Why Washington Cannot Prevent Depression

Martin D. Weiss, Ph. D. takes a closer look at the fear of depression that is sweeping through the U.S. In this issue of Money and Markets, Dr. Weiss explains that with the already falling economy it is absurd to think that Washington is able to bailout every individual and company.

Jupiter, Fla. (PRWEB) November 13, 2008 -- Martin D. Weiss, Ph. D. takes a closer look at the fear of depression that is sweeping through the U.S. Dr. Weiss explains that with the already falling economy it is absurd to think that Washington is able to bailout every individual and company.

Millions of Americans are consumed with anxiety, abandoning their old shopping habits, slashing their spending, trying desperately to pinch pennies for the coming hard times. Thousands of bankers are snapping shut their coffers, tightening their lending standards, hunkering down in anticipation of a massive economic downturn. Sophisticated investors are pulling out of hedge funds, selling their mutual funds, rushing their money to the safety of Treasury bills. Even the established media, is beginning to speak out more loudly:

CNN Money: "The rapid deterioration of labor markets points to a sharp decline in hours worked and output in the fourth quarter. This is likely to lead to a decline in personal consumption to the tune of 5% or so for that period. Since that makes up about 70% of the economy, the stage has already been set for real GDP to shrink at a more than 4% rate in the fourth quarter."

New York Times: "As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy, the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years. The word for this is deflation, or declining prices, a term that gives economists chills. Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan's so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s."

The Wall Street Journal, USA Today, and hundreds of other newspapers around the world are all asking essentially the same question: Is the U.S. sinking into a depression? How bad will it be?

The answer, they say with unanimity, lies with Washington. That's why General Motors has suddenly switched PR tactics, now admitting it will run out of the cash it needs to stay in business. It wants a Washington handout. That's why dozens of major cities and states are saying the same thing. They want their share of the federal money, too. The dire reality is that Washington cannot save the world. It cannot prevent the next depression.

Based on the Federal Reserve's Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S. Based on estimates provided by the U.S. Government Accountability Office and other sources, it's safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in for Social Security, Medicare and other pensions.

Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion, or more than a half quadrillion.

In contrast, even after the most reckless outpouring of government bailouts in recent months, the total rescue money announced in the U.S. so far is $2.7 trillion, a huge, unwieldy amount, but still minuscule in comparison to the massive debt build-up.
Clearly the government bailouts are too little, too late to end this crisis. At the same time, the cost of the bailouts is too much, too soon for those who must finance it.

With the economy already falling, Washington cannot and will not fund the bailouts with higher taxes. Nor will it do it by making major cuts in government expenditures. Instead, at this phase of the crisis, the government will try to finance its folly largely by borrowing the money. Just recently, the U.S. Treasury department announced that it is borrowing $550 billion dollars in the fourth quarter, more than the entire deficit of fiscal year 2008. Also, Goldman Sachs recently estimated that the upcoming borrowing needs of the U.S. Treasury will be a shocking $2 trillion to finance the bailouts, to finance the existing deficit and to refund debts coming due. This means an avalanche of new Treasury bond supplies can be expected, crowding out private borrowers and putting severe upward pressure on interest rates.

Washington is prodding consumers to borrow more, spend more, and save less. But consumers are doing precisely the opposite, as seen from the October collapse in retail sales. Washington is prodding bankers to dish out more mortgage money, give people continuing access to credit cards, and even lend money to sinking businesses. But the bankers are also doing precisely the opposite.

Why the reluctance to borrow and lend? Because most borrowers and lenders are finally beginning to recognize what really went wrong in the United States: Too much debt, not enough savings. They also recognize what they have to do about it: Try to cut back.

Deflation alone is not so bad. It can help make homes more affordable, a college education more achievable, a tank of gas easier to fill. It's when debts and deflation come together that a depression is inevitable. That's what happened in the 1930s; and, in a somewhat different way, that's what's happening today.

"We are witnessing powerful vicious cycles in which deflation brings down debts and debts help accelerate the deflation. In every sector of the economy and every corner of the globe, debt defaults are causing deflation; and deflation is causing debt defaults. No government can stop this powerful, vicious cycle. It has to play itself out. It's preposterous to believe that Washington can save every failing individual, company, country and government on this planet. It's naive to believe that government gimmicks or trick, manipulating the currency, writing new laws, changing the banking structure will be a match for billions of consumers in revolt, millions of investors desperate to sell and thousands of banks pulling in their horns. So act promptly now to liquidate or hedge your holdings, build cash and make sure the cash is safe," Dr. Weiss states.

To read this issue online, please visit:
http://www.moneyandmarkets.com/why-washington-cannot-prevent-depression-27968

About MARTIN D. WEISS & MONEY AND MARKETS    

Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.

Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.

Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.

Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.

Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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