Very often when I read about the prospects of the US economy, it seems to be from the perspective of a debtor that can't repay his debts, and therefore must fail. Otherwise the perspective is one where the analyst pretends that the debt-situation is not that bad. Well, the debt-levels are bad (just look at these graphs!) and the derivatives market with its huge uncertainties along with constant government bailouts is not exactly making things better. I've heard estimates for total derivatives losses from only a few billion (in the very beginning) up to over hundreds of trillions of dollars. Whatever the total losses will be, we basically have two scenarios of how it will end; either the losses stop coming fairly soon or the government is going to keep bailing out the banks and eventually the bailouts will have become so many that everyone is going to start asking questions and then we'll have a great public indignation which would force the government to declare an end to bailouts and let the banks and the financial system finally crash, or the government will have to somehow quench the uproar. The bailout and stimulus-packages already in place and the potential coming ones are going to be funded by monetization, cause there's no way that the rest of the world will lend those kind of sums of money; this will inevitably devalue the dollar, which brings us to the lenders...
For the last couple of years (decades really) all they've done is to accumulate IOU's like crazy, when the reasonable thing would have been to spend those IOU's in exchange for things from the US. Now they're sitting on these huge mountains of IOU's and they're getting worried because of the bail-outs and the possible devaluation of the IOU's (or: the dollar). What would be the reasonable thing to do here? Would you throw the dollars away, keep sitting on them or would you start giving them back to the debtor in exchange for something useful?
I think the answer is pretty obvious. The countries that have huge holdings of dollars will have to start spending them, and this can only mean that a lot of business is coming to American companies. If you look at the trend, it tells you that more and more dollars are pouring back into American companies. Take GE for example, they're sucking up five billion dollars a year from China today and that number is growing. It's all very simple: If the foreigners don't spend these dollars, they're just getting into more trouble - as will the American people because they will have to default, and/or inflate away parts of the debt.

So, does this all mean that things will be honky dory? Well, one should definitely not disregard the huge importance that the US consumers have for American companies, and to rebuild wealth will take some time. It really depends on how stupid the lenders and the US government are, if the lenders start spending dollars then the rebuilding of wealth (or destruction of debt) will go a lot faster and things may well stabilize (stop going down) within two years - this assuming that the derivatives market will have stopped imploding (!) - and that really is the huge wild card here, in fact the very thing that will determine the future of the global economy. Again, if you look at the trend, the derivatives losses are not slowing down and nobody knows where it will end. But when these losses stop coming or when the government stops paying for this garbage, then I beleive it will be a good time to invest in America. But beware, not until the black hole of derivatives has gone away completely is it safe to really invest in anything related - and by related I mean economies with financial sectors exposed to these instruments. Even a company like GE, mentioned just above, has taken credit losses although they may see great growth in places like China. So, until the green light comes up... let's focus on precious metals, perhaps energy and perhaps some more independent economies.

From the viewpoint just expressed I think it looks reasonable that things may well not go so bad as some have predicted; government can really only put the people in so much debt. I doubt that we really will see more than, at the most, another five trillion of bailout or stimulus money (which in itself is obviously a humongous lot of money). But then the US government has to cut down on a lot of other spending as well, which may prove difficult - but they would not be the first country in history to have run up a huge public debt, and others in that position have prevailed. Big problems are on the horizon and the government of the US really has to do things right in order for this crisis to be resolved (globally, as well) - so far they haven't. Hopefully even they may start to see that the bailouts are not sustainable and that the spending has got to be cut. I may seem naive to say that politicians like the Obama-gang might actually learn something, but stranger things have happened, and we should all hope that they do learn... unless you happen to really like things post-apocalyptic?

China's worried...

It seems that in these times of uncertainty and financial chaos, different types of cycle-theories become popular. I've seen these types of articles all over the place in the last few months - not that cycles weren't popular before, especially among those propagating rising prices in commodities. The rise of cycle explanations for economic events seem to go hand in hand with uncertainty - like it's a last resort of trying to bring clarity. I'm not saying that there aren't cycles, it's obvious that things tend to fluctuate; It's just that the introduction of the cycle often seems a bit strained or awkward - like it's not enirely necessary for explaining events. After all, we know that a credit expansion is going to have to contract at some time, but why call it a cycle? When the cycle is introduced we are venturing into the realm of philosophy.
Luckily for me and my readers, I actually studied philosophy for almost two years before I studied economics and my main interest there was in philosophy of history and cycles (don't be confused: history of philosophy is the actual history of philisophical thought - philosophy of history is a philosophy OF HISTORY). In economics we have cycles of many different sorts, some span over more than a hundred years while some span only over months or a few years. They're all related to the basics of economics - production and demand - and how these two can be manipulated by different 'forces'. In philosophy we have cycles that are generally focused on the elusive concept of culture; perhaps the most well-known of these cycle-philosophers is Oswald Spengler who identified (or theorized about) the rise and decline of cultures - like the rise and fall of the Roman culture. In short, what he identified was a type of original virility and strenght of the culture that then got weaker with time and finally ceased to exist, however this 'culture' did not coincide exactly with the Roman empire, which in it's later stages had lost all of the Roman culture and was nothing more than a zombie - and this zombie-analogy was transferred onto the modern western culture, not entirely unjustified (!). At about the same time as Spengler there were other philosophers who had taken on impressions from Hegelian-Kantian philosophy as well as Spengler and went a step further. I think the most well-known would be René Guénon and Julius Evola who both introduced cycles that not only covered cultures but also spirituality. A lot of their thought was actually formed not only from philosophy, but also from hindu and greek sources. It was the same basic lay-out as Spengler's culture-cycle, only here the origin was one of a pure spiritual understanding that over the course of many thousands of years became weaker and more and more forgotten and eventually led to a state of spiritual confusion. In hindu and greek traditions there are very clear accounts of these spiritual cycles, some may know of Plato's tale of the four humans - gold, silver, bronze and iron - that all represented a different age of humanity.
Ok, so we've briefly covered the philosophical cycles now and although I don't fully agree with the necessity of cycle-theories I am able to recognize a degree of truth in all of them, and that truth is best expressed in my all-encompassing theory of cycles (both philosophical and economic), namely the 'douchebag-cycle'.
What combines all the cycle-theories is that things start out good and then turn bad. Or as I like to think of it - some people are really clear about something, they're fired up and ready to go, but as they've kept going and the purity of their reality is realized they gradually loose passion for the state of things and forget about what was important. This is what a typical douchebag kind of person would normally do - they get fired up about something and then they loose interest and soon enough they're sitting around eating snacks and watching TV, while everything slowly fades away. Therefore: The douchebag-cycle. It explains everything! If you forgot to whipe your ass - blame the douchebag-cycle. If you are too lazy to pick your kids up from school - blame the douchebag-cycle. If you got really drunk and made an ass of yourself, blame the douchebag-cycle. Soon enough, you'll see Ben Shalom Bernanke on TV blaming everything on the douchebag-cycle. And why not give the guy a break, right? He's just on the wrong side of the douchebag-cycle!

If you were to simply consider the huge debt levels we in the west have accumulated in the last two decades or so, and then take a look at what happened in the world - politically - during the last depression, the picture is not too positive. We all know what happened in Iceland recently, of course it's a very small country with a citizenry that is basically unarmed and nice enough not to use violence. Eastern Europe (Russia excluded) is brewing from anger as all the easy loans from western europe are starting to make their negative impact - and here latvians got rid of their government just recently.
All this debt has turned a lot of people into modern serfs, or debt-slaves. If the number of people in this situation and others badly hurt by the crash start to reach a large enough mass, they will start to make political demands. So far two european governments have been overthrown, in a very "friendly" manner. And this is just the beginning - the debt levels have not come down and governments are frenzied to find ways to tackle this problem, but to work against an avalanche of debt this size could prove impossible.
And still, even if Iceland had a change in government it doesn't really change anything, we have not seen a real revolution - the political systems in Iceland and Latvia are exactly the same as before and some minor tinkerings with policies won't make the mob happy. What the people have expressed in Iceland and Latvia is that they want an overthrow of a system that has ruined everything, and they want a fresh start without the debts. These debt-slaves and/or debt-victims will continue to grow in numbers and with interventions that do nothing but prolong the process the politicans who had been hoping to stave off revolution, do in fact make it more likely. So, when we talk about political risk, we should be talking about where the highest debt-levels are, and they are in the US.
What would happen if US-citizens started demanding a new government, like in Iceland or Latvia, or maybe even a new political system? Do you think that Obama would be willing to just declare himself defeated and give up his seat? (Yes, here comes a tirade of Obama-bashing) This is a guy who consistently refuses to admit when he's wrong, who calls those who dissent him 'cowards' or 'irresponsible'. He claims to be transparent and willing to discuss everything - as long as the outcome is that he gets it his way! He talks down to or mockingly laughs at reporters who remind him of his lies or faults. This is a man who, unlike Bush, not only thinks he's right - he KNOWS he's right and won't stop to reconsider any of his decisions. He would not willingly leave his seat, because he's Obama and he knows best. Watch any number of interviews with Obama and you couldn't spot one moment where he doesn't give of an aura of authoritarianism and complete self-righteousness. Lets just pray that the people of America don't start to demand a change - not an Obama-change - I strongly doubt they will get one without violence. Lets hope I'm mistaken.

I don't know how informative that was? Maybe you think I simply hate Obama for whatever motive - but I'm telling you if you simply watch a bunch of his interviews or interactions with other politicans, you'll start to see what I'm saying. Maybe this creepy video can give you a hint of what the Obama-athmosphere can do to people...

good Obama-article: http://www.antiwar.com/justin/?articleid=14319

I figure it would be a good thing to have a look at the world economy to put the economic worries in some perspective and perhaps to try and see where and when the economic downturn might end. First off, the US is about 30% of the world economy, the EU is also about 30%; this makes these two regions of the world very important, and if you throw Japan in there, you're almost up to 75% of world GDP. The world economy of today is a very integrated one, thanks to globalism. This means that if 30% or 60% of the world economy is contracting, then so must invevitably the rest - obviously the ones with big exports will be hit harder.

I guess just looking at these charts says a lot, and the situation for the EU is about the same as for the US, only differences are that consumer debt levels vary greatly in the EU and generally are lower than in the US; corporate debt (non-financial) is about $11 trillion in the EU whereas the US only has about half of that. The financial debt levels? Well, nobody seems to know what those might be (there are estimates out there, but they look very unreliable), perhaps the derivatives market is some kind of guide. The situation today is much worse than the one the world faced in 1929-30, debt levels and imbalances of trade are much higher. (note: derviatives market has grown to almost 700 trillion, chart is alittle out-dated)

What we've had is a credit-driven expansion of the world economy and now that people don't want to or are unable to keep expanding the aggregate debt, then government steps in to keep things "growing". When an economy is expanded by credit it simply means that you buy something before you're able to buy it, which means that you will not be able to buy the same thing later. So, when government spends your money by borrowing (which is what they have to do) they are making sure that whatever you might have wanted to buy in the future will instead be purchased in an economy that is over-priced. This over-pricing came from the fake demand created by credit, and now the markets are saying that prices need to go down to reasonable levels so that business can carry on as normal. Government prolongs the agony of a bloated economy and is rewarding incompetitive businesses by keeping them alive, when in fact, the only good thing to come from recessions are that bad companies go into bankruptcy and the stronger ones survive to make the recuperation easier.

From this very sad background of government intervention the economic crisis might last for many years, when it might only have lasted for a year or two if things would have run their natural course. If the natural crash would have been allowed, you could see business resumed pretty much as usual (at a lower level) and young people just entering the economy could do so with very bright prospects, with very low prices and more job opportunities than under intervention, while those still in debt would be working to pay it off, and maybe in a couple of years they could have paid off the debt to a reasonable level where their personal economy can grow again. Now we're going deeper into debt, wasting money that needs to be saved for the recovery. If the past is any guide then I'd say that we might have to endure a depression-type economic environment for the coming ten years. What might make it different is the possibility of hyper-inflation, which would simply erode away the debt and possibly give us the natural crash in a kind of detour-way (that is, with lots of more suffering). Governments look pretty desperate and they might get carried away with the spending, so I'm slightly favouring this out-come... The world economy is in trouble!

In my first post I would like to try to make my position clear about economics, investing and all that is related. I wouldn't want to put myself in any category of economic viewpoint, but I guess that I come fairly close to the Austrian school. How a person like Keynes can be the most famous economist, or even known is beyond me. But I guess it's no big mystery since most people of the world or the west don't even have a clue about how our monetary system works or that there are any alternatives. People in general seem not to be aware that we have money that is based on debt or that the constant manipulation of interest-rates of a central bank creates these unnecessary swings/malinvestments in the economy and all the distress it brings with it. This does not mean I favour precious metals although I must admit that this is probably the best place to be invested right now and for some time looking forward. The issue of monetary policy is one of my main interests since it has such important consequences and as it is also the main cause for the current economic crisis. For those who are not well-acquainted with a sober viewpoint of economics (or the political side of it) should go to youtube and watch some videos of Ron Paul, Marc Faber or Peter Schiff.

As far as investments (mostly stocks) are concerned I usually just focus on whether the economic climate favours this company, if it is valued too high, if its financial balance is good and its ability to earn money or make me money by being bought out... In the past greed has made me disregard these very common-sensical considerations, especially when it comes to junior-mining or it-stocks ... some say the trend is your friend... Well, as I've learned from my former mistakes, I'd say if the trend is mostly based on greed - then get out.