Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 





The Reverse Wealth Effect though underway will likely not fully show itself until Stage 5 of an expected toppling of cascading economic dominoes still ahead of us:
On-Going Forced Cuts of Fixed & Variable Expenses
– Small businesses employ 58.9 million Americans, making up 47.5% of the country’s total employee workforce and it has been in almost complete lock-down. A major small business bank survey indicated that Forty-seven percent of the small business owners surveyed said they anticipate shutting down, and 41% said they are looking for full-time work elsewhere
– Current Unemployment Benefits ~ 44M,
– Missing from Unemployment Benefits is “Gig” Economy and “Black Market” Services,
Inability of Corporations & Small Businesses to be able to pay their bills
– Rising Delinquencies& Defaults,
– Credit Impairment, Rising Credit Costs and Falling Credit Ratings.
Reduced Consumer and Business Consumption
Reduced Economic Growth
Reduced Retail & Business Commercial Real Estate Needs
Growing Shortage of New “Bigger Fool” Investors
– Inability to fund excess leverage to support falling prices
Excess Sustainable Leverage Across Lending Sectors
– Rising Costs & Risk of Lending
– Shortage of funds to Borrow Short and Lend Long.
  The Fed said in its semi-annual report to Congress that: … 
The economic damage from the recession may be “persistent” as a collapse in consumer demand could bankrupt many businesses, and there’s uncertainty about future demand and productivity as firms shift production processes, which could lead to lower wages.
  • While the wealth effect can reverse, debts have to be paid regardless. Debt payments are forever while the wealth effect is fleeting.. 
  • The current mass delusion is that the Fed can bail everyone out with cost-free cash. But we have to keep in mind what my co-host in this video, Charles Hugh Smith emphasizes the Fed can’t do:
    • It can’t reverse the unprecedented wealth inequality its policies have pushed to the point of civil breakdown.
    • It can’t make people take on the risks and heartaches of starting new businesses. 
    • It can’t force employers to hire more employees.
    • It can’t make unprofitable businesses profitable.
    • It can’t force people to buy assets at prices that no longer make financial sense.
    • It can’t make insolvent businesses and local governments solvent.
    • It can’t force people who now realize their priority is to save money to spend their cash, even if the Fed forces negative interest rates so it costs money to have savings.
    • It can’t lower the unaffordable cost structure of the entire economy.
    • It can’t de-link all the financial dependencies in the financial system that make it so vulnerable to the first domino falling.
    • It can’t stop people from selling their assets.
  • In summary, it can’t stop the reverse wealth effect. We are entering The Greatest Depression because there is no exit. Either the phantom wealth of asset bubbles completely vanishes, or the phantom purchasing power of fiat currency vanishes. Both paths lead to the same destination: systemic collapse.
The heart of the American economy lies in small town America. Approximately 70% of the US Economy is Consumption and approximately 70% of Economic activity comes from Small Business. It is a strong Middle class that has delivered the American Dream
We need to understand what built these Towns and Municipal areas. It starts from understanding where the wealth came from that allowed America to prosper. Like all Wealth it derives from Growing it, Mining It or Building it – You cannot print it. Printing it is about transferring risk or increasing debt. As many listeners know, Money in America only comes into existence through the creation of debt.
The wealth for America and the small towns it created initially came from mining or family farms. America was initially an agriculture economy. In the early part of the last century we exploded into being an Industrial powerhouse, exporting globally and raising the standard of living of all through increasing wealth and manufacturing productivity – these were the boom times for America and its 100’s of thousands of small towns.
Things started changing as manufacturers were taken over and became part of conglomerates. Ownership shifted from local entrepreneurs and family controlled enterprises to conglomerate. Profits left the town and went elsewhere to be distributed. 
Towns and local Municipals began to feel budget squeezes. Then in the build up to the Dotcomm Bubble and welcoming China into the WTO they witnessed massive Off-shoring, Down-sizing and Right-sizing. Shuttered factories across America was the norm and with it crippling impacts to local fiscal budgets and more importantly the middle class consumers within the impacted areas. Merchants and Services began to feel the impact but exploding easy money policies fostered real estate booms and explosions in chain stores. Malls, big box stores and franchises. Cookie Cutter America arrived.
What arrived with it was that all these entities sucked money out of the local economies like vacuum cleaners.
Small town America was about the money being turned over and over again – not the total amount being depleted!!
This is what this chart is trying to tell you. Money is no longer moving through many hands because the hands are being reduced and small business are bankrupted or forced out of business by chains and franchises.
Policies of Liquidity injections and Fiscal Stimulus don’t fix this problem. It only postpones the inevitable reckoning.


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