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I like you optimism, and I truly want to believe it.

Before we can have a positive outcome such as you have described, we need to "get real" first, and recognize the problems we have. The leadership we have in Washington has been captured by Wall Street and their role seems to be to keep us sedated while Wall Street louts the wealth of the country.

Facing reality means seeing the problems clearly:

+ A second leg down in US house prices lies dead ahead, with even larger fall is possible in the UK
+ Commerical property is headed towards a debacle in both the US & the UK
+ A second banking crisis seems inevitable (as the above problems manifest themselves)
+ Sovereign and US state credit ratings have come into question, and defaults are likely in 2010
+ Days of low inflation from the first downturn are ending (as low inflation from early 2009 gets lost in history)
+ Rates are bound to go higher, as savings rich countries attempt to flee the increasing credit problems
+ Iceland, and its stagflation are a model for the future in many countries, including the US & the UK
+ Weaker currencies are not really a cure, since they will bring much cost-push inflation in food & energy
+ The longer term cure only begins after we face reality, make writedowns, and restructure the economy
+ So-called stimulus programs merely add debt, and low-return investments to an economy which needs better

This outline comes from an article I wrote for Financial Sense, and it suggests some remedies:

+ New types of investment are required, western consumer economies must be restructured towards becoming producers again with more internal savings. That is a slow process, especially when limited capital is being steered towards wasteful areas, propping up old malinvestments in a an obsolete consumer-driven economy, rather than aiming to build a new and more efficient post-consumer economy with dramatically less reliance on expensive imported energy

+ As savings are rebuilt in Western countries, growth will be slower, and probably bring negative growth for many years.

+ Those who are unprepared and unhedged are likely to suffer a huge loss in their wealth.

The "Y-shaped" downturn - A Greater Depression?
A more severe crisis is already "Baked in the Cake"


Dr Bubb, good start to the solution, how to get to the new economy post Depression. I have more to add to my piece, which I should do soon. I will include some of your ideas - if you have more or post another Y Shaped piece, please let me know. I think we lose assembly line (unskilled) manufacturing, but it has been leaving for years We replace it with a layer above where the real value is. But none of this is backed in; we need leadership and policies to help get us there, or we need the govt to get out of the way.

"I think we lose assembly line (unskilled) manufacturing, but it has been leaving for years We replace it with a layer above where the real value is. But none of this is backed in; we need leadership and policies to help get us there, or we need the govt to get out of the way."

I hope you are right - and you may be. But to have that "layer above", we will need access to materials and sub-assembly components. If the dollar is too weak, and we have stopped all mining in the US, it may be tough. Perhaps we should also focus on mining of certain strategic metals and base metals we need to run out own economy, as per the following comment which I originally posted elsewhere on your Blog:

"I think that in the final analysis, oil prices caused the housing bubble to collapse by pushing the marginal subprime borrower into default, which goes to my point that oil is the single most important price in the economy. We can't inflate our way around that fact."

I Agree.
The subprime crisis was really an oil crisis. Stockton CA was "ground zero" in the crisis, with the city being 45 minutes drive from SF, 45 minutes from San Jose, and 45 minutes from Sacramento (have I got that right?) As oil shot thru $3 on its way to $4, peoole woke up and realised that they were not going to be able to afford to live there and drive 45 minutes each way to their jobs. The "cheap" homes they thought they had bought, were unaffordable. Those who planned to flip them, and make a profit they could use to buy somewhere closer saw it wasnt going to happen. So 1/3 of the buyers all defaulted at once, and the game was over.

Similar things happened in Phoenix and in ex-urban communities all over America. This end of the commuters suburban dream, was the final end of America's suburban project. But it will take a decade or so before everyone really understands that.

The suburban bust will reduce US oil consumption, as Chindia is growing theirs. And this little shift will turn into a much bigger shift as the dollar slides and really finishes off the suburbs.

Some think that a weaker dollar will be America's salvation. And, yes, that will bring back manufacturing in America. But at the same time, it will put up the dollar oil price - up to the moon. So as manufacturing comes back, ex-urban McMansion living will finally die. Very few will be able to afford the long commutes.


I just had dinner here in Hong Kong, with a guy called Jack Lifton. He lives in Detroit and travels the word giving talks about Rare Earths, and how vital they will be in the future. The Japanese "get it", and are looking from sources of supply outside China. The US is only slowly waking up.

The high tech future that Duncan imagines relies on some vital inputs like that. Foreigners will not be keen to surrender vital metals and get paid in a sliding dollar. The US (and Canada too) need to realise that the global trade we have been seeing will be totally changed as the Dollar slides.

It will he a hard wake up call to take.


Dr Bubb, I am overdue with part 2 of my discussion of how the US economy will be transformed. A lot is made of how the Agriculture Dept has more employees than we have farmers, but that is misleading at two levels: it leaves out migrant workers, and it overlooks where the money is made in foodstuffs: food processing, the layer above farming. The act of farming is highly automated (plus migrant pickers), and the value has shifted to a higher level. Productivity.

Similarly, the high tech future is one in which the layer above core manufacturing is where the value is. Assembly Line = Farming, Apple = Archers Daniel Midland. The middle class life that used to come for unskilled workers migrating to Detroit is gone, replaced by migrant college kids looking to work in "manufacturing processing."

Yes, certain rare earths are becoming more critical. I mention a couple over in my post on Investing in CleanTech, including Lithium for batteries and Thorium for clean nukes. There are many more, and a lot of them are not in the US. Fortunately for the West, a lot are in still-accessible places like Australia, which is not yet a suburb of Shanghai.



This guy seems to share some of your thoughts on oil and transport:


DG, oh boy, fear that higher oil prices means we go to electric canal boats? Nuts.


Your stock market crash in 2011 video was spot on with a high of 1363 S P April 2011 and the next wave high of 1225(1218 August 31, 2011. Do you fololw the convergence of the moving averages(death cross)that appeared in August 2011? I'm sure more people would like to know more of your reasoning.

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