The beginning of the Second Phase of the World Economic Depression

U.S. retail sales unexpectedly fall in May



Plummeting Sales - (A sale is the pinnacle activity involved in selling products or services in return for money or other compensation). When sales fall it is generally due to a downturn in the business cycle and much of downswing we are currently seeing is directly attributable to the "debt-based" monetary system we currently live under, which requires an ever increasing and exponentially growing money supply in order to continue positive economic momentum.

The problem is that Newton's law of motion states, "For every action, there is an equal and opposite reaction." The vast expansion of credit that we saw due to low interest rates and easy credit in the 2000s is being followed by tightening of the credit markets and thus a reduction of money available to the general public.

People are purchasing fewer goods and services as a result and the full dynamic circle makes them worry about the negative ramifications that are associated with an economic downturn and the lack of security fostered by such dynamics.

Fewer Jobs - (A job is a regular thing performed to create a value in society (and personality of individual) for meeting the needs of that individual)). As a result of customers purchasing fewer goods and services, businesses begin to see inventories rise. With rising inventories, businesses have no need for excess labor. The business must find ways to reduce these pysical goods inventories. Labor cost is the largest expense of most businesses and thus the most crucial element of reducing overhead costs.

Lower Wages - (A wage is a compensation, usually financial, received by workers in exchange for their labor). If the macro-economy sees people have their employment terminated in many sectors of the economy, then the supply of labor will increase drastically at the same time that demand for labor is decreasing (drastically). That means that for businesses it becomes a buyers market when purchasing labor and they can pretty much name their price when it comes to wages.

Lower Prices - (In ordinary usage, price is the quantity of payment or compensation given from one party to another in return for goods or services). Because of increasing inventories and terms of credit (net 30, 60, 90), businesses must lower prices and profit margins in order to sell the merchadise and meet their short term debt obligations.


All of the above can take a toll and lead to the following consequences for both business owners and labor:

Foreclosures - Foreclosure is the legal and professional proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor's equitable right of redemption.[clarification needed] Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, the lender cannot be sure that it can successfully repossess the property, thus the lender seeks to foreclose the equitable right of redemption. Other lien holders can also foreclose the owner's right of redemption for other debts, such as for overdue taxes, unpaid contractors' bills or overdue homeowners' association dues or assessments.

Bankruptcies - Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a business or corporate debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the insolvent individual or organization). An involuntary bankruptcy petition may not be filed against an individual consumer debtor who is not engaged in business. (Bankruptcy in the United States)

Bank Failures - occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. More specifically, a bank usually fails economically when the market value of its assets declines to a value that is less than the market value of its liabilities. As such, the bank is unable to fulfill the demands of all of its depositors on time. Also, a bank may be taken over by the regulating government agency if Shareholders Equity (i.e. capital ratios) are below the regulatory minimum.

The failure of a bank is generally considered to be of more importance than the failure of other types of business firms because of the interconnectedness of banking institutions. It is often feared that the effects of a failure of one bank can quickly spread throughout the economy and possibly result in the failure of other banks, whether or not those banks were solvent at the time. As a result, banking institutions are typically subjected to rigorous regulation, and bank failures are of major public policy concern in countries across the world.

Articles that lead to the conclusion that we are in the second phase of the Depression:

George Soros: Risk Of Double Dip Recession Can't Be Ruled Out - Wall Street Journal - 6/10/2010

1930's Redux - IBTimes - Global Forex Trading Portal - 6/12/2010
Doubts about sovereign credit are forcing reductions in budget deficits at a time that the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude-George Soros

In English, what Mr. Soros is saying is that (European) austerity programs are coming at the exact worst time, because governments which implement them are likely to double-dip into recessions.

Tax Hikes and the 2011 Economic Collapse - Wall Street Journal - Arthur Laffer - 6/6/2010
Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.

The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.

Why We’re Falling Into a Double-Dip Recession - Robert Reich - 6/4/2010
The Labor Department reports this morning that the private sector added a measly 41,000 net new jobs in May. (The vast bulk of new jobs in May were temporary government Census workers.) But at least 100,000 new jobs are needed every month just to keep up with population growth. In other words, the labor market continues to deteriorate.

Of the small number of jobs created by the private sector in May, many came from temporary help services. Which is one reason why the median wage continues to drop.

Why are we having such a hard time getting free of the Great Recession? Because consumers, who constitute 70 percent of the economy, don’t have the dough. They can’t any longer treat their homes as ATMs, as they did before the Great Recession. Businesses won’t rehire if there’s not enough demand for their goods and services.


The week ahead in telling the tale - Thursday's consumer price index, and Friday's release of the leading economic indicators. Although the numbers are cooked, it will be good to gage a reading of what top economists think.


Next up: Debasing the currency