“Scorched Earth Economy” May be the Most Accurate Description the Current Economy - DailyReckoning

Summary:
According to David Galland, the markets are heading toward what might be he terms a Scorched Earth Phase (rather than stagflation, due to severity of both sides of the equation). The cause is the coincidence of a tumbling collapse in the largest component of the stock market (the financial sector); a tumbling collapse in the largest component of people's net worth, their homes; an energy, which increases the cost of everything, especially food; and, most importantly of all, a collapsing fiat monetary system. $6 to $7 trillion dollars is now held by foreign holders, which is unprecedented. If the Fed reduces rates or prints money, in an attempt to placate voters and/or reduce the size of the foreign debt, this will trigger a massive dollar sell-off, reducing its value to zero. There is no doubt a serious economic crisis is on its way, most likely with very high inflation. (Published: 11/07/08)

Notes:

• tumbling collapse in the largest component of the stock market, coinciding with a tumbling collapse in the largest component of people's net worth, their homes:
  
• US financial firms: single largest component of S&P500
• losses so far approaching half a trillion dollars
• quickly running out of rope in attempts to shore up balance sheets
• e.g. Morgan Stanley: saw its investment banking fees fall by half and fixed income sales and trading revenue collapse by over 85%
• SWF to the rescue?
• not anymore
• those that initially rushed in were seriously burned and many are now on record as staying on the sidelines
• housing meltdown
• will continue for at least another year or two
• unless government decides to "do something"
• in which case downturn could last 5 to 10 years
• what markets need most right now is for house prices to fall as quickly as possible to market-clearing price
• but nobody knows where the bottom is (10, 20, 30%?)
• "doing nothing" is not a concept that politicians in an election year are very comfortable with
• energy crisis
• Mexico, 3rd largest source of imported oil for the US, will stop exporting within 4 to 6 years
• no emergency initiatives to open up new energy sources
• on the contrary: perfect world mentality
• ensures that the cost of what energy is available will on get greater
• energy is required in the production of everything, so the cost of everything will go up
• e.g. food
• collapsing fiat monetary system: biggest threat
  
• system that helped create the recent series of bubbles in the first place
• in a fiat monetary system the only tangible barriers to money creation are provided by a loss in stakeholder confidence
• not the average American, unaware of this system let alone consequences
  
• but: the foreign holders of an unprecedented $6 to $7 trillion dollars
• going into the jaws of a vicious economic/dollar crisis those foreign dollar holdings become akin to playing toss with a lit stick of dynamite
• he who holds the dollars when the fuse meets the powder is in for a very, very bad day
• as a result, the foreign holders are watching the moves of the Fed very closely
• if the Fed raises rates to prevent a sell off in dollars, they’ll crush the highly indebted and already struggling populace and, in so doing, unleash a serious economic crisis
• if the Fed keeps rates where they are, or even lowers them, they’ll trigger a dollar sell-off and unleash a serious economic crisis
• most likely scenario, for two reasons:
• depreciating dollar means a reduction in the trillions of dollars in obligations now owed by the US government
• foreign holders don't vote
  
• serious economic crisis either way
• with high inflation