[R-G] [BillTottenWeblog] The Worst Case Scenario

[Bill Totten]

(Someone Has to Say It)

by Big Jake

Seeking Alpha (May 03 2009)


Since the economy began sliding downhill in late 2007, mainstream
economic and market experts have consistently erred on the sunny side.

As late as June 2008, mainstream consensus held that the US was heading
for a "soft landing" and would avoid recession. Several months later,
the slump was acknowledged to have started in January 2008, but we were
supposed to see renewed growth by mid-2009, with unemployment peaking in
the eight-to-nine percent range. A quick "shovel-ready" stimulus bag was
supposed to set us back on the road to prosperity.

In January, recovery projections were pushed forward to late 2009.
Today, the consensus is for a mid-2010 recovery, with unemployment
peaking at just over ten percent. Clearly, the mainstream has struggled
to catch up to reality for well over one year. What are the chances that
they finally have it right this time?

Moreover, the mainstream continues to see what is going on as a
plain-vanilla recession that will be quelled with some on-the-fly
monetary and fiscal tinkering. Washington, we are told, will pull us out
of this slump - as soon as the masses can be enticed back to the
shopping malls. Then things will return to how they were before. But
what if the experts and politicians are wrong not only on their
ever-changing recovery timeline, but also on the nature - nay, the very
existence - of a recovery?

America's reigning political-economic ideology has demonstrably failed.
Given that its government is obviously fumbling along without a clue,
its foreign and domestic credit is tapped out, and its 300 million
people are discovering that their hopes for continuous material
improvement will never be met, could the US be headed the way of the USSR?

Instead of a recovery as the mainstream envisions it, what if America
permanently bankrupts, impoverishes, and marginalizes itself? What if
its cherished institutions fail across the board? For example, what
happens when the police realize that their under-funded pension plans
cannot support a decent retirement? Will they stay honest, or will they
opt to survive by any means necessary? These are questions that the
mainstream does not even begin to contemplate.

In the interests of providing you with an alternate vision - something
outside the mainstream - below are ten predictions for America through
the year 2012. This is not boilerplate doom-saying. Rather, I am laying
out in highly specific terms what will happen over the next three-odd
years. Others have thrown around the term "Depression", but I am going
to tell you precisely what it means for you, your investments, and your
community.

When these predictions come true, I expect to be rewarded with a
seven-figure consulting gig, a book contract, or a high-level position
in whatever administration succeeds the doomed Obama team - that is, if
anyone succeeds it at all.

Prediction one. The twenty-five-year equities bubble pops in 2009. US
and foreign equities markets will stop treading water and realign with
economic reality. Stock prices will cease to reflect the "greater fool"
mentality and will return to being a function of dividend yields, which
have long been miserable. The S&P 500 will sink below 500. In a bid to
stem the panic, the government will enforce periodic "stock market
holidays", and will vastly expand the scope of its short-selling
prohibitions - eventually banning short-selling altogether.

Prediction two. With public pension systems and tens of millions of 401k
holders virtually wiped out - and with the Baby Boomers retiring en
masse - there will be tremendous pressure on the government to get into
the stock market in order to bid up prices.

Therefore, sometime in 2010, the Federal Reserve will create and loan
out hundreds of billions of fresh dollars to the usual well-connected
suspects, instructing them to buy up stocks on the public's behalf. This
scheme will have a fancy but meaningless name - something like the
"Taxpayer Assurance Equities Facility". It will have no effect other
than to serve as buyer of last resort for capitulating smart-money types
who want to get out of stocks entirely.

Prediction three. Millions of new retirees - including white-collar
people with high expectations for a Golden Retirement - will be left
virtually penniless. Thousands will starve or freeze to death in their
own homes. Hundreds of thousands will find themselves evicted and
homeless, or will have to move in with their less-than-enthusiastic
children. Already strained by the rising tide of the working-age
unemployed, state and local welfare services will be overwhelmed, and by
2012 will have largely collapsed and ceased to function in many parts of
the country.

Prediction four. "Quantitative easing" will fail to restart previous
patterns of lending and consumption. As the government sends out
additional "rebate" checks and takes ever-more drastic measures to force
banks to lend, hyperinflation could take hold. However, comprehensive
debt relief via a devaluation of the dollar is even more likely. This
would entail the government issuing one "new" dollar for some greater
number of "old" dollars - thus reducing both debts and savings
simultaneously. This would make for a clean slate a la Fight Club.

As there are many more debtors than savers in the US, the vast majority
would support devaluation. The Chinese and other foreign holders of our
bonds would be screaming mad, but unable to do anything. Every country
that has not found a way out of dollar-denominated reserve assets by
2012 will see its reserves eliminated.

Prediction five. The government will stop pretending that it can finance
continuous multi-trillion-dollar deficits on the private market. By late
2010, the sole buyers of new US Treasury and agency bonds will be the
Federal Reserve and a few derelict financial institutions under
government control. This may or may not lead to hyperinflation. (See
prediction four).

Prediction six. As the need for financial industry paper-pushers
declines and people have less money to spend on lawyers and Starbucks
(SBUX), unemployment will rise until the private sector has eliminated
all of its excess capacity and superfluous or socially needless jobs.
The government's narrow unemployment figure (U3) will rise into the high
teens by late 2010. The government's broader unemployment figure (U6)
will cease to be reported when it reaches 25 percent - it will simply be
too embarrassing. Ultimately, one in three work-eligible Americans will
be unemployed, underemployed, or never-employed (for example, college
grads permanently unable to find suitable work).

Prediction seven. With their pension dreams squashed, and their salaries
frozen or cut, police and other local government workers will turn to
wholesale corruption in order to survive. America's ideal of honest,
courteous, and impartial cops, teachers, and small-time local
functionaries will have come to an end.

Prediction eight. Commercial overcapacity will strike with a vengeance.
By 2012, thousands of enclosed malls, strip malls, unfinished
residential developments, motels, truck stops, distribution centers,
middle-of-nowhere resorts and casinos, and small-city airports across
America will turn into dilapidated, unwanted, and dangerous ghost towns.
With no economic incentive for their maintenance or repair, they will
crumble into overgrown, plywood-and-sheet-rock ruins.

Prediction nine. By the end of 2010, tens of millions of households will
have fallen behind on their mortgages or stopped paying altogether. Many
banks will be unable to process the massive volume of foreclosure
paperwork, much less actually seize and resell the homes.

Devaluation (as mentioned in prediction four) could ease the situation
for those mortgage holders still afloat, but it would also eliminate any
incentive for most banks to stay in the mortgage business. In any case,
the housing market in many parts of the country will lock up completely
- nothing bought or sold.

With virtually no loans being made, even the government will finally
acknowledge that most banks are fundamentally insolvent. A general bank
run will only be averted through a roughly one trillion-dollar
recapitalization of the FDIC, courtesy of new money from the Federal
Reserve.

Prediction ten. As an economy is never independent of the society within
which it functions, the next few paragraphs will focus on social and
political factors. These factors will have as much of an impact on
market and consumer confidence as any developments in the financial sector.

Whether rightly or not, President Obama, having come to power at the
dawn of this crisis, will be blamed for it by over fifty percent of the
population. He will be a one-term president. In response to his
perceived socialization of America, there will be a swarm of
secessionist and extremist activity, much of it violent. Militias and
armed sects will be more prominent than in the early 1990s. Stand-off
dramas, violent score-settlings, and going-out-with-a-bang attacks by
laid-off workers and bankrupted investors - already a national plague -
will become an everyday occurrence.

For both economic and social reasons, millions of immigrants and guest
workers will return to their home countries, taking their assets and
skills with them. The flow of skilled immigrants will slow to a trickle.
Birth rates will plummet as families struggle with uncertainty and
reduced (or no) income.

Property crime will explode as citizens bitter over their own shattered
dreams attempt to comfort themselves by taking what is not theirs.
Mutinies and desertions will proliferate in an increasingly demoralized,
over-stretched military, especially when states can no longer provide
the educational and other benefits promised to their National Guard troops.

There will be widespread tax collection issues, and a huge backlash
against Federal and state bureaucrats who demand three-percent annual
pay raises while private sector wages remain frozen or worse. In short,
the "Tea Parties" of tomorrow will likely not be so restrained.

Finally, between now and 2012, we are likely to see another
earth-shaking national embarrassment on the scale of the 9/11 attacks or
Hurricane Katrina and its aftermath. This will demonstrate conclusively
to all Americans that their government, even under a savior-figure like
Obama, cannot, in fact, save them.

By 2012, there will be a general feeling that the nation is in immediate
danger of blowing up or coming apart at the seams. This fear will be
justified, given that the US has always been held together by the
promise of a continuously rising material standard of living - the
famous "pursuit of happiness" - rather than any ethnic or religious
ties. If that goes, so could everything else. We were lucky in the 1930s
- we may not be so lucky again.

_____


Big Jake lives and works in the Washington, DC area.  He has five years
of experience in the Federal bureaucracy, Congress, and the lobbying
sector.  He is also a US Army veteran.  Notwithstanding his long-time
involvement with government, Big Jake has no personal interest in any
political party or ideology. Articles by Big Jake:
http://seekingalpha.com/author/big-jake/articles/latest

Disclosure: no positions relevant to this column.

http://seekingalpha.com/article/134820-the-worst-case-scenario-someone-has-to-say-it


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