All Money In The United States Comes Into Existence As Debt – So What Will Happen Now That Bank Lending In The U.S. Is Contracting At The Fastest Rate In History?

Most Americans who closely follow economics understand that all money in the United States comes into existence as debt.  Either the Federal Reserve creates it when the U.S. government borrows money, or private banks create it when they use fractional reserve banking to make loans to customers.  If lending increases, it is going to create new money and increase the money supply.  But if lending declines, it is going to take money out of the system and will decrease the money supply.  So why is this important?  It is important because without sufficient lending, the U.S. economy will seize up and grind to a standstill.  Unfortunately, we have created an economic system that is fueled by credit, and without enough credit businesses can’t expand or hire more workers, individuals can’t buy homes and cars and there will not be any hope that the U.S. economy will function at previous levels.

If you will remember, this is what happened at the beginning of the Great Depression.  The big banks severely tightened credit and it created a deflationary depression.

Unfortunately, the same thing is happening again.  In 2009 U.S. banks posted their sharpest decline in lending since 1942.  In 2010 so far, bank lending in the U.S. has contracted at the fastest rate in recorded history.  A “credit freeze” has struck the entire banking industry.  One indication of just how bad the credit freeze has gotten is to look at a graph of the M1 Money Multiplier.  It is now at the lowest point it has been in decades.  Why?  Because banks are simply not lending money….

But didn’t Bush and Obama insist that if we got cash into the hands of the bankers that they would lend it out and help all of us “Main Street” folks out?

It didn’t work out that way, did it?

Instead, the banks (especially the big banks) are reducing their lending, hoarding cash and shrinking the money supply.

If this continues, we may very well experience a 1930s-style deflationary depression, at least for a while.

Already we are seeing the effects of tighter credit hitting the economy….

*Federal regulators on Friday shuttered banks in Florida, Illinois, Maryland and Utah, boosting to 26 the number of bank failures in the United States so far in 2010.  The closing of numerous banks on Friday is almost becoming a weekly ritual now.

*The FDIC is planning to open a massive satellite office near Chicago that will house up to 500 temporary staffers and contractors to manage receiverships and liquidate assets from what they are expecting will be a gigantic wave of failed Midwest banks over the next few years.

*The U.S. Postal Service, facing a $238 billion budget deficit by 2020, is being urged to consider cutting delivery to as few as three days a week.  As money continues to get tighter, we should expect even more government services to be cut.  In fact, some local governments around the U.S. are considering bulldozing whole neighborhoods just so they don’t have to spend money on providing those neighborhoods with essential services.

So will the U.S. government come to the rescue?

Well, some would argue that the unprecedented spending by the U.S. government over the past several years is the only reason why the U.S. economy has not already plunged into a full-blown depression.

But of course all of this government debt is only going to make our long-term problems even worse.

The Congressional Budget Office is projecting that Barack Obama’s proposed budget plan would add more than $9.7 trillion to the U.S. national debt over the next decade.

That is not good news.

Especially if the Federal Reserve refuses to keep “monetizing” all of this debt.

During a recent hearing, Federal Reserve Chairman Ben Bernanke warned Congress that the Federal Reserve does not plan to continue to “print money” to help Congress finance the exploding U.S. national debt.

So if the Federal Reserve will not finance this gigantic pile of U.S. debt, who will?

Already China and some other major foreign powers have reduced their holdings of U.S. Treasuries.

So who is going to borrow the trillions upon trillions that the U.S. government is going to have to borrow?

Perhaps the U.S. government will decide to stop spending so much and will start cutting back and will start being more fiscally responsible.

But don’t count on it.

You see, if the U.S. government does not keep borrowing insane amounts of money to pump up the U.S. economy the whole thing could come down like a house of cards.

Of course it is all going to come down like a house of cards eventually anyway.

There are several ways that all of this could play out (deflationary depression, hyperinflationary implosion, societal collapse, etc.), but all of them are bad.

The truth is that an economic collapse is coming whether you or I like it or not.  We had all better get ready while we still can.

Why Situps Don't Work

15 Reasons Why Barack Obama’s Declaration That “A Second Depression Is No Longer A Possibility” Is Dead Wrong

Is the United States economy headed for another Great Depression?  Well, according to Barack Obama, that is no longer possible.  According to Obama, the United States has avoided an economic collapse and is headed for another wonderful era of growth and prosperity.  But is Obama right?  Do the economic signs indicate that the U.S. is headed towards recovery or towards even more difficult times?  As you shall see below, there is no way in the world that Barack Obama should have ever said that “a second depression is no longer a possibility”.  In fact, as the U.S. financial system continues to crumble, it is likely that those words will be exploited by his political adversaries again and again.  If you are a politician and you are going to issue a guarantee, you had better be able to deliver the goods.  In this case, Obama is making a promise that defies all of the economic data.

Video of Obama making his declaration that “a second depression is no longer a possibility” is posted below….      

So why is Obama wrong?  Well, if you want a full examination of why the United States is headed for an economic collapse, please read the rest of this blog.  In this article we just wanted to highlight a few of the reasons why the U.S. is headed for a complete financial meltdown….

#1) The U.S. housing market is continuing to come apart like a 20 dollar suit.  The U.S. government just announced that in January sales of new homes plunged to the lowest level on record.  This is not a sign that the U.S. economy is recovering.

#2) In fact, a lot more houses may be on the market soon.  The number of U.S. mortgages more than 90 days overdue has climbed to 5.1 percent.  An increasing number of Americans find themselves simply unable to keep up with their mortgages.  This is another indication that things are getting worse instead of better.

#3) Over 24% of all homes with mortgages in the United States were underwater as of the end of 2009.  So in other words, nearly one out of every four U.S. homeowners with a mortgage owe more on their homes than the homes are worth.  That is a giant mess, and it is going to be very painful to untangle it.

#4) If all of that wasn’t bad enough, a massive “second wave” of adjustable rate mortgages is scheduled to reset beginning in 2010.  The “first wave” of mortgage resets from 2006 – 2008 absolutely crippled the U.S. housing market, and this second wave threatens to make things far worse.

#5) Confidence among U.S. consumers fell dramatically in February to the lowest level in 10 months.  Consumers that are not confident in the economy tend to hold on to their money.  If consumers don’t spend their money then the economy is not going to grow.

#6) Many analysts are predicting that the next “shoe to fall” in the ongoing financial crisis will be commercial real estate.  U.S. commercial property values are down approximately 40 percent since 2007 and currently 18 percent of all office space in the United States is sitting vacant. 

#7) In fact, the commercial real estate sector is just now entering the danger zone.  It is projected that the largest commercial real estate loan losses will be experienced in 2011 and the years following.  Some analysts are estimating that losses from commercial real estate at U.S. banks alone could range as high as 200 to 300 billion dollars.  To get an idea of how rapidly commercial real estate loans are turning sour, just check out the chart below….

#8) All of these bad loans are causing banks to dramatically slow down real estate lending.  During the middle of the decade, the number of commercial real estate loans exploded, but now the bubble has burst, and as the chart below reveals, commercial real estate lending has dropped through the floor….

#9) All of these real estate problems are decimating America’s small and mid-size banks.  The FDIC has announced that the number of banks on its “problem” list climbed to 702 at the end of 2009.  This is compared to only 552 banks that were on the problem list at the end of September and only 252 banks that were on the problem list at the end of 2008.  As you can see from these figures, the banking crisis in the U.S. is escalating rapidly.

#10) The U.S. national debt is now over 12 trillion dollars and it is rising at a rate of about 3.8 billion dollars per day.  In fact, some analysts are projecting that the United States will borrow more money in 2010 than the rest of the governments of the world combined.

#11) The financial mess in the U.S. is scaring off other nations from buying U.S. government debt.  In fact, the Federal Reserve now has to “buy” most U.S. government debt because others are extremely hesitant to purchase the massive amount of bad paper the U.S. is trying to sell.  In addition, other countries are now using the massive amounts of U.S. government debt that they already hold as leverage.  A major U.K. newspaper is warning that evidence is mounting that recent Chinese sales of U.S. Treasury bonds are intended as a warning to the United States government rather than simply being part of a routine portfolio shift.

#12) But the U.S. is not the only economy that is suffering during this economic downturn.  The entire world economy has been impacted.  The World Trade Organization has announced that world trade fell by 12% last year as the world economic crisis caused the biggest drop in world trade since 1945.

#13) The United States should not expect the rest of the world to pick up the economic slack either.  The crisis in Greece has made headlines all over the globe recently, and Harvard University Professor Kenneth Rogoff is warning that we could soon see a huge wave of sovereign defaults.

#14) The reality is that things are so bad in some parts of Europe that it could take years and years to recover.  In fact, the chief economist of the International Monetary Fund is warning that financial “belt-tightening” in Europe will be “extremely painful” and could take up to 20 years.  The truth is that if Europe is suffering economically, it will be very difficult for the U.S. to recover at the same time.

#15) In addition, some of the most prominent investors in the world know what is coming and are issuing their own warnings.  For example, Charlie Munger, Warren Buffett’s long-time business partner, has warned in a new article for Slate.com that “it’s basically over” for the U.S. economy.  Marc Faber is warning that things are going to get so bad that it is time for investors to buy farmland and gold.

But apparently Barack Obama knows better. 

Apparently Barack Obama can guarantee that it is impossible for the United States to go into another depression.

Do you believe him?

Do NOT follow this link or you will be banned from the site!