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Green Shoots or Greater Depression?

Net US Debt as a % of GDP 26 August 2009.JPG

In this mornings mail bag we have this take on the current state of the economy by Bud Conrad/David Galland, Editors, The Casey Report which we hope that you enjoy.

While we aren’t contrarian for the sake of being contrary, more often than not that is the position in which we find ourselves. Today, with the media falling all over itself to paint a rosy outlook for the economy while simultaneously voicing encouragement to the new administration in its remake of the nation in previously unimaginable ways, it’s hard not to question our conviction that the worst is yet to come.

Could the economy really recover this quickly from the traumatic trifecta of a record real estate bubble, leviathan levels of debt, and a global credit collapse? We don’t see it as remotely possible, but yet… but yet… there for everyone to see are countless happy headlines and breathless exhortations that the worst is behind us.

So, is it Green Shoots or Greater Depression?

Getting the answer right is critical, because from it flow serious consequences to each of us. And not just in our investment portfolios but in how we organize our lives.

Looking for an evidence trail leading to the correct conclusion, Casey Chief Economist Bud Conrad once again put in very long hours digging through the data. Here’s what he uncovered, about the claims of green shoots, and what may actually be in store for the economy moving forward. 

David Galland    

Rather than accepting the many commentaries that our economy may be improving, let’s focus for a minute on the important forces that will play out over the decade ahead, and the minor improvements – from disastrous levels – that have given commentators such hope that the worst of our problems are behind us.

What Do the “Green Shoots” Really Look Like?

While some individual measures of economic activity appear slightly less dire than previously, it’s important to understand that most improvements are largely attributable to government intervention.

For example, at the onset of this crisis, commercial paper spreads rose to the point that this important source of corporate short-term funding had virtually shut down. Today, those spreads have returned to almost normal levels. But the bulk of this improvement is not due to a return of confidence in the economic system but rather to the Federal Reserve directly intervening in the market with several hundred billions of dollars.

And mortgage interest rates, which briefly dropped into the 4% range, did so not because of a surge in credit worthy borrowers or eager lenders… but rather because the Federal Reserve launched a program of buying $1.25 trillion of mortgage-backed securities. Doing its part, the Treasury has poured billions into Fannie and Freddie and provides guarantees for their mortgages.

In these and many other instances, the "green shoots" that optimists have spotted are really just the visible manifestations of the massive interventions by an increasingly bankrupt government.

Indeed, the massive fiscal stimulus provided by the federal government – and by the Fed, which has slashed interest rates to near zero, purchased mountains of toxic waste, and bought up Treasury debt with billions in freshly printed money – are unprecedented in the history of the U.S.

But even a cursory review of key metrics reveals continuing declines in housing prices, rising unemployment, and slowing consumption as measured by falling retail sales, GDP, and the collapse of world trade. Sure, housing unit sales recovered a little recently, but that’s due mostly to the distress sales of foreclosed homes and houses worth far less than the outstanding mortgage. These are not signs of a strong economy.

The only rational conclusion to be drawn is that the crisis is far from over and that we are not likely to see a strong recovery anytime soon. In fact, things are likely to get much worse before they get better.

The massive debt expansion that played a crucial role in creating the disastrously overleveraged economy is not shrinking. As you can see in the chart above, it’s growing ever bigger.

That debt growth was fostered by U.S. government debt growth, which is now getting out of control.
[Don’t just believe what you hear about “green shoots,” or you could lose some serious money. To find out what’s really going on and where all this is leading, read the rest of Bud’s in-depth article here.]

Your thoughts are of course most welcome.

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Reader Comments (7)

Yes, yes, the reckless printing and spending and pretending will come back to haunt us all at a later time. It is obvious that one thing this new money has done is just keep the system afloat for a while longer. People are sure starting to catch on though. When all of these lies and this deceit is finally put on the table, it is very plain to see what the outcome will be - and that is, firstly, the United States (if it still calls itself that name) will use gold and silver as the basis for its money. Next, following from this, it will come to pass that with the re-establishment of gold and silver as our sovereign wealth and backing for our currency, that the size of our government will SHRINK DRAMATICALLY. This will be good for the people and for our free society and will create an ideal environment in which free thinking and new ideas will give birth to a new and really free market economy. People will not have fond memories of what their government and their fiat bankers did in their names and how the government and bankers lied to the citizens and tried to steal the wealth of the citizens. In the future, government workers will act with great humility and will honor their citizens and go out of its way to do what is right without ever spending more than is in its budget. GOD BLESS THE FRENCH REVOLUTION. LET US NEVER FORGET ABOUT THIS MOST TRIUMPHANT EVENT OF WORLD HISTORY!

August 26, 2009 | Unregistered CommenterScott

and what makes you think gold is gonna survive this next wave of collapse. how quickly you forgot March 2008. on DOW/GOLD chart gold just broke above 10.0 (the 200 EMA, an important point), now it can go end at 12 or 15. if it makes golden crossover it will mean gold will do major correction and the dow and gold will be falling together for quite a while (1-2 years) before it goes to 2 (or 1) on DOW/GOLD as all the gold bugs wish. i think market makers will load on their gold positions around 500 or just below that. all the fundamentals are crap, unless you are playing with the big boys. and btw, what is 1 trillion ? 1 trillion is 6billion people on Earth giving US 45 cents per day for his fiat. that's nothing, the debt can go much higher before US collapses

August 26, 2009 | Unregistered CommenterDi

Reply to comment by Scott: I sure hope you are right but I doubt your senario will manifest itself because you are describing utopia.... man is inherently evil and selfish which causes the type of dilemma we face now.... what you have discribed won't happen till Jesus comes back

August 26, 2009 | Unregistered CommenterRon

Yes OK Di, you can throw in the towel and just send your gold to me, LMK and I'll send you my shipping address...Snakeman

August 26, 2009 | Unregistered CommenterSnakeman

Utopia? Not even close, just economic and silver will allow you to do that. Forget Utopia...

August 26, 2009 | Unregistered CommenterSnakeman

Yes Snakeman, I used the word utopia to discribe what was written above... I was being facetious... with comments like "In the future, government workers will act with great humility and will honor their citizens and go out of its way to do what is right without ever spending more than is in its budget".... that would be utopia and it's not going to happen.... that was my point.... what is your point other than to snipe at everyone

August 26, 2009 | Unregistered CommenterRon

not everyone, just turkey's like you

August 26, 2009 | Unregistered CommenterSnakeman

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