deep recession or depression? NOTHING! IT IS TOO LATE TO DO THE CORRECT THING FOR THIS CYCLE. The damage has been done, events have been set in motion and the outcome is now assured! NOTHING CAN DERAIL THIS CYCLE FROM EXPRESSING ITSELF FULLY AT THIS POINT.

Once a credit bubble is allowed to develop, nay, even encouraged to be bigger, the eventual bust is 100% guaranteed. The roots of the bust lie in the exponential math that took us up the front side of that parabolic curve! Once launched, all exponential growth rates CRASH as those who have Spent some Time with the Good Dr. Bartlett… know.

While Dr. Barlett describes the math of exponential growth, it was Dr. Minsky who accurately described the seven bubble stages, a review of which is most definitely in order:

Ludwig Von Mises noted that the size of the bust is commensurate with the size of the boom and it was Hyman Minsky who accurately described the seven bubble stages (the following excerpt is from my book Flight to Financial Freedom – Fasten Your Finances, written during 2005/2006):

The late Hyman Minsky, Ph.D., was a famous economist who taught for Washington University’s Economics department for more than 25 years prior to his death in 1996. He studied recurring instability of markets and developed the idea that there are seven stages in any economic bubble:

Stage One – Disturbance:
Every financial bubble begins with a disturbance. It could be the invention of a new technology, such as the Internet. It may be a shift in laws or economic policy. The creation of ERISA or unexpected reductions of interest rates are examples. No matter what the cause, the outlook changes for one sector of the economy.

Stage Two – Expansion/Prices Start to Increase:
Following the disturbance, prices in that sector start to rise. Initially, the increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, more people start to notice.

Stage Three – Euphoria/Easy Credit:
Increasing prices do not, by themselves, create a bubble. Every financial bubble needs fuel; cheap and easy credit is, in most cases, that fuel. Without it, there can’t be speculation. Without it, the consequences of the disturbance die down and the sector returns to a normal state within the bounds of “historical” ratios or measurements. When a bubble starts, that sector is inundated by outsiders; people who normally would not be there. Without cheap and easy credit, the outsiders can’t participate.

The rise in cheap and easy credit is often associated with financial innovation. Many times, a new way of financing is developed that does not reflect the risk involved. In 1929, stock prices were propelled into the stratosphere with the ability to trade via a margin account. Housing prices today skyrocketed as interest-only, variable rate, and reverse amortization mortgages emerged as a viable means for financing overpriced real estate purchases. The latest financing strategy is 40, or even 50 year mortgages.

Stage Four – Over-trading/Prices Reach a Peak:
As the effects of cheap and easy credit digs deeper, the market begins to accelerate. Overtrading lifts up volumes and spot shortages emerge. Prices start to zoom, and easy profits are made. This brings in more outsiders, and prices run out of control. This is the point that amateurs, the foolish, the greedy, and the desperate enter the market. Just as a fire is fed by more fuel, a financial bubble needs cheap and easy credit and more outsiders.

Stage Five – Market Reversal/Insider Profit Taking:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”

Stage Five is where the real estate industry is today [2005/2006]. This stage can be cruel, as the very people who shouldn’t be buying are. They are the ones who will be hurt the most. The true professionals have found their ‘greater fool’ and are well on their way to the next ‘hot’ sector, like the transition from real estate to commodities now.Those who did not enter the market are caught in a dilemma. They know that they have missed the beginning of the bubble (gold, silver, and oil today [2005/2006]). They are bombarded daily with stories of easy riches and friends who are amassing great wealth. The strong will not enter at stage five and reconcile themselves to the missed opportunity. The ‘fool’ may even realize that prices can’t keep rising forever… however, they just can’t act on their knowledge. Everything appears safe as long as they quit at least one day before the bubble bursts. The weak provide the final fuel for the fire and eventually get burned late in stage six or seven.

Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end (remember who has sold their rental properties?).

Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.

This is where you may see the “lender of last resort” who is usually the government. The government, although they were talking up a soft landing, are now forced to step in to prevent the crises from spreading to other sectors. Ironically, this is where the savvy investor who profited before, really profits now. With government backing, they are asked to step in and return “normalcy” to a now damaged sector.

The government’s attempt to “put out the fire” usually works. However, the conditions beyond the year 2010 will require oceans of water that the government does not posses. You must be ready!

So, there is a very predictable sequence of events with any economic bubble, again, the roots of the bubble can be found in the way exponential math functions. Economists and especially politicians have yet to figure this out, much less deal with it. For in fact, IT IS THEY WHO ARE THE ONES WHO SET THESE CONDITIONS IN MOTION AND IT IS THEY WHO ARE EQUALLY RESPONSIBLE FOR THE BUST.

Getting back to Chris’s original question, “what would cause this (possible depression) to deviate from prior cycles?” The answer is NOTHING.


This is a critical concept to understand, it is a concept that pilots are taught about in flight school… for you see, airplanes are made to be dynamically stable – that is they tend to return to center on their own IF THEY ARE DESIGNED PROPERLY. A properly designed economy will also be dynamically stable and IF LEFT ALONE will return on its own, the deviations from center would be small. But when a “pilot” is at the controls, they see a deviation develop and apply INAPPROPRIATE control forces that get in phase with the cycle and cause it to actually grow in size!

If they would have simply taken their hands OFF THE CONTROLS, then all would have been fine! I will humbly submit that Karl Marx, Keynes, Friedman, Greenspan, Bernanke, Paulson, Geithner, Bush, Obama, Larry Summers, and all other “PILOTS” have never studied economic stability and have yet to attend day ONE of pilot school! In fact, they actively prevent anyone from creating a school that actually teaches what happens in the REAL WORLD!

Why is that? It’s because they are not the pilots at the controls, the real pilots are not seen by the public, they are the central bankers of the world who profit from the malinvestments of bubble dynamics and set them in motion by creating a currency system and economy that IS NOT DYNAMICALLY STABLE.

These people need to be rooted out so that a dynamically stable system can be built.

So, I know this is becoming extremely long, but complex problems cannot be understood by lazily trying to mash it into a paragraph or two. So, as evidence that we are cycling from a “private” wave to a “public” one and that the bust WILL DEEPEN, let’s review Martin Weiss’s latest update that he published just this morning:

Memorial Day Disaster

by Martin D. Weiss, Ph.D. 05-25-09

This would normally be my time for a quiet Memorial Day at home.

But even as we seek calm, investors overseas are doing precisely the opposite.

They’re dumping U.S. assets.

They’re driving those assets down in price.

And they’re threatening to sink our entire economy into a THIRD phase of this crisis.

Remember: The first phase was the debt disaster. The second phase was the collapse in the economy. Now, in the third phase, Treasury bonds and the U.S. dollar are getting hit hard, largely due to foreign selling.

The latest drama began this past Thursday…

The supply of U.S. Treasury bonds dumped on the market was so overwhelming, even the Federal Reserve, with all its massive efforts to buy up bonds, could not stop the avalanche.

By the time most traders left for the weekend Friday afternoon, ALL of the gains in bond prices the Fed had been able to engineer in recent weeks were wiped out — vanquished by market forces beyond the Fed’s control.

Why The U.S. Government Is the Next Victim of the Market’s Revenge!

Look. In each successive phase of this debt crisis, investors have consistently attacked and destroyed the market value of institutions that owned large amounts of toxic assets — Countrywide Financial, Fannie Mae, Citigroup, Bank of America and many others.

The shares of these companies were pummeled; their ability to raise new capital, virtually extinguished.

Now it’s the U.S. government that’s the next victim of the market’s revenge.


Because the government never was — and never will be — immune to market selling. Like private corporations, it borrows. Like any borrower, it has creditors. And like all creditors, it’s ultimately up to THEM — not up to the borrower — to decide what to do with their money.

But unlike most borrowers, the U.S. government has arrogantly thumbed its nose at its creditors. Without remorse.

“We can do anything we damn please,” was the message from Uncle Sam.

“We can spend our money wantonly. We can bail out our giant corporations to our heart’s content. We can even debase our currency.

“But YOU, our creditors, are stuck with us. No matter what we do, you’ve got to keep loaning us more money, endlessly.”

Our creditors swallowed hard and tolerated this message for a while. But not now.

Now they’re fed up. They can’t take it anymore.

Now, explicitly or implicitly, the U.S. government has assumed the liability for TRILLIONS of dollars of bad mortgages, sour commercial paper, and sick consumer credit.

Now, directly or indirectly, the U.S. government has placed its own credit and credibility in grave jeopardy.

And now, our creditors are raving mad, dumping U.S. bonds and the U.S. dollar.

The Immediate Consequences...

  • Treasury bond prices aren’t the only U.S. assets plunging. The U.S. dollar is also plunging against major world currencies. It has just fallen below 6-month lows. It’s almost certainly going to fall further.

    Gold has surged dramatically, coming within striking distance of the $1,000 level — and beyond.

    Meanwhile, new, unexpected supplies of bonds are being tossed on the market on TOP of the massive supplies the Treasury must issue to finance its mammoth $1.84 trillion budget deficit estimated by the Obama administration for fiscal 2009.

    Long-term interest rates are getting ready to soar far further. And as rates rise, consumers and businesses will have to pay through the nose to borrow. Or they won’t be able to borrow at any price.

    You can expect a sweeping, devastating impact on the economy, especially in the real estate market. Even with LOWER mortgage rates, commercial real estate is already collapsing. With HIGHER mortgage rates, any hope for stabilization will be dashed.

    Thousands of insurance companies and banks will suffer a new round of losses that could make the subprime mess seem small by comparison.

    The Dow will plunge to our target of 5,000; the S&P, to 500.
A Unique Convergence of Events

If all of these events can tell you anything, it’s that you now have the kind of opportunity that generations of investors could only dream about.

You have the ability to read the handwriting on the wall; to know in advance what is most likely to happen next.

Treasuries bond prices are already sinking. Interest rates are rising. The dollar is falling. Unemployment is surging. Commercial real estate is collapsing. General Motors is going bankrupt.

This is the recipe for disaster I’ve been warning you about.

But it’s also a prescription for some of the greatest profits of all time, using contrarian investments designed to profit from the decline.

Good luck and God bless!


As you can see, the “pilots” of this cycle are making the same mistakes as the “pilots” of previous cycles. With the exception of the central bankers who profit from our poorly designed system, the rest of the “pilots” may have the best of intentions, but they simply do not understand the dynamics. As they say, “the road to hell is paved with good intentions!”

There are cycles in EVERYTHING, they are occurring on ALL time scales, they are ALL INTER-RELATED, and thus when you manipulate one, you manipulate them all! The odds of stopping this or any cycle any time soon are exactly nil. Perhaps in the year 2525…

Zager and Evans - In The Year 2525

So, Chris, I hope this answers your question; it was a good one – key in fact, as sometimes asking the RIGHT questions is the key to getting the RIGHT answers.