State of the Economy

As the blow-off top in the Primary degree bear market rally enters what could possibly be its last days, exuberant optimism continues to grow in intensity. There is consensus among economists and analysts that the worst is over.

The latest development occurred yesterday with a jobs report that indicated that 244,000 jobs were created in April 2011. The report, of course, served as fuel for exuberant optimism. In response of the report, President Obama has put down the proverbial "Mission Accomplished" sign on the economy, declaring victory. There is more information about the development on this Daily Kos page, which also includes a video of the weekly address.

What we are seeing is the "seductive personality" of a large wave 2 (in a bear market) play out in the political arena. The rich, the upper class, bankers, and politicians are all partying like its 2007. There is a lot of exuberant optimism in the air, even more evident than it was in 2007. In a bear market, bullish sentiment is stronger at the peak of wave 2 than at the start of the bear market.

In terms of nominal GDP, the economy has been growing since 2009. To get the true state of the economy, one must look at GDP in terms of real money. Gold is considered real money. GDP in terms real money better reflects the true purchasing power of a nation's economic output. Nominal GDP (and Real GDP as well) is expressed in terms of dollars. The dollar is a fiat currency.

In terms of real money, the US economy peaked in 1999 (39 billion ounces of gold) and has fallen 73% from the peak, reaching a new low of 10.4 billion ounces of gold in the first quarter of 2011. Using the same measure, the US economy fell 48% during the Great Depression. By this measure, we are in a major depression, which has so far unfolded in terms of the loss of purchasing power.

"The Great Deflation" has been unfolding since 2000. Wage deflation has been unfolding for the last 11 years. There is more information about the development on this Daily Kos article. There are other places where "The Great Deflation" has been unfolding such as the declining housing market and the stock market in terms of real money (DJIA/gold ratio).

The only reason why economists still believe the economy is expanding is that GDP in terms of dollars continues to rise. However, the reason why the Nominal GDP and Real GDP continue to rise is that the dollar has been devalued into the ground as government, corporations, businesses, and even individuals get leveraged to the hilt in credit and debt -- which has resulted in a massive credit bubble that has been growing for 37 years and counting.

The bear market rally will soon come to an end, and the next leg down, Primary wave [3], will unfold. When the trend change occurs, "The Great Deflation" will unfold in full force, and the economy will decline in nominal terms as well as in real money terms. The economy (in terms of nominal GDP) will fall faster than gold will. The stock market will fall in nominal terms as well, and will also fall faster than gold, with a downside target of around 500 for the DJIA by 2021.

There is already awareness of the true magnitude of the bear market that we are in, as evidenced by a Gallup Poll done last month. There are more people that think that we are in a depression than those who think that the economy is growing. There is no doubt, however, that those who think that a depression is unfolding are making comparisons with the Great Depression. As I have shown many times, we are in a major depression, and I think that the Crisis of the Roman Republic is a better comparison to the hard times that we are going though right now.