The coming (and presently here) Depression

[Arne]

Obama and McCain Tax Proposals
According to a new analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, Democrat Barack Obama and Republican John McCain are both proposing tax plans that would result in cuts for most American families. Obama's plan gives the biggest cuts to those who make the least, while McCain would give the largest cuts to the very wealthy. For the approximately 147,000 families that make up the top 0.1 percent of the income scale, the difference between the two plans is stark. While McCain offers a $269,364 tax cut, Obama would raise their taxes, on average, by $701,885 - a difference of nearly $1 million.



Link: http://www.washingtonpost.com/wp-dyn...060900950.html

If you really think that a tax decrease of 1,7%, which will be financed by the Federal Reserve printing some more money and borrowing it to the government, THEREBY TAXING THE AMERICAN PEOPLE THROUGH THE NEWLY CREATED INFLATION, will turn the "Obama depression" into a "McCain economic slowdown", then you're clearly not getting the economic fundamentals here.

The Inflation Tax

All government spending represents a tax. The inflation tax, while largely ignored, hurts middle-class and low-income Americans the most. Simply put, printing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is very real- the individuals who suffer most from cost of living increases certainly pay a “tax.”

Unfortunately no one in Washington, especially those who defend the poor and the middle class, cares about this subject. Instead, all we hear is that tax cuts for the rich are the source of every economic ill in the country. Anyone truly concerned about the middle class suffering from falling real wages, under-employment, a rising cost of living, and a decreasing standard of living should pay a lot more attention to monetary policy. Federal spending, deficits, and Federal Reserve mischief hurt the poor while transferring wealth to the already rich. This is the real problem, and raising taxes on those who produce wealth will only make conditions worse.

Borrowing money to cut the deficit is only marginally better than raising taxes. It may delay the pain for a while, but the cost of government eventually must be paid. Federal borrowing means the cost of interest is added, shifting the burden to a different group than those who benefited and possibly even to another generation. Eventually borrowing is always paid for through taxation.

The third option is for the Federal Reserve to create credit to pay the bills Congress runs up. Nobody objects, and most Members hope that deficits don’t really matter if the Fed accommodates Congress by creating more money. Besides, interest payments to the Fed are lower than they would be if funds were borrowed from the public, and payments can be delayed indefinitely merely by creating more credit out of thin air to buy U.S. treasuries. No need to soak the rich. A good deal, it seems, for everyone. But is it?

The “tax” is paid when prices rise as the result of a depreciating dollar. Savers and those living on fixed or low incomes are hardest hit as the cost of living rises. Low and middle incomes families suffer the most as they struggle to make ends meet while wealth is literally transferred from the middle class to the wealthy. Government officials stick to their claim that no significant inflation exists, even as certain necessary costs are skyrocketing and incomes are stagnating.

The transfer of wealth comes as savers and fixed income families lose purchasing power, large banks benefit, and corporations receive plush contracts from the government-- as is the case with military contractors. These companies use the newly printed money before it circulates, while the middle class is forced to accept it at face value later on. This becomes a huge hidden tax on the middle class, many of whom never object to government spending in hopes that the political promises will be fulfilled and they will receive some of the goodies. But surprise- it doesn’t happen. The result instead is higher prices for prescription drugs, energy, and other necessities. The freebies never come.

The moral of the story is that spending is always a tax. The inflation tax, though hidden, only makes things worse. Taxing, borrowing, and inflating to satisfy wealth transfers from the middle class to the rich in an effort to pay for profligate government spending, can never make a nation wealthier. But it certainly can make it poorer.

- Ron Paul

Link: http://www.house.gov/paul/tst/tst2006/tst071706.htm

When central banks print notes and issue credit, they increase the amount of money available in the economy, usually as a reaction to worsening economic conditions. Through a change in real money balances, this causes inflation. Financing expenditure in this way is called seignorage and the effect of increasing the money supply and causing the holders of money to pay an inflation tax is the most obvious cost of inflation.

If the annual inflation rate in the United States is 5%, one dollar will buy $1 worth of goods and services this year, but it would require $1.05 to buy the same goods or services the next year; this has the same effect as a 5% annual tax on cash holdings, provided there is 0% economic growth, or other price-reducing factors, such as efficiency-enhancing technology. With price reducing factors at play, a 5% inflation rate indicates a tax rate of higher than 5%.

Link: http://en.wikipedia.org/wiki/Inflation_tax

So in other words tax cuts that are not followed by cutting the same amount in spending can mainly be called a renaming of the tax. In this case: tax reduction in income tax, replaced by tax increase in the inflation tax.

[wmbwinn]

By JENNIFER C. KERR, Associated Press Writer
1 hour, 59 minutes ago



WASHINGTON - Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.


The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.

Collectively, the companies reported trillions of dollars in sales, according to GAO's estimate.

"It's shameful that so many corporations make big profits and pay nothing to support our country," said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.

An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called "S" corporations pay taxes under individual tax codes.

"Half of all business income in the United States now ends up going through the individual tax code," Edwards said.

The GAO study did not investigate why corporations weren't paying federal income taxes or corporate taxes and it did not identify any corporations by name. It said companies may escape paying such taxes due to operating losses or because of tax credits.

More than 38,000 foreign corporations had no tax liability in 2005 and 1.2 million U.S. companies paid no income tax, the GAO said. Combined, the companies had $2.5 trillion in sales. About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.

The GAO said it analyzed data from the Internal Revenue Service, examining samples of corporate returns for the years 1998 through 2005. For 2005, for example, it reviewed 110,003 tax returns from among more than 1.2 million corporations doing business in the U.S.

Dorgan and Levin have complained about companies abusing transfer prices — amounts charged on transactions between companies in a group, such as a parent and subsidiary. In some cases, multinational companies can manipulate transfer prices to shift income from higher to lower tax jurisdictions, cutting their tax liabilities. The GAO did not suggest which companies might be doing this.

"It's time for the big corporations to pay their fair share," Dorgan said.

http://news.yahoo.com/s/ap/20080812/...ons_income_tax

_________________________________

Points regarding the above:

1)I have said many times before that the tax code had a problem with how it handled the business structure which problem is related to the ability of accountants to avoid the tax liability in many creative ways.
2)The proposed tax increase of Obama on the top 2% of the nation is going to be a tax increase primarily on those who are employees. An employee making over 250K is going to get nailed by Obama. The companies are going to probably still be successful in avoiding tax liability.
3)This is why the "flat tax" idea might work well. If all business entities had to pay a flat rate of maybe 8-15%, then the "2/3 of all businesses" noted in this article would suddenly be paying taxes.
4)Downside to the flat tax idea or overhauling the tax code to prevent tax avoidance
(avoidance is legal and everyone does it when and where they can; evasion is illegal and related to a fraudulent claim) is that it will certainly hit the economy's machines (businesses) at a time when the economy is struggling.

But, some fix is in order. We would probably not have a budget deficit if "2/3 of all businesses" (both US and foreign based) were paying taxes...

The Alternative Minimum Tax was invented to prevent people from avoiding taxation if they made an amount over the AMT level. The same idea can be used in the business world.

The issue of 'smacking' the business world when the economy is suffering can be ameliorated to a degree with some industry specific tax breaks or credits (such as going softer on the airline and auto industries).

The other negative to 'going after business' for taxes is that many companies may just move their bases out of the country...

Tricky stuff to figure out.

[Arne]

August 27, 2008

Who Will Suffer Least From Depression?


Though few may have noticed, the past few weeks may be regarded as a global economic turning point. Evidence is mounting that the United States is entering a recession, with increasing signs that it could morph into a depression. While the current Administration appears resigned to bail out or nationalize large tracts of American commerce, the presidential candidates drift towards Great Society era spending proposals. At the same time, America’s principal economic rivals appear to be charting courses that are not in line with U.S. interests.

The Russian invasion of Georgia has revived tensions that have not been seen since the most frigid periods of the Cold War. With the Olympic Games over, China can relax and now exert its muscle without risking any politically motivated boycotts. Between them, these global players hold well over a trillion dollars, or 10 % of U.S. government debt, which they can use in as leverage in any strategic, economic or political confrontation with the U.S. There is also evidence that America’s economic power is even waning in our own back yard. This week, Honduras, a traditional U.S. ally in Central America, announced that it was throwing its lot in with a Latin American trade bloc dominated by Venezuela and Cuba!

For two years I have warned readers of a severe, real estate led recession and encouraged extreme asset allocations to cash, particularly short-term, hard currency government bonds, and gold. Last year, I urged short positions in financials and U.S. stock markets. Some ridiculed me. The financials are currently down some 84 percent. Apparently, the real estate crash is biting deeper than just about any market “expert” had imagined.

The size of the problem is enormous. A fall of just 20 percent in U.S. house values, (which is confirmed by the latest Case Shiller data release) wipes almost $5 trillion from the wealth of American consumers and businesses. This amounts to more than one third of America’s GDP and half of the total U.S. Government debt! How could the fallout be anything less than systemic?

Imprudent lending behavior, inspired by the housing boom, placed the security of banks depositors and shareholders at undisclosed and unprecedented risk. The banking problem is so large that failures cannot be allowed. The government has bent rules regarding financial reporting and the Fed’s lending criteria to keep the financial ship afloat.

The main focus for now is on government sponsored lenders Fannie Mae and Freddie Mac, who are now understood to be hopelessly undercapitalized. Despite the complete predictability of this outcome, even conservative investors, including many banks, had been persuaded that securities issued by both Fanny Mae and Freddie Mac were risk free. And although shareholders for both entities are likely to be wiped out, corporate bond holders, and those individuals and financial institutions who hold mortgages backed by both the GSE’s, correctly assume that the government will back their assets. However, hundreds of billions, perhaps trillions, of Federal dollars will be needed to make whole all who foolishly loaded up on Fannie and Freddie debt. Unfortunately, the Federal cupboards are bare.

This week, the Federal Deposit Incurrence Corporation (FDIC) announced that its problem list had increased from 90 banks to 117. Worse still, the FDIC announced its fund had fallen below its legal deposit ratio, forcing it to increase its levy on member banks. This, just when the net income of its member banks, in desperate need of retained earnings, has fallen by some 86 percent. As more banks begin to fail, the ultimate cost to the Federal balance sheet is hard to imagine.

But, as the old saying goes, ‘What’s good for the goose is good for the gander.’ So, if government financial ‘favors’ are granted to reckless investment firms (Bear Stearns) and now mortgage borrowers, what about other economically vital ‘multiplier’ industries like: automakers, airlines, credit card and insurance companies and even corporate real estate lenders? The logical conclusion for this current drift is hyperinflation. In order to make good on its promises the Federal Government will have to resort to the printing press…with a vengeance.

With America facing severe recession, many regions around the world will suffer. So who will suffer least? Nations that have run relatively prudent economic policies and those who ‘produce’ goods required even in an economically depressed world will continue to prosper increasingly, relative to the U.S.

The differential may become magnified as America’s government hyper-inflates. Investors will then increasingly dump dollar paper assets and buy hard currencies, government bonds of ‘producer’ nations and gold. Investors ahead of this depression curve will likely suffer least!

Link: www.europac.net

[DirkFTW]

US Q2 GDP revised up to 3.3 pct gain due to higher exports, spending

WASHINGTON (Thomson Financial) - The US economy grew faster than expected in the second quarter of 2008 due to rising exports, falling imports, more consumer spending and less inventory reduction than initially reported, the Commerce Department said today.

The economy grew at a 3.3% annualized rate in the second quarter, a sharp upward revision from the 1.9% growth reported in Commerce's first estimate a month ago and higher than the 0.9% gain in the first quarter. The 3.3% GDP increase is the fastest pace since the third quarter of 2007, when GDP grew at a 4.8% annualized rate.

...

Link

Lots of blah-de-blah economics that's beyond me. But 3.3% GDP growth, adjusted for inflation, seems to me like a pretty good mark.

[Arne]

First of all you should read this piece right here: http://www.europac.net/whitepapers/T...bout%20CPI.pdf

It's about the CPI, how it is meassured and how they've changed it over the years. It also gives reasons why they'd do such a thing.

Second of all they took the "core consumer price index" in order to come up with that data as far as I can see. "Core CPI" is in essence the same as the CPI, only that prices for Energy and Food are excluded.

Once again, read the .pdf I posted. To me, if it looks like a duck, swims like a duck, and quacks like a duck it is a duck, no matter what government tells me. The same goes for recessions.

[Arne]

Originally Posted by DirkFTW

Link

Lots of blah-de-blah economics that's beyond me. But 3.3% GDP growth, adjusted for inflation, seems to me like a pretty good mark.

Well, here's your answer:

Down the Rabbit Hole


In recent months, investors have been unjustly chastised for their lack of consistency. In truth, they have an unblemished record of drawing the wrong conclusions. Last week’s 2nd quarter GDP report provides the freshest evidence of market cluelessness.

In its report, the Commerce Department stunned economy watchers by showing a 3.3% annualized increase in 2nd Quarter GDP. The robust growth apparently wrong-footed those expecting further recessionary signals, lent further strength to the current dollar rally, and encouraged previously cautious investors to take another look at U.S. stocks. The strong number also bolstered claims by the Bush administration and the McCain campaign that a recession is primarily a psychological phenomenon. These conclusions would be at least quasi-logical if they were not based on a complete misreading of the report.

Without raising an eyebrow on Wall Street or in the press, the GDP deflator, used in the report to downwardly adjust GDP to account for inflation, was shown at just 1.2% annualized.... the lowest deflator in ten years. In other words, to arrive at a 3.3% growth rate, the government assumed that inflation is running at a ten-year low! In contrast, the latest reading on consumer prices (CPI) in the second quarter shows year-on-year inflation running at a 5.6% rate, a seventeen-year high! In fact, for the second quarter, the same time period measured by the GDP deflator, prices actually rose at an even faster pace of 8.0% annualized. How can it be that inflation is simultaneously running at a seventeen-year high and a ten-year low? Welcome to the Alice in Wonderland world of government statistics.

You would think that this statistical bombshell would raise the hackles of the press. Think again. Not only did the hawk-eyed media completely miss the story last week, they have totally ignored our subsequent attempts to show them the light (with the exception of the N.Y. Post’s John Crudele – who has long suspected a ruse). Although none of the reporters we spoke with could explain why inflation could run at a 10 year low and a 17 year high at the same time, they did not deem the anomaly sufficiently noteworthy. Having been ignored by reporters, I then tried the opinion pages. Unfortunately the piece that we prepared on the subject was rejected this week by all the leading national newspapers.

Reporter Michael Mandel did note the head scratcher on a Businessweek blog posting last Friday. As a partial explanation he pointed out the CPI measures the prices of what we buy, and the GDP deflator measures the prices of what we make. Although this certainly sheds some light, it offers no real explanation. Excluding imports and exports, both measures are determined by the same forces, and should move in relative harmony. If anything, the costs of what we make should be outpacing the costs of what we buy. Producer prices are now rising faster than consumer prices (the latest annual reading of the Producer Price Index ‘PPI’ being 13.2% annualized from the 2nd quarter), which helps explain why corporate profits have fallen drastically. In addition, from July 2007 through July 2008 (the latest data available) import and export prices have risen 21.6% and 10.2% respectively. In other words, no matter what numbers you use, the 1.2% GDP deflator simply doesn’t add up.

I have often argued that government statics are dubious, particularly those related to inflation. But here is an example where they are not even consistent! If we simply use second quarter CPI to adjust nominal second quarter GDP for inflation, the number would have registered a 3.5% annualized decline.

Such horrific GDP numbers are much more consistent with the anecdotal recession evidence that Wall Street and Washington want us to ignore (confirmed by today’s weak jobs report which included the unemployment rate spiking to 6.1%, a five-year high). However, with Orwellian propaganda, our government fabricates GDP growth out of thin air without the smoke and mirrors traditionally required for such an elaborate illusion. All that is required is to put out ludicrous statistics and hope no one notices. Given that this strategy appears to be working, expect future government numbers to get even more outrageous. After all, if they can get away with this, they can likely get away with anything.

Investors relying on this data and reacting to the global economic slowdown by buying dollars and other U.S. based assets while selling gold, commodities, and foreign assets, are jumping out of the frying pan right into the fire. My guess is that it will not be much longer before they feel the heat.

http://www.europac.net

[Arne]

'The Worst Economic Downturn In 60*Years'
by Gary North



So said the Chancellor of the Exchequer, the senior economic official in Great Britain. The story ran on August 30.
Britain is facing "arguably the worst" economic downturn in 60 years which will be "more profound and long-lasting" than people had expected, Alistair Darling, the chancellor, tells the Guardian today.
In the government's gravest assessment of the economy, which follows a warning from a Bank of England policymaker that 2 million people could be out of work by Christmas, Darling admits he had no idea how serious the credit crunch would become.
It was later reported by another source that the interview had taken place two weeks earlier.
This means that the economy by mid-August had convinced the Chancellor to give the interview.
I recall no negative economic statement this forthright by any incumbent senior politician in my lifetime. This simply is not done.
The response to this article was a fall in the British pound on Monday, September 1. The decline continued all week.
The bad economic news arrived at his office rather late. The British public has been well aware of this for months. On June 30, the London Times ran this headline: "Families' cash fears worst for 26 years."
The monthly poll of consumer sentiment found that householders' confidence about future economic prospects had sunk to its lowest level since 1982. Confidence in existing economic conditions dropped during June to levels not seen since late 1992, at the end of the last recession.
Additional evidence of negative sentiment was concern over unemployment.
A new survey from Lloyds TSB also shows that people are more worried about losing their job than at any point in the past three years, as employers feel the effects of the downturn and may have to lay off staff.
When a nation's workers are fearful about their jobs, they become fearful about the economy in general. Confidence is crucial to the maintenance of prevailing spending patterns. Confidence is falling.
The GfK NOP poll – based on people's views on their own finances as well as wider economic conditions – found that the overall confidence index sank by five points this month to a reading of minus 34, on a par with the lowest level since the poll began in 1974. The record low of minus 35 was reached in March 1990, immediately before the start of the last recession.
When sentiment turns down nationally, the economy is threatened by the unwillingness of consumers to keep spending on anything except necessities. This creates a crisis for retailers who depend on feel-good spending.
Willingness to make "big ticket" purchases has also fallen to a record low. Figures published last week showed that families suffered the steepest decline in disposable incomes for nearly a decade during the first three months of the year.
Great Britain is facing what the United States is facing, along with Ireland, Australia, and Canada: a falling housing sector.
House-price falls are accelerating as potential buyers retreat from the market in expectation of cheaper property values in future. The number of homes changing hands last month fell to its lowest in 30 years, according to the property website Hometrack. The average house price dropped by another 1 per cent in June, twice as fast as in May.
Recent figures indicate that home prices in July were down 10% over July, 2007, the month before the international credit crunch began.
The biggest drag on the British economy is the housing market where mortgage approvals are down by more than 70 percent compared to just one year ago. Given the difficult market, Prime Minister Gordon Brown's government is eliminating the home-buyer tax – known as the stamp duty – on residential home purchases of less than $312,000. That rate would affect just less than half of all homes on the market in Britain.
"We've got a credit crunch, the like of which we have not seen in generations," Darling told the BBC.
We are in an international economic slowdown. The Organization for Economic Cooperation, a mainstream international organization, has been unusually frank. It has predicted economic contraction for Great Britain for the next two quarters. It has said that Germany, Italy, and France will barely grow.
"We are facing difficult times, you know we are in a situation where you have the combination of the credit crunch together with high oil and food prices and we have not seen that coming together. It is unique, which the IMF itself has said we have not seen this since the 1930s in fact," said Darling.
Here is what is remarkable about Darling's statements. As recently as April, he shrugged off all such talk. The Times reported this on April 10.
Alistair Darling moved to calm fears about a house price crash yesterday and stood by his predictions for economic growth despite a gloomy forecast from the International Monetary Fund.
The Chancellor told the Radio 4 programme Today that there were still "grounds for optimism" in the face of an "unprecedented shock to the economy". He said that there would "obviously" be a slowdown but stuck to his Budget projection that the economy would grow by between 1.75 and 2.25 per cent this year and between 2.25 and 2.75 per cent in 2009. . . .
Mr Darling said that Britain had a "strong economy that had proved remarkably resilient" in the slowdown. He said that the IMF had downgraded Britain by less than other big economies. He also insisted that Britain was better placed than other countries to cope with the downturn.
The downturn has proven to be relentless. The figures reveal that Great Britain is moving rapidly into a recession. Finally, Darling decided to come clean. He admitted publicly what the British public has known for months.
I would like to say something like this: "When a senior politician finally admits that there is an economic crisis, the crisis is large." But there are no precedents for such an announcement.
AN INTERNATIONAL CRISIS
The economic slowdown that has engulfed the United States is not limited to the United States. The expansion of fiat money under Alan Greenspan, beginning in the summer of 2000, and continuing until his retirement at the end of January, 2006, was sufficient to expand the international economy.
Greenspan's policies created a massive international real estate bubble. He did this with the cooperation of other central banks. These central banks purchased the IOUs of Fannie Mae and Freddie Mac on the assumption that the United States government stood behind this debt. No such legal guarantee was ever made for either organization. But central bankers believed that the United States government would intervene in the case of a breakdown of these private organizations. As yet, this has not happened, but it is clear that it is going to happen if the two organizations go bankrupt.
With the expansion of fiat money and the reduction of interest rates around the world, the world has indulged in fantasy. Investors have bought houses on the assumption that there would be enormous on-paper profits, year after year, for holding residential real estate. Tens of millions of families have moved into houses that they can just barely afford to pay for. They assumed that this investment decision would enable them to live in much nicer housing and also provide capital gains. In other words, they believed in the tooth fairy. They believed they could live in their gingerbread houses and get rich with them, too. It was going to be a win-win deal. It has now become a lose-lose deal. Investors have lost fortunes, and they are going to lose far more money. The solvency of Freddie Mac and Fannie Mae has been called into question on the Web and on the stock market. Their share prices have collapsed. So have the share prices of the banks that financed the building boom.
We are now seeing the entire Western world facing a recession. China and Asia have not yet hit the brick wall, but their stock markets are down by over 50% over the last year. This indicates that the days of wine and roses are over for Asia, too.
China's central bank has inflated the currency consistently by close to 20% per annum for years. This is now catching up with the nation. Prices are rising; bottlenecks are appearing; and businesses are going bankrupt that had relied on cheap labor. The Austrian theory of the trade cycle still is alive and well in Asia. When Asian central banks begin to cut back on the expansion of their currencies, the recession will hit them the way that it has hit the West.
The fact that the Chancellor of the Exchequer would go public with his assessment of the economy indicates that the incumbent politicians have been covering up the real situation all year. Darling went public because no other incumbent politician was willing to do so. The British public is well aware of the situation. Voters in Great Britain have been voting Labour politicians out of office. Labour has been the incumbent party, and Labour will now pay politically. The same situation is facing the Republican Party in the United States. There is no escape from reality of this economic crisis. Incumbent politicians are saying as little as possible, but the reality of the economy cannot be hidden indefinitely.
THE MAINSTREAM FINANCIAL MEDIA
The mainstream financial media in 2008 finally caught up with what obscure financial newsletters such as mine warned about in 2005, and which began to appear in 2006. The financial markets have learned the reality of fiat money's effects, as explained by the Austrian theory of the trade cycle, beginning in August of 2007. It has taken over a year for the inescapable reality of the Austrian theory the trade cycle to become apparent to the mainstream media. Now, it has actually caught the attention of a senior government official. I do not expect this candor to spread to other incumbent politicians.
I especially don't think this will happen in the United States between now and the general election in November. The Democrats will do their best to blame the Bush Administration for the crisis. The Bush Administration deserves plenty of blame, but the real culprit has been Alan Greenspan. He always had bipartisan support, and no one even today is willing to call a spade a spade in the mainstream media. It was Federal Reserve policy more than it was Bush's deficits that led to the present crisis. Bush's deficits have exacerbated the situation, but the public really does not care about government deficits or any other deficits. When politicians come up with tax cuts for the middle class, most voters approve. Democrat politicians vote for the tax cuts, if the tax cuts are for the middle class. The deficits continue.
So far, the Federal government has contented itself with pontificating about the need for public action. It has done almost nothing. This is good. Whatever it does is going to cost taxpayers dearly. But it is likely that as the Fannie Mae and Freddie Mac crisis accelerates, and housing continues downward over the next year, the government is going to intervene in the housing market. It is going to nationalize Fannie Mae and Freddie Mac. It is going to do so in the name of the voters, but in fact it will do so because the central bank of China holds at least $350 billion in Fannie Mae and Freddie Mac debt. This will be a bailout of the biggest banks in the world: central banks.
Anyone who says that the worst is behind us has got to show that he never said it before, and that the evidence clearly indicates that the new engine of economic growth has begun to accelerate. There is no identifiable engine of growth today. There is no large segment of the American economy, the British economy, the European economy, or the Asian economy that indicates that there has been a turnaround, and that the engines are sufficiently large to pull the stagnating national trains.
At this point, investors had better pay close attention to the logic and evidence of every argument, if there is an argument, presented by somebody who says that the worst is behind us. He has to show that the consumer has become optimistic again. He also has to show that the consumer can continue to spend as much as he has spent over the last six years, despite the fact that his home's equity is declining and may actually be negative. He has to show that the consumer can tap into low-interest loans that will enable him to expand his consumption without increasing his monthly economic payments on debt, which is the crucial limiting factor on whether or not the consumer will go into further debt. The old statement, follow the money, applies equally well when there is no new money to follow.
CONCLUSION

The international economy will continue downward for the rest of 2008. The housing markets in Western Europe and North America will continue downward for at least two years, and possibly as long as five years. The end of the illusion regarding living in your own ever-expanding ATM is here.
We now await the re-inflation of the money supply by Western central banks. Even then, I don't think it will be enough to reignite the housing markets. The bloom is off the rose. Only the thorns remain.
September 6, 2008
Gary North is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2008 LewRockwell.com

http://www.lewrockwell.com/north/north651.html