Article 43
Wednesday, September 21, 2022
The Next Depression Part 65 - Another Global Collapse
The economic situation in Europe is far worse than it was a year ago, and it is going to continue to get worse as AUSTERITY continues to take a huge toll on the economies of the eurozone.
- Bad Moon Rising Part 56, Fiscal Collapse, 2013
With the exception of a few thousand very powerful people, the entire worlds’ population, all seven billion of us, are trapped - trapped into a criminal debt creating banking system that has taken hundreds of years to perfect and to come to fruition.[T]he banking dynasties, such as the House of Rothschild, control the political processes around the world to such an extent that their network of private central banks have the right to create money completely out of thin air and then charge interest on that nothingness. The polite term is “Fractional Reserve.” Lending but in reality it is just simple fraud. The result is that the whole world is currently drowning in a sea of fraudulent debt.
There is absolutely no defence for the present system whereby private bankers create money completely out of thin air for themselves to lend and then charge interest on that “nothingness.”
If our government were to go down the path of a new Bradbury Treasury Note (as well as pursuing the banksters with Common Law for their crimes against humanity) then our debt burden would be removed overnight - there would be no deficit and no national debt.
- Bankers, Bradburys, Carnage And Slaughter On The Western Front , Justin Walker, UK Column, November 19, 2012
In just over a week the government is probably going to enter full-scale austerity. Republicans are refusing to end tax loopholes for big corporations and billionaires, choosing to let the sequester occur instead. Unless something changes, and soon, $1.2 trillion in cuts to defense and domestic spending begin to kick in. This will hit jobs, growth, and above all it will hit real people.
- Austerity American Style Part 9, 2013
The war industry loves the Christian fascists who turn every conflict from Iraq to Ukraine into a holy crusade to crush the LATEST ITERATION OF SATAN
The glue holding this Christianized fascism together is not prayer, although we will get a lot of that, but war. War is the raison dtre of all systems of totalitarianism. War justifies a constant search for internal enemies. It is used to revoke basic civil liberties and impose censorship.
Christian fascists have never hidden their agenda or their desire to create a “Christian” nation, any more than Adolf Hitler hid his demented vision for Germany in Mein Kampf. They prey, like all fascists, on the despair of their followers. They paint gruesome portraits of the end times when the longed-for obliteration of non-believers presages the glorious return of Jesus Christ. The battle at Armageddon, they believe, will be launched from the Antichrist’s worldwide headquarters in Babylon once the Jews again have control of Israel. The closer we get to Armageddon, the giddier they become.
Violence is embraced as a cleansing agent, a key component of any fascist movement. The Christian fascists do not fear nuclear war. They welcome it.
- Jesus, Endless War, and the Rise of American Fascism, Chris Hedges, May 8, 2022
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Economic Collapse Has Arrived In Germany. Will The U.S. Be Close Behind?
By Michael Snyder
The Economic Collapse Blog
September 20, 2022
Things are starting to get really crazy in Germany. The Germans are dealing with the worst inflation crisis that they have seen since the days of the Weimar Republic, and meanwhile economic activity is starting to shut down all over the nation. Of course other European countries are facing similar problems, but Germany was supposed to be the economic rock that the rest of Europe could always depend upon. Unfortunately, the decision by the Russians to cut off the flow of gas through the Nord Stream 1 pipeline is hitting Germany extremely hard. If we could just get both sides to agree to end the war in Ukraine, that would greatly help matters, but that simply isnt going to happen. In fact, it appears that Vladimir Putin has decided to greatly escalate matters, and the western powers will inevitably greatly escalate matters in response. What this means is that the economic turmoil that we are witnessing in Europe isn’t going anywhere any time soon.
This week, we got some inflation numbers out of Germany THAT ARE SO HIGH that it is difficult to believe that they are actually real
German producer prices rose in August at the fastest rate since records began in 1949, data released by the Federal Statistical Office showed today, pointing to a further increase in consumer prices.
Producer prices of industrial products rose by 45.8 percent compared to the same month of last year. Compared to July 2022, prices rose 7.9 percent.
Soaring energy prices on the back of Russia’s war against the Ukraine remain the main driver behind rising prices.
If we continue to see monthly increases of around 8 percent, next year at this time we could be talking about a yearly jump of close to 100 percent.
Wow.
How bad do things have to get before we actually start using the term “hyperinflation”?
Energy prices are the biggest reason why inflation has gotten completely out of control, and the German government has been forced to nationalize a huge natural gas company in order to TO KEEP IT FROM GOING UNDER.
The German government is closing in on an agreement to nationalize gas giant Uniper SE, as Berlin moves to stave off a collapse of the countrys energy sector.
A provisional agreement between the government, Uniper and its main shareholder, Finland’s Fortum Oyj, has been reached, according to people familiar with the situation. While contracts havent been signed, Berlin is aiming for an announcement later this week.
According to the CEO of Uniper, the company has been losing about 100 million euros a day during this crisis.
Needless to say, the German government cannot save everyone, and so a lot of firms won’t survive this crisis at all.
For example, a manufacturer that has been making toilet paper for Germans for nearly 100 years is now HEADED INTO INSOLVENCY
Hakle has been a German household name since 1928, but the Duesseldorf-based toilet paper manufacturer said all it took was this summer’s gas price shock to drive it into insolvency.
Sadly, this is just the beginning.
According to the German central bank, the nation is moving into a BROAD-BASED AND PROLONGED DECLINE IN ECONOMIC OUTPUT
“Economic activity may pull back somewhat this quarter and shrink markedly in the autumn and winter months,” the central bank said, adding that it didnt forecast this adverse scenario in a June report.
Bundesbank continued: “There are mounting signs of a recession in the German economy in the sense of a clear, broad-based and prolonged decline in economic output.” It said a contraction is expected in the third quarter with deeper declines in economic activity in the fourth.
“High inflation and uncertainty with regard to energy supply and its costs affect not only the gas and electricity-intensive industry and its export business and investments, but also private consumption and the service providers dependent on it,” the central bank said.
You can refer to such a scenario as a “recession” or a “depression” if it makes you feel better.
I call it an economic collapse.
The U.S. economy will soon be experiencing immense turmoil as well.
According to billionaire Barry Sternlicht, the Fed’s exceedingly foolish policies are pushing us toward a SERIOUS RECESSION
In an interview with CNBC’s “Squawk Box” on Thursday, Barry Sternlicht, the chairman and CEO of Starwood Capital, said he believes Americans are facing a major recession if the Federal Reserve proceeds with several more rate hikes as a means of curbing inflation, which is reportedly the central bank’s plan.
“The economy is braking hard,” Sternlicht told the financial news outlet, according to the Daily Caller. “If the Fed KEEPS THIS UP, they are going to have a serious recession and people will LOSE THEIR JOBS.”
He is right on target, but instead of saying people “will lose their jobs” he should have noted that lots of people are ALREADY being laid off. This is something that I have been documenting ON MY WEBSITE for quite some time, and this week we learned that GAP HAS DECIDED TO LAY OFF HUNDREDS OF CORPORATE WORKERS
Gap Inc. is cutting about 500 corporate jobs as the clothing retailer struggles with declining sales.
The job cuts, which include open positions, will be primarily at Gap’s offices in San Francisco, New York and Asia and hit various departments, a representative for the retailer confirmed Tuesday. The moves were first reported by The Wall Street Journal.
Ouch.
In this environment, very few workers are truly safe.
At this point, EVEN THE ENTERTAINMENT INDUSTRY IS LETTING LOTS OF PEOPLE GO
The struggling TV and film industry continues to run face first into bad news. This week it was reported that Warner Bros. Discovery was firing 100 TV ad salespeople at the same time that Paramount has considered ending offering Showtime as a standalone service, Bloomberg reported.
Netflix followed suit with their own layoffs, the report says. The company has reportedly let go hundreds of employees and abandoned some of its office space. At the same time, the firms stock price has collapsed and fallen more than 60% from its all time highs.
Back in 2008 and 2009, millions of Americans lost their jobs.
Will we see something similar in the months ahead?
And just like during “the Great Recession,” the housing market is really starting to slow down. In fact, we just learned that HOMEBUILDER CONFIDENCE HAS NOW FALLEN FOR NINE MONTH IN A ROW
The confidence of builders of single-family houses fell again in September, the ninth month in a row of declines, ғas the combination of elevated interest rates, persistent building material supply chain disruptions, and high home prices continue to take a toll on affordability, the NAHB report said.
With today’s index value of 46, the NAHB/Wells Fargo Housing Market Index is now below where it had been in May 2006, on the way down into the Housing Bust.
This time around, it wont just be a few areas of the planet that suffer.
At this moment we are literally witnessing economic implosions all over the planet, and the stage is being set for an immensely painful 2023.
The one thing that could really turn things around would be peace.
Unfortunately, global leaders on both sides seem absolutely determined to drag us into the type of cataclysmic global conflict that I have BEEN WARNING ABOUT FOR YEARS
So there isn’t going to be peace, and that means that things are going to get really bad in 2023 and beyond.
But I also believe that you were put at this specific moment in history for a reason.
It is when times are the darkest that the greatest good can be done, and that is something that we will all need to remember during the very dark times in front of us.
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The Fed just raised interest rates by another 0.75%, putting Main Street economy ‘dangerously close’ to edge of lending cliff
By Eric Rosenbaum
CNBC
September 21, 2022
The FEDERAL RESERVE’S DECISION TO RAISE INTEREST RATES by 0.75%, or 75 basis points, for the third-consecutive time at the Federal Open Market Committee meeting, is a step being taken to cool the economy and bring down inflation, but it is also putting small business owners across the country in a lending fix they have not experienced since the 1990s.
If the Federal Reserve’s FOMC next moves match the market’s expectation for two more interest rate hikes by the end of the year, small business loans will reach at least 9%, maybe higher, and that will bring business owners to a difficult set of decisions. Businesses are healthy today, especially those in the rebounding services sector, and credit performance remains good throughout the small business community, according to lenders, but the Feds more aggressive turn against inflation will lead more business owners to think twice about taking out new debt for expansion.
Partly, it is psychological: with many business owners never having operated in anything but a low interest rate environment, the sticker shock on debt stands out more even if their business cash flow remains healthy enough to cover the monthly repayment. But there will also be more businesses finding it harder to make cash flow match monthly repayment at a time of high inflation across all of their other business costs, including goods, labor, and transportation.
“Demand for lending hasn’t changed yet, but weҒre getting dangerously close to where people will start to second guess,” said Chris Hurn, the founder and CEO of Fountainhead, which specializes in small business lending.
“Were not there yet,” he said. “But weҒre closer.”
Increasing interest cost
As traditional banks and credit unions tighten lending standards and businesses begin to breach debt covenants based on debt service coverage ratios [ the amount of cash flow needed to cover debt - more business owners will turn to the SBA loan market in which firms like Hurns specialize.
“Every time we get into one of these cycles and the economy is slowing and rates are going up, one of the few places to get business credit is SBA lenders,” he said.
But even in the SBA market, business owners are beginning to pause as a result of the Fed’s rate actions, said Rohit Arora, co-founder and CEO of Biz2Credit, which also focuses on small business lending. ғFrom a credit perspective, people are getting more cognizant about increasing interest cost, and that the Fed will keep interest rates at 4-4.50%, Arora said.
FED OFFICIALS SIGNALLED the intention on Wednesday of continuing to hike until the funds level hits a “terminal rate,” or end point of 4.6% in 2023.
“Even a month ago, this was a ‘2022 phenomenon’ and now they will have to live with the pain for longer,” Arora said. “ItԒs a harder decision now because you don’t have the Fed ‘put’ behind you,” he added, referring to an environment in which you could bank on adjustable loan rates not going higher.
Fed expected to keep rates higher for longer
The big change since the summer, reflected in the stock market as well, is the acknowledgment that the Fed is not likely to quickly reverse its interest rate hikes, as inflation proves stickier than previously forecast, and key areas of the economy, like the labor market, dont cool fast enough. As recently as the last FOMC meeting in July, many economists, traders and business owners expected the Fed to be cutting rates as soon as early 2023.
Now, ACCORDING TO CNBC’S SURVEYING of economists and investment managers, the Fed is likely to reach peak rates above 4% and hold rates there throughout 2023. This outlook implies at least two more rate hikes in November and December, for a total of at least 75 basis points more, and including WednesdayҒs hike, 150 basis points in all from September through the end of the year. And that is a big change for business owners.
The FOMC meeting decision reinforced this expectation of a more hawkish Fed, with the TWO YEAR TREASURY BOND YIELD HITTING ITS HIGHEST RTE SINCE 2007 and the central bank’s expectations for when it starts cutting rates again pushed out even further in time. In 2025, the fed funds rate median target is 2.9%, implying restrictive Fed policy into 2025.
How SBA loans work and why rate hikes are a big issue
SBA loans are floating rate loans, meaning they re-adjust based on changes in the prime rate, and that has not been an issue for business owners during the low interest rate environment, but it is suddenly becoming a prominent concern. With SBA loans based on the prime rate, currently at 5.50%, the interest rates are already between 7%-8%. With the prime rate poised to reach 6.25% after the Feds latest 75 basis point hike, SBA loans are heading to as high as the 9%-9.5% range.
“Most of the business owners today, because they have lived in such a low rate environment, while they have floating interest rate loans they didnҒt even realize that on existing loans it could go up,” Arora said. “Everyone expected with gas prices coming down to what I would call ‘pre-high inflation levels’ that things looked a lot better. Now people are realizing that oil prices dont solve the problem and thatҒs new for lots of business owners who thought inflation would taper off and the Fed not be so hawkish.”
He stressed, like Hurn, that demand for business loans is still healthy, and unlike deteriorating consumer credit, small business credit performance is still strong because many firms were underleveraged pre-Covid and then supported by the multiple government programs during the pandemic, including the PPP and SBA EIDL loans. “They are well capitalized and are seeing strong growth because the economy is still doing pretty well,” Arora said, and he added that the majority of small businesses are in the service economy, which is the strongest part of the economy right now.
But many business owners were waiting for the Fed to cut in early 2023 before making new loan decisions. Now, theyve been caught flatfooted by adjustable loan rates that went up, and an interest rate environment poised to go higher still.
“Lots of business owners look at gas prices first and that was true for most of the year, and now itҒs broken down. Wage inflation and rent inflation are running amok, so were not seeing inflation coming down anytime soon,” Arora said.
That’s leading to more interest in fixed-rate products.
Fixed versus adjustable rate debt
Demand for fixed-rate loans is going up because businesses can lock in rates, from a year to three years. “Though its pretty late to the game, they feel like maybe the next 14 to 15 months, before rates start coming down, they can at least lock in a rate,” Arora said. “The expectation is, in the short term, SBA loans will adjust up and non-SBA loans are shorter tenure,” he said.
SBA loans range from three years to as long as 10 years.
A fixed rate loan, even if it is a little higher than an SBA loan today, may be the better option given the change in interest rate outlook. But thereҒs considerable potential downside. Trying to time the Fed’s policy has proven difficult. The change from the summer to now is proof of that. So if there is a significant recession and the Fed starts cutting rates earlier than the current expectation, then the fixed-rate loan becomes more expensive and getting out of it, though an option, would entail prepayment penalties.
‘Thats the one big risk you run if taking a fixed-rate loan in this environment,” Arora said.
The other tradeoff in choosing a fixed-rate loan: the shorter duration means a higher monthly repayment amount. The amount a business can afford to pay back every month depends on the amount of income coming in, and a fixed rate loan with a higher monthly repayment amount requires a business to have more income to devote to servicing the loan.
“After 2008, business owners never experienced a jumped in SBA loans and now they see monthly interest payments increasing, and are feeling the pinch and starting to plan for it ... get adjusted to the new reality,” Arora said. Demand is still healthy but they are worried about the increased interest cost while they are still battling inflation, even as lower oil prices have helped them.Ӕ
SBA loan guaranty waiver ending
Another cost that is suddenly influencing the SBA loan decision is the end of a waiver this month on SBA loan guaranty fees that are traditionally charged to borrowers so that in the event of a default, the SBA pays the portion of the loan that was guaranteed.
With that waiver ending in September, the cost of guaranteeing a loan can be significant. For example, a 3% SBA guaranty fee on a $500,000 loan would cost the business borrowing the money $15,000.
“Its adding to the costs,” Arora said.
ItҒs still a mistake to wait too long to access credit
While oil prices are coming down, food and other inventory costs remain high, as do rent and labor costs, and that means the need for working capital isn’t changing. And business owners who have been through downturns before know that the time to access credit is before the economy and cash flow start to deteriorate. At some point, in the most severe downturns, “you won’t get money at any cost,” Arora said.
“If you have a reasonably calculated growth plan, no one is going to say keep your head in the sand and wait until Q2 of next year and see where rates are,” Hurn said. “Banks don’t like to lend when the economy is slowing and there are higher rates, which translate to higher risk of defaults.”
Hurn said loan covenants are being “tripped” more frequently now in deteriorating sectors of the economy, though that by no means typifies the credit profile on Main Street.
“Once interest rates go up, and if inflation does not go down, we will see more debt service coverage ratios getting violated,” Arora said. This has to be taken into account because here is a lag between Fed policy decisions and economic impact, and this implies that sticker forms of inflation will last for longer even as sectors like housing and construction are deteriorating.
Much of the surplus liquidity businesses are sitting on due to government support is being eroded, even amid healthy customer demand, because of high inflation. And even if this economic downturn may not be anything like the severe liquidity crisis of 2008, business owners are in a better position when they have the access to credit before the economic situation spirals.
This is not 2008, or 1998
The systemic issues in the financial sector, and the liquidity crisis, were much bigger in 2008. Today, unemployment is much lower, lender balance sheets are much stronger, and corporate balance sheets are stronger too.
“Were just running into a slowing economy,” Hurn said.
When he started in small business lending back in 1998, business loans reached as high as 12% to 12.5%. But telling a business owner that today, like telling a mortgage borrower that rates used to be much higher, doesn’t help after an artificially low interest rate era.
“Psychologically, people set their expectations for borrowing costs… ‘they will be this cheap forever,’” Hurn said. “ItҒs changing radically now.”
“If rates go close to 10%, psychologically, businesses will start hesitating to borrow,” Arora said.
And with a peak Fed rate level of 4% or higher reached by late this year, that is where SBA loan rates are heading.
The problem of higher interest rates and recession
Another 150-175 basis points in total from the Fed, if it has its intended effect of bringing inflation down, would leave many businesses in a stable condition because all of the other costs they are facing outside of debt would be more manageable. But the key question is how quickly the interest rate actions bring down inflation, because the higher rates will impact the cash flow of businesses and their monthly loan payments.
Lower inflation in stickier parts of the economy, like labor, combined with energy costs remaining lower, would allow small businesses to effectively manage cash flow. But if those things don’t happen as quickly as people are expecting, “then there will be pain, and consumer spending will be down too, and that will have a bigger impact,” Arora said. “The challenge is recession and high interest rates together that they have to handle and havent seen in 40 years,” he said.
Rates are not ordinarily considered the determining factor in a businessҒs decision to take out a loan. It should be the business opportunity. But rates can become a determining factor based on the monthly repayment amount, and if a business is looking at cash flow against monthly costs like payroll being harder to make, expansion may have to wait. If rates go up enough, and inflation doesnt fall off fast enough, all borrowing may need to be applied to working capital.
One thing that won’t change, though, is that the U.S. economy is based on credit. “People will continue to borrow, but whether they can borrow at inexpensive rates, or even get capital trying to borrow form traditional sources, remains to be seen,” Hurn said.
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