what could happen between 2009-2012

November 14, 2008 at 3:32 pm Leave a comment

Squirrel alert — Greater Fool – The Troubled Future

Some people will tell you on this blog that you are crazy and have lost your mind for warning them of an economic depression of historical proportions

They will say that you are a doom and gloomsayer.

They will say that you are too pessimistic about the ability of the current global leadership to stop an economic meltdown.

They will say that Prime Minister Stephen Harper, Finance Minister Jim Flarity and the Conservative Government in Ottawa and the Bank of Canada have the economic and financial situation in the country under control and we need not to worry.

In this country anyone with an RRSP has lost a minimum of 20% of the total value of their investments. Pensioners over the age of 71 who have RRIF’s must withdraw (by law) funds from investments that are losing money. Ottawa has not decided what to do about the situation. Companies are asking the Minister of Finance for a longer time period to shore up pensions that have lost a considerable amount of money. Canadians can sure count on the federal government for help in these troubled economic times.

Many Canadian feel that they will not experience the severe economic troubles that their neighbors to the south are facing right now? They feel that the downturn and potential real estate crisis will not be as bad is the US.

However, has anyone ever stop to think that financial experts and journalist offered the same advice in your article today in 1993 and NO ONE, ABSOLUTELY NO ONE believed them!!!

James Dale Davidson and Lord William Rees-Mogg wrote a book called the Great Rekoning which was published by Simon and Schuster in New York. The ISBN number is 0-671-86994-9 and copies are currently avalible from Amazon.com for under $30.

In Chapter 14 of the book(pp438-485), the authors present a chilling even frightening analysis of how the private and public economy could decline in a deflationary depression. Here is a brief synopsis of what could happen between 2009-2012:

1) The declining real estate market will lead to the withdrawl of credit lines to individuals and business (p449).

2) Consumer spending which is 2/3 of the economy will start to drop as people defer purchases of durable goods . In the Great Depression of the 1930’s spending on furniture dropped 50%, auto sales plunged 70% and sales of consumer electronics declined 80% (p449)

3) Tarrif barriers could go up causing importers and exporters to lose money. Spending on capital goods for manufacturing firms will decline dramatically. Information based companies may escape this situation because capital will be spent on basic research as in the biotechnology sector (p451)

4) Spending in the defense and construction industry will decline as US forces with be withdrawn from areas of little or no strategic importance and directed towards the war on terror, russia or securing oil supplies etc. Private construction will decline as spending on public infrastructure projects will increase(p452-3)

5) People will spend money on basic necessities such as food during a depression. If their incomes are under strain they will buy cheaper or lower quality items. In the Great Depression of the 1930’s , prices for agricultural products declined 60%. However, i believe that agricultural prices may rise due to shortages in production and increasing global demand during this time period(p453)

6) There will be less spending on personal fashion and personal care items. Pawn shops will grow in popularity. Repair trades generally do well in economic slumps as people will be unable to replace their older vehicles and will try to keep them on the road as long as possible. Lastly multi level marketing, home entrepreneurs and personal care services will survive during these hard times. Companies such as Tupperware, Avon and Rubbermaid are reporting record profits due to non US sales in Asia, Europe and India p454)

7) Service industries could be hard hit during a depression. Restaurants, medical and legal services (other than bankruptcy) may face low demand as people cut back spending in these areas (p.456)

8) Commercial real estate will be in a slump as retail and other service business close their doors due to declining sales and inability to pay landlords rent and utilities. Some business such as law and business admin services will be run from home to save money in renting expensive office space(p.458)

9) Oil is not depression proof because demand from car owners, trucking firms, railways and airline companies will drop. Even if the US dollars is devalued or is replaced, demand will drop because Americans will not be able to pay for foreign oil imports and will do with less. Road infrastructure could deteriorate due to less spending by government(p459-60)

10) The cost of insurance will go up despite the possible decline in auto use, the increase in uninsured drivers continuing to drive and risk to business in areas of the city which is highly dependent on automobile activity(p461)

11) There will be a drop in profits for media firms especially in publishing and newspaper industries. Advertizing revenue from furniture stores, auto dealers and grocery chains could drop significantly during an economic downturn. New startup companies will have trouble surviving because it will have a difficult time raising cash to move to a larger facility or hire staff to meet business demands(p.466)

12) Household could be under strain if more than one member has lost a job. This may result in the reduction of spending to buy the bare necessities. Governments may be forced to chose to bailout some industries and let the weaker ones die. At present GM is asking an estimated $100 billion from western government to restructure the company to prevent its bankruptcy. Other industries such as airlines and manufacturers are asking for a bailout package.

13) Stimulation packages to stabilize the economy may not work. Governments will embark on infrastructure spending on roads as opposed to potable water and sewage disposal in cities. They may chose to invest in “industrial base” jobs for low skill workers that may show small returns. Income redistribution programs such as high taxes on the rich, moves money to poorly educated parts of the city. It may diminish incentives to save and forces people to be more dependent on government services.

There could be a situation in which higher regulatory measures could be imposed on businesses resulting in a local economy less competitive and slowing the recovery. Lastly these stimulation initiatives could result in adding to the size of the national debt (now $10.2 trillion)and increase the debt service cost not to mention the pressure on the value of the dollar(p.471)

14) Government services could be privatized during the depression. The breakdown of law and order will lead to an increase in private security firms to augment police departments to protect people and property. Public infrastructure services would collapse due to the loss of revenue to maintain and upgrade the system. Water and wastewater services could be privatized to save money. There could be a dramatic growth in privatized educational services as governments layoff teachers and support staffs to balance the books. This enables these firms to establish collages that charge high fees to train students for the new economy. Universities like MIT have already put their entire undergraduate&graduate courses on line for no charge for anyone to use to solve problems. The University of Phoenix is one of the largest tele-universities in North America and have graduated tens of thousands of people ready to go to work in the new economy. Universities in Canada better adapt to the new realities or get sweped away by other institutions(p.472-3)

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Entry filed under: Personal Finance.

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