first majestic silver

Will the U.S. Survive Coming Recession?

November 17, 1998

It is widely recognized that the roaring engine of the U.S. economy is showing the signs of wear and tear from its high octane performance over the past several years - and almost certainly will slow down in the coming months. Even most mainstream economists, notorious for their exuberant, if misguided, optimism are almost unanimously forecasting a recession by the second quarter of 1999. Of course, as doleful as this expectation may be to most investors/consumers (increasingly the same group) no one really believes this expected recession to be any more painful than the minor one of 1991. But are those expectations realistic?

Before we delineate our thesis, we want to make quite clear that we are not necessarily forecasting a "depression" in the U.S. in 1999, as some analysts are. Our concern here is not whether or not the stock market crashes or whether bank credit collapses; rather, our focus is solely on the possibility of "recession," a word whose connotations are much more palatable. To most people, a mention of the word recession, even if it is viewed as a distinct possibility, will elicit hardly concern. No one fears recession. And most believe that even if recession did visit these shores once again it would be strong enough only to cause minor discomfort, certainly not enough to warrant a significant change of lifestyle for the average American. But we propose here that even something as "insignificant" as a recession would prove devastatingly painful for the average American, and would rock the very foundations of our economy.

Before one can comprehend our assertion, it is necessary to first identify what is meant by recession. In so doing we must put away the false notion that the economic slowdown of 1991-1992 was, in fact, a recession. It was not. Its breadth and magnitude were not considerable enough to label it so and its duration was of no consequence. In fact, one could make the case that the entire period of the so-called recession of the early nineties was purely psychological, engendered by a rabidly anti-George Bush mainstream media which incessantly chanted the mantra, "We're in a recession," in the months preceding the 1992 presidential elections. In January 1993, when President Clinton was inaugurated, the "recession" mysteriously disappeared and nothing more was heard of it. Further, while layoffs did increase somewhat, and consumer spending did abate, it was quickly restored and the economy picked up where it had left off before the elections.

To witness the last time the country experienced a true recession one must go back to the period between 1972-1974. It was here that the country got its first real post-World War II economic slowdown, accompanied by a bear market in stocks. GDP growth slowed tremendously, unemployment rose, incomes fell, and considerable discomfort was felt by all. It was also during this period that America first opened her borders to free trade with other nations, and we became officially an "open" economy.

As bad as the recession of 1972-74 was, America still had her industrial base to support her throughout. When the recession cleared, we were able to go immediately back to business as usual in the U.S. without too much trouble, thanks to our strong manufacturing economy. Today, however, our industrial support is gone and we are no longer an industrial economy. We sold our industrial birthright for a bowl of pottage in the form of a service sector economy. Industry today thrives mainly in Third World countries where labor can be had for slave's wages. What remaining agricultural support base we had has long been lost, as well. In short, all that remains are services.

What we are proposing is that for the first time in our nation's history we are about to enter an economic recession as a post-industrial economy. And since the "recession" of 1991-92 was of questionable substance - and since during our last true recession we had an industrial base to carry us through, it remains to be seen how a post-industrial, service-based economy such as ours will carry through during such a time. Services, after all, depend largely on discretionary incomes and relative prosperity. This is not true of manufacturing which is needed at all times (though in varying degrees).

When the U.S. economy turns down, how will most service industries make money when discretionary income has largely vanished? Most disturbingly, the economic "experts," least of all the masses of investors, do not seem to comprehend the gravity of this situation, and are not the slightest bit concerned. The only persons who seem to have comprehended the enormity of our plight are the members of the Federal Reserve, who have cut interest rates three times in the last three months.

This action is unprecedented on behalf of the Fed - and it reflects a deep concern on their part. But will their efforts avail? We do not believe so. The U.S. economy is largely the victim of widespread deflationary pressures. Deflationary forces overseas have been evident for years are only now becoming severe. Our participation in the "global economy" assures that we, too, will be overcome by deflation as bank credit slowly dries up and lending institutions become less cavalier in their lending. We wrote earlier of the tremendous importance of bank credit to the success and perpetuation of any bull market (see our Gold-Eagle piece, "Bank Credit and the Bull Market") and it is the lack of availability of bank credit that will kill it. We pronounce that the bull market in U.S. equities is entirely over (if not nearly so) - and since it was fueled almost exclusively by bank credit, it can be asserted that a credit contraction will ensure its demise.

Most banking institutions—at home and abroad—are suffering the consequences of an easy lending policy - and signs of an impending banking crisis are everywhere, even in America. Disastrous loans to third world countries, major exposures to risky and equally devastating derivatives, and extending personal and business loans to the credit unworthy have combined to place the global banking system in a most precarious situation. Worse, consumer bankruptcies are at an all-time high, while the savings of the average U.S. household is at pre-1933 lows. According to a survey released last month by the Department of Commerce, the national savings level is now actually in the negative percentile for only the second time this century. None of this, of course, bodes well for future economic prospects. How long will it be before banks begin calling existing loans and tightening lending standards for future debtors? You see, it doesn't matter so much what the Federal Reserve does to Fed Fund rates as it is what the local bank does to the real rate of interest.

To further address the profound deflationary forces already at work in the U.S. economy, we need only examine the supply and growth of money in the U.S. as measured by M3 (which includes currency, checking accounts, demand deposits, traveler's checks, and deposits in money market mutual funds). When we do, we find that the chart measuring M3 growth has plunged dramatically—from a 13% growth rate to a 3% growth rate—in only a matter of months. A decline of this nature in broad money supply growth is always an indication that business is slowing. This is the strongest decline in this component of money supply in well over 20 years. We could go on, but the overriding question remains: How will the U.S. handle an economic recession (which, due to our service base, will almost certainly prove devastating)? Will our existing economic infrastructure remain in place? Have we the social and moral fabric to withstand the inevitable tensions and frictions that will arise in such a milieu? All of these questions will be answered very shortly.

Remember, this thesis is only predicated on a simple recession. It will be compounded if the U.S. stock market fails to hold up, or worse, crashes. A crisis in the banking sector, a continuation of the overseas economic crises and a social/technological breakdown associated with the expected Y2K computing crisis (even if it is just a perceived crisis) will only add to these woes. Are you prepared?

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit

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