Rapid Declines in Manufacturing Spread Global Anxiety

How the decline in manufacturing but the continued expansion of the manufacturing base is not understood to be phenomenally deflationary is beyond me.

Interest rates have been manipulated progressively but steadily lower for thirty years (the graph goes from the top left to the bottom right at a 45 degree angle).

The velocity of money has been dropping steadily for thirty years.

Savings rate has dropped commensurately to the point of going negative.

Household, corporate and sovereign debt has been on a tear for decades.

Money supply has been manipulated progressively and steadily higher and has gone parabolic in recent years.

Why is it so difficult to understand that all these factors combined have brought about industrial capacity of galactic proportions?

The point at which the commercial activity carried out by individuals and corporations no longer generates sufficient revenues to service the debt accumulated, credit markets must contract. This is not an opinion. This is an arithmetical fact.

At that point, given that interest rates have been declining steadily over the past thirty years and economic actors are no longer able to assume more debt, even lowering interest rates to zero will not expand credit markets.

In the absence of expanding credit (debt), the demand trend cannot be sustained. Therefore the production trend cannot be sustained. This, regardless of how much money is created and stuffed into bank’s reserves. Economic actors are saturated with debt and are unable to borrow the newly created reserves.

Thus: in an environment where government is mandating an increase in manufacturing capacity (USA, China, Europe) but where demand is collapsing, industrial capacity utilization is dropping like a rock. This can only mean decreased margins, therefore decreased earnings, therefore higher unemployment, therefore decreased demand … therefore lower velocity of money. In turn this means imploding credit markets, lower tax revenues for  government thus lower social spending… lower social spending means still lower demand…

The above spells sovereign bankruptcy… if you believe a Western government can declare openly and officially that they are bankrupt, then we’ll be ok. Our standard of living will drop for a time but, overall, we’ll be ok. There will be demonstrations and at times they will be violent especially as the shenanigans of the power elite come to light as they inevitably will as this depression unfolds. But overall, we’ll be ok. Heads will roll, likely politicians’; some officials will have to go to jail (many bankers, all regulators and rating agencies staff, a whole bunch of politicians across the political spectrum, a number of entrepreneurs and businessmen) but generally we’ll be ok. It’ll be messy, but we’ll be ok.

But I tell you that there is no way on God’s green earth that any Western country will come out and declare bankruptcy. Technically, if accounting rules are applied in the mildest of forms, you’ll be hard pressed to find a Western government that is solvent. As unemployment rises and governments borrow money in amounts orders of magnitude what they have already borrowed in recent decades, Western governments are digging a hole so deep that can only lead to one conclusion… a world war…

I am telling you that the figures that are being tossed about today can only lead to one conclusion. In order to restart the inflationary cycle, global manufacturing capacity must be destroyed and debt must be written off. You must realize that debt can only be paid off or written off. Either way, it has to be dealt with and there is no third way. This is not opinion. This is fact.

Therefore, if debt is repaid by the debtor, demand and production will take a hit for many years to come. If government repaid debt even only partially, demand and production will crater for a very long time. In case you did not make the connection, this would be deflationary.

If debt is written off, a whole bunch of banks, mostly large global banks, will instantly implode.

This is your typical damned-if-you-do-damned-if-you-don’t situation and there is no way any Western government will take the medicine.

So, as the ranks of the unemployed swell in the West and as they see the pervasive corruption surrounding them, there will be social unrest and, if let go, there will be political devastation and change.

So, before that happens, Western governments will engineer a war. Any excuse will do and we’re certainly not short of excuses nowadays. However, wherever the war should start and for whatever reason, the ultimate goal is to destroy industrial capacity and infrastructure.

There is no other way in hell Western governments can restart the inflationary cycle.

THIS IS DEFLATIONARY.

http://www.nytimes.com/2009/03/20/business/worldbusiness/20shrink.html?_r=2&ref=business

“But the speed of the decline in orders,” he said, “is the worst we’ve ever seen.”

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