Gordon,

Thanks for raising this issue.

Fact: A bank is stable
Rumor: The bank is unstable
Action: People withdraw their money from the bank
Result: Making the bank unstable

There are very real reasons why *I* think we are heading into a recession at least and possibly a longer term depression. And they are based partly on Fact and partly on Rumor/Action of people.

# 1: The sub-prime fiasco. Some so-called real estate experts say the problem is not as bad as is being made out. That when taken over the Number of loans taken out, those in default represent a small small number - in terms of loans taken and the dollar amount of those loans in comparison. (Do those saying such things have a vested interest in saying them? Often, yes.)

But consider, if there are roughly 60,000 loans in default by more than 60 days, and those loans are an average of $1,500 per month, then we are talking about $180,000,000 in default loan money. And that doesn't include those who are 30 days behind and still yet to go into 60 days behind.

But it Is a little worse than that. Because not only can these loans be in default, they cannot be refinanced into a profitable position. Meaning, the Security is worth less on the market than the current mortgage (if all are foreclosed on that's 60,000 properties hitting the market and driving the price down).

Also, the default figures represent Domestic loans and do not consider Commercial Loans. RAMS homeloans in Australia has close to $7 Billion in questionable Commercial Loans - that's just them, and a far cry from $180 million. (RAMS sold their loans into the subprime market in the US)

When the S&L collapse happened, it got rid of the Competition and brought the loans back to the banks. The S&Ls sold loans, which were bundled into investment packages which the S&Ls invested the money they got from selling their loans. But you cannot keep robbing Peter to Pay Paul. And in the end the Banks end up with security over a lot of stuff that they acquired for pennies on the dollar - upto 60% discount.

Now we have the same thing. RAMS has been partly bailed out by one of Australia's Big Four banks. They bought the Name first and have now bailed them out. Simultaneously obtaining a bunch of Loan Assets and Outlets/Branches from which they can sell loans to other people. We see a repeat... loans acquired at a discount by a big bank.

The banks get stronger and the competition disappears.

But as banks do Bail Out each other to a degree, they take on Problems. And so what happens in the US also happens elsewhere to an extent.

# 2: Stockmarket decline. While the Value of a stock does not represent the economic conditions of the company it represents, it is a devaluing of money. When seen by Mom/Pop investors the money is withdrawn from the market to either be held on to or put into other investment vehicles - such as real estate.

Every Market Segment the Boomers have gone through has grown as a result. When they were being born it was Baby Related product companies that grew - cribs, bottles, etc. As they aged and their requirements moved into other areas those areas also boomed. While areas they just left suffered declines.

The baby boomers will start to Retire. They will take their money Out of the stockmarket. if there aren't enough Buyers to acquire their stocks, then those buyers available will be given the opportunity to buy them at a discount - not necessarily the Boomer's stocks but those who must Pay Out the boomers. We end up back in a situation where one thing is sold for less money to pay a slightly more expensive thing - 11 stocks are sold at 9 cents to fund/replace the money paid out to the boomer who cashed in their 10 stocks for 10 cents each. And the downward spiral begins - the money is devalued and money taken out of the market to prevent further devaluation.

Also, those who Insure mortgages see their stocks decline due to the sub-prime issues. Those Funds with investments in real estate - and there are plenty - also see a devaluing of their investments as real estate takes a hit.

As the boomers are not Investing in real estate, that part of the economy slows - or slows further. Sure, other parts of the economy begin to increase - such as retirement complexes, nursing homes, pharmaceutical purchases, and so on. But for other parts the decline is noticeable and those other parts always play a Big part in economic growth.

IF those boomers do not have enough money to fund their retirement, they will be on the govt welfare - which means Increased govt spending which leads to inflation and higher taxes as an excuse. And many of those boomers will run Out of money during their retirement. That's not scaremongering, but fact. And that's a LOT of people that are suddenly Taking from the system and not putting back In to the system.

Yes, I understand the Population is larger now, there are the echo boomers and so on. But that doesn't negate that the boomers are a large number of people all doing the same things at around the same time.

So even a simple act of taking money out of the stockmarket to fund retirement could cause a run on the stocks. It's nice if everyone could just Wait It Out. But if you saw your hard earned dollars suddenly dropping in value - that $1 you invested is now only worth 80 cents, but worth even less due to inflation and rising prices - then I don't blame you for taking your money out of harms way. It's a natural reaction.

This Combination could create interesting results. Money taken out of the stock market but not put into the real estate market. Banks have money to lend but no-one wants to borrow it. Interest rates drop to encourage borrowing but still the money does nothing and remains in the bank - awaiting better times. Welcome to Japan's domestic economic issues.

Is there a way out? Can such a thing be prevented?

Yes. But there ain't no current govt willing to do it. The solution is...

Abolish Income Tax!

You cannot suck 30% - 50% of money out of people, spend it like crazy on consumables to help cause inflation, rise interest rates as an excuse to compensate for the inflation you caused (Which sucks even more money out of their pocket) and expect things to be rosey or tell people to tighten their belt.

If you allow them to Keep the money they earned, they will have money to get them through any higher interest rates imposed. They will also likely spend more. Which will FUEL the economy.

But it is highly unlikely any Govt Worker reading this will even pass-on this idea. And even more unlikely any govt will actually put it into action. Even though enacting such measures - reducing tax, small flat tax etc. - have shown to Boost an economy as well as increase Govt coffers.

After all... if people have money they have increased economic freedom and are less able to be controlled. And will clamor less for govt help - govt help is an oxymoron. Something anathema to govt.

Govt money is best spent on Infrastructure - not bailouts, consumables, etc.

That's why *I* think a recession (possibly depression) is coming. And while I do echo Sandi's sentiments about the People bringing it on themselves, nothing I write here will prevent that mindless mass herd of sheeple from taking the actions we can see them taking. They will walk themselves into oblivion and then say "someone should do something about it".

My solution: Make sure you have a nest egg not effected by stocks - the volatility of the stocks is why I do not put my own money into Retirement Stocks (we call it superannuation in Australia and once put in it cannot be touched until retirement). A small nest egg is at least 3 months of living expenses.

If you have consumer debt, pay it off as soon as you can. Then make a note to not use debt to fund lifestyle - entertainment, do dad purchases, etc.

Make sure you spend less each month than you earn.

This gives you economic control. What you do after that is... up to you. Invest in old world skill training - not university stuff, but old school. Such as truck driving, forklift driving, machinery and plant driving, construction skills not a trade (full trades take too long). Because if office jobs go there will be a LOT of people with office/clerical/degree related skills in the market. I'd rather have the skills I mentioned as it gives me more flexibility as well as quicker to acquire. But that's just me.

I don't think we'll have total economic collapse. But a recession is on the cards. Maybe a depression (which is a longer lasting recession). Will such a thing last a decade or just be harder one or two years? That depends on what steps the govt takes to allow people to have their own money.

Michael Ross