"It's all in your mind, V. They can take away your job, but they
can't take away that brain you have inside your head," she told me,
trying to pacify my fears of being fired.

"I guess, you are right," I replied.

"But
to tell you frankly, it is not looking good. The US has come up with
another rescue plan. This time, the big round number is $787 billion.
So if we add the earlier two rescue efforts, the bigger round number is
more than $2 trillion. One of the biggest items in this new plan is a
$400 payroll tax cut for individuals and $800 for couples. Some
others like retirees, war veterans etc who do not pay payroll taxes
will get a $250 payment from the government. The idea is that the
beneficiaries will spend all this money, which will help revive a
contracting economy and, in turn, save jobs. But I don't think all this
is going to make much of a difference," she said, puncturing all the
pacification she had just indulged in.

"Why do you say that?" I asked.

"I
don't think all the efforts being put in by the US government to get
its citizens to start spending will bear much fruit. Private debt is
usually around 80% of the gross domestic product (GDP), but right now
in the US it is 140% of the GDP. In money terms, private debt in the US
is now around $6 trillion and this is after nearly $1 trillion was
written off in the last two years. Now, I need not tell you, that is a
hell of a lot of money.

People realise that unless they save,
they won't be able to pay off all the debt that they have accumulated.
People have also lost nearly $30 trillion in value from their homes and
investments over the last few years. This has led to a huge change in
psychological attitude when it comes to spending. With real estate
prices falling and incomes either stagnant or falling, it is natural
that people want to hold on to all their cash. Savings as a percentage
of income currently stands at around 2%. Now, that rate has to increase
if people are to pay off all the debt that has been accumulated. So,
basically, people want to save even though the government wants them to
spend in order to revive the economy. Get that?"

"Yup, I do. You seem to be getting better and better," I commented.

"You
know, David Rosenberg, an economist at Merrill Lynch, has opined that
the US economy is not in a recession, but in a depression," she said.

"Depression! But what is the difference between a recession and a depression?" I asked.

"Good
question. I Googled and found that there is no precise difference
between depression and recession. But a depression is essentially an
extremely severe recession. And that is why all these attempts by the
government to print and spend money -- and to get its citizens to spend
-- to revive the economy just won't work.""Hmmm! But why won't it
work? There have been cases in the past when increased government
spending has helped revive many economies?" I questioned.

"You
know this is an exception that proves the rule. The prescribed remedy
for a government to get out of any recession is increased government
spending that leads to its citizens spending more and hence revival of
the economy. But this time it's different. People just have way too
much debt to pay off and, even if they are given tax cuts like they
have been offered in this new plan or lower interest rates to borrow
and spend, they just won't spend. All the plans presented till now seek
to get people to spend and hence revive consumption. But the economy is
in trouble primarily because people borrowed way beyond their capacity
and spent too much. As economics and financial writer Mike Shedlock
recently put it, 'Consumers and banks have both been burnt, and attitudes have changed'," she replied with great confidence.

"You explained the consumer part of it. But what about the banks... Why
are they not lending? The US government has been helping banks. The
increase in lending to American banks as of November 2008 was a
staggering $700 billion. Where is all that money going? Even after a
lot of government money has been pumped into banks,"

"Hmmm! Just imagine if all that money were to hit the economy. What do you feel will happen?" she asked.

"Well
at a very basic level, such an increase in money supply will lead to a
humungous increase in inflation. "Inflation is always a monetary
phenomenon," this is one of the few things that various schools of
economics seem to agree on," I answered.

"Right! The fact is that
inflation is well under control even with all this increase in money
supply. What does that tell you?" she asked.

"It means that all
that money given to the banks is not coming into the economy... But if
it's not coming into the economy, where is it going?" I asked.

"Banks
are depositing the money lent to them by the US Fed, back at the US
central bank. On this, the US Fed pays them an interest of 0.1%. Other
than this, the money that banks raise through depositors is also being
deposited with the US Fed. Now why would a bank which pays an interest
of around 2% on its fixed deposit, go back and deposit that money to
the US Fed at almost zero percent?" she questioned.

"It would do
that only if it expects to lose more money by lending to people," I
replied, finally getting what she was trying to explain.

"But is there a way out of this?" I asked."There
is a way," she answered. "Economist and investment letter writer Bill
Bonner wrote in a recent column, 'There is about $6 trillion worth of
debt that needs to be eliminated before the economy can begin to grow
again. Liquidation would do it - quickly and painfully'. He seems to be
suggesting that the simplest way to get around all this is to write off
the humongous amount of private debt that remains and start afresh."

"So why is it not being done?" I asked nonchalantly."You
know, you can be really stupid at times. If that happens, the US dollar
would simply collapse and that of course is not acceptable to the
present establishment or for that matter the previous establishment.

But
I guess the US dollar would collapse anyway. All those dollars that are
being printed to rescue the economy will hit the economy sometime, and,
when that happens, inflation is going to go through the roof. When
inflation goes through the roof, the world at large won't want to hold
on to the humongous amount of securities issued by the US government.
They will get out of those securities leading to a crash there. Once
they have got the dollars by selling those securities, they will also
want to sell off those US dollars and get into other currencies and
that my dear, as you have explained in the past, will lead to the US
dollar crashing," came as a long wielding response from her.

"So what is the moral of the story?""Buy gold. With the expected collapse of the US dollar, all the money is going into gold."

source: DNA