Crash + Depression + Hyperinflation = Financial Disaster

"There's more under heaven and earth than is contained in your philosophy," wrote Shakespeare. No matter what you think, things are always more complex than you imagine with interpretations different from those you impose.

So far is witnessed a stock market crash and what looks like the beginning of a depression, seen from the many bailouts and nationalizations. On the horizon the vision arises of hyperinflation. Crash, Depression and Hyperinflation are the ingredients of a Financial Disaster.

Contrary to media reports: there will be no recovery as long the feds continue to pump more money in the financial system that in the end is causing inflation, with consequently falling stock values. Not yet, but probably sooner than expected. Further the Transport Index has still not confirmed a new bull market in shipping, which is a reliable signal for the end of the recession, as might yet the increase in stock prices do believe. Moreover jobless rates are still on the rise too.

While the private sector deflates and deleverages by paying down debt, the public sector is building the biggest debt bomb the world has ever seen. Some of the statistical numbers:

•    US private debt is at a record high, about $44 trillion.

•    Compared to the federal government's $11 trillion of official national debt doesn't seem so bad.

•    While the states have about $2 trillion more, which doesn't seem like a cause for concern.

But last week, Gov. Schwarzenegger said California's 'day of reckoning' had come. He's looking at a $24 billion hole in the Golden State's finances. And at least he's proposing to close the gap honestly, by cutting back on services and raising taxes. What else can he do?

The federal government has other options, “the printing press," as Ben Bernanke famously put it. But California can't counterfeit the money to pay its expenses; instead, it has to borrow what is needed from willing lenders or steal it from unwilling taxpayers, because there's no other alternative.

The feds are convinced that they can spend as much as they want. This week alone, for example, they were selling $65 billion in Treasury bonds. And this year, a total of about $2 trillion are to be auctioned off.

But in addition to the fed's 'official' debt, there's some $100 trillion more of unfunded liabilities, commitments and obligations, as Social Security and Health Care pledges. When all those "debts" are put together the total number is about $157 trillion of debt in America, or more than 10 times its total annual GDP.

When long-term interest rates increase, dramatically and rapidly, as yet 81% in just 5-month period, many different industries will suffer, in particular the commercial real estate industry. Even in the best of times, rising interest rates increases the cost of capital, while also undermining the value of commercial real estate assets. In bad times those rising rates can produce catastrophic consequences.

The commercial real estate market was already distressed, even before rates started to rise. The problem is excess capacity. During the last several years, too many shopping malls and office buildings were constructed to satisfy the excess of phony demand that easy credit produced. But now that home equity loans and other readily available forms of credit have disappeared, the phony demand has gone as well.

The awkward result: a glut of shopping malls, office buildings and hotel/motel properties. “Vacancies are definitely rising across the commercial real estate market,” observed a hedge fund manager, “You've got office vacancies well over 15%. We think those are going to approach 25% before this is over.”

To protect your savings against (hyper)inflation: the best option is buy gold or ‘buy whatever the Chinese want.' Namely commodities as: Oil, copper, aluminium, lead, zinc and nickel.

"Chinese auto sales soared 34% in May, year on year. According to the China Association of Automobile Manufacturers, the Red Nation scooped up 1.12 million vehicles last month, outpacing any nation in the world.”

"Chinese property sales rose 45% in the first five months of 2009 compared with the same period in 2008, their National Bureau of Statistics announced.”

These numbers are manipulated by government intervention, but even if it’s half it still is impressive.