Weakest Borrowers Will Go Bankrupt

Greece is having trouble again and it seems Italy is about to join the party. Greece economy is small enough that it can be saved. But can the same be said for Italy? Why are these countries having trouble? Why are home owners having trouble paying their mortage? Let me explain.

In an interest based economy with fractional reserve banking, weakest borrowers will go bankrupt when deflation hits! Why?

Banks create money when we borrow. Google for "How do banks create money" to understand how it happens if you don't know. Entire money supply is debt. It is the principal we borrowed. But banks demand that it is paid with interest. It is not possible for every borrower to be employed at levels that enables them to earn principal + interest. Because the interest portion is not created yet. It is only created with more borrowing. The inflation created by money creation of banks punishes savers and forces more people to borrow. New money is used to pay old debt. When we run out of borrowers, it crashes. Here is how deflationary crash happens:

http://www.kondratieffwavecycle.com/economy/deflationary-crash/

New money that is created in a society should belong to the society. It should not belong to private bankers. Thus, if any interest is to be paid, it should be paid to the people, not to the private bankers. A solution is to require 100% fractional reserve. Let treasury print principal + interest when a loan is made. Principal is loaned out to the borrower. Interest portion is spent in place of taxes. principal + interest is available to earn. When interest is paid back, destroy it. Web of Debt by Ellen Brown explains it well.

http://www.kondratieffwavecycle.com/web-of-debt/

Current system requires perpetual debt since existing debt cannot be paid without further borrowing. Banks can at will withold loans and create a depression. Then they will make loans to their friends and withold loans from competitors. When competitors who cannot access loans go bankrupt, they are bought by the friends pennies on the dollar. This way the banking cartel gains control of the media and other industries. This is a ponzi scheme but when it goes bust, they get bailed out.

Last but not least, if banks did not create money out of nothing when they made loans, then home prices would be lower and savers would afford them cash down. This is because when 30% of the population works in financial services, the other 70% has to work harder to feed the 30%. If financial services is reduced to 1% just like farming, then they will be employed at more productive tasks (building homes?) and the burden on the 70% will be reduced.

Roubini Warns About Global Recession

Economist Nouriel Roubini says the risk of a global recession is greater than 50 percent, and the next two to three months will reveal the economy's direction. In an interview with WSJ's Simon Constable, Roubini also says he's putting his money in cash. "This is not the time to be in risky assets," he says.

How to Short the Stocks

Stocks have been falling sharp and the talk of recession has started again. Normally, the stock market goes down first and recession is declared later. Similarly, on the way up, stocks move up first and recession ends later. So what does this mean? It means if you are going to buy stocks, you need to buy when the hour is darkest. Similarly, you need to short the stocks when it's all sunny and seemingly good.

If you are watching the market timing services, some of them already went short more than a month ago. Rode the 1st Elliott Wave down and now closing shorts.

I think this is a good level to cover. Yesterday we have touched 38.2% fibonacci retracement level which is the first technical support. As the media beats the drums about upcoming recession, market should rally punishing late short entries now. A 3 waves up will bring back the optimism and should suck in wanna be longs just before the major leg down.

I think stocks are a bubble and nothing has been fixed. Last 3 years we have enjoyed spending the borrowed money at Uncle Sam's expense. But it won't last forever. I suspect this leg down will be worse than the 2008 market crash. So I will either try to short it or stay in cash. I suspect Gold bugs will get caught in a deflationary crash as well.

Debt is the problem and it is denominated in US dollars. Not Gold. People borrowed and they promised to pay back US dollars. When the s$%#!t hits the fan, it will be a race for US dollars. Borrowers will have to sell everything including Gold. If they don't, their creditors will!

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Debt Debate: Spend or Save?

Debt debate rages on: Republicans are insisting on spending cuts yet Obama does not want to see a downturn on his watch so he wants to keep spending. GOP wants to cut spending now so that when deflation hits, they can point to Obama as the scapegoat.

Meanwhile the stock market has been slowly falling and I think it is at the start of wave 3 of a 5 wave decline according to elliott wave technical analysis.

This means the main portion of the decline lies ahead of us. Will a deal on debt that avoids a US default help the stock market? I think while a default can cause havoc in financial markets, avoiding a default will not be an event to celebrate either.

Stocks are a major bubble. According to hundreds of years of market history, we are at bubble valuations when we consider that dividends are all time low. These low dividend ratios appear at market tops. Not at market bottoms. We have not seen a long term stock market bottom back in March 2009.

Why are people buying stocks? The population has a herding mentality. A herd does not act rationally. People look at each other and feel content to be doing what others are doing. This is similar to those sheep who follow others off the cliff to their death.


In debt based monetary system, debt must expand exponentially to create new money in order to pay old debt. When borrowing stops, deflation will take hold. Why would borrowing stop? Because we are going to run out of borrowers. Even if the congress increases debt limit, there is a natural limit that we are going to face and it will come suddenly. It is an exponential function where moments before the end, it would seem like all is fine.

Housing Double Dip Has Arrived

Case Shiller index shows home prices have fallen to duble dip levels. Despite two rounds of Quantitative Easing, FED is unable to get the home prices go up again. Unemploymenr remains high. Someone should tell Bernanke that lenders will not lend at low rates if they see him printing money. The day Bernanke announced QE2 marked tha day of the US dollar for the time. Since then the dollar rallied, then went down, and then is going up again, while credit dependent sectors like housing continue their relentless march down.

“Data through March 2011, released today Case-Shiller Home Price Indices show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels.”

This is bad news for the FED and for the banking industry in general. Debt based monetary system and fractional reserve banking creates money as debt. All of our money is interest bearing debt and in order to afford interest payments, we must create new debt faster and faster at an exponentially increasing rate. Banks and the government used housing as an engine of debt growth by encouring people (even sub-prime borrowers) to buy bigger and more expensive homes in order to inflate the money supply to avoid a deflationary crash. It has not worked. The music has stopped.

The great depression is coming. An entire nation cannot borrow for decades, inflate the money supply, prices and salaries with borrowed money and then hope that all will be fine when the pay back time arrives.

Double Dip Recession explained here.

Understand the Federal Reserve Bank

QE2 (Quantitative Easing 2) has ended and we are already discussing whether QE3 is needed or not. So far FED has been printing about 1 trillion a year and inflation has not materialized. Deflationary forces are too great. Bank credit is still deflating. Even though FED has printed almost 3 trillion, total debt which is 65 trillion dwarfs the base money supply. FED's printing did not fix unemployment, did not fix housing. Home prices have reached new lows and are still going down. The question is, can FED's printing press prevent another major crash like 2008?

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Housing Market Holds Economy Back

Latest news headline states: "Housing market stirs, but holds economy back".

"The housing recession – now entering its third year – has recently shown some signs of abating. But with economic growth still feeble in many parts of the country, analysts say any meaningful housing rebound is still years away"

http://www.msnbc.msn.com/id/41180293/

Home building is down. Job creation is not happening. Home prices are still on the decline. Further declines are expected. State and local governments are going towards bankruptcy. So, why do we need housing to fix all of our problems?

That is the ponzi scheme we are running. Home prices need to go up. Showing their homes as collateral, consumers need to borrow form their home equity and spend it to keep the consumer economy running. Wishful thinking. Even if it happens, it is a dead end that digs us deeper into debt!

How does it all work? Banks create money when we borrow:

http://www.tradingstocks.net/html/banks_create_money.html

This debt becomes our money supply. It has principal + interest to pay. Principal exists because we borrowed it. But interest is only created with further borrowing! When borrowing stops, there is not enough money to pay outstanding total debt! This is why banks are in trouble. This is why FED triples the base money supply and inflation is nowhere to be seen. This is why home prices are down, unemployment is up. The money to pay old salary levels does not exist. Employment numbers will get worse. A new recession will be declared well into the stock decline. An entire nation cannot borrow for decades, inflate the money supply and the prices with borrowed money, and then hope that all will be fine when the pay back time arrives!

We cannot borrow and recover. Borrowing is the cause of the problem. More borrowing will not solve it. I wish the Keynesians would understand common sense economics. Consumer economy is a myth. It is a way to put the American public to sleep while the multinational corporations pillage and plunder their wealth until there is nothing left.

From a banks perspective, lending to consumers is not ideal as well. Banks went all out to hand out consumer loans instead of business loans. Lending to small business has been declining. This is a trend of the past 30 years. It is not a new thing. The banks have been lending to the consumer instead of the businesses. These deflationary trends are part of the banks troubles now.

http://www.tradingstocks.net/html/signs_of_deflation.html

In the past, the banks used to hold their money mostly in US treasuries. That is why in past crisis they could remain solvent even if other assets lost their value. Their US debt would still be secure. Loans to consumers are backed by an asset such as an house. Today the banking industry is invested 95% in consumer loans and mortgages. This is why the banks were insolvent when the housing market collapsed and required a bank bailout.

The loans made to consumers are non-self liquidating. The consumer consumes. The consumer does not create value. Their ability to pay mainly depends on their job. Consumer loans are not put to use to create new value in the economy. On the other hand, loans to businesses are used to produce new value, to employ people, and to earn money so that the debt can be paid. These are self liquidating loans. And we have very little of them left now.

Banks see this as a deflationary collapse and they do not want to lend. Deflation occurs when total debt reaches it's growth limits and borrowing stops. Here is the private debt problem in the United States:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

Meanwhile home prices are still a bubble. We are still 20% above long term average prices according to Case Shiller index. We can fall much more. Housing collapse is a result of deflating money supply. With less money available, it becomes impossible to sustain current prices and salaries:

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

If we end up with a Japanese style deflationary crash, housing market crash may continue for decades.