Global Economic Boom and Bust Cycles: The Great Depression and Recovery of the 21st Century

Table 1: U.S. Government Major Debt Holders

Table 2: European Economic Community

Table 3: Post-World War II Recessions

Table 4: Pre-Crash Point Loss

Table 5: Post-Crash Dow Jones Volatility

Table 6: Junk Bond Industry Analysis

Table 7: World’s Ten Largest Banks

Table 8: Crash of 1990: Nikkei Declines

Table 9: Historic Share Prices of Tech Leaders

Table 10: GAO Audit Report

PROLOGUE

This book supports the premise that during the period 2013-2015, there will be a major global economic collapse, but it also envisions a recovery and new beginning if our world can avoid systemic wars and massive economic destruction. The economic thesis presented in this publication is the result of over 25 years of research, writing and thinking on this subject matter, which is culminating in this incredible era of enormous transformation. What is emerging from the historical data examined over the past century and what forms the foundation of my thesis is what I call the Grand Convergence, the confluence of a diversity of economic forces bringing about a manifestation of creative destruction and global economic reformation. My interdisciplinary research and approach seeks to arrive at the truth embedded in a number of factors that are coming together in epic proportions. These very powerful economic forces will collide to bring about collapse and massive disruptions to our modern civilization. We will witness the rise and fall of government leaders, technologies, and economic systems and models that are part of the creative destructive nature of capitalism. In 2012, our world entered a period of economic, political, technological and social trials and tribulations. And this will be an economic reformation that will not come easy.

The first phase of this economic reformation was the Meltdown of 2008, which was a truly shocking event, one that made the Crash of ’87 appear minor by comparison. The boom and bust pattern was similar: A roughly five year boom period followed by a massive meltdown and bust period, however, this was something quite different and was much more deadly and destructive in its impact on the global economy. Unlike the Crash of 2000 which brought to an end the Dot-Com Bubble Mania, this crash took us to another level and nearly brought about the collapse of financial systems throughout the entire world. The global credit system froze and was literally in a state of shock. This was clearly an epic event and drove me to revise my thinking on economic collapse and periods of recession and depression. After over two decades of observing major boom and bust cycles, my gut reaction to the Meltdown of 2008, from Bear Sterns to Lehman Brothers, was to conclude that we had entered a new zone of economic extremes; that we were looking at the result of decades of over expansion of the financial system; a kind of economic financial insanity, greed gone wild.

After experiencing a strong rally and mini-boom period for nearly two years (2009-2011) the stock market crashed again in August 2011, and it was that event that finally led me to the conclusion that not only is a massive Global Meltdown and Great Depression imminent, but in all likelihood, the Great Depression of the 21st Century had already begun with the Meltdown of 2008 (I believe that when historians write about this period decades from now they will come to that conclusion). From December 2007 to late 2013, over $20 trillion was deployed primarily by the U.S. Federal Reserve System (loans to major banks in the U.S. and Europe, government stimulus programs, quantitative easing programs (QE), etc.) to keep the world out of a deep economic deflationary depression. This was a massive undertaking, however, Fed Chairman Ben Bernanke and his counterparts in Europe and Asia managed to delay or postpone the global collapse into the deflationary abyss. But now a Great Reckoning is upon us and we cannot turn back or renounce the verdict. Greed to the nth power got us to this point in history, and engulfs the entire world: it was no longer a pleasure to just be a millionaire, the goal was billionaire status and the players took on enormous risks in the pursuit for enormous Warren Buffett-type wealth. Greed and financial power drove the world into an economic ditch.

The year 2012 was the defining moment for the global economy, the end of an era and super-long wave cycle, and the continued transformation of the Industrial Age. After having studied and written about the Information Age Revolution (as coauthor of Black Futurists in the Information Age: Vision of a 21st Century Technological Renaissance) I’m convinced that the grand recovery that will take place after the depression years will be centered in the Information Age Revolution of the 21st century. This digital and tech revolution is going to be the perfect solution for the next economic recovery (and that too will come with a price) but we will first have to go through a significant period of financial and economic purgatory.

As the research in this field continues to evolve, new ways of examining this exciting economic phenomenon will expand our understanding of what we are dealing with. Since the field of economics is not a science, but an art, economic data and events tend to bring about conflicting levels of interpretation. For instance, in the Meltdown of 2008 the world was presented with enormous economic and financial devastation on par with the Great Depression of the 1930s. Many mainstream economists and government leaders avoided using the word depression to describe this monstrous economic contraction, and that is understandable from a political point of view. The recession (labeled the Great Recession) was considered a typical garden-variety recession, and it was declared over in June of 2009. It was expected at that point that the U.S. economy would be in a full recovery mode. However, my analysis confirm that by late 2013, the global economy was still struggling to avoid the second phase of this great economic decline.

Perhaps it is no coincidence that we have entered this period of turmoil with the Information Age Revolution in full motion, humming seamlessly in the background. The world will have the means to eventually overcome the destructive forces of this global depression, but the big question is, will our leaders pursue the right course of action or will they decide to continue to go to war over oil and other rapidly diminishing resources, and continue the destructive practice of building and operating nuclear fission reactors? Scarcity of natural resources is going to be a key factor in driving many nations to the brink of economic insanity; and they will make bad decisions in the pursuit of governmental and regional survival. At this moment in history, this world civilization has very serious issues to contend with: global warming, population explosion versus food production and water shortages, massive unemployment versus the technology revolution in robotics and automation, and diminishing resources versus the rapid growth of emerging economic powers in the so-called developing world economies. This is clearly an era full of enormous challenges.

THE OBAMA ERA

Although the central theme of this book is to examine the power and massive influence of Boom and Bust Cycles on a global scale, a parallel mission is to also examine elements, technologies and systems that will give rise to a new era during our next recovery phase. My economic philosophy proclaims that our civilization has arrived at the end of the Age of Oil, and that governments, corporations and institutions should (in 2012) be actively engaged in a transition period of withdrawal from this depleting and environmentally destructive resource. This publication also advocates phasing out the use of nuclear-fission power as a source of energy in modern civilization. Both of these energy vectors are products of the Industrial Age that witnessed massive use and development in the 20th century. The clean energy and green revolution is the wave of the future and that, from an energy perspective, is the paradigm shift we must make in the 21st century. And this is not some future program we must get started on in 2030; this needs to happen here and now! There must be a political will and resolve to implement the transition period; however, there has been a dismal failure by many American presidential administrations to get this process off the ground. By some estimates it will take one to two decades to make a comfortable transition into the full use of renewable energy resources.

The Meltdown of 2008 and the coming of Barack Obama heralded the birth of a new era and a president who understands and appreciates the grand significance of the Information Age Revolution and the mission of clean energy: The birth of the Obama era in support of renewable energy followed the decline and collapse of the Bush era and the Age of Oil. He understands the reality of global warming and that this civilization must now begin to break its addiction to oil. He was swept into office to begin a new era in the American economic journey; a dynamic era of change with substance and commitment to bold new economic, technological and social initiatives.

When President Obama took office in January 2009, his administration had to hit the ground running with a new economic agenda and the beginning phase of an energy efficient future, for the American economy was rapidly descending into a deep abyss of economic chaos: the first phase of the Great Depression of the 21st Century. Against very powerful entrenched forces of the Industrial Age, Republican opposition in Congress and a very powerful entrenched banking system in Washington, President Obama tried to begin the process of moving America into a new era free from the overwhelming dominance of oil. He has the vision and conviction to get this job done, but the massive support he needs from various powerful entities in the United States points to a mission impossible. As a nation, America has not taken bold steps (like Germany) towards making a full commitment to a nuclear-free and clean energy future. This nation is deeply divided over that mission!

However, the crisis in early 2009 presented the new Obama Administration with an opportunity to do something big, something that would not have been possible under normal circumstances. President Obama and his administration put together a recovery plan with an initial value at $787 billion (an amount that by 2012 was increased to $840 billion). On Feb. 13, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 in response to the devastation and ferocity of the 2008 economic meltdown. Within a week the bill was signed into law by President Obama, and thus began what some observers have called the New Deal of the 21st Century. Franklin Delano Roosevelt’s (FDR) New Deal of the 1930s Great Depression is the prime example of the implementation of comprehensive recovery legislation during a massive economic downturn. Much of the New Deal legislation of that era is still with us: FDIC, unemployment insurance, social security and other key safety-net programs. Author, Michael Grunwald, refers to the Recovery Act of 2009 as The New New Deal, which is the title of his new book published in 2012.

Grunwald’s detailed behind-the-scene analysis of the Recovery Act is an informative and highly readable account of the significance of this legislation. His investigative reporting provides a focused account of Obama’s vision and the major players that were brought together to implement that important piece of New Deal legislation.

With GDP contracting at an annual rate of nearly 9 percent and 800,000 jobs being wiped out monthly, the initial mission of the Recovery Act was to create new jobs and save existing ones. In addition, there was an urgency to generate economic activity and invest in long-term growth. The immediate concern was to focus the stimulus on millions of working families and businesses by providing them with relief in tax cuts and benefits. Long-term unemployment benefits and entitlement programs were funded in order to keep individuals and families functioning and stable during the Great Recession. According to the Council of Economic Advisors (CEA), by the second quarter of 2011, the Recovery Act had …raised employment relative to what it otherwise would have been by between 2.2 and 4.2 million people. It clearly stopped the economic bleeding and rapid decline, however the situation was still anemic.

The long-term reach of the Recovery Act of 2009 turned out to be what Grunwald describes as the biggest and most transformative energy bill in U.S. history. The bill managed to include a substantial down payment on a clean energy and technology future for the American economy. Funding was made available for wind and solar energy, electric car production, advanced biofuels and refineries, energy efficient battery production, construction of a smarter grid and many other clean energy resources, research and jobs. Obama made use of this crisis to invest in a modern energy efficient society, preparing itself for the next stage in the Information Age Revolution. Here was a president attempting to implement a nationwide clean technology revolution that many futurists and progressive thinkers (including myself) dream about, however it was not fully appreciated or harnessed as a springboard for the beginning of a massive clean energy conversion and revolution (similar to what’s happening in Germany) in America.

In education, healthcare and national infrastructure projects, the Recovery Act again made a substantial down payment on the future of the American society. The Obama era set the stage for economic rebirth with the added mission of what’s to come next in the technology revolution of the 21st century. Nations that do not seize the opportunity to make this transition now, may find themselves at a distinct disadvantage at some point in the not-too-distant future. Political leaders who understand this and have the courage to act on their convictions and beliefs, are the kind of individuals that deserve our support. In January 2009, the Obama Administration was presented with a grand opportunity for structural and dynamic change, and that opportunity was not wasted. That’s the kind of leader we need in this era of enormous uncertainties and major technological and scientific challenges.

Did the Obama era correct all of the massive problems generated by the Meltdown of 2008: the simple answer is no! However, let us not forget that the deeply embedded economic and financial sins of the past three decades could not be rectified in four short years. And as this publication will bring to light in reference to job creation, the American worker (in 2012) is fully exposed to the internationalization of wage competition, robotic factories and workers, the Internet revolution and other factors that point to the birth of a new era similar to the magnitude of when the Industrial Age emerged as the game changer in the 18th century. We are in the midst of a paradigm shift of profound significance, and many global leaders do not really understand the full implications of this massive era of change!

With the re-election of President Obama in November 2012, the stage was set for the full implementation of his economic, scientific, technological, social and financial policies. The Obama era was given the opportunity to continue its mission for the 21st century, and that was the most intelligent decision that the American people could have made in the 2012 historic election. President Obama has the same (if not greater) mission as FDR had during the 1930s Great Depression. In his second term he will need to strengthen his administration with a cohesive team of dedicated reformers and implement economic policies that will focus on de-leveraging by the American people, the reality of balance sheet recessions and stronger economic and financial reforms. In addition, his next four years should be about the full implementation of a dynamic new green technology future. That’s the vision I share with this president of what will need to come after the massive fallout of the bust cycle. The important thing is to implement the correct economic policies that will benefit the vast majority of Americans, and that process will result in a much stronger recovery.

We are living in the time of an incredible technological revolution, and this will be the salvation of our world after the period of financial and economic purgatory. There has to be this period of cleansing, and it will most likely be more painful in Western societies, where the source of the boom and bust, credit expansion and irrational exuberance was initiated. The transition and transformation periods must take place, but it will not be a seamless/sterile process. That is why we must strive to see the truth in these matters as quickly as possible and not be driven by sheer emotion, ideology, politics or religion, trade wars and currency wars. Something major is about to happen and it will take an enlightened worldview to save our planet and continue the march of civilization. And again, this is not an alarmist ranting, but a call to enlightened minds on our planet to prepare for a coming period of enormous change, transition and transformation.

NOTES

Grunwald, Michael,The New New Deal: The Hidden Story of Change in the Obama Era, Simon & Schuster, New York, 2012.

ECONOMIC TURMOIL

INTRODUCTION

For centuries manias and panics, boom and bust cycles and bubble formations have been major events in our global economic and financial system(s). One of the most extreme examples is the time of Tulip mania, the Dutch mania for tulips that dramatically peaked over a two month period in 1636 to 1637. During that brief time, some individual tulip bulbs traded as high as the price of a house! When the collapse finally came, it was swift and brutal, wiping out the fortunes of those who were left holding the severely devalued assets (tulips). Some historians described this extraordinary bubble as a period of mass insanity and greed. Other examples of extreme manias and periods of financial collapse include The Panic of 1907, German hyperinflation and the Weimar Republic in 1923, Crash of 1929 and the Great Depression, Crash of 1990 in Japan, Dot-Com Collapse of 2000, hyperinflation in Zimbabwe in 2005 and the U.S. Meltdown of 2008.

What happened during the boom and bust cycles of 1995-2000 was explosive and full of surprises, and its abrupt ending made and shattered many fortunes and fabulous dreams of enormous wealth. During that period of unbridled optimism, many traditional attitudes regarding investment analysis were temporarily suspended in favor of New Economy beliefs and mantras. In fact, during that time, the new Internet Economy was born! By some estimates, that boom period was bigger than any bubble the world had ever seen.

With the start of the bust cycle in April of 2000, Washington and the Federal Reserve System (The Fed) were left to clean up the mess while Big Money Financiers (the major architects of financial boom and bust eras) moved on to target a new area of economic growth. With the lowering of short-term and long-term interest rates by the Fed, the real estate markets of 2002-2007 began to take shape and grow into the next bubble. Billions of dollars were lost in the Dot-Com crash, with much of the disaster and collapse occurring within the technology and Internet sectors. The survivors Amazon.com, Cisco, Microsoft, Apple, Yahoo, AOL, ASK, Priceline and others) went on to live another day and prosper in the emerging New Internet Economy and other areas of the Information Age Revolution. Thus, hundreds of billions of dollars that survived the Dot-Com collapse, in addition to billions more from new sources and global investors (sovereign funds, hedge funds, banks and various institutional and wealthy investors) would go into fueling what would become the most massive boom and bust cycle in world history: the global mortgage, credit and finance bubble of the 21st century. So the world experienced a near back to back performance of bubble formations in the space of 12 years.

We are living in an era of the formation of the most massive global financial bubble in all of recorded history. The Meltdown of 2008 (and its aftershocks) was the initial bursting of this bubble and the first phase of the Great Depression of the 21st century. As the bust cycle continues to unfold in the wake of the 2008 collapse, the sovereign debt crisis that has a strangle hold on most of the developed world, has evolved into the epicenter of a massive credit and money supply expansion bubble that threatens to derail the entire global economic system. Governments and their central bankers are conducting a titanic battle to prevent contagion and collapse into deflation and global depression.

As astounding as the 2008 meltdown was, with the serial collapse of some of the most powerful corporations in the world (at that time) it represented only the tip of the iceberg in this epic calamity. The sovereign debt crisis in Europe is a constant reminder of why this bust cycle may linger on for many years without resolution and a robust recovery. Greece and Spain are microcosms of the much larger global crisis, and the world must learn by observing the failed austerity policies that are not working in their ongoing Great Depression years. As authors Carmen M. Reinhart and Kenneth S. Rogoff reminds us, This Time Is Different!

We have reached a major turning point in this bust cycle where an accurate assessment and appropriate reforms are critical; inappropriate policies and short-term remedies will only produce greater failure. And there must be a total recognition by global leaders and lawmakers that unrestrained and unbridled free enterprise systems will not work in this economic bust cycle. The longer our leaders delay in implementing the full measure of economic and depression-era reforms, the more difficult it becomes to stop what is now inevitable: Global Economic Turmoil and Collapse! At some point in this bust cycle, additional stimulus programs, massive money printing, bailouts and corporate welfare will not reverse what we will witness in the second decade of the 21st century. And it now appears that 2012 was the pivotal turning point in this unfolding drama! Fortunately, for the entire world, there is still time to prepare for the finale, but no one knows the hour or the Day of Reckoning.

This book is not a thesis on remedies and reforms, but is more of a lengthy narrative seeking to uncover the enormity and realities of the downward bust cycle moving steadily towards a finale in the second decade of the 21st century. This narrative suggest that we may possibly be confronted with a future meltdown greater than the Meltdown of 2008!

The primary mission of this book is to provide, in layman’s terms: (1) a unique and passionate understanding of the amazing boom and bust cycles of our times, and to understand the full scope of what kind of bust cycle we are dealing with in this current era (2) to present a theory of a Grand Convergence of major economic forces that will bring about massive change and revision throughout the global economy (3) to chronicle the emergence of the Great Depression of the second decade of the 21st century that began with the Meltdown of 2008 and (4) to declare that we have reached the end of the Age of Oil and that the entire world should begin a global transition period away from this depleting energy resource.

In 2013, we are witnessing the greatest bubble and credit expansion in modern economic history, and when this entire system finally implodes, it will bring into existence some harsh economic and financial realities. Given the fact that we are also in the midst of one of the greatest technological revolutions in the history of the world, I sense that there is an urgency to come to a much greater understanding of both the cause of this great calamity and the main source of the inevitable recovery that will take place sometime before 2022.

Major paradigm shifts in the industry sectors of energy, communications, travel, infrastructure, medicine and other fields are scheduled to transform our world in ways that we have only imagined in Hollywood. As these events unfold, global markets are going to react, and in many cases, irrationally to stalled economic performance in the West, natural disasters, terrorists attacks and wars, the possible emergence of trade wars, barrier-breaking technologies and more.

If this book were a major motion picture, the Grand Convergence might be viewed as the main protagonist, and boom and bust cycles, peak oil, economic, financial, technological and political events would be the main plots and subplots of our drama.

Part One, Economic Turmoil, examines the foundation and framework of the current economic crisis. Review and analysis of the epicenter of the global economy brings into focus the major factors of decline. In Chapter One, we look at the American Debt Crisis (both public and private) and the slow but steady decline and revision of this superpower nation. We examine the issues of America’s domestic decline and political gridlock in Washington versus its financial commitments to maintain an international presence and empire. This is unsustainable and will ultimately lead to economic collapse, which is what has ultimately happened to other nations in the past. In Chapter Two, the focus is the European Sovereign Debt Crisis and the fate of the euro. The European Union (EU) has reached a critical impasse that will either be resolved in total political and economic union, or collapse into economic disunion and political chaos. Both the EU and America are at the crossroads and the fate of the global economy hangs in the balance on what happens next in these superpower entities.

Part Two, Boom and Bust Cycles, provides a detailed analysis of five Boom and Bust Cycles and the global impact of these periods of manias and panics. Each historic period provides a unique set of conditions, instruments, economic, political and social factors that came together to generate the bubble period and, within a specific time frame, would ultimately create the conditions for the bust cycle. Despite the differences of each era, there are some fundamental factors at work that are similar in all boom and bust cycles: the cycle of greed and fear, interest rates, and easy money policies by the Fed, to name a few.

In Chapter Three, we examine the fabled era of the boom and bust cycles of the Roaring 20s and the Great Depression of the 1930s. In Chapter Four, our attention will focus on the boom and bust of the Booming 80s and the Crash of ‘87. In Chapter Five, we examine the rise and fall of the Japanese bubble economy and its so-called Great Recession. We take a close hard look at the rise of the Japanese juggernaut and the role it occupied in international finance during the Booming 80s. Here, we also pay close attention to the rise and collapse of Japan’s bubble markets in stocks and real estate, and the deep economic slump it endured throughout the decade of the 1990s and the early years of the 21st century. Understanding what happened in Japan is a very important study analysis and will help us to better understand the aftershocks and fallout of the coming global crisis.

Chapter Six examines the birth of the commercialization of the Internet and the Dot-Com era. The Roaring 90s was one of the 20th Century’s greatest bubbles, and this boom and bust era heralded a major turning point in the Information Age Revolution prior to the birth of the 21st century.

In Chapter Seven, we take a hard look at the mortgage bubble and the Meltdown of 2008; a climatic period that penetrated deep into the financial sectors and economic fabric of the American and global economic system. This was the greatest credit bubble in modern financial history and we examine how this bubble was created and what ultimately triggered its collapse. We also explore the premise that this meltdown was probably the first phase of the Great Depression of the 21st century.

Part Three, Forces of Transformation, presents a historical analysis of the key forces that are destined to initiate a dramatic transformation of our current global civilization: Information Age technologies and the emergence of China are destined to transform the global landscape in the new era. The collective force of these enormous factors will bring about a simultaneous shock and revision of global economic development.

The transition period (2012-?) will be determined by how quickly world leaders respond to the challenge of reorganizing world trade, commerce and development within the context of the Information Age Revolution. Chapter Eight provides key observations on the developments and excitement of the information age and the enormous possibilities of new technologies that have been developed and nurtured over a period of decades. Many of these new technologies are ready or near ready for prime time. We will study the challenges involved in new technologies, some of which, are wiping out jobs while building whole new economic models. We have entered a period of enormous change that is sweeping the entire globe. For example, revolutionary developments are changing our financial markets at an extraordinary pace, bringing about transparent stock market, bond and currency systems.

In Chapter Nine, we examine the emergence of China and the Asian Century. The exponential growth and global impact of this nation is examined in detail. The coming of China and its elevation to superpower status (as well as the emergence of other BRICS nations) has resulted in the establishment of a new multipolar world order for the new millennium. This new paradigm is destined to have a major impact on the world and reconfigure the geopolitical landscape.

Part Four, Future Shock, provides some visionary assumptions regarding technological innovations, paradigm shifts and economic X-factor analysis of natural disasters and terrorists attacks in the 21st century. In Chapter Ten, we take a long hard look at oil and alternative energy resources. A case will be made to announce the end of the Age of Oil and the formal adoption of a New Energy Revolution to power the world of the future. Regardless of how much oil is left in the ground, the world should begin a Transition Period phasing out the use of oil, especially in the area of personal automobile transportation.

Chapter Eleven examine terrorism and natural disasters. This book refers to these unknown events as Economic X-factors, events that happen unexpectedly and are unpredictable. The financial impact of unknown events and catastrophes will continue to play a significant role in the global economy as we move forward in the new millennium. The emergence of Hurricane Sandy prior to the 2012 elections was a deadly reminder of the significance of climate change and extreme weather patterns in this day and time. This civilization cannot afford to ignore the dramatic increase in the power and ferocity of natural disasters. The probability is very high that we will witness much greater catastrophes.

In the Epilogue, I summarize the book’s journey and bring into focus the key issues that are critical to understanding our current crisis and what technological, political and economic solutions the world needs to consider as we move forward in the 21st century. As a civilization and global economic system, we have traveled beyond the point where we can painlessly return to a place of safety: Economic and financial purgatory is unavoidable.

What we may now experience in the West, which will provide the contagion that will affect the entire world, is a grand collapse of an entire global economic system and the complete immersion into the second phase of the Great Depression of the 21st century. As governments and their central bankers struggle to avoid a major collapse in the global system, there is a strong probability that we will witness more frequent boom and bust cycles during the interim periods. This means that even during a long downward bear market, periods of boom and bust will continue to occur, just as they did during the Great Depression of the 1930s. These events may begin to happen in much shorter time frames.

The announcement by Fed Chairman Ben Bernanke (at the September 2012 FOMC meeting) to purchase $40 billion per month in mortgage-backed securities (from banks) until the unemployment crisis in America had improved and the real estate market was in a stable recovery stage, was a clear indication that the country was experiencing an anemic recovery and that the Fed needed to pull out a monetary bazooka and blast out a new quantitative easing program (QE3). By December 2012, this new QE3 initiative became a $85 billion per month program, purchasing $40 billion in mortgage-backed securities and $45 billion in treasury bonds. QE3 was clearly aggressive, open-ended and would continue until there was sustained improvement in labor market conditions. Other international central bankers were also implementing new QE programs in an effort to stabilize their economic systems. All of this was unprecedented, with the entire world economy in unchartered waters addicted to QE solutions and money printing. The Fed sent a very strong message to the markets; that the situation in America was so dire and weak, that it was necessary to initiate an unlimited QE program (some observers began calling it QE forever). However, with this next move, the global economy ventured deeper into unfamiliar territory, and no one knows what the end result will be. By late 2013, the Fed began to signal that it was time to start tapering the QE3 operation by late 2013 or early to mid 2014.

Enormous wealth will be made and lost during the coming volatile periods, so it will be important to know what’s happening when this process is in full motion. Global Economic Boom & Bust Cycles is about coming to grips with this phenomenon; it's about markets, people, power, politicians, central banks, Wall Street, attitudes and beliefs and about building a strategic plan for survival and success in the 21st century. We will have to live through the enormous challenges of what may become, the mother of all economic depressions: The Great Depression of the 21st century. But this story does not simply end with a global economic collapse; as with all boom and bust cycles, there will be a recovery and that will usher in a new era of prosperity. However, the world will have to go through a period of economic purgatory (an unknown number of years) before the time of renewal.

CHAPTER ONE

AMERICA AT THE CROSSROADS

Today, I can report that as promised…After nine years, America’s war in Iraq will be over. Over the next two months our troops in Iraq – tens of thousands of them – will pack up their gear and board convoys for the journey home.

President Barack Obama

The era of global supremacy by a major power…is over…The world is now much more diversified. There is now the new East in Asia. There is now a globally, politically awakened population…If we want to compete in it, we have to revitalize ourselves.

Zbigniew Brzezinski

The 20th Century was the American century, with American ideals, cultural influences, life styles, and its economic and military prowess encircling the globe. America is known as the land of opportunity, the beacon light of freedom and Democratic principles, the place where millions of people all over the world dream of setting up a home. But the glory period may be fading, as past historical periods have taught us: America is at the Crossroads!

In the 20th Century America emerged victorious from three major global wars: World War I, World II, and the Cold War of the Bi-polar era. As the number one superpower on the planet, the military of the U.S. is now deployed in roughly 150 countries around the world. Nearly $1 trillion a year is required to maintain this global presence and system of power, and that has become unsustainable. Since 911, the cost of the wars in Afghanistan and Iraq, and the counter-insurgency in Pakistan, came to a total of $4 trillion and 225,000 dead, both civilian and soldiers. The requirements of being the number one superpower in the world are immense, and as past historical periods have taught us, it has a way of driving a nation to a point of economic collapse.

America is not immune to history’s epic cycles. The rise and fall of nations is a historical reality that cannot be ignored. Americans are now witnessing growing poverty, homelessness, crime, and urban and educational decline. These are clear signs of a nation neglecting its domestic problems in favor of a grand design for international power and prestige. As the economic decline deepens, American cities and states are going broke. School closings, shutdowns of essential services along with increases in taxes are common in many cities throughout the nation. In the early 1990s recession, 37 million Americans were without health insurance, by 2011 that number had climbed to nearly 50 million people, and nearly 50 million people are living in poverty. In November, 2011, the Census Bureau reported that 49.1 million Americans were living in poverty, close to 16 percent of all Americans. And according to another report released by the Census Bureau in November, there are now 51 million Americans who are part of a new category of near poor people. This group earns paychecks, owns homes and cars, pays taxes, but are barely making it, scraping by on very tight budgets. Thus, in America, the land of opportunity, one in three Americans (100 million people) is living in poverty or in the zone just above poverty. Without the safety net programs of social security, food stamps, Medicaid and Medicare, as well as welfare, the situation would be a lot worse. Policies or programs that cut too deep and too fast will quickly throw this nation into turmoil. That is the critical message these numbers present.

American workers are now totally exposed to the globalization of wage competition and within the last 20 years this issue has been exacerbated by the corporate strategy of outsourcing jobs to developing nations in order to save on labor costs. These are the realities that have been building and expanding over many decades, and the culmination of this issue will now contribute to a steady erosion in our economic and financial systems. Can a new vision work for America if millions of her citizens are technologically and economically left behind in the race for the new multi-polar world order of the 21st century? Can America continue to maintain its international global military presence in 150 countries at the expense of its crumbling infrastructures and overall domestic decline; draining critical resources from its economically depressed population? We continue to borrow vast amounts of money in order to maintain the yearly payments we make to foreign countries to accommodate the global empire. Ultimately, America will be forced to retreat from its role as the world’s number one superpower, unable to sustain its financial and economic obligations. Bottom line, we will continue to make these payments until we enter into a period of collapse, just like the Soviet Union did a little over 20 years ago.

America has begun to generate statistics worse than some Third World nations. Unless America implements a concentrated effort to invest in the future of all of its people, it will lose its world class leadership role and all Americans will lose their standard of living. In fact, the United States and Europe are two economic systems that are in structural decline; an economic reality that is more permanent in nature, evidenced by a loss of various industries and jobs, emergence of dynamic technological change, and new global job market realities. These new realities represent a paradigm shift in global economic affairs.

In September 1991, a Washington-based research group, the Nonpartisan Tax Foundation, announced that total overall U.S. debt had soared to $10.6 trillion. This figure included total governmental, consumer and corporate borrowing that largely occurred during the Booming 1980s. According to the report, total debt in 1980 was $3.9 trillion, which meant that in the space of one decade Americans had borrowed an enormous amount of money to help finance our world class lifestyle and to maintain our No.1 status. By 2011, the overall Federal Debt alone had climbed to $14.3 trillion. Since the collapse of 2008, for three years straight the federal deficit exceeded $1 trillion: The Congressional Budget Office projects $1.4 trillion for 2011; $1.29 trillion in 2010; and $1.4 trillion in 2009. On average (since September 28, 2007) the national debt is increasing $3.90 billion per day. The U.S. is borrowing 40 cents of every dollar it spends. As we entered 2012, the national debt was over $15 trillion, rising $75 million every hour of each day!

According to the Treasury Bulletin for March 2011, $2.5 trillion of the $7.8 trillion outstanding marketable debt will come due and need to be paid off. Given this number, the weekly borrowing amount is $60 billion or $240 billion per month. And with the obligations for Social Security, Medicare, and other federal programs rising rapidly, a collision course is expected at some time in the future because all of this is unsustainable: extraordinary borrowing every week, rising federal program payments combined with an anemic economy with a steady drop in tax revenue is a combination of factors that will have dire consequences. If the United States were a large corporation, it would need to file for bankruptcy.

How did the U.S. arrive at this point of a massive debt crisis? The historical record is clear, starting in 2001 the U.S. went from a record surplus position to a massive debtor nation in less than a decade. The tax revenue base was severely eroded and is cited as the main reason for this descent into debtor economic hell. Several rounds of tax cuts, two wars (Afghanistan and Iraq) and two recessions have pushed this nation over the edge. Instead of keeping the surplus as a base for maintaining a balanced budget, George W. Bush, when he took office in 2001 immediately pushed for tax cuts, and Congress approved a $1.35 trillion dollar tax cut package. A second package of $350 billion followed in 2003. Analysts estimate that the tax legislation enacted under President Bush wiped out nearly $6.3 trillion of anticipated revenue. In addition, an analysis presented by the nonprofit Pew Fiscal Analysis Initiative tells us that Bush-era policies generated more than $7 trillion in debt and is the main source of the huge yearly deficit numbers. Thus far, the same report estimates that Obama-era policies has accounted for $1.7 trillion in new debt. This, then, is the legacy of the past decade that has literally sentenced the United States with an undetermined number of years to debt repayments, de-leveraging and fiscal austerity. Table 1 presents a list of the major public and private holders of U.S. Government Debt:

United States Government Major Debt Holders

(As of February 2012)

(1)Federal Reserve and Intra-governmental Holdings: $6.328 trillion (2) China: $1.132 trillion (3) Other Investors/Savings Bonds (a diverse group consisting of corporations, brokers and dealers, GSEs, estates, bank personal trusts, savings bonds, etc.): $1.107 trillion (4) Japan: $1.038 trillion (5) Pension Funds: $842.2 billion (6) Mutual Funds: $653.5 billion (7) State and Local Governments: $484.4 billion (8) The United Kingdom: $429.4 billion (9) Depository Institutions (commercial banks, savings banks and credit unions): $284.5 billion (10) Insurance Companies (property, casualty and life insurance companies): $250.1 billion. Source: Adapted from data presented by the Department of the Treasury/Federal Reserve Board and CNBC.

[Table 1]

As will be discussed in a later chapter, the first two years of the Obama Administration was centered on crisis management and focused on preventing the onset of another Great Depression. He now needs to pivot and focus his administration on massive reform policies and New Deal type structural initiatives, and he should consider forming a new cabinet that has a complete understanding of what needs to be done in this type of economic crisis. He needs to come to the full realization that he is a depression-era president. The sooner he does that, the better president he’ll become during a second term, if he is re-elected. And it is probably a good idea for President Obama to strongly consider appointing a new Secretary of Treasury who is not a Wall Street insider and who is a dedicated reformer.

In the case of the Federal Reserve System (The Fed) and Ben Bernanke, the Fed Chairman needs to concentrate his vast resources on bailing out the American people. As a scholar on the Great Depression of the 1930s, he should clearly reposition his stance in favor of policies designed to encourage the banks to do debt forgiveness and loan modifications. Although he cannot or will not admit it in public, he also needs to come to the full realization that he is a depression-era Federal Reserve Chairman.

THE GREAT RECESSION

As will be presented in my analysis, the Great Recession of 2007-2009 was actually the first phase of the Great Depression of the 21st century. This recession changed the dynamics of the American Dream; something was ripped out of the fabric of our system like a stolen organ from our collective economic body. We now have nearly 15 million American people unemployed; 26 million when you count those who have given up looking for work. Unemployment for young Americans in their 20s is nearly 24 percent (a 1930s Great Depression unemployment rate) with many unable to find any meaningful employment and unable to leave the home of their parents. Many of our younger generations are also saddled with enormous student loan debt, which is considered another bubble crisis in the making.

We tend to associate a great depression era with soup lines, massive unemployment (20 to 25 percent) a banking system collapse and economic blight. However, this time around the main features of the Great Depression of the 20th Century are not currently present in this current phase of the collapse due to the safety nets we have in place: unemployment insurance, FDIC, social security, public assistance, Medicare and Medicaid, etc. And it is extremely important to understand this! Without these safety-net features, we would already have chaos in the streets and massive crime.

The gap between the rich and poor has exploded: Income for the wealthiest 1 percent of Americans (since 1979) expanded 275 percent. During that same period, the income for the poorest 20 percent grew by 18 percent. The disparity is the worse since 1929. In addition, the off-shoring of jobs, automation, the Internet and robotics have taken their toll.

Lakshman Achuthan, managing director of Economic Cycle Research Institute, has these predictions for us: It’s virtually certain that the next recession will come before the job market has healed from the last recession. He believes that there will be at least three recessions over the next ten years, stating that, We’ve entered an era where the United States will see more frequent recessions than anyone is used to. This was a conclusion I came to several years ago in my book Bubble Markets and Boom & Bust Cycles; more frequent boom and bust cycles resulting in periodic episodes of recession during an era of structural decline.

Low demand will plague the U.S. economy for some time to come due to the high level of private debt. Consumers are focused on paying down debt loads (de-leveraging) fearful of losing jobs and are very uncertain about the future. People have basically lost confidence in a stable future and are assuming a very conservative posture on spending. This is the start of a trend that will deepen in 2012 and beyond.

Moving forward into 2012, we can expect the following: (1) federal budget cuts mandated by the debt-ceiling crisis will shrink federal spending at a very critical time (2) fiscal and monetary stimulus has just about run its full course and will run into strong headwinds in a deeply divided Congress (3) the unemployment rate will continue on a course of deep uncertainty and (4) without intervention, the housing crisis will continue on a path of slow recovery. Global uncertainty will continue to plague us and supply and demand forces will shift downwards as more countries are hit with austerity measures. Stock, commodity and bond markets will fall. Table 2 illustrates American recessions since World War II.

POST- WORLD WAR II RECESSIONS

(a)Truman/ Post WW II - Nov. 1948 to Oct. 1949 (12 months) (b) Eisenhower Era (post Korean War contraction - July 1953 to May 1954 (10 months) (c) Eisenhower Era (worldwide economic downturn) August 1957 to April 1958 (9 months) (d) Pre-Vietnam (high unemployment and high inflation rates) April 1960 to Feb. 1961 (11 months) (e) Vietnam Era (high inflation and fiscal policy stance) Dec. 1969 to Nov. 1970 (12 months) (f) Oil Crisis (OPEC) Nov. 1973 to Feb. 1975 (17 months) (g and h ) Double Dip Recession (Oil Crisis, high inflation) - Jan. 1980 to July 1980 (7 months) and July 1981 to Nov. 1982 (17 months) (i) S&L & Banking system Crisis -July 1990 to March 1991(9 months) (j) Dot-com bust period, terrorists attacks, energy crisis - March 2001 to Nov. 2001(8 months);(k) Global financial crisis of 2007 (Meltdown of 2008) Dec. 2007 to June 2009 (18 months). Sources: Adapted from data presented by U.S. Bureau of Economic Analysis and the National Bureau of Economic Research.

[Table 2]

STATES AND CITIES GOING BROKE

A deepening economic crisis will witness many American Cities and Counties going broke. These municipalities will face very difficult times with shrinking tax bases, excessive liabilities, high labor costs, fallout from bad investments, and massive unemployment: this is driving many local governments to cut critical services and/or consider filing for bankruptcy. By May 2010 many American cities were on the brink of bankruptcy.¹ As the downturn deepens, many cities and counties in hard hit locations will be forced to raise taxes, sell assets, sell real estate and renegotiate bond payments. These governments are backed up against the wall with few options. Cities and states are laying off tens of thousands of people each month, and for those who are still working, their wages aren’t keeping pace with inflation.

According to the center on Budget and Policy Priorities, 42 state governments and the District of Columbia are faced with a combined budget shortfall of more than $100 billion. Much of this shortfall stems from the collapse of the housing market and subsequent demand for more critical services for people who have fallen on hard times. This again demonstrates an urgent need for a massive resolution to the housing crisis, as well as the strategic importance of the federal government instituting a Depression Era (or something similar to a Marshall Plan) plan to regenerate the American economic system.² Our domestic crisis should take precedence over the international design of maintaining a global empire. History has demonstrated the dire economic consequences of maintaining an economic empire over and over again: Those who do not learn from the lessons of history are doomed to repeat it! America should be about the business of forging a domestic policy to save its crumbling cities and states instead of wasting valuable resources on useless wars and global controlling mechanisms. It’s worth repeating; the Soviet Union did this a little over 20 years ago and witnessed a massive global collapse of its empire. Some high profile observers contend that this could never happen to America, and I say that they are dead wrong!

Vallejo, CA (population of roughly 120,000 people) filed for bankruptcy in 2008, and after years of austerity, emerged from its crisis in late 2011. For the entire state of California, projections are for annual $20 billion deficits for the next five years. The cumulative budget deficit for the state of New York was expected to reach $50 billion in the year 2012. And it’s reported that Illinois is on the brink of economic calamity and has (in 2011) started paying vendors with IOUs; the state is also pushing for massive tax hikes to balance its books.

In 2010, Colorado Springs, in an attempt to address a $28 million budget deficit, turned off a third of its street lights. Other American cities began doing the same in order to cut expenses. Some local governments even decided to break up roads that no longer could be maintained, returning them to plain gravel. In March 2010, the remaining industrial cities and mill towns in America were at the edge of a cliff in regards to their economic futures. Textile mills in the Carolinas, steel in the Midwest, paper in New England, and aluminum in West Virginia are locations vulnerable to globalization and internationalization of labor costs. When the central employer leaves a small town (population of less than 15,000 people) the result is near economic collapse for the local economy.

In October 2011, 9,000 homes and lots (a total area the size of New York’s Central Park) were on the auction block in Detroit, Michigan: minimum bid $500.00. Total vacant land in Detroit now occupies an area of the size of Boston. In early March 2012, Detroit, Michigan Mayor Dave Bing, introduced a novel program to sell vacant lots in the city of Detroit for $200. Bing stated that the initiative was designed to reduce blight in our neighborhoods. The initial focus of the program was 500 homeowners who had vacant lots adjacent to their own property. Letters were mailed to these owners with attached applications and stating the $200 offer. If the offer is accepted, the homeowner would simply send in the completed application and $200, and the deed would be mailed back to the owner. It was that simple. An added incentive was that the homeowner would receive a $200 gift card to a locally-owned lumber yard in order to purchase wood to build a fence for their new lot. It was a great deal for the homeowner and the city was able to place another piece of property back on the property tax rolls.

The car manufacturing base of Detroit and other cities in the state of Michigan has been decimated, leaving in its wake economic collapse and blight. Unable to pay a $4 million electric bill, Highland Park, Michigan elected officials voted to turn off 1,000 streetlights and also removed them - poles, bulbs, everything. By removing the lights entirely, observers stated that this appeared to be a permanent policy. Here the city is $58 million in debt, has dozens of burned-out or vacant houses and buildings and is experiencing a major decline in population. This was a severe measure undertaken by a community that could no longer meet the demands to pay its municipal bills. Other towns have closed libraries, cut back on trash collection, and instituted cuts in education.

In early November 2011, Commissioners for Jefferson County, the most populous county in Alabama, voted to declare an estimated $5 billion bankruptcy after negotiations with creditors had failed. This went on record as the largest municipal bankruptcy in U.S. history.³ Jefferson County had been trying to avoid bankruptcy since 2008; struggling in a maze of debt obligations, lagging economy, court rulings and public corruption. Jefferson County is home to 660,000 residents and Alabama’s largest city, Birmingham. Observers did not view this as systemic to the municipal bond market, but rather a situation of gross mismanagement of a municipal water and sewer project. However, the systemic risk of investing in municipal bonds will emerge as more of these mismanagement municipal situations move to the surface.

In addition, in order to prevent default on municipal debt and ward off collapse of the government, some small municipalities began utilizing a procedure to either merge with or acquire other municipal governments. As the crisis deepens, it is very likely that many smaller townships will elect to follow this process. In the end, there is strength in numbers, and in unity.

Austerity programs are being implemented all over the world. The people that are suffering the most are the poor, hungry and unemployed. Many American cities and states are flat out broke or soon will be broke and unable to pay their bills. Experts are predicting a surge in municipal bankruptcy filings in future periods, particularly as the real estate market worsens. This is another clear reason why an across the board real estate solution in America is mandatory if the nation is to carve a path towards recovery. According to the Center on Budget and Policy Priorities, these governmental bodies have eliminated a half million jobs since August 2008. Expectations are that an additional 450,000 jobs will be eliminated by the end of 2012. This crisis will accelerate in 2012 and beyond: America is at the Crossroads.

ECONOMIC COLLAPSE: PART ONE

The United States entered a severe recession in December 2007 and this recession was officially over by March 2009 (16 months later). The meltdown of 2008 shook the foundation of the global economy and came close to cascading into the greatest financial crisis since the Great Depression of the 1930s. Recent movies and documentaries on the financial crisis such as Too Big To Fail, Wall Street: Money Never Sleeps, Inside Job, and Meltdown have all showcased the greed, profligacy, incompetency and arrogance of Wall Street, Washington politicians and American banking institutions.

What stopped the total collapse was the extraordinary response of the Fed, the Bush and Obama Administrations, and Congress to create and deploy massive bailout and stimulus programs. Troubled Asset Relief Program (TARP), trillions of dollars of hidden loans to global financial institutions by the Fed, The American Economic Recovery Act (the Obama era New Deal) Quantitative Easing One (QE1) and Quantitative Easing Two (QE2) were employed to save the world from total economic and financial devastation at that critical juncture in history. QE1 saw the Fed buy $1.7 trillion in assets from banks, mainly mortgage-backed securities. The QE2 operation witnessed the central bank purchasing $600 billion of Treasury bonds. Thus, the Federal Reserve purchased $2.3 trillion of debt during both of these operations.

Not only were countless billions of dollars loaned and deployed to banks, corporations and financial institutions in America, but also to financial and banking institutions in other nations. It was a global response to prevent contagion and total global economic disaster.

The American economy was placed on life support for 2 ½ to 3 years and this was called a recovery and a bull market. However, there was not a traditional recovery nor was it a bull market (in the traditional sense); it was a stock market rally on steroids, courtesy of Federal Reserve Chairman, Ben Bernanke and the Fed. A genuine bull market has the ability to generate real sustainable economic growth. This did not happen during that period. What we experienced was monetary inflation and this does not create real sustainable economic growth and employment. The auto industry was rescued, the economic bleeding was stopped and a significant down payment was made (by the Obama Administration) on America’s infrastructure, educational system, green energy and the medical field.

The only reason the U.S. did not enter a depression in 2008 is due to trillions of dollars of bailouts and stimulus programs. The Obama Administration moved quickly in early 2009 to implement their version of a massive New Deal to jump start an economic system that was in free fall. The nearly $800 billion program was significant in stopping the rapid descent into structural decline. Quantitative Easing Two (QE2) was started in November 2010 and ended in June 2011. It provided stimulus to the economy but mostly by creating the atmosphere for a stock market rally and helped to lift gas and oil prices in early 2011. The procedure is to print money