[...] The bulk of defaults are yet to come in housing, and the number of foreclosures over the next year (or 18 months at least) will dwarf the number of foreclosures thus far! Meanwhile, commercial real estate and credit cards have imploded, … Yes, …

collapse of the dollar

One Dollar and forty cents buys you a Euro today…
Ninety cents buys you a Canadian Dollar today…

The US Dollar has been collapsing in slow motion against all foreign currencies that are backed by anything that looks like a functional economy for the last eight years…

This is what happens when you have never ending trade deficits, outsourced manufacturing, outsourced services and don't produce anything other than weapons and raw materials…

Third world policies get third world results.

All of that suggests that there is a possibility that the EU could break up, as it would allow the different countries to have more of a natural correction. On the other hand, other analysts (even ones that are very pessimistic) say that there is no benefit to breaking up and they are more likely to issue common bonds and stuff.

The problem before was that Germany had a huge trade surplus and was in good shape, so it was expected that they would be asked to shoulder the burden. However, their economy is now contracting faster than ours so I haven't read as much about that. I think the greatest chance for breakup is if some of the countries rebound and others stagnate….if they all continue to contract at a record pace they are more likely to stick together I'd assume.

Question: If the situation continues to deteriorate, do you see the possibility of serious discord (perhaps disintegration) in the EU as nation states place national economic interests above their committment, easy in good times, to an economically unified Europe?

You have two basic scenarios:

1) A free for all in which the EU and the Euro disintegrate.
2) Fortress Europe, they close their borders to foreign trade, create a European Minimum Wage with European Defined Benefit package which prevents “Social Dumping”.

Option 2 seems to be what the French Left and Center Right are shooting for, will the Germans go along with the French left or will they go with the British vision of free for all?

This is not 'doom and gloom'. This is being a realist.

Having said that, I must agree that the term “global political cooperation” sounds more like an oxymoron than a reality. We remain a planet that is far more nationalistic than cooperative.

Regarding how long it takes people to realize what's happening, my response is anecdotal. As I was selling out of the tech market in late 2000, most were riding it to the bottom believing against the evidence that the market would recover from this “temporary” correction. Now, living in Scottsdale, AZ, I observe regularly that friends/homeowners are still listing their homes at '06 valuations, refusing to believe that the RE market has collapsed by nearly 50%. My conclusion is that people do not accept bad news readily, but will cling to unrealistic hope (irrational exuberance) until reality can no longer be denied. It is that type of anecdotal observation, combined with government's ability to present an appearance of improvement, that leads me to predict a longer time frame than you.

However from a political perspective, I believe that things could be put off by simply refusing to acknowledge reality and having targeted manipulation. For example the unemployment losses last month were 523k, but that counts 80k in census jobs…

So politically I believe that if everyone cooperates that it can be avoided in the near term, but on the other hand, I also think that we are grossly overstating the chances for global political cooperation. Economics is almost always impossible because forward projections are just as important as current dynamics.

I don't believe that it's that far fetched that another few months of suppressed demand will lead to such unrest in Japan and China that they completely change their tune. I also think that far from the situation being a product of panic, what you are saying is actually the rational analysis, and as people calm down they may be more likely to become pessimistic.

On the other hand I consistently underestimate how long it takes for people to realize what's happening, and there are so many moving parts that it is very hard to time things. For example, Britain is in completely awful shape, far worse than the US, and they were very close to complete collapse a few months ago. However, that was because of capital outflows into the the US and EU.

When it came out that the EU was far worse than people thought, then stuff flowed back into the UK and they got a reprieve. It's not that their situation has improved in absolute terms, just relative to the EU. In a lot of ways it not only matters where things should go, but the order in which they do.

By fiscal '12, the government will no longer be able to write multi-trillion dollar IOU's. The debt really is unsustainable. The inflation that the government is counting on to pay off the debt will not occur, as businesses, without credit, begin price wars, to attract consumers without credit, setting off unexpected deflation, spurred on by a collapsing bond and equity market. Aside – I was once a hyper inflationist, but the points you make about housing prices and the unavailability of unsecured credit, together with government's inability to assume enough of the risk, has drawn me to the dark side – Conclude Aside.

The point you make that, to me, is inescapable is that “creditors [eventually] will realize that problems are far bigger than the US Government can handle.” My only addition would be that creditors are not the only ones with their heads in the sand on this truth ; small businesses and consumers have also yet to come to grips with this. And, when this inability of the government to address the problem is forced into view and becomes an undeniable realization for all, the real crash will follow. Like the 30's, as you point out, a faux uptick for a couple of years, followed by the tsunami. You may have been off by a couple of years, thinking it would start in '07, but your analysis is excellent.