Feelin' Bearish?

Yesterday, Martin Hutchinson at Prudentbear.com posted a negative (and pretty scary) forecast of the U.S. economy.

In his piece, Waiting for the Train-Wreck, Mr. Hutchinson wrote...

The rise in the gold price above $1,100 per ounce last week is a pretty good indicator that something has changed. For 18 months, the gold price had been in a trading range topping out around $1,000. It has now broken out decisively from that range. The opportunity for the world's central banks to change policy and affect the economic outcome has been lost. The world economy is now locked on to an undeviating track towards another train wreck...

The exceptional monetary stimulus entered into around the world during the financial crisis last year has prevented a downward liquidity spiral, but at the cost of destabilizing markets...With current Fed policy, gold is headed rapidly toward $2,000 per ounce, probably within six months. The forecasters who see such a price, but suggest it would take four to five years to get there, are ignoring history. Since gold was able to get from $185 to $850 in 18 months in 1978-80, there is no reason why it cannot get from $1,100 to $2,000 in six months now...

As was demonstrated by the housing bubble of 2004-06, modest rises in interest rates are not sufficient to stop a bubble once it is well under way. Given the Fed's recent track record, it is most unlikely that we will get any more than modest and very reluctant interest-rate rises...Hence the bubble will inexorably move to its denouement, at which point gold will probably be north of $3,000 an ounce and oil well north of $150 per barrel...

At some point, probably before the end of 2010, the bubble will burst. The deflationary effect on the U.S. economy of $150 plus oil will overwhelm the modest forces of genuine economic expansion. The Treasury bond market will collapse, overwhelmed by the weight of deficit financing. Once again, the banking system will be in deep trouble.

In the next downturn, the Fed will not be able to cut interest rates, because inflation will be spiraling, as in 1980. Instead it will need to raise them while dealing with a profound crisis in the bond markets. Capital in the U.S. will become still more difficult to come by, and unemployment will approach 15%...

2011 and 2012 will be very unpleasant years, as the Obama administration struggles to get closer to budget balance without pushing up taxes so far as to cause yet a third recession. Stock prices will be at or below their March 2009 lows, and will stay there even as earnings of export-oriented companies will be robust...Foreign goods and services will be inordinately expensive in dollar terms.

The danger in those years will be that Ben Bernanke will attempt yet again to refloat the U.S. economy through inflation, buying government debt to fund the deficit and forcing short term rates well below the inflation rate. This danger is exacerbated by the Obama administration's insouciance about deficits. Ben Bernanke on his own (and his predecessor Alan Greenspan) bears a large share of responsibility for the 2008 crash, but the Bernanke/Obama combination is potentially even more dangerous. If expansionary monetary and fiscal policies are pursued regardless of market signals, the U.S. will head towards Weimar-style trillion-percent inflation. That would make the government's position easier as its mountain of Treasury debt became worthless, but devastate everybody else's savings and impoverish the American people as Weimar impoverished 1920s Germany.

As I said, a train wreck. Probability of arrival: close to 100%. Time of arrival: around the end of 2010, or possibly a bit earlier. And at this stage, there's very little anyone can do about it...

Yeesh.