Wednesday, June 15, 2011

Economic collapse: What are the indicators?

The warnings about a pending “economic collapse” are increasing.  Such warnings sound very ominous and have an “end of the world as we know it” aura about them.

But what exactly is an economic collapse?  Wikipedia has as good a definition as any:

An economic collapse is a devastating breakdown of a national, regional, or territorial economy. It is essentially a severe economic depression characterized by a sharp increase in bankruptcy and unemployment. A full or near-full economic collapse is often quickly followed by months, years, or even decades of economic depression, social chaos, and civil unrest. Such crises have both been seen to afflict capitalist market economies and state controlled economies. However, in either case the causes and cures are quite different. The economic forecasting community is of two minds on the likely outcome of the financial crisis that erupted in 2007 [in the US]. Some commentators consider it to herald an international economic collapse while the majority, including governments and international organizations, predict a sluggish economy or a recessionary trend.

How can we tell if such collapse is going to occur, and when?  Such collapse is not an “all or nothing” event.  There are degrees of decline without a full blown collapse occurring.  But then again, we have heard the phrase “tipping point” used more frequently.  Is there a “tipping point” when all economic hell does break loose; where we have reached the point of no return; of irreversible collapse. 

Such event is more a function of loss of trust in the dollar, in our financial institutions, and in the ability or intent of our government to fix it.  We have a new ingredient in the “trust” mix today that we have never had before.  And that ingredient is “the intent of our government to fix it.”  So now, not only do we have declining trust in the ability of our government to improve the economy, we have an increasing distrust of our government’s intent to improve the economy.  We have an administration that is rife with motives to collapse our economy, however stealthily its attempt may be to do so.  The communist/socialist/progressive/Sharia band the administration has assembled is accompanied by chilling statements of disdain for capitalism, self-determination, and founding principles of our nation, economic and otherwise.

Trust in our economy and financial institutions is key.  And when that trust fails, the tipping point is breached and collapse is upon us.  So, then, the question is what is the “final straw”, the event or combination of events that breaks that last thread of trust?

Most often we look at numerous indicators of the economic health and prosperity of our nation.  Such indicators are not merely one day’s static figures but are relationships of indicators over time.  For example, what is the unemployment trend or the international dollar dumping trend?   And we need to distinguish between leading indicators vs. trailing indicators:  Causes versus effects.  Actually, come to think of it, effects may impact “trust” more than causes do.  Causes are usually unnoticed by the masses.  Effects get our attention.

Below are a number of the more common indicators of the health and direction of our economy.  A negative news report about any one, or a combination of these indicators, could dissolve the last remnant of trust that holds our economy together breaching the tipping point into collapse. Giordano Bruno describes several of these factors at 

Value of the dollar relative to other currencies: If the dollar declines relative to the collection of other measured currencies, our  economic health is declining relative to other economies.  But if world economic health is also declining, a stable dollar is not necessarily a sign of improving health of our economy.  Things to watch:  1) World currency values relative to major commodities:  Food, precious metals, oil. 2) The dollar relative to world currencies (for a sign of the US economy sinking faster.)  Here is an example as of this writing.

Weakness, crash of the Euro: The value of the dollar generally increases as trust in the Euro declines given that the Euro is a major component of the basket of currencies the dollar is measured against. However, an extreme version of a decline of the Euro, i.e., a crash of the Euro, could precipitate dire consequences for the world economy. The US will probably itself lend hundreds of billions to Europe before letting its economy fail. See “National debt.” Things to watch: Look for a breach of the floor of the Euro, below which nations lose confidence.

Gold/dollar decoupling:  A sign of gold/dollar decoupling is when the value of gold increases even when the value of the dollar increases.  The value of the dollar is normally stated in terms of its relationship with other world currencies.  The dollar rises or falls relative to the Yen or Euro, for example.  But world currencies may be falling relative to the value of gold.  So even if the dollar goes up relative to world currencies, and gold goes up relative to the dollar, that is a sure sign of decoupling of gold from the dollar.  And that means increased confidence in gold and decreased confidence in the dollar.  Some experts interpret a concurrent rise of the dollar and gold as indicative of a strong dollar.  It is, only compared to the weakness of other currencies.  Things to watch:  Increase in frequency of number of days with concurrent increases in dollar and gold prices.  Here and here are further explanation of this phenomenon.

Gold up/dollar down:  An accelerating increase in the price of gold could mean either rampant speculation, or an impending fiscal collapse.  Such increase with an accelerating decline of the dollar is a bigger deal and a sign of pending collapse.  Things to watch:  Increasing frequency of number of days of gold price increases and dollar value decreases.

Dow/dollar relationship:  Normally if the dollar is up, the Dow is down; the Dow up, dollar down.  But when they both go down together that means that people taking their money out of equities are  putting their proceeds into something other than money markets, CDs, and treasuries.  It is either being stashed or purchasing commodities.  Things to watch:  Increase in number of days both the Dow and the dollar decline.

National debt: Our national debt is accelerating exponentially.  How high and fast will it go before our nation is seen as a lost cause for international investors?  Things to watch:  Watch for TARP III.  Watch for failure of Congress to take painful steps to reverse this trend.  If they are not forthcoming at each critical juncture such as debt limit considerations and budget cutting, then count on the tipping point coming earlier than later.  See Here and Here for more.

Another round of bank failures:  While additional banks fail every week, a marked increase in the rate of bank failures would shake confidence in the entire banking system once again.  Bank failures have declined over the most recent quarter to quarter.  But other factors could reverse that trend.  Things to watch:  Bank failure trends.

Confidence of lender nations/dollar dumping:  Our national debt and value of our currency will impact lender nation confidence in our dollar.  Dollar dumping will increase with decreasing international confidence.  Since their exports are dependent on our out of proportion consumption, these investor nations will use every stealthy means possible to divest their holdings in an unprovocative manner so as to not spook the consumers.  Things to watch:  1) Watch China and other major investors for signs of divestment of dollar related investments.  2)  Watch trends of international organizations distancing themselves from use of the dollar as the preferred means of exchange.

Confidence of consumers:  Consumer confidence equates with consumer consumption.  Consumption equates with continuing trust of foreign nations lending to the US.  The lower our rate of consumption of foreign exports to this country, the less incentive those exporters have to lend to us.  See interactive consumer confidence chart hereThings to watch:  A precipitous drop in consumer confidence could trigger countries like China losing hope that we will consume their exports, eliminating their last remaining reason not to divest themselves of all credit to the US.

Productivity:  Our gross national product (GNP) is a measure of our national production of goods for both domestic and foreign consumption.  A downward trend is bad. See GNP forecast here.  There is good reason to believe that this forecast is overly optimistic given current trends in unemployment and housing. Things to watch:  What is the trend of GNP?

Balance of trade:  How much do we export compared to how much we import?  Decreasing exports relative to imports is bad.  Here is a chart that illustrates the perpetual negative balance of trade.  The imbalance has been in the $40 to $50 billion range for the past year.  We rejoice when there is a slight reduction in the imbalance.  Things to watch:  What is the trend?  What are the consequences of remaining negative?

Productivity relative to interest charges:  Some relationships are more important than others.  One stand out relationship is GNP relative to our total required interest payments.  A declining GNP with an increasing interest payment is the worst combination.  Things to watch:  A trend of declining GNP and increasing interest payments.

International lending interest rates:  What is the rate of interest that must be paid to other nations for them to continue provide credit to the United States?  What is the trend of that interest rate?  A spike in such rates will magnify our projected national deficit and be a visceral trigger eroding confidence.  Things to watch:  Interest rate required to attract lenders to the United States.

Unemployment rate:  The employment rate reflects the demand for good and services.  A high unemployment rate indicates less demand.  Things to watch:  A declining or statically high unemployment rate.

Rate of Inflation, especially food and energy:  Our measures for rate of inflation unintuitively omit food and energy.  These and housing comprise the great majority of things most of us purchase.  Food and energy prices have increased dramatically over the past year and are expected to continue to rise.  See forecast for price of oil here.   See forecast for the price of food here.  There is good reason to believe that food inflation will be much worse than that forecast.  See here. Things to watch:  Look for an increasing rate of increase in food and energy prices.  This will indicate both a decreasing supply as well as a declining value of the dollar.

Housing:  Market prices and loss of equity:  How many people owe more for their homes than the homes market value.  We relied on steadily increasing market value of our homes to make it possible to take out home equity loans to make home improvements or spend in other ways.  Home equity is thing of the past for most people.  Local governments depend on increasing home values to increase assessed value as the basis for collecting property taxes.  Lower home values mean lower tax revenues.  Lower tax revenues mean a cut back in government services and infrastructure maintenance.  See forecast for housing prices here and here. Things to watch:  Continued stagnation or continuing decline of housing prices.

Moral degeneracy/corruption:  Weiner-gate,Soros-gate, and Obama-gate are known cases of scandal, deceit, and back room deals in government.  They are the tip of the iceberg.  For every known scandal and publicly revealed deception, there are dozens unrevealed.  Even suspicion and rumors of such moral degeneracy is enough to erode or eliminate confidence in our government.  Check out Watergate.  Things to watch:  Increased chatter and rumor about Obama’s radical agenda, George Soros plots, banking industry intrigue, and back room politics generally.

Natural or man-caused disaster:  A strong solar flare knocking out communications for weeks or months, or a terror attack exceeding 9-11 proportions could trigger an economic collapse.  Combinations of record-breaking disasters have occurred in the last several months – tornados, floods, fires – when taken together – cost our economy billions of dollars.

So, what will the trigger be?

Any one or a combination of these indicators could be the cause eliminating the last remnant of confidence in our economic system.  Which of these events or conditions is most likely, by itself, to trigger a collapse?

I’ll go out on a limb and first rule out the natural or man-caused mega-disaster.  Why?  While such event has shown to have an immediate negative effect on the stock market, in the longer run such event is energizing and stimulates human activity and productivity.  Such event will delay a crash.  At the same time, such event will require us to go deeper in debt causing the delayed crash to be even worse.

But then again, all of this depends on the severity of the disaster.

For the remainder of the crash triggers, here is my priority order prognosis:

    1. Declining confidence of lender nations/dollar dumping
    2. Reduction in the value of the dollar compared to other currencies
    3. Increase in international lending interest rates
    4. National debt continuing to inflate; failure of Congress to aggressively address the problem
    5. Continued rise in unemployment rate
    6. Spike in food and energy prices
    7. Continued decline in housing prices.

Many official indicators and forecasts are overly optimistic because they have a lag time, failing to take into account more current indicators of lower performance of various economic factors.

Additional signs of the road to collapse will be demonstrations, protests, strikes, riots, and an increase in general lawlessness aggravated by a reduction in protective services by local governments.

The bottom line of all of this is the wisdom of diversifying your assets.  What may be best is a whole ‘nother story.

I welcome other opinions and other sources of information on this topic.  Let me know what your thoughts are.


Anonymous said...

God is not happy with the wicked American women and her ways. He is going to slay her materialistic ways in the days to come.

Gerardo Moochie said...

No surprise there. Though I would qualify the statment with "many American men and women." It is a bit on the bigoted side to infer "all" of one group while totally ignoring other offenders.