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Special Economic Report

The U.S. Economic Crisis and Economic Recovery Plans
An exclusive interview with Med Jones
The expert who predicted the financial crisis

Med-Jones-Financial-Crisis-Report-2008-2009

The Expert Who Predicted Financial Crisis | Economic Crisis | Recession  | Med Jones, The Expert Who Predicted Financial Crisis | Economic Crisis | Recession
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CEO Q Interview

Med Jones
International Institute of Management

June, 2009

CEO Q had the privilege to interview Med Jones, one of the few economic oracles who predicted the global financial and economic crisis. Med Jones challenged the US President’s State of the Union Address, the Federal Reserve Chairman, and the opinions of top economists back in January of 2007. In an interview with Reuters he warned about the subprime crisis, the real-estate bubble, and the fall out from the loss of confidence in the US economy.

This interview took place after he gave the keynote speech on June 23, 2009 at an Investment Conference for the world’s richest families and investors, in Geneva, Switzerland. Jones talks about the US economic recovery, the outlook for the next five years, Obama's economic policies, the emerging new world order, the decline of the US & the EU, the rise of China, the troubles of the financial industry, the North American Union and more.

The US Economic Outlook
The Economic Recovery: When and How?

CEO Q > What will the recovery look like (V, U, L or W shaped)?

Med Jones > That is not the right question; the economy goes through cycles, and the better question is how will it behave in the short, medium and long term.

CEO Q > Back in October of 2008, at the height of the crisis, when everyone was talking about the great depression and other doom scenarios, you predicted in an interview with CEO Q that the decline will bottom in 2009 and we could see a modest recovery in 2010. Is your outlook still the same?

Med Jones > Yes, we could see a modest US recovery of about 1%. In the last few weeks we saw a slowing down of the decline and a lot of media talk about green shoots. My predictions are still valid. However, technical recovery is one thing and real recovery is another. The recovery will be a jobless one, some industries will recover faster than the others and the gross national recovery will not undo the damage anytime soon.

These positive indicators are neither permanent nor driven by healthy economic growth. They are the result of the government bailouts, the stimulus package, tricky accounting manipulation, and media cheerleading.

The problem of toxic assets is not resolved. The decline in US real production and other structural problems are still unchanged. Real recovery cannot be driven by more debt-spending.

My earlier forecasts still hold true:

  • The reported unemployment rates could hit 10%. The real figures may reach double that rate. (counting those who stopped seeking jobs or those who now have part-time jobs)
  • Credit cards and auto loan delinquencies (late and unpaid) could double
  • Residential real estate prices will decline about another 10% and bottom in 2010. Commercial real estate will bottom in 2011
  • Federal income tax (receipts) will be reduced by about 30-40% (correction 13-14% from the high of 2007)
  • The Federal Reserve will continue to print trillions of dollars out of thin air which will pressure the dollar to decline in value. We will see higher gold and oil prices.

 

The real US debt is much larger than announced.
If the current economic forces and policies remain the same,
there is a risk of another major US economic crisis in 2015.
Europe and Japan are not in any better shape.

 


CEO Q > What about the recent increase in investors’ confidence?

Med Jones > Consumer, business or government confidence is fed by media cheerleading rather than fundamentals. Investors’ sentiments are volatile. Just watch and see the extreme swings in the stock markets.

CEO Q > What is your economic outlook for the next 2 to 3 years?

Med Jones > After the initial deflation due to high unemployment, the reduction in demand, and the continued depression of the real estate prices, we will more likely experience stagflation or higher inflation with no real economic growth due to lower dollar exchange rate causing higher prices of imported raw materials and foreign products. Most growth numbers will be driven by government debt-spending and inflation. The US economy will most likely suffer like the Japanese economy after their financial crisis.

In the next decade, the real challenge for the US and other countries is to find a way to grow without excessive credit and leverage.

CEO Q > What is your economic outlook for the next 3 to 5 years?

Med Jones > Unfortunately, the world could experience another crisis caused by accumulated debt, social security deficit, the aging baby boomers and misdirection of bailout money to stock market and other risky assets.

Countries that have high Debt-to-GDP ratios and follow the same US economic policies will be hurt the most. Japan and some EU countries in particular Italy, Spain and Latvia could also suffer a lot.

Economic growth neither comes from bailing out failing businesses, nor from state-led infrastructure investments. It comes from technological innovations, hard work, and gains in productivity; these things come from the private sector and the entrepreneurs rather than state bureaucrats and private interest lobbies.

The current financial crisis, the bailout Ponzi scheme, the continued deficit spending, the misallocated stimulus funds, and the ballooning of the real uncalculated debt-to-GDP ratio of about 680% as opposed to the official number of 87%, could pose the greatest risk to the US economy.

CEO Q > Are you saying the government is lying and that the real debt-to GDP number is 680%?

Med Jones > This information is not new, most economists know about these numbers. It is just that the government uses different accounting standards for its agencies to make them look better.

The 11 trillion dollar debt figure does not take into consideration the unfunded 57 trillion dollar of entitlement liabilities for Medicare, Medicaid, Social Security and the Federal government and military pension funds, and that is how you arrive at the 680% figure. In addition to the federal debt, the individual states budget problems and debts are all over the news

The government spends 25% of its budget on these benefits. Up until 2007 the government collected more taxes than it paid. It is estimated that Social Security funds will turn into negative cash flow by 2015 or even earlier. The rate of workers-to-beneficiary has gone down from about 17 to 1 to 3 to1. People are living longer, birth rates are declining, and anti-immigration sentiments are increasing. These will lead to the reduction in social security or increasing of payroll taxes, reducing business profits and increasing inflation. The EU and Japan are facing even more troubles with their ageing demographics.

Regardless of the timing of these unfunded obligations, if you want to invest in any entity (a person, a company or a government), you have to look at the debt-to-equity ratio, revenues and cash flow to see the solvency and ability of the entity to pay its debt and invest in growth. These indicators are getting worse across the board.

The exact timing, the depth and the speed of the next crisis and the recovery from it depend on several factors. Current policies will delay the crisis but we will have to pay an even higher price later.

One of the main reasons the US has been able to prevent the economy from collapsing, despite all the bad policies and massive currency printing, is because the dollar is the de-facto standard for international trade and the largest international currency reserve.

The US is running on the goodwill of previous decades, once that is challenged or the dollar is replaced with a basket of international currencies, the US economy could crash, especially if the government does not stop spending or go back to healthy production-based growth and investments.

CEO Q > If the risk is so high, then how do you explain the demand for US government bonds and treasuries?

Med Jones > The logic of most investors is that in a global economic crisis, US treasuries and currency are a safer bet than other investments. Now, we all know that the US government has a straight debt obligation which is about $11 trillion. But that’s nothing compared to the $57 trillion Social Security and Medicare entitlement liabilities. If we add the entitlement "debts" to the Fed’s Z.1 definition of debt, then US Debt-To-GDP calculation becomes 680%. When social security drains its trust fund around 2015, how will they make up the shortfall of money?

  • Social security bond auction? More T-bills?
  • Reduce payments?
  • Tax hikes?
  • Print more money and risk further devaluation of the US dollar?

The US economy runs on credit. Credit is based on trust. The US government is betting that regardless of the increase in debt numbers, the national and global creditors and investors will still trust us. This is the exact same mindset that led to the current financial crisis.

They ignored the warning and suddenly they woke up to a collapsing industry that is dragging along the entire economy.

In my mind the next crisis is inevitable. The time frame is subject to government policies and the resiliency of American industries. The increasing debt is the main driving force behind the next socioeconomic and political shock that we will experience. Connected to other forces, like ballooning  investment  and  trade  deficits,  and globally traded speculative asset instruments, the economy will not withstand  a chance.

CEO Q > What could hinder the recovery of the U.S. economy?

Med Jones > There are several possible scenarios. The complex governmental (and banking) accounting rules hide the fact that many of the current investment papers (risky debt and derivatives) are overvalued and risky. This is very dangerous. National and global investors will sooner or later catch up with the fact that their investments are highly inflated and riskier than they thought. If reforms are not taken, the result could be the serious erosion of investors’ confidence. The confidence in U.S. economic policies is the single most important factor for recovery. The loss of confidence in the U.S. economy could lead to the significant loss of the dollar value and the migration of capital from the U.S. financial markets to alternative international investment destinations.

 

 

The best way to restart the economic engine is to invest in innovation development and enterprise creation.
Enhance the competitiveness of US industries and improve the business environment to attract more investments.

 


CEO Q > What are the risks to the recovery?

Med Jones > There are several risks including, but not limited to:

  • The devaluation of U.S. treasuries and other assets
  • New waves of home foreclosures from variable rate mortgage loans that will reset in 2010
  • New waves of major consumer and business bankruptcies (especially for large industries)
  • States’ bankruptcies
  • Double digit unemployment rate
  • Wrong economic policies (uncontrolled spending deficits and higher tax policies)
  • The sharp devaluation of the US dollar
  • National political unrest
  • Wrong foreign policies (increased instability and decreased global collaboration)
  • Geopolitical and security risks
  • A war with Iran that could hike oil prices and cripple the global economy

The combination of some of the counterproductive policies and bad news can further damage investors’ confidence, thus sending the economy in a downward spiral and resulting in another "great depression". Fortunately, the administration does have the tools to mitigate those risks and it is not too late to implement the economic reforms needed.

 

 

Forming North American Union
or opening immigration doors
to more productive professions,
are politically difficult options

 

 

CEO Q > What is the best case scenario?

Med Jones > There are several positive forces:

  • The deregulation and globalization of markets, capital and trade, information technology, better management, lean inventory and production systems will all help in a faster recovery.
  • New market regulations such as increasing mandatory banking reserves, increasing the power of the shareholders to manage executive compensation, and regulating credit reporting agencies will improve the confidence in U.S. investments.
  • The lower dollar value will help exports, thus supporting foreign capital spending and growth.
  • The lower mortgage rates will allow investors and first-time home buyers to get into the market, thus reducing the market inventory and improving prices.
  • The proactive monetary and fiscal policies will help absorb the shock and help ease the credit market crunch (assuming the bailout plan is not abused by the banks to reduce their balance sheet losses, rather than passing the money to consumers and businesses).
  • In a global integrated economy, the global investors (including the Chinese, Japanese and the Gulf Arabs), all want the U.S. to recover so that they, too, can recover their investments. We can expect to see collaboration with various central banks and investors which will help us overcome the crisis. It is unlikely that we’ll see these governments taking hostile actions which would cause the collapse of the dollar.
  • Oil prices can drop on lower demand, giving U.S. businesses and consumers a break.
  • The government can invest in, and help develop new industries including biotech, alternative fuel, and nanotechnology, thus creating new jobs which will generate enough income to reduce the budget deficit.

Continue the Interview at:

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About Med Jones

Med Jones is the president of International Institute of Management. He is recognized as one of the few experts who predicted the US financial and economic crises of 2008. In January 2007, he challenged the US President's State of the Union Address, Federal Reserve Chairman and mainstream economists. The original warnings and predictions can be found at:

Jones is a non-partisan technocrat. He can be reached at medjones.com

 

  

 

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