The Classic Liberal Blog

Jobless claims continue to rise ...

Jobless Claims Rise to 472,000

Economists forecast initial claims would fall to 455,000 from 459,000. Instead, we saw another “unexpected” spike in jobless claims to 472,000. The 4-week average of jobless claims has now risen to 466,500, its highest level since March.
The economic recovery appears to be running out of steam.

It's sad ... truly scary.

Truth is, like "Thelma and Louise," we're heading straight towards an economic cliff and it's time American's come to grip with this fact ... before it's too late to protect you and your family.

Straight up, what is going on today is truly a matter of bail out the banks and screw over the people. With bank bailouts that could cost the federal government up to $23.7 trillion, Congress continues to vote against emergency support for the millions of people who remain unemployed after 26 weeks, while ignoring those all together who haven't found work for over 99 weeks.

Real unemployment is far higher than the 9.7% reported. Two months ago in Betting on that "Jobless" Recovery?, I reported that "real unemployment (everyone not working) is currently at a whopping 21.7%." Since then of course, we've experienced the BP oil spill which has put tens of thousands more out of work, with the potential of hurricanes making the oil spill situation even worse.

Many Americans are fighting for their lives right now, without an income to support themselves. So it shouldn't surprise anyone that almost 40 million people (one out of every eight Americans) are currently receiving food stamps. Stop and think about that for a moment ... You don't have to be an economist to understand how bad it is to have millions of people without income, and tens of millions on food stamps.

The long-term unemployment problem creates further problems too, because people are forced to draw down their savings and sell their assets to survive. Capitalism does not exist without capital and debt is not, has never been and will never be a form of capital. Without capital, there is no growth (no matter what the Keynesians tell you).

While more and more Americans are facing poverty, government services will be cut, taxes increased, and even more jobs will be lost. You can bet your bottom dollar too, that our Washington Overlords will spend another round of "stimulus," with more bank bailouts to boot! The affects of which will be to suck even more capital out of the private sector, sending the economy further into decline.

The global banking crisis isn't over either. Not even close. Pretty soon we'll be hearing about underfunded banks again, with "experts" warning of bank runs and panics if we don't bail them out. Here, take a look into your future ...

The $5 trillion rollover

Banks around the world must refinance more than $5 trillion of debts in the coming three years, a massive rollover that poses threats to financial stability and growth.

The need to replace these debts, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth.

"If funding costs increase dramatically, which is perfectly possible in what could be pretty febrile market conditions, that will hit profitability (and the banks ability to raise capital organically) until they are able to re-price loans and facilities," according to Richard Barwell, an economist at the Royal Bank of Scotland in London.

"And to the extent that banks are unwilling or unable to roll over funds that would trigger forced deleveraging. Both outcomes imply a sharp contraction in credit conditions for those within and outside financial markets, putting considerable downward pressure on activity and asset prices."

The track record of the past three years tells us one thing is likely: the banks will get their money, courtesy of government support if needed.

Unless there is a profound sovereign debt crisis, we can count on governments taking the needed steps to see that the banking system does not fall over for lack of funding. So, if liquidity or support schemes need to be extended or invented anew, they will be.

The bottom line is that banks need to raise a significant amount of capital over the next 3 years, by selling debt in a global market already drowning in debt. This means they'll pay a lot more to do so. The consequence of which is that your wages, pensions, retirement accounts, and savings will be inflated away (confiscated and handed to the politically connected). Prepare for ‘Monster’ Money-Printing by the Federal Reserve.

Oh yeah, more bank bailouts are on their way alright. But that's not all, because the banks are facing other problems too. As the stock markets continue to decline, banks will see their shares fall to desperate levels, creating a new set of negative problems. Plus, they're all still sitting on huge amounts of "toxic assets," most of which is priced at face value even though the real value is mere pennies. It's a mirage that can't last forever.

We're in a situation where banks, governments (federal, states, county, city), businesses, and individuals will be looking to sell more debt in an already saturated market, just to survive. Which means no matter what the Federal Reserve does, interest rates will rise sharply until every dollar in debt at best, only returns pennies. Thus squeezing the flow of credit further, and resulting in yet more "quantitative easing." There Will Be (Hyper)Inflation.

The housing crisis isn't over either.

Pending home sales 'fell off a cliff'

According to the National Association of Realtors (NAR), pending home sales fell a whopping 30% in May. Their index, which measures signed sales contracts but not closed sales, plunged to 77.6 from 110.9 in April. It's even off 15.9% from a year ago when the nation was barely emerging from the recession.

"The pending home sales report is a disaster," said Mike Larson, a real estate analyst for Weiss Research. "Sales fell off a cliff after the tax credit expired. It's the biggest monthly decline ever and the index is at its lowest level since NAR began tracking it in 2001."

"We're not creating jobs," said Larson. "The housing problems now are being driven by broad economic problems."

Back during the original Great Depression, housing prices fell 15% from their 1925 peak. Today, housing is down anywhere from 30 to 50% (and still falling) depending on where you live. So on top of the 14% of borrowers who are 30 days late or worse, the people still paying their mortgage will be paying twice their home's value. Quite an extraordinary incentive to walk away ...

Hopefully you get the picture by now, because it's too depressing to keep writing about. We're heading into the Greatest Depression the world has ever known folks. So please, be prepared. Don't pin your hopes on politics and politicians. Make sure you can produce your own food and keep your family safe, and look after your friends and neighbors.

God help us all.