As if Things Weren't Bad Enough, Russian Professor Predicts End of U.S.

MOSCOW -- For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument -- that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. -- very seriously. Now he's found an eager audience: Russian state media.

Igor Panarin

In recent weeks, he's been interviewed as much as twice a day about his predictions. "It's a record," says Prof. Panarin. "But I think the attention is going to grow even stronger."

Prof. Panarin, 50 years old, is not a fringe figure. A former KGB analyst, he is dean of the Russian Foreign Ministry's academy for future diplomats. He is invited to Kremlin receptions, lectures students, publishes books, and appears in the media as an expert on U.S.-Russia relations.

But it's his bleak forecast for the U.S. that is music to the ears of the Kremlin, which in recent years has blamed Washington for everything from instability in the Middle East to the global financial crisis. Mr. Panarin's views also fit neatly with the Kremlin's narrative that Russia is returning to its rightful place on the world stage after the weakness of the 1990s, when many feared that the country would go economically and politically bankrupt and break into separate territories.

A polite and cheerful man with a buzz cut, Mr. Panarin insists he does not dislike Americans. But he warns that the outlook for them is dire.

"There's a 55-45% chance right now that disintegration will occur," he says. "One could rejoice in that process," he adds, poker-faced. "But if we're talking reasonably, it's not the best scenario -- for Russia." Though Russia would become more powerful on the global stage, he says, its economy would suffer because it currently depends heavily on the dollar and on trade with the U.S.

Mr. Panarin posits, in brief, that mass immigration, economic decline, and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces -- with Alaska reverting to Russian control.

In addition to increasing coverage in state media, which are tightly controlled by the Kremlin, Mr. Panarin's ideas are now being widely discussed among local experts. He presented his theory at a recent roundtable discussion at the Foreign Ministry. The country's top international relations school has hosted him as a keynote speaker. During an appearance on the state TV channel Rossiya, the station cut between his comments and TV footage of lines at soup kitchens and crowds of homeless people in the U.S. The professor has also been featured on the Kremlin's English-language propaganda channel, Russia Today.

Mr. Panarin's apocalyptic vision "reflects a very pronounced degree of anti-Americanism in Russia today," says Vladimir Pozner, a prominent TV journalist in Russia. "It's much stronger than it was in the Soviet Union."

Mr. Pozner and other Russian commentators and experts on the U.S. dismiss Mr. Panarin's predictions. "Crazy ideas are not usually discussed by serious people," says Sergei Rogov, director of the government-run Institute for U.S. and Canadian Studies, who thinks Mr. Panarin's theories don't hold water.

Mr. Panarin's résumé includes many years in the Soviet KGB, an experience shared by other top Russian officials. His office, in downtown Moscow, shows his national pride, with pennants on the wall bearing the emblem of the FSB, the KGB's successor agency. It is also full of statuettes of eagles; a double-headed eagle was the symbol of czarist Russia.

The professor says he began his career in the KGB in 1976. In post-Soviet Russia, he got a doctorate in political science, studied U.S. economics, and worked for FAPSI, then the Russian equivalent of the U.S. National Security Agency. He says he did strategy forecasts for then-President Boris Yeltsin, adding that the details are "classified."

In September 1998, he attended a conference in Linz, Austria, devoted to information warfare, the use of data to get an edge over a rival. It was there, in front of 400 fellow delegates, that he first presented his theory about the collapse of the U.S. in 2010.

"When I pushed the button on my computer and the map of the United States disintegrated, hundreds of people cried out in surprise," he remembers. He says most in the audience were skeptical. "They didn't believe me."

At the end of the presentation, he says many delegates asked him to autograph copies of the map showing a dismembered U.S.

He based the forecast on classified data supplied to him by FAPSI analysts, he says. He predicts that economic, financial and demographic trends will provoke a political and social crisis in the U.S. When the going gets tough, he says, wealthier states will withhold funds from the federal government and effectively secede from the union. Social unrest up to and including a civil war will follow. The U.S. will then split along ethnic lines, and foreign powers will move in.

California will form the nucleus of what he calls "The Californian Republic," and will be part of China or under Chinese influence. Texas will be the heart of "The Texas Republic," a cluster of states that will go to Mexico or fall under Mexican influence. Washington, D.C., and New York will be part of an "Atlantic America" that may join the European Union. Canada will grab a group of Northern states Prof. Panarin calls "The Central North American Republic." Hawaii, he suggests, will be a protectorate of Japan or China, and Alaska will be subsumed into Russia.

"It would be reasonable for Russia to lay claim to Alaska; it was part of the Russian Empire for a long time." A framed satellite image of the Bering Strait that separates Alaska from Russia like a thread hangs from his office wall. "It's not there for no reason," he says with a sly grin.

Interest in his forecast revived this fall when he published an article in Izvestia, one of Russia's biggest national dailies. In it, he reiterated his theory, called U.S. foreign debt "a pyramid scheme," and predicted China and Russia would usurp Washington's role as a global financial regulator.

Americans hope President-elect Barack Obama "can work miracles," he wrote. "But when spring comes, it will be clear that there are no miracles."

The article prompted a question about the White House's reaction to Prof. Panarin's forecast at a December news conference. "I'll have to decline to comment," spokeswoman Dana Perino said amid much laughter.

For Prof. Panarin, Ms. Perino's response was significant. "The way the answer was phrased was an indication that my views are being listened to very carefully," he says.

The professor says he's convinced that people are taking his theory more seriously. People like him have forecast similar cataclysms before, he says, and been right. He cites French political scientist Emmanuel Todd. Mr. Todd is famous for having rightly forecast the demise of the Soviet Union -- 15 years beforehand. "When he forecast the collapse of the Soviet Union in 1976, people laughed at him," says Prof. Panarin.

The Peak Oil Crisis: Civil Unrest

Before grappling with 2009, it might be useful to remind ourselves that there is a dark side to what lies ahead.

There was a little flurry in the news last week when it was discovered that the Army War College had released a report talking about preparing for civil unrest in the U.S. When you read the report, it turns out to be yet another warning about generals preparing for the last war. It devotes only three pages to the idea that the Army might soon find itself so embroiled in helping local authorities cope with civil unrest that international commitments, such as the war on terrorism, could become secondary concerns.

Since the close of the Civil War, America has enjoyed nearly 150 years of domestic tranquility. There were, of course the Indian wars, some labor disputes and a handful of urban riots in recent decades, but these were isolated and did not last for long. Even during the great depression of the 1930's America's social fabric stayed largely intact. Signs that these idyllic decades may be coming to close are starting to arise. In the last few weeks the deteriorating economic situation has seen serious disturbances in Greece and Thailand. We are beginning to read of disturbances in Russia and China.

Most realists foresee that 2009 will be a bad year with stock markets declining, unemployment rising, real estate values falling, government bailouts continuing, deflation morphing into inflation, the dollar falling, and oil prices rising. Thus far the economic downturn has not had a serious social impact. However, food banks are running short, shoplifting and other property crimes are on the rise, child neglect is increasing as is infant mortality. However, considering the pace at which people have been thrown out of work during the last year most seem to be getting by - so far.

Of all the world's nations, America is probably the worst prepared to deal with deep, prolonged economic hardships, for more of us have disconnected from 19th century, rural, somewhat self-sufficient, lifestyles than in most other countries. In the 1930's many found that they could still return to the family farm, where food, shelter, and meaningful work was available. In 2010 that option exists for very few; we have become dependent on a complex infrastructure fueled by oil for our food, water, clothing and warmth. Start reducing the flow of oil and increasing numbers of us are going to become increasingly desperate.

There are too many turns in the twisting paths that the current economic and oil depletion crises could take to speculate on the details of what is likely to happen. However, there are many potential "failed states" around that we are likely to have concrete examples, shortly, of what happens in the 21st century when civil order breaks down.

It is clear that we are already seeing the opening ripples of what might turn out to be the major social problem of the century - caring for large numbers of destitute people. Most of the social nets in America such as unemployment insurance, charities or shelters have strict time or limited resources. Already charity and religious contributions are starting to drop.

As the situation worsens, it is going to be much cheaper for governments at all levels to provide essential food, shelter and other services, rather than wait for desperate people to start stealing and become ensnared in the criminal justice system. One of the key benchmarks of the next few years is how quickly governments will redeploy resources away from 20th Century priorities such as space travel, expensive weapons systems, and highways towards simply getting people through the decades of transition from current lifestyles. The change will not be an easy one.

Before we get to mobs in the streets, we are likely to go through a time of increasing petty crime and the ensuing pressures on the criminal justice system. Somebody is going to have to think through the appropriate response to major increases in shoplifting and burglaries by people who are trying to feed children after having exhausted all other avenues of assistance.

It is likely that who is kept in prison and for what is going to have to be rethought. State and local revenues are already dropping rapidly and the day is not far away when choices between funding school systems and maintaining vast prison systems will need to be addressed. Alternative forms of deterring criminal behavior and forms of punishment will need to be devised. Indeed the economic situation could deteriorate so rapidly that some of these changes may need to be made in months rather than years.

It is likely that part of the of the solution to getting hundreds of millions through decades of shortages will involve increasing infringement on what many now consider their civil liberties. Better forms of personal identification will be necessary. It is likely that rationing of many things we take for granted such as fuel, food, medical services and travel and even places of residence may become necessary. Other societies have found such measures necessary in times of crisis.

America has not faced a serious domestic crisis for 150 years. We have never faced a situation where 300 million of us bound up in a complex and interdependent society has had to make major involuntary changes in our lifestyles.

America's Municipal Meltdown: It's Tough Times for Troubled Towns

Small towns are feeling the pain far worse than the rest of us, and no one knows how to stop the bleeding.

When Barack Obama traveled to Elkhart, Indiana, to push his $800 billion economic recovery package two weeks ago, he made the former "RV capital of the world" a poster-child for the current economic crisis. Over the last year, as the British paper The Independent reported, "Practically the entire [recreational vehicle] industry has disappeared," leaving thousands of RV workers in Elkhart and the surrounding area out of work. As Daily Show host Jon Stewart summed the situation up: "Imagine your main industry combines the slowdown of the auto market with the plunging values in the housing sector." Unfortunately, the pain in Elkhart is no joke, and it only grew worse recently when local manufacturers Keystone RV Co. and Jayco Inc. announced more than 500 additional job cuts.

In a speech at Elkhart's town hall, Obama caught the town's plight dramatically: "[This] area has lost jobs faster than anywhere else in the United States of America, with an unemployment rate of over 15 percent when it was 4.7 percent just last year… We're talking about people who have lost their livelihood and don't know what will take its place… That's what those numbers and statistics mean. That is the true measure of this economic crisis."

Elkhart, as it happens, is but one of countless towns and small cities across the U.S. that have proven particularly vulnerable to tough times simply because their economies relied on just a few major employers, or a single industry, or even a single company that has gone under or cut back drastically. Places like Elkhart are feeling the pain in ways most of the country isn't -- yet; and even worse, from the out-of-work to local officials, no one knows how to stop the bleeding.

Take Dalton, Georgia, and its 33,000 residents. As the self-proclaimed "Carpet Capital of the World," it wasn't exactly well positioned when the foreclosure crisis hit and the construction industry ran off the rails. In fact, with its carpets piling up underfoot rather than heading out the factory doors, the housing crisis has all but wrecked Dalton which, from the 1980s to last year, had never been at a loss for jobs. Now, the Atlanta Journal-Constitution reports, U.S. Bureau of Labor statistics show the Dalton metro area ranking "second among 369 American cities in its rate of job loss, jumping from 6.2 percent to 11.2 percent last year."

Across the country, individuals, foreclosed or suddenly jobless, have been melting down like the economy and so bubbling up into the news in the form of extreme acts ranging from suicide and murder to arson and robbery. The same might now be said for news about whole troubled communities.

A few months ago, stories of economically-troubled towns were strictly local fare. Now, more and more of them are rising to regional or national attention. Take Lehigh Acres, Florida, a community that's home to large numbers of carpenters and pest exterminators who rode the housing boom until it went bust in a county that, between June 2007 and June 2008, lost a higher percentage of jobs (8.8%) than any other in the nation. A New York Times article on the "once-middle-class exurb" detailed the devastation:

"[H]omes are selling at 80 percent off their peak prices. Only two years after there were more jobs than people to work them, fast-food restaurants are laying people off or closing. Crime is up, school enrollment is down, and one in four residents received food stamps in December, nearly a fourfold increase since 2006."

Similarly, the Wall Street Journal profiled the plight of Rockford, Illinois, an industrial city about 90 miles northwest of Chicago with 12.5% unemployment, the highest in the state, a shortfall of $7.6 million in the city's budget, streets filled with "gaping potholes" and a "city center… rife with vacant storefronts."

Most of America's desperate towns and small cities, however, still remain relatively anonymous. Even with their pain quotient on the rise, they lack New York Times profiles or presidential photo ops to draw attention to their woes. But it's important to note that Elkhart, Dalton, and Lehigh Acres aren't American oddities. Other towns and cities in surprising numbers are following fast down the path they have already cleared. Such places are now hurt or possibly, in some cases, even dying -- with little in the way of hope or help in sight. Under the circumstances, they should no longer be treated as individual stories, locally or nationally. They represent a pattern, and putting even a small number of their stories together casts a light on a disturbing countrywide trend that may determine the tomorrows of a remarkable number of Americans.

Tough Times in the East

After Governor Deval Patrick slashed aid to municipalities across the state, the "cash-strapped" town of Winthrop, Massachusetts, was left with a $512,000 budget gap. As a first step, the town axed its $117,000-a-year police chief and is now considering shuttering its public library. "The library has gotten a lot of attention, but if it's not the library it's going to be something else," said Winthrop Town Council President Thomas Reilly, a 40-year veteran of local government. "This is the worst I've seen," he told the Boston Herald.

Tough times have even reached tony Greenwich, Connecticut, which, the Greenwich Time reports, is looking to cut $5 million from its proposed 2009-2010 budget, in part through layoffs as well as a wage freeze for public employees. This famed haven for the rich is also experiencing joblessness "near a record high that has not been seen since the withering downturn of the early '90s."

West Warwick, Rhode Island, a textile mill town that, according to its website, gave the world the "Fruit of the Loom" trademark, is another municipality in dire fiscal straights. In early February, West Warwick announced that it could not meet its obligations on a multi-million dollar lawsuit settlement stemming from a nightclub fire and that its school system was $3.5 million over budget. "There is no way that we can tax our way out of this problem," Town Manager James Thomas told local television station WPRI.

Tough Times in the South

The small Appalachian town of West Jefferson, North Carolina, like its northern brethren, has also been hit hard. A recent Associated Press report noted that in a little more than a year, "the town and the neighboring county seat of Jefferson have lost more than 500 factory jobs -- a number equal to 20 percent of the town's population." All of this resulted from crucial town businesses like its light-switch plant, which had long benefited from the housing boom, shutting down, sending ripples through its heavily manufacturing-dependent economy. As a result, other local businesses, from Thistlewood, a women's clothing boutique, to a Dodge car dealership, are shutting down as well. It's a symptom of the times that the local food bank is now feeding nearly 50% more families than a year ago.

When the Peanut Corporation of America plant linked to the 2008 salmonella outbreak decided to lay off almost all of its 50 workers in January -- the company has since filed for bankruptcy -- it was a hard pill for Mayor Ric Hall of Blakely, Georgia, to swallow. After all, it was one of the two main businesses the town of 5,700 -- and the self-proclaimed "Peanut Capital of the World" -- relied on for its economic wellbeing. In a sign of the times (and perhaps of the collapsing newspaper industry), the other, a newspaper production plant, had already announced plans to lay off at least 100 workers. "We're already struggling with high poverty and a struggling agricultural economy, and this will impact not just our community, but this entire region of the state," Hall told the Los Angeles Times. "That's a total of about 150 to 170 people who have lost their jobs," he said. "Being the small agricultural community that we are, the prospect of finding new employment is virtually impossible. People here don't have much, and the layoffs make it even more devastating."

Times are tough in Dillon, South Carolina, too, the town where Federal Reserve Chairman Ben Bernanke grew up. Just recently, his childhood home was purchased at a foreclosure sale -- an all-too-common occurrence in a town already long battered by the decline of the local tobacco and textile industries. Now, writes the Wall Street Journal, it's "facing a fresh assault of plant closings and layoffs that have pushed its unemployment rate to 14.2% -- almost double the national average." As in so many other places, the catastrophic housing and automotive markets have hit Dillon with hurricane force. Mohawk Industries, which made yarn for carpeting and employed 137 people in town, shut down, while Wix Manufacturing, which produces automotive filters, has slashed employee hours and some jobs. In fact, just outside of town, at South of the Border, a faux Mexican-themed "village" of souvenir stops, restaurants, and low-rent attractions where Bernanke once worked, business -- which depends on vacationers trekking down the East Coast to Florida -- is off 10%, the worst downturn since the 1973 oil crisis, according to Richard Schafer, the patriarch of the family that runs the tourist trap. "People are losing their home and jobs," he says, "and they're not traveling as much."

Tough Times in the Midwest

Wilmington, Ohio, is another company town whose fortunes have plummeted. After overnight shipper DHL shut down its domestic courier service, the town went into a tailspin. Already, 3,000 jobs have been lost at the local airport. Within months the number is expected to rise to 8,000, according to an Associated Press report. As a result, in the town of 12,000, new claims for unemployment benefits are the highest they've been in 26 years and many businesses are facing the prospect of closing down, as is its hospital. "I think one in five small businesses will fail or could fail," says Wilmington's mayor David Raizk. As a result, more and more families are visiting local food banks, while community leaders are promoting backyard gardens as an inexpensive way to help feed families. In fact, Wilmington College is even opening up gardening plots on its property for needy townspeople.

In Lordstown, Ohio, a town of 3,600, General Motors and its 5-million-square-foot plant was the lifeblood of the community. In January, however, GM told 2,800 of its more than 4,000 Lordstown workers to stay home for the month. At the end of the month, 800 of them were told not to return. Now the town, which derives 75-80% of its tax revenues from the auto plant, according to the Youngstown Vindicator, is facing ruin. "We're a one-horse town in that regard," said Mayor Michael Chaffee, who estimates, according to a CBS Evening News report, that for every GM job lost, at least two others are needed to replace it, due to pay differentials. Meanwhile, the Lordstown village council approved a wage freeze for its full-time workers and 60 part-time employees and is looking for other ways to cut costs, like suspending capital improvements like road repair. Elsewhere in Ohio, other GM towns are feeling Lordstown's pain. At GM's engine and transmission parts plant in Defiance, for instance, 100 GM employees were being laid off in mid-February.

GM isn't the only source of mid-Western woes, though. In recent months, massive layoffs by businesses in downtown Des Moines, Iowa, have caused great economic hardship. And the situation won't be getting better soon as software giant Microsoft recently shelved plans to build "a $500 million data center in West Des Moines" that would have brought with it 75 new jobs. On top of that, just this month the American Enterprise Group, a local insurance company announced 51 layoffs; the Des Moines City Council announced 88 jobs cuts; while the Des Moines County jail is contemplating unpaid furloughs or layoffs and a scheme by which inmates would pay for their own toilet paper. Robert Crandall, the executive director of the Bidwell-Riverside Center, a food pantry in Des Moines, noted that the number of families his group was serving had risen as much as 33% in recent months. "The really sharp [jump in numbers] started late summer, early fall," he told the Des Moines Register.

Tough Times in the West

In the West, California dominates the news with a seemingly endless string of stories about the deepening crisis faced by towns (sometimes in that state officially labeled "cities," even with populations of less than 1,000). El Centro, California, for example, boasts an eye-popping 22.6% jobless rate -- and while this is the highest rate in any metropolitan area, it isn't even the worst case in the state.

"We have a major problem to deal with," Mayor Robert Silva of Mendota, California, told local TV station KFSN in January. A month earlier, the "Cantaloupe Capital of the World" (population: 10,000) experienced the greatest spike ever in its unemployment rate. At an astounding 35%, it was clearly in a local Great Depression, whatever the rest of the country was in. In a rich agricultural area, it was also in a great drought as water supplies dwindled, fields were left fallow, and farming jobs dried up. Not surprisingly, with so many out of work, local businesses are suffering. Among the hardest hit are fertilizer and irrigation equipment suppliers as well as trucking companies with nothing to transport. "And, of course, it all trickles down to hairdressing shops, restaurants and other small businesses in town," Sarah Woolf of the Westlands Water District, which provides water to more than 600 family-owned farms in the region, told the San Jose Mercury News. Silva, who also works as a manager at a local store, agrees: "We're down 20% like all business in Mendota. Everybody's down." The fallout from the agricultural crisis has also hit the housing market where, the Wall Street Journal reports, Mendota's home sales "fell to fewer than 10 in the fourth quarter of last year from nearly 100 in the second quarter of 2007; [and] median prices dropped 37% to about $175,000 from a 2006 high of about $275,000…"

Things are only slightly better eight miles north in Firebaugh (population: 5,700), which saw its jobless rate climb to nearly 23%. In that town, too, the crisis is intimately linked to drought conditions across California. "I would call it the perfect storm or compound crisis," said Firebaugh City Manager Jose Ramirez.

In Rio Vista, a town of about 7,000, "plummeting property and sales taxes and building fees due to the housing bust, and a drop in funds from the state" have led to a $900,000 deficit in the local budget, according to a report in the San Francisco Chronicle. As a result, Rio Vista was forced to lay off four employees and leave 20 already vacant full-time jobs empty, freeze salaries, cut recreation programs, and adopt a four-day work week at city hall. The austerity plan has so far staved off bankruptcy, but the wolves at the town's door didn't have far to travel to find easy prey.

Maria La Ganga of the Los Angeles Times recently reported that Rio Vista's neighbor, tiny Isleton -- a half-square mile town with just 817 residents -- is almost $1 million in the red and fighting to stave off bankruptcy, if not dissolution, due to its seemingly insurmountable debt. "Some people have said, 'Just hand it over to the county and go home,'" said City Manager Bruce Pope. But while Isleton's case is among the worst in the state, it's hardly alone in its fiscal anguish. La Ganga notes:

"Vallejo, 36 miles northwest, filed for bankruptcy protection in May. Watsonville closed all city services except police and fire for two weeks over the holidays. Calexico declared a fiscal emergency… The state's 10 biggest cities are more than a quarter-billion dollars in the red this fiscal year. Next year, San Francisco and Los Angeles predict a combined $1-billion deficit."

Big Cities Going Bust in Tough Times

San Francisco and Los Angeles are far from alone. The one- or two-factory towns lacking economic diversity and suffering mightily for it may be harbingers for the fate of the bigger cities, many of which are already facing financial hardships. After all, as CNN reported, Labor Department statistics show unemployment rates rising "in 98% of metropolitan areas across the country in December."

In Chicago, recently named "the third most miserable city" in the United States by Forbes magazine, "unemployment is expected to rise to 9.2 percent… and major layoffs have hit local powerhouse employers including Midway Games, Motorola and the University of Chicago Medical Center."

In January, during his fourth State of the City message, Mayor Jerry Sanders of San Diego painted a typically grim picture, citing "a $54 million deficit, scaled-back city services, higher fees, layoffs and mandatory water rationing." And it could get much worse, he told San Diegans. "This year, an even larger deficit looms. Sacramento [the state government] is more likely to hurt us than help us, and we'll again need to make painful decisions. That scenario could repeat itself, next year and the year after." Subsequently, Rani Gupta of VoiceOfSanDiego.org -- San Diego's non-profit on-line site that has been hailed as a new model for news gathering -- reported that estimates of the city's budget gap by a former mayoral candidate's think-tank actually top out at more than double the mayor's figure -- an astounding $128 million.

In New York City, 65,000 jobs were lost in the last three months of 2008 alone, while the jobless rate jumped from 6.3% to 7.4% between November and December. Mayor Michael Bloomberg has estimated that an additional 300,000 job losses, including 46,000 fewer jobs on Wall Street, are expected to clobber the Big Apple by year's end. At the same time, a report by investment bank UBS suggests that such losses may translate into a 10.5% unemployment rate, "a level not seen since the mid-1970s."

Meanwhile, New York's Metropolitan Transportation Authority (MTA) is considering a 23% increase in fares and tolls, the elimination of multiple subway lines and more than 24 bus routes, among other measures to help close its own $1.2 billion budget gap. The MTA is just one of many big city transportation authorities looking to make giant cuts in tough times. Recently, the New York Times reported that "[t]ransit systems across the country are raising fares and cutting service even after attracting record numbers of riders last year." A particularly dire case is St. Louis, where "despite rising ridership, the transit system plans to lay off a quarter of its work force and make drastic service cuts to balance its books." Boston, Atlanta, and San Francisco are facing similar tough choices when it comes to cutting subway or bus services, raising fares, and potentially leaving significant numbers of city and suburban dwellers high and dry.

Troubled Towns and Troubled Times

Stories about the economic woes facing individual cities and towns are already a staple of national newspapers, even as the bad news, experts believe, is only beginning to flow in. Spikes in unemployment already reaching double-digit levels in some cases, municipal governments deep in the red, essential cutbacks in local services, increasing lines at food pantries, towns facing bankruptcy or even contemplating municipal suicide are increasingly common nationwide.

Towns like Elkhart, Lehigh Acres, and Mendota may now be media poster-towns for tough times nationwide, but most distressed small towns are still suffering in silence and, as a group, they may only be the proverbial canaries in the coal mine. It isn't surprising that towns which relied heavily on the collapsing auto industry and the building trades are going belly-up first, but what about the rest of America's towns and even big cities? The same economic forces are battering them, and while they may have been able to withstand immediate collapse, there's no guarantee that town after town won't be deep in the red, drowning in joblessness, and facing catastrophe as the American depression drags on.

Warning for the West as crisis spills onto streets

There are also worries about larger economies such as Slovakia, Bulgaria, Romania and Ukraine. If they weaken further, it will put banks in Germany and Austria in even deeper trouble. Austrian banks have run up huge debts in neighbouring countries.

Last month saw the biggest demonstrations in Latvia and Lithuania for nearly 20 years. In Vilnius, the capital of Lithuania, a mass protest against austerity measures ended up in a riot as protesters hurled eggs, rocks and snowballs at the police.

In Latvia's capital Riga, people dug up cobblestones from the street, smashed storefronts and trashed police cars. The protests followed the government's decision to push through massive cuts in social security payments.

Angry demonstrations have broken out elsewhere in Eastern Europe. The centre of the Bulgarian capital Sofia was brought to a standstill by protesters who surrounded the country's parliament building.

In Romania, thousands of workers walked out of factories and marched against government plans for more privatisation and budget cuts.

Tension is rising in Hungary, where unemployment has jumped to above 8%, according to analysts in Budapest. Last year, the government was forced to turn to the International Monetary Fund to avert a debt default, and the economy is forecast to contract as much as 3% this year.

Meanwhile, some of the strongest emerging economies outside of Europe are also in trouble. Taiwan said last week that exports in January plunged a record 44% from the same month last year, pushing them down to a level unseen since 2005.

Last week, Brazil posted industrial production numbers for December that showed a historic tumble of 12.4% from the previous month, shocking the country and forcing its president to calm nerves.

In South Korea, the December fall in industrial output over a year earlier was the largest since the country began keeping records. The South Korean won has shed nearly 10% of its value against the dollar.

Malaysia announced last week that its factory output fell at its steepest pace in 15 years in December from a year ago, reinforcing expectations the government will step up spending to fend off a recession.

It was the fourth straight month of decline in output in the South-east Asian country, which is grappling with collapsing demand for electronic goods, the biggest export revenue earner for the country.

"The magnitude of the deterioration (in emerging economies) is nothing short of dramatic," said Amer Bisat, an analyst at US investment firm Traxis Partners. "We're continually catching up with the data, and with continuing downward revisions, at a pace which to my mind is unprecedented."

Bleak economic figures have prevented some stock markets in developing countries from making gains this year. Benchmark indices in Brazil and China are up about 10% this year, but India's is down slightly and Russia's has fallen sharply. The Russian equity market is one of the worst-performing bourses in the world.

Analysts said a number of emerging markets are grappling with a series of blows such as declining trade, shrinking capital flows and slumping commodity prices. Domestic demand also is going into reverse.

JP Morgan forecasts that at least 11 emerging economies - among them South Korea, Taiwan, Russia, Turkey, and Mexico - will shrink in 2009, with another four posting no growth.

Brazil is the latest example of the swift reversal of fortune in emerging markets. Just last month, the country's finance minister predicted "good economic results" and gross domestic product growth of 4% in 2009 for South America's largest economy. But forecasts by private economists are in freefall, and many now predict no growth or very little this year.

JP Morgan economists predict that China, the giant of the emerging world, will grow 7.2% this year, a major deceleration compared to 2008 and 2007. Chinese imports and exports are falling at their worst rates in a decade, a sign not only of weak global demand, but of a retrenchment by Chinese companies and consumers.

The Chinese government has responded with an aggressive stimulus package and interest-rate cuts. A gauge of manufacturing posted a slight rebound for January, but is still signaling a contraction in activity.

In South Korea, the economy began spinning backwards late last year. Surging exports from its ports stalled and then fell more than 30% in January over a year earlier, a reversal that has outpaced declines the country experienced during the Asian financial crisis of 1997-98.

In 2009, Taiwan, Indonesia, and the Philippines are expected to see a fall in exports that will outstrip what they experienced during the Asian financial crisis of 1998, according to Credit Suisse.

During that debacle, emerging nations were able to recover relatively quickly by relying on export markets like the United States to keep buying their goods - something they may not be able to count on this time around.

Bankruptcy Funding Solicited for Car Makers

Lenders are reluctant to commit funding to GM or Chrysler for several reasons -- mostly concern they won't get all their money back. Recently, the government advisers have begun aggressively courting big lenders Citigroup Inc. and J.P. Morgan Chase & Co. -- themselves government-aid recipients -- to participate in any bankruptcy financing, said people familiar with the matter.

The government advisers also are looking at ways the Treasury could "prime" other banks making DIP loans, so the government could be paid back before private creditors. Banks are deeply resistant to such steps. Both GM and Chrysler insist they can avoid bankruptcy, warning that option could cost the government as much as $125 billion in rescue financing. Bankruptcy experts say the sum isn't likely to be that high.

Even so, the estimated total of $40 billion in DIP financing GM and Chrysler would need would be five times as large as the previous record for such financing, which is used to fund day-to-day operations while companies sort out their debt. To fill such a large hole, Treasury's advisers are trying to corral as many as 70 lenders to participate in what is now informally called the "bank steering committee."

The advisers are sounding out banks about loan terms based on a government backstop, figuring out what interest rate the private market would accept and what covenants or restrictions lenders would expect.

Rick Wagoner

At a news conference Tuesday, GM Chairman and Chief Executive Rick Wagoner, once a fierce opponent of even talking about a bankruptcy filing in public, said GM could engage in talks soon with the government on how to fund a stay in bankruptcy court. "We haven't had extensive discussions yet with the government on DIP financing," he said.

DIP loans are usually viewed as among the safest loans because those lenders typically get paid before other creditors. However, that corner of the lending market froze up late last year and has only recently begun to thaw.

Interest rates for bankruptcy financing have spiked in recent months, more than doubling from a year ago. In 2006 and 2007, the rate on the average DIP loan was the London interbank offered rate plus about 4 to 4.5 percentage points. Last year, the rate on the average DIP loan jumped to Libor plus 6.1 points, and rose throughout the year. A backstop by the federal government, however, probably would make such a loan less expensive.

Bankruptcy experts say that absent government support, lenders wouldn't step in to aid GM and Chrysler, given the proposed size of the loan and the tightness of credit markets. Most likely, the bankruptcy loan would roll up -- or pay off -- the $17.4 billion the government has so far lent the two auto makers. It might also pay off some other debt, including a senior bank facility.

Advising the Treasury on the GM-Chrysler situation are law firms Cadwalader, Wickersham & Taft LLP and Sonnenschein Nath & Rosenthal LLP, and the New York investment-banking firm of Rothschild Inc.

Cadwalader attorneys, who are in charge of advising the government on DIP lending and other matters, declined to comment. A spokeswoman for Sonnenschein declined to comment. Rothschild didn't return phone calls seeking comment.

In early January, Cadwalader bankruptcy attorney Deryck Palmer helped line up $8 billion in DIP financing for chemical company Lydondell Basell, the current record for such a loan.

So far, GM has received $13.4 billion in federal loans, The viability plan it submitted to the government last week said the company needs a total of $30 billion in aid, or $16.6 billion more than it has already gotten. GM also said it needs at least $7.7 billion in loans from the Department of Energy to develop fuel-efficient technology.

Chrysler has received $4 billion in government loans and said it needs $5 billion more. It said it would need $24 billion in financing if the company were to seek bankruptcy protection.

GM said it might need as much as $100 billion in financing from the government if it were to go through the conventional bankruptcy process. GM's $100 billion estimate stems from the belief that it would suffer "catastrophic revenue reduction impact" in a prolonged conventional Chapter 11 process, as it would expect to sustain as much as an 80% decline in sales after a bankruptcy filing. GM would need financing not only so it could weather the storm, but also to help its suppliers and dealers survive.

Mr. Wagoner, the GM CEO, said the bankruptcy scenarios are "risky" and "costly," and would only be pursued as a last resort. "We haven't had extensive discussions yet with the government on DIP financing," he said. "They asked us to put together and address the topic. We've done that in [GM's viability plan], so I suspect we may enter into those discussions."

Get ready for a wave of bank failures

In less than two months, regulators have seized 14 banks. Experts think many more banks will collapse before the financial crisis is over.

NEW YORK (CNNMoney.com) -- If it's Friday, there must be a bank failing somewhere across the country.

For six consecutive weeks, industry regulators have seized control of a bank after the market closed on Friday, bringing the total number of failed banks so far this year to 14.

To put that into perspective, 25 banks failed in 2008, suggesting that the rate of failures is quickening as the economic crisis deepens.

"We'll have a banner year [of failures] this year," said Stuart Greenbaum, retired dean and professor emeritus at the Olin Business School at Washington University in St. Louis.

At the current rate, nearly 100 institutions -- with a combined $50 billion in assets -- will collapse by year's end.

The latest is Oregon's Silver Falls Bank, which was closed by U.S. regulators Friday.

With more consumers and businesses likely to default on loans as the recession drags on, some industry observers think the pace of bank failures could accelerate further.

Gerard Cassidy, managing director of bank equity research at RBC Capital Markets, upped his expectations for bank failures earlier this month, warning that he anticipates 1000 institutions could fail over the next three to five years.

"The sooner the bank regulators can shut down the troubled banks, the faster the industry will get back on its feet, in our view," he wrote.

A different era

Still, the current crop of bank failures hardly comes close to what happened during the savings & loan crisis two decades ago.

More than 1,900 financial institutions went under during 1987-1991, peaking with the failure of 534 banks in 1989.

And many experts are quick to draw distinctions between the two eras.

During the last crisis, many savings and loans were coping with an inability to adapt to higher interest rates, while many banks were significantly undercapitalized to deal with losses.

"That is not our problem here," noted Ann Graham, a professor of law at Texas Tech who spent part of her career as a litigator for the FDIC and Texas' Department of Banking during the 1980s.

Instead, she said the main problem now is that banks have been stuck with assets in their loan and investment portfolios that have quickly soured.

It's also worth remembering that when banks fail, they don't close down for good. The Federal Deposit Insurance Corp. guarantees deposits up to $250,000 in single accounts. Also, the FDIC often is able to find a willing buyer for the failed bank immediately, which means little, if any, disruption for the failed bank's customers.

Still, regulators face a crisis of significantly larger proportions today that promises to keep the nation's banking industry strained for some time.

Even though the overwhelming majority of the banks that have gone under since the beginning of 2008 are smaller community banks, there have been two notable big bank failures.

Last year, the California-based mortgage lender IndyMac failed. That was followed by the collapse of savings and loan Washington Mutual, the largest bank failure in history. The FDIC seized WaMu and immediately sold its banking operations to JPMorgan Chase (JPM, Fortune 500).

Several experts fear the potential for another large bank failure. While the U.S. government has repeatedly said it will not allow major institutions to fail, namely Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), some embattled regional banking giants may be too far gone to save.

"Conceivably, we'll see some larger names fail as we go forward," said Frank Barkocy, director of research with Mendon Capital Advisors, a money management firm that invests primarily in financial stocks.

Bracing for tough times

Regulators have indicated they are gearing up for tougher times. In addition to requesting an increase in its borrowing authority from the Treasury, the FDIC has maintained that it expects its deposit insurance fund to suffer $40 billion in losses through 2013. Last summer's collapse of IndyMac wiped out $8.9 billion from the fund.

Fearful of drawing down the fund any further, banking authorities may attempt to broker more assisted acquisitions like JPMorgan Chase's purchase of Washington Mutual, where the purchaser acquires the deposits and a portion of the failed bank's bad assets.

"The [FDIC's] incentive is not to have a bank failure at all," said Jack Murphy, a long-time partner at the law firm Cleary Gottlieb Steen & Hamilton, who previously served as general counsel for the agency. "If it is possible to have a private market solution, that is ideal."

Next week, regulators are expected to provide a better glimpse of the health of the banking sector, when the FDIC presents its quarterly banking profile for the fourth quarter of 2008.

One highlight of the report will be the agency's so-called "problem bank" list. That number is expected to climb from 171, where it stood at the end of the third quarter.

Some have charged that the list is hardly reliable, given that only a fraction of the banks that are included ever actually reach the point of collapse.

Nevertheless, a big jump in the number of banks on the problem list could serve as an indicator that there will many more Friday failures to come this year.

Gone in 60 Days: Citi and Bank of America Won’t Live to See May

Citigroup (C) and Bank of America (BAC) won’t live to see May. The government will take them over within the next 60 days. The announcement may come as soon as tomorrow evening.

If there’s one thing our readers know, it’s that ChartingStocks.net has made some bold calls in the past which seemed controversial and highly unlikely at the time. Our January 2007 post warned of the coming stock market crash at a time when the market was making new all time highs. In February 2007 we warned about the breakdown of the brokerage stocks and singled out Bear Stearns (Trading at $160), Merrill Lynch (Trading at $87), and Morgan Stanley (Trading at 78). In September 2007, we warned of a selloff in the coming weeks. The market peak and decline began 4 weeks later.

We’re going to make another bold prediction. Bank of America and Citigroup won’t live to see May. The two banks will be nationalized in the coming weeks, and we think that the announcement can come as soon as tomorrow evening (Friday evenings are when major bank announcements and failures occur).

The US government has already committed half a trillion dollars to these two firms which is more than 10 times the amount it would cost to buy and control both companies. The market doesn’t believe that $500 billion is enough to save these companies.
All the kings horses and all the kings men can’t put humpty dumpty back together again.

Today both banks made fresh new lows with Citi closing at $2.51 and Bank of America closing at $3.93. The 1 year charts below show the short term price movements. You should understand that when a bank stock’s chart looks like this, even a HEALTHY bank would be in trouble. Nobody wants their deposits tied up in a company that trades at $2. The outflows of deposits from Bank of America and Citi must be catastrophic.

The stock charts and potential run on these banks are not the only basis for our opinion. The media can be an excellent investing tool if you know how to decipher the news. We don’t watch the news for the information, we watch if for THE LIE.

We play close attention to air time given to so-called “Experts” and the way the media spins the information. If you know that our mainstream media is simply a licensed PR firm for the US government, you can get vital information which you can use in trading. Always ask yourself - What opinion are they trying to insert? What are they selling? What’s the underlying agenda?

The government uses the media to float policy before the public so it can digest it. By the time the government takes the action, most people not only anticipate it but are even asking for it.

In the past two weeks there have been countless debates, op-ed’s, and even opinion polls regarding bank nationalization. The popular opinion among the establishments “Experts” is that nationalizing the banks may be the only way. Even Alan Greenspan, a LIBERTARIAN, recently said that it would be a good idea. It’s coming folks! It’s what the establishment wants. (Sidenote: They may not actually use the word nationalization, even if thats exactly what they do)

Below is the long term view of BAC and C. These stocks have made multi decade lows. Other stock charts which looked similar to these were Fannie Mae, Freddie Mac, Lehman, Bear Stearns.

What happens to the shareholder? We can only speculate that the deal would look something like the takeover of Fannie and Freddie. We believe that the common and preferred shareholders will be wiped out while the bondholders MAY be protected.