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Friday, June 17, 2011

Double Dip Recession -- June 11, 2011

This week, the Dow Jones fell below 12,000 as investors saw the writing on the wall. Despite attempts by the Obama administration and Federal Reserve, the ailing economy cannot be cured. The enormous intervention and spending has only delayed the inevitable, and made the day of reckoning worse. Massive debt, increasing home foreclosures, unemployment, inflation, and slowing domestic, as well as export business, are all causing financial agencies to lower growth expectations. Fed Chairman Ben Bernanke even had to downgrade forecasts of gross domestic product this week. However, even this reassessment was overly optimistic. The future of the United States is a shallow recession, followed by years of slow anemic growth.

A considerable amount of my time is spent in my cell reading and analyzing various types of economic news and data. I have a subscription to the Wall Street Journal that I read almost in its entirety. I also read various financial and investment magazines. Then quarterly, I will go over the fundamentals of approximately 10,000 companies on the New York Stock Exchange and Nasdaq. I keep charts on 500 stocks that go back several years. Finally, I read a number of specific corporate and mutual fund reports. A few days ago, I read about a number of Fidelity Select Portfolio Funds, including chemicals, energy, and natural resources. Earlier today, I listened to the Larry Kudlow Report on WLS radio. My cellmate recently scolded me for spending so much time on studying the economy and investments instead of working on my appeal after I spoke about some of the injustices of my case. What he does not realize is that the vast majority of what work I need done is the procurement of documents and affidavits I am unable to do myself.

This week, I visited with my parents and a friend. As is common, I became frustrated with my mother. I give friends and family members advice about investments, including my parents. Despite the enormous amount of time I dedicate to studying the market, my mother will often dismiss my recommendations. I told her to sell at least 10% of her portfolio when the Dow Jones breached 12,500 and looked like it was to surpass the 13,000 mark. I gave her specific stocks and funds to sell and even the prices to sell at. However, she did not. Like many other people, she wrongfully thought the market was going to go higher and have a full recovery. This was preposterous to me. I know the impressive rebound was a facade created by unprecedented governmental spending and intervention. I cannot predict when, and the market will no doubt have its ups and downs, but ultimately I expect another 15% decline in the S & P 500.

The friend who came along on the visit was surprised by my expressed anger. She does not, however, understand how much of my life revolves around trying to predict the market and make wise judgments about the economy. I live in a 10 x 5 foot cell, and there is little meaning to my existence. I make these herculean efforts to be productive in some way, rather than just rot away. I will probably die in this cell or one very similar to it. What will I have to show for it? At the least, I wanted to assist others, since I cannot assist myself. Maybe I should just watch TV all day, or pound on my door for hours, like the bug downstairs in Segregation.

The housing bubble that occurred in 2008 has never been allowed to deflate. The U.S. government has tried all sorts of rebates, foreclosure obstacle loans, and other gimmicks to stop or at least put the brakes on tumbling home prices and homeowners' losses. Despite all this, a staggering number of people are underwater in their mortgages. Almost one out of every four homeowners owe more money than their house is worth, and home prices are not going to improve for years. In fact, prices fell further in the first quarter and will continue to fall well into 2012 before flatlining. In the end, trillions of dollars in wealth will have disappeared. Even a country like the United States cannot absorb such a loss without a significant contraction.

Although the government bailed out a number of large banks that held bad debt, numerous other medium-sized and small banks are in precarious positions. Almost 800 banks that own commercial and residential loans are still at risk of going under. Most of these banks' capital reserves should be adequate if the economy keeps humming along. However, there is a severe problem if economic growth and housing prices go in reverse. It is certain that the latter will, and in my opinion, the former will as well. Once the banks start to go under, it will precipitate a domino effect that will only be prevented by another enormous bailout package the government cannot afford.

President Barack Obama and the Democratic legislature have racked up a debt never seen before in the history of the United States. Last month, the federal government hit its debt limit -- the total amount Congress has authorized the Treasury Department to borrow. The sum is a staggering $14.3 trillion, and is continuing to grow exponentially. Soon the U.S. will default on its debt if the two parties are unwilling to come to an agreement to permit the government to borrow yet more money, and this is likely to occur if Democrats refuse to cut spending and insist on raising taxes. A default on Treasury securities will cause the country to lose its triple A credit rating, although this may occur anyways if debt continues to mount. As most people are aware, if you do not have good credit, it affects your ability to borrow and increases your costs of borrowing. This is the same with Uncle Sam. Already, countries and major financial institutions are fleeing U.S. treasuries for gold and other countries that pay higher rates and have more secure economies. The ability for the government to continue spending stimulus or to prevent another financial freefall is over.

The future of federal financing is what is already occurring in most states' sharp austerity measures. Even if Democratic legislators and the President continue to block significant cuts to government, they are set to be voted out of office in 2012. Despite how much constituents love handouts, they will come to realize how entitlements and other social subsidies are crushing the United States. Within this year, government debt will total the entire gross national product of the country. Half of all government revenue will soon go to paying off merely just the interest $15 trillion in debt requires. The government and Federal Reserve are the only reasons the economy rebounded, and soon they will not only be impotent, but retracting. The economy will retreat along with it.

Republican Congressman Paul Ryan first put forth a bold and courageous plan that will solve the United States' financial crisis. It is bold and courageous because it calls for cuts in entitlements that most politicians, including Republican presidential candidate Newt Gingrich are too cowardly to confront. Reductions and modifications to Medicare, Medicaid, Social Security, and other spending, along with simpler and less oppressive taxes is the only solution to restore the health of the nation. President Obama continues to offer an expanded nanny state that squelches business with higher taxes, and will continue the United States' descent into the abyss.

The austerity measures by states, and soon by the federal government, will cause significant pain in the economy. However, removing a splinter, or probably more anomalous, an arrow from the body is better than leaving it in. Democrats under the leadership of Obama would like to see a slow death, rather than fix the problem, and see constituents cry and whine. It is not surprising when many registered Democratic voters are those special interests that gain by lavish spending and handouts by the government. These voters, in my opinion, should be ashamed of themselves because they are, in effect, parasites. I wonder if these leeches have the foresight to see that eventually they will kill their host. Whether they do or not, the future of the economy is down. The question is only when and for how long.

The Federal Reserve has reduced the rate banks borrow money to virtually zero. It has also bought trillions of dollars in treasuries and other securities. The government has now shot all of the rounds in its arsenal except one, and that bullet if used, will be tantamount to playing Russian roulette with the economy. Inflation is already suppressing economic activity in the U.S. Gasoline, food, and other products have risen in price, causing consumers to cut back spending. Consumer spending is 70% of the United States' economy and is vital for continued growth. If the Federal Reserve were to print even more money, the stimulating effects will probably be offset by higher prices. A persistent stagflation as seen in the 1970's during the Carter administration is almost certain to occur.

Also weighing on economists' minds is the huge debt levels of the countries in the European Union. Some of these countries have already had their credit ratings reduced, and a few are facing default. These countries, also known as the PIGS (Portugal, Ireland, Greece, and Spain), even if able to pay their bond holders, will have to endure years of austerity. The cuts in spending, although necessary for long term prosperity, will cause temporary retraction in their economies. The PIGS, because of their membership in the European Union, will cause the entire group to suffer financially. Germany and other well-off countries will have to pay for the excesses and irresponsibility of their neighbor states. Due to a globally entwined marketplace, the problems of Europe will effect the U.S. and vice versa. We are all in the same ship, and that boat is sinking slowly.

One of the few bright spots in the economy has been the manufacturing sector. As the U.S. dollar has plummeted, the goods produced in America are cheaper and thus more desirable globally. However, recently manufacturing has seen a decline. The White House would like to remind people of the effects the tsunami in Japan had on crimping production, but although some of the slowdown can be attributed to this, not all of it can. Global demand for U.S. products and services has slowed as governments like China have ceased to stimulate their economies and are in fact pulling back. China and other countries have raised interest rates to stop soaring inflation. They have also raised the cash requirements of banks. U.S. officials were counting on emerging markets to help sustain the recovery. Instead of reducing the value of the dollar, however, they should have enacted a tougher and fairer trade policy as was advocated by Donald Trump, until he was mocked at a White House dinner party for questioning whether Obama was truly a U.S. citizen.

Citizen or not, President Obama promised unemployment would not rise above 9%. The last numbers to come out this week show unemployment increased to 9.1%, and this figures does not nearly illustrate the enormous problems with the workforce. 9.1% is only the number of people known by the government to be actively seeking a job. Many more people have given up and are no longer looking for employment. The true unemployment rate is more than double. Furthermore, many people who do have jobs are not working full time, or have had to accept lower wages. Despite rhetoric by the President, unemployment will stay high for years to come.

As a prisoner, I have noticed how the Illinois Department of Corrections has attempted to cut costs to deal with the poor economy. The food served throughout the state, and not just at Stateville, has become worse and more meager. Clothing that used to be given out to prisoners has ceased, and Stateville inmates are expected to buy their T shirts, boxers, and socks, as well as other items. Inmate workers' meager wages have become more minute, and most jobs at this institution only pay $25 a month. Programs including schooling have been cut. Even prisoners' health care has been severely curtailed so that even those with serious illnesses or injuries must vigorously fight for treatment.

Despite the cost cutting, the budget for IDOC has continued to grow. According to the documents procured through the Freedom of Information Act, Illinois spent approximately $1.6 billion in fiscal year 2010. This cost is 20% higher than 5 years earlier, and exceeds almost all of the state's expenditures. The reason for this is obvious. The draconian laws passed by the state legislature are greatly increasing the number incarcerated. Over 50,000 people are now imprisoned in the State of Illinois.

A few weeks ago, I read a U.S. Supreme Court decision mandating that California release tens of thousands of felons, or provide adequate housing and medical care. California's prison population has risen 800% since the 1970's, due to severe sentencing laws enacted, which are very similar to those in Illinois. Despite the huge growth in their incarceration rate, the state has been unwilling or unable to build more prisons and give adequate care. Governor Jerry Brown is currently attempting to convince voters to raise taxes to pay for the improvements, but this is almost certain to fail, and the State of California will be forced to free thousands of prisoners.

The silver lining to the looming dark cloud of serious economic malaise is Big Brother government will have to be sharply curtailed. The Leviathan has grown to monstrous proportions, crushing freedom and liberty in its wake. The Tea Party that swept elections in 2010 hopefully will return to demand revolution in 2012. Hopefully, it will not only sweep away Barack Obama and the oppressive, intrusive, and debt-ridden government he espouses, but also the prison industrial complex.

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