Economic Recovery: A Solution

Bill Bonner writes:

Trying to fix a depression it is not only expensive…. The US government spends $1.60 for every $1 it receives in taxes. This is a recipe for a disaster, not for a recovery.

Worse. It actually prevents a real recovery from happening, by blocking the market’s natural self-healing system

Let us ask you this, dear reader: what’s the cure for a depression?

Answer: a depression!...

The unemployment problem is a “tough nut to crack,” says The Financial Times.

Of course, we could fix the jobless problem overnight. But people wouldn’t appreciate it. We would simply remove all subsidies for unemployed people…and all restraints on hiring. Labor prices would fall fast. Within days, we’d have full employment again.

read the entire essay

Bill Bonner on the Economy and Gold

Bonner writes:

Still, we’ll stick with gold. Gold has gone up too. But for completely different reasons. You buy US Treasuries when you have faith in the system and the people running it. You buy gold when you don’t.

T-notes have gone up because the lumpeninvestoriat seeks to protect itself from natural market forces. It looks for safety in the world’s ersatz reserve currency – the dollar. As Alan Greenspan said, the US won’t default. It can always print more dollars!

Gold has gone up because smart people know that there is only one money they can really trust. There is only one currency that won’t disappear. And there is only one financial reserve that will hold up to a real crisis.

That is gold. Gold is back on its throne – as the world’s One True Money. Wise governments, wise investors, and wise families are buying it to protect themselves from the jackasses who run the world’s money system.

A few days ago, Ben Bernanke was asked about gold. Ron Paul asked him if he considered it money. ‘No,’ he said. Gold was just a commodity. Like bauxite or guano.

But now commodities are tumbling. If gold were just a commodity, it should be going down with copper and lead. Instead it is soaring.

Why is that, Ben?

Ha, ha, ha…so you see…the financial world is fun again. Yes, England is smoking from riots. Europe is on the edge of a complete financial meltdown. And America is sinking into depression. But we can still laugh at the morons who rule us. We can guffaw and snicker at the people who are supposed to know what they are doing. We can curl up in spasms of mirth at the knuckleheads who run the world’s financial institutions…

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Debt Default

Bill Bonner writes:

And here we find a political movement The Daily Reckoning can stand…far…behind... the part that actually wants the US government to default.

Whoa! We know what you’re thinking. A default would be dangerous. Suicidal. Unthinkable. Ben Bernanke. Tim Geithner. Larry Summers. They all said so! The old folks wouldn’t get their medicine. The soldiers wouldn’t get their ammunition. Tops would go back onto honey pots all over the Washington DC area. The whole system would fall into anarchy and pandemonium. There would be riots. Revolution. Bourbon would disappear from the liquor store shelves. The dead would rise from their graves and the living would fall into the open holes. A man would be happy to see his dead wife alive again. Another would be even happier to see his living wife dead!

Well, maybe they’re right. It would probably be a catastrophe. A disaster. But let’s take the chance anyway!

Because the real problem is debt. The quicker it is eliminated…the faster the economy can get back to work.

So, don’t raise the debt ceiling. Let the feds figure out how to get by like everyone else – spending no more than they take in as income. Is that really so tough?

read the entire essay

Economic Recovery??

Bill Bonner writes:

The fight for recovery is over. The feds have waved the white flag. Maybe…

The Labor Department came out with the latest employment numbers last week. They were atrocious. Only about a fifth as many new jobs as economists expected. Which shows you three things.

First, economists can’t really predict levels of employment, growth, prices, or anything else. And they are especially bad at it when they have the wrong idea of how things work.

Second, the feds have failed. They have been completely unable to make any progress against the downturn.

Third, this is not a recovery. Widely reported in the media was the opinion that the employment numbers were ‘disappointing for the second year of a recovery.’ Well…yes. Because it’s not a recovery. It’s a Great Correction. And this is just what you’d expect.

For the last 4 years – since the beginning of the financial crisis in ’07 to today – economists, analysts, investors and policymakers have had the wrong idea. They thought they were dealing with an ordinary (though perhaps severe) recession, which they thought would be followed by an ordinary (though perhaps weak) recovery.

Not at all! It was not an ordinary post-war recession. So, the ordinary counter-cyclical policy measure – more credit! – didn’t work. This time, the economy already had too much credit. Which is to say, too much debt. It didn’t do any good to add more debt. Households were already drenched in it.

They couldn’t absorb any more. They couldn’t increase their spending by borrowing more money. So, spending couldn’t go up…

Instead, households are struggling to maintain their standards of living in the face of rising consumer prices and flat…or falling…incomes.

And now, the mainstream financial press is finally catching on. Heck, even the US Secretary of the Treasury, Tim Geithner, may be opening his eyes.

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How the Fed Keeps Feeding the Financial Crisis

Bill Bonner writes:

Wow! Is this fun, or what? We are so lucky, we can scarcely believe it. We’re getting to live through something most people only read about in the history books…a monetary meltdown.

Last week, our own central bank – the US Federal Reserve – announced that it would print up another $600 billion. This will bring the total to $2.3 trillion added in just a bit over 24 months.

Is this crazy? Is it foolish? Is it stupid? Yes! It is all of those things and more – vain, pigheaded, destructive, reckless…

…supply your own adjective!

Intervention on this scale is risky. So, you might expect that the Fed has some sort of computer program – trusted, reliable, tested and proven – that tells it exactly how much money to put into the system via its QE program…and when.

Well, if you think that, you’re dreaming. The Fed has no such computer program. No formula. Not even a theory that will hold up to inspection.

The whole thing is just a willful, dangerous gamble.

And we’re just happy that it is happening now…when we’re still alive to appreciate it.

It’s not everyone who gets to see a genuine, real-life example of hyperinflation…depression…money panic…and currency suicide. We’re going to see them all. At least, we think so…

But we know the risk of a crash is high. Investors are buying stocks as speculations. The Fed’s hot money is not really going to improve the economy. Everyone but Ben Bernanke knows that. Investors are just speculating that it will push up the stock market. They’re gambling too – just like the Fed.

And maybe it will. But it will be temporary. Because the only thing that can push up the stock market in a reliable way is real growth. And you don’t get real growth by running the printing press. If you did, Zimbabwe would be growing faster than China.

No, dear reader, hot money produces hot action in the market. Speculative fever. Bubbles.

…And crashes, of course.

read the entire essay

Bill Bonner: Creating Bubbles to Maintain Stability

Bill Bonner writes:

“Global Backlash Grows,” says The Wall Street Journal.

This is the backlash against Ben Bernanke’s crackpot money-printing scheme.

The foreigners don’t like it. Because the US is flooding the world with “hot money.” This fast cash chases oil, commodities, collectibles, farmland – just about everything.

It creates bubbles. It distorts markets. And it will certainly lead to busts and bankruptcies…and maybe to hyperinflation, too.

So, sit back and enjoy the show, dear reader. It’s the greatest show on earth. Yes, it will most likely lead to embarrassment and poverty in the US. Yes, the US dollar will cease being the world’s reserve currency. And yes, America’s leading economists – many of whom have won Nobel prizes – will be shown to be hapless goofballs.

But this is all good news to us. Under the leadership of modern US economists, Americans have been getting poorer for the last 10 years...

How came it to be that the taxpayers are on the hook for $600 billion more in financial responsibilities with no vote of their elected representatives? No point in even asking the question….

This is, after all, late, degenerate state-guided capitalism. If Congress can make citizens buy something they don’t want – such as health insurance – surely the Fed, which is a privately-owned bank, can write checks from the taxpayers’ checkbooks. Heck, nothing is too absurd.

So, the Fed goes boldly where no sensible person would want to go. It is trying – trying! – to create bubbles…asset bubbles, to make people feel like they have more money. If people feel richer, the feds reason, they’ll spend more money. Presto, we’ll be richer.

read the entire essay

QE2: $600 Billion

The Federal Reserve cannot solve all the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector.

-Ben S. Bernanke, chairman of the Federal Reserve Board of Governors

This is what life after “QE2” looks like:

• Record gold prices
• Stocks back at pre-Lehman levels
• And a dollar cruising toward its 2008 lows.

Everything is rallying…in terms of depreciating dollars. Mission accomplished. Ben Bernanke needs George W. Bush’s ol’ “shock and awe” flak jacket.

In case mainstream media coverage made you glaze over, here’s the quick and dirty of the Federal Reserve’s fateful decision…

• The Fed will buy $600 billion in Treasuries over the next 8 months
• The mortgage securities the Fed bought during QE1 now reaching maturity will continue to be rolled over into Treasuries, as they have been since August. That’s another $275 billion, give or take
• There was also the caveat that more of this could be in the works if unemployment stays high and inflation (as defined by core CPI) stays low.

Hmmn… If the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that’s the consensus guess)…and the Fed will purchase $875 billion in Treasuries over the next eight months (that’s two-thirds of a year)…

This is yet another reason we don’t expect the House Republicans to convert to the gospel of fiscal responsibility any more than they did last time they were in the majority: They can indulge in demon spending unto oblivion…and the Fed will have their back...

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Bill Bonner writes:

The Fed announced a $600 billion purchase program, from here until June. Even in dollars, that’s a lot of money to throw into a market. The stated purpose is to lower interest rates even further…trying to coax business into hiring and consumers into spending.

Will it work? Will it create real prosperity…growth…and wealth? Ha. Ha. Nope. No chance.

How can we be so sure? Well, theory and practice. In theory, it makes no sense. Real jobs require real investment by real investors, entrepreneurs and businesspeople. It takes time. Skill. Luck. Giving the banks more money (which is what happens with QE) merely destabilizes serious producers. They don’t know what to expect. Cheap money forever? Will inflation increase? What should interest rates be? They don’t know. So, they wait…and watch…and the slump gets worse. Besides, the economy is correcting for a reason. Any interference is bound to be a mistake.

The lessons from experience are even more damning. There is no instance in all of history when printing press money actually turned around a correction. And if you really could make people better off by printing money, Zimbabweans would be the world’s richest and most prosperous citizens. Followed by the Argentines; they’ve got 25% inflation right now.

Nope; it isn’t going to work. And even if it seems to be working…it will actually be making people worse off.

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Bill Gross writes:

The dollar is in danger of losing 20% of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said on Monday.

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Investing in Gold

Bill Bonner writes:

The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we’ve been watching Bernanke, Jackson Hole, and stocks – gold has been quietly creeping up…

…stocks go down; stocks go up – and gold keeps moving up…

…fiscal stimulus, monetary stimulus, quantitative easing – and gold keeps moving up…

…recovery…no recovery – gold keeps moving up…

…inflation…deflation – and gold keeps moving up…

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all...

But here’s the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you’ll probably succeed. When the Bernanke Fed loses its grip – which it will – and when the public gets on board the gold bull market – which it will – gold speculators will probably make a lot of money.

We’ve been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative…not inherent. When we bought gold in ’99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another “stimulus” effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We’re happy with our gold holdings and don’t really care if the price drops. Heck, we’d be happy to see the price back below $1,000; we’d buy more.

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A New Stimulus?

Bill Bonner writes:

Wolf, Stiglitz, Krugman – we love these guys!

They pushed the world’s governments to undertake huge “stimulus” programs. Of course, the stimulus programs didn’t work. They couldn’t work. All they could do was to disguise the facts and delay the necessary adjustments.

But these fellows don’t care about that. They are the technicians, scientists, and engineers of finance. They have measures of financial health – GDP, employment, inflation, etc. They may not be able to make anyone better off…but they can damned sure move those indicators. At least, they believe they can.

Spend enough money and you can move the GDP up. Hire enough people and you can get unemployment down. It’s not that complicated.

So, the engineers went to work two years ago. You know the rest of the story. That is how we got where we are. They turned valves. They connected wires. They adjusted dials and switches. They put at risk nearly an entire year’s worth of US GDP – on the idea that an economy can be controlled and managed, just as if it were a brewery...

The trouble is…managing an economy is not science at all. And these guys are not scientists. They have no controlled experiments. They have no test panels nor test results. They have no peer reviews. They have no proper theories – none that can be disproven or confirmed. They just have crackpot ideas and quack treatments.

And now, Paul Krugman is on television in the US calling for another $800 billion program of boondoggles, bailouts and bumph. “Stimulus,” he calls it. Claptrap is what it is.

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Fighting the Correction

This correction is a good thing. Consumers have too much debt. They’ll be better off when they get rid of half of it. But the feds want to fight this correction in the worst possible way. What’s the worst possible way? Adding more debt!...

When stocks go down, they will drag inflationary expectations. It will probably bring down stock markets in the emerging economies…possibly causing the Chinese economy to blow up…and bring falling commodities prices and deflation too. The idea of a “bond bubble” will disappear. People will see the “depression/Great Recession” as real…and permanent. They will try to protect themselves by buying US Treasury bonds. This will permit the feds to go further and further into debt.

Thus begins the world’s long day’s journey into night.

The US economy will become a Zombie Economy, with more and more activity dependent on government spending and government support. Banks are already Zombie Investors. Rather than lend to viable businesses that expand the world’s wealth, they borrow from the feds and lend the money back to them. We’ll see private investors become Zombie Investors too – putting nearly all their savings into US Treasury paper, just as the Japanese did.

The Dow will sink down towards 5,000. The feds will announce program after program to boost up the economy. Household savings rates will head to 10%. Unemployment will go to 12%…maybe 15%. Bond yields will collapse to new record lows. Ben Bernanke will threaten to drop money from helicopters…but as long as the US remains in an orderly decline, he will not dare to do it.

Eventually, the whole system will blow up in a spectacular fireball. But not until America’s investors are fully committed to US paper. Then, after having suffered huge losses in stocks and real estate, they can be finally ruined in what they thought were the safest investments in the world – dollar-based US Treasury bonds.

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Social Security: An Analysis

You know all that money you pay in Social Security taxes? Where do you think it goes? Into current expenses and US bonds!

That’s right, the feds just use the money to finance whatever fool scheme they’ve got going at the moment…and give the Social Security Administration a bond in return. In theory, the SSA has assets. In practice, all they’ve got is the hope that the feds can squeeze enough money out of taxpayers to meet their obligations...

In other words, there is no question about whether the US government will default or not. It will default. The only question is how. Will it manage to slip out of its obligations by raising the inflation rate enough to slough them off? Or will it have to officially renounce them? Will it refuse to pay retirees? Or bondholders?

Any way you look at it, the situation is interesting. Retirees, employees, loafers and chiselers – all are stakeholders in the US government. They have something to lose and will fight to hold onto what they’ve been promised. Bondholders have something to lose too.

So far, the bondholders have been largely protected – even enriched. Stakeholders in Greece, Ireland and other countries have begun to feel the pain. In America, the class of stakeholders is actually increasing, as the public sector spends more and the private sector spends less.

Best guess: stakeholders, bondholders, placeholders, cupholders, napkin holders – they’ll all take a loss.

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No Recovery

We’re not worried about the recovery. Because there is none.

None of the key components of recovery – housing, jobs, or consumer spending – suggest that the economy is returning to its pre-recession habits...

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Bill Bonner on the Great Correction

Bill Bonner writes:

After 18 months and $2.5 trillion in counter-cyclical budget deficits, people have begun to realize that the ‘recovery’ is a flop. What they haven’t realized – yet – is why. But, it’s summer…no one is doing too much thinking now...

Obama, Geithner, Summers – none seems to have a very clear idea of what we are pushing forward towards. You may want to forward this message to them. For it is fairly clear to us: we’re headed into a long spell of de-leveraging. Not many jobs? Slow consumer spending? Falling house prices? Tumbling stock market? Zombie-like, shuffling economy? Get used to it! The US economy continues its Great Correction.

read the entire essay

Empire in Decline?

Bill Bonner writes:

Is that what we have to look forward to in America…a post-imperial decline, where our standard of living stagnates…our economy limps…and our place in the world frays and crumbles?

Yes. Most likely.

Why? Because the government is taking a larger and larger role in the economy. Because US social programs are too costly. Because we don’t have enough money to pay for them. Because not enough money has been invested in productive business. Because our military burden is too heavy…and difficult to escape. Because we have no savings. Because we will likely spend the next 10 years paying down private debt. Because the rest of the world is racing ahead. Because we are growing older. Because our leaders are corrupt and incompetent. And because the whole society becomes more zombified every day.

read the entire essay

The Great Correction and Phony Recovery

Bill Bonner writes:

In 1999, the US stock market – led by the NASDAQ – clearly topped out. The bubble in the tech sector blew up. Equities started down...

It was time for a bear market/credit contraction. That is, it was time for a correction.

The correction began in January 2000. The NASDAQ collapsed. And in 2001, the economy entered a recession.

But this recession was phony. Consumer spending didn’t go down; it went up. Consumers kept borrowing money. It wasn’t correcting the debt problem, in other words, it was making it worse...

The correction of 2001 had been held up and made much worse by the feds’ efforts to stop it. At least $10 trillion of additional debt was added to the system in the decade of the ’00s...

Stocks boomed. Spending boomed. Real estate boomed. Finance in all its formed boomed.

Growth was positive. But it was phony. Because it was almost all based on debt. It was a debt-fueled bubble – particularly in real estate...

The bill came due in 2007. Subprime crashed. Then, the whole financial sector crashed, followed by the economy itself.

There are a number of ways to look at it, but we think it is most accurate to look at 2000 as the beginning of the present correction. That’s when stocks hit their peak in real terms. Since then, stocks have gone nowhere. And probably 90% of the “growth” since then was phony. Certainly, the average person did not get richer; he got poorer.

But having learned nothing in the ’00s, the feds set to work in ’08-’09 repeating and magnifying their mistakes. Instead of running $500 billion deficits, they ran deficits of $1.5 trillion. Instead of dropping rates below inflation, they took them down as far as they could go – to effectively zero. In addition, they nationalized whole industries, bailed out big businesses, and proceeded to add immense new financial obligations that nobody really understood.

You have to hand it to the Obama administration. We didn’t think anyone could be worse than Bill Clinton’s bunch…but then along came George W. Bush. In comparison, Clinton seemed like a great president. And then, just when we thought we’d seen the worst administration ever, here comes Barack Obama and his team. Obama has continued all of Bush’s programs (save torturing people). The war in Iraq continues. The war in Afghanistan continues. And the war on the correction continues. And Obama even added a new front – a health care initiative that is almost sure to be a financial and administrative disaster.

Not that we’re complaining. To the contrary, we find it all very entertaining. But we don’t think people are going to like the consequences.

The economy has been trying to correct since 1999. Every effort to stop it merely increases the size of the eventual correction. In round numbers, the US economy currently has debt equal to 350% of GDP. It averaged about half that much in the ’50-’80 period. If it were to go back to that level, it would have to eliminate about $25 trillion in debt. According to the last number we saw, the private sector was currently writing off, defaulting on, or paying down about $2 trillion per year. Not bad. But that would mean another 12 years of correction.

It would go a lot faster. But, remember, the government is helping.

read the entire essay

How to Cure an Economic Depression

Bill Bonner writes:

It is amazing that anyone takes Krugman seriously. It is obvious now that he – and his fellow interventionists – had no idea what was going on two years ago...

So you see, dear reader, even a Nobel Prize-winning dog can learn a new trick. Now, he sees through a glass darkly… Soon, he will be face to face with deflation.

Of course, the poor man still completely misunderstands what is really going on. But what do you expect? His career depends on not understanding it. Krugman would have to turn his back on his neo-Keynesian creed if he ever caught on to the plot. He would have to look for a new job if he were ever to tell his readers about it. Almost everyone wants the feds to “do something” to avoid the Japanese “trap.” Imagine what would happen if The NY Times’ leading economist were to say:

“Forget it. The feds have already done too much. Following my advice, they were a major cause of the present crisis. Following my advice, they have made it worse. I was wrong. Now the best thing they can do is to withdraw as gracefully as possible.”

That’s not what Times readers want to hear. It’s not what anyone wants to hear, except us “crazy alarmists” here at The Daily Reckoning.

We’ve been talking about the Japan trap for years. Economist Richard Koo calls it a “balance sheet recession.” He’s right about that. The private sector destroys excess capacity and excess debt. When it’s over, the private sector balance sheet looks a lot better.

Of course, it could happen faster. In Japan, it may still be going on. Why? Because the Japanese feds worked so hard to stop it. Monetary stimulus. Fiscal stimulus. Quantitative easing. They tried everything. And kept at it for nearly 20 years.

But what they were really doing was preventing the one fix that really fixes. It is as if they were letting the air out of the market economy’s tires…and then were amazed that it didn’t roll.

You know what cures a depression, dear reader? We’ll tell you. A depression.

A depression destroys excessive debt. Businesses with too much debt go broke. Bonds that can’t be paid go into default. Households that have spent more than they could afford go broke.

Problem solved. Debt disappears.

Then, the economy can grow again.

So what does Krugman suggest? You guessed it: stop the process of debt destruction at all costs! Do what the Japanese did, in other words, only do more of it.

read the entire essay

Fragile Recovery or Great Correction

Bill Bonner writes:

We continue to live in a gray zone.

It is not as black as the Great Depression.

But it’s certainly not as bright as the go-go Bubble Era, either.

What is it, exactly?

Is it a correction?

What is it correcting?

We don’t know. Not exactly.

When will it be over?

We don’t know that either.

What will happen next?

Wish we could tell you.

Let’s keep it simple: will prices go up or down?

Hey, stop asking so many questions!

Look, we’re way ahead of most people. Most people – including most economists – think we are in a period of ‘fragile recovery.’ They think we had a recession. Now the economy is in recovery. If the recovery doesn’t seem much like other recoveries in the Post-War era, it doesn’t trouble them particularly...

So far, the economy gives no sign of normal ‘recovery.’ We’d be deeply concerned if it did. Because what it had before the crisis of ’07-’09 was not something to have again. It had the bubble heebie-jeebies, if you know what we mean.

Now, the economy gives every sign of being in a Great Correction…

…unemployment is not recovering. In fact, it seems to be getting worse. It would not be at all surprising to see the official unemployment rate go up to 12% in the next leg down…

…housing is not recovering. It has stabilized…but only tentatively. There is still a huge overhang of inventory and underwater mortgages to be resolved. And the latest figures show they’re not moving. Under these circumstances, you’d have to be one heckuva optimist to think prices would ‘recover’ anytime soon…

…credit is not recovering. Instead, it is shrinking… Last week’s figures show more contraction.

These things do not point to the end of the world. They point to the end of the credit expansion that ballooned up the economy from the first Reagan administration through the last administration of George W. Bush.

That expansion is over. Kaput. Finished. What’s coming next? We’ll see…

read the entire essay

Is a Depression All Bad?

Maybe a depression wouldn’t be so bad, after all.

The gist of the argument against depression is that people lose their jobs, incomes go down, companies go bankrupt and so forth. Is that all? Well, in general, people have less stuff…and less money to buy more stuff.

If that were all there was to it, it would seem like a small price to pay for the benefits of a depression. After all, a depression would wring the debt out of the economy. It would get rid of weak businesses. It would turn spendthrift households into savers. That’s got to be worth something.

The large presumption behind these worries is that, in a depression, people do not get what they want…they are disappointed. They are poor. They wear shoes with holes in them and drive old cars. They vote for Democrats and start reading Das Kapital.

Big deal.

What actually causes a depression, anyway? People choose to save rather than spend. Reduced demand causes a drop in sales…an increase in unemployment…falling prices and all the other nasty things we associate with a ‘depression.’ And yet, behind it is something people really want – savings. And behind the desire for savings are very real calculations and concerns. Without savings, people cannot retire comfortably. Without savings, they cannot withstand financial shocks and setbacks. Without savings, they may not be able to take advantage of opportunities that come their way.

In other words, there is a depression because people would rather have savings than a new car, or a new pair of shoes, or a vacation. In other words, people choose to have their cake rather than to eat it. What’s wrong with that?

Nothing. But it causes the economists’ GDP meters to tick over in a direction they don’t like…or at least in a direction they think they can do something about. The economists’ answer to this is to let the people have their savings…but to counteract the economic affect of higher savings rates with increased government spending.

It sounds so neat…so clean…so symmetrical. You might almost think it made sense, if you don’t think about it too much.

But wait. Where do the feds get any money to spend? They have to take up the savings. They take the cake! And there you have the problem right there. Resources have to come out of some other use – say, inventories, investments, whatever – and be put to use on government projects. We can safely assume that the federal projects are not the angel food, layered and frosted confections that the savers wanted to eat. Otherwise, they would have willingly paid for them themselves and there wouldn’t be a downturn in the first place. So, instead of savings and depression, the people get boondoggles and “growth.” Only it isn’t real growth. It is growth that flatters economists but leaves the rest of us hungry and disappointed. It is empty calories…measurable as “growth” on the economists’ GDP meters…but completely phony and not at all what people really wanted.

And what happened to their savings? They’ve been eaten up by the feds and their favored groups.

This whole Keynesian stimulus project is scammy from beginning to end. And in the middle too.

read the entire essay

Bill Bonner: The Great Correction

The latest from the G20 meeting in Toronto. As you recall, the meeting was billed as a showdown between the Germans and the Americans…that is, between the deficit cutters and the big spenders…

That is, between the people without a hope and the people without a clue...

As near as we can tell, the recovery has been on the wrong road since it started its motor. And the folks in Toronto couldn’t put it “back on track,” even if they knew what they were doing. All they can do is get out of the way.

The system has too much debt. It needs to get rid of some of that debt – by write offs, defaults, and pay downs. Things that must happen, must happen sooner or later. Better sooner than later.

But what IS happening now?

World trade is breaking down – the Baltic Dry index, a measure of world trade, recently fell 17 days in a row.

Consumer spending is breaking down – the “consumer discretionary” sector has turned ominously negative.

Stocks are breaking down – the Dow fell 9 points on Friday…145 points the day before….

Employment is breaking down – you know the story.

Housing is breaking down – not since 1963 have people bought so few new houses.

Does this sound like a recovery? Of course not.

What it sounds like is a defeat. A failure for the recovery team.

But don’t worry, boys, sometimes failure is the best you can hope for. And come to think of it…defeat is not so bad. Think how much better off the Chinese would have been if Mao’s long march had ended in the total collapse of his army. And suppose George W. Bush hadn’t been such a total failure? People might not have elected Barack Obama. And what if the invention of the television had never caught on? Americans might still have some dignity and brains….

Not only do collapse and failure help prevent bigger mistakes, they also correct mistakes after you’ve made them. Running up debt equal to 362% of global GDP was probably not the smartest thing the human race ever did. Trying to ‘recover’ the economy and reproduce the system that produced those debts is even dumber.

Instead, let’s have a good old fashioned correction…a collapse…a failure of the Geithner, Bernanke, Obama team. We’re going to have it anyways. Bring it on. Get it over with!

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The Slow Decay of a Healthy Economy

Bill Bonner writes:

Today, we boldly announce a NEW THEORY about the way the world works....

Something is wrong...

We just had the biggest financial crack-up of all time. Even under ideal conditions, it will take people a long time to rebuild lost savings…to get rid of houses they can’t afford…and to restructure debt they can’t pay. While this restructuring and adjustment is going on, you’d expect the markets to be a little punky.

But instead of letting people get on with it, the zombies have moved in. At first, you hardly notice. An arm here. A leg there. Pretty soon, you’re dead!

The percentage of the economy controlled, guaranteed, or paid for by the government is increasing. Since the feds were already deeply in debt themselves, the only way they could spend more money was by borrowing more. You can’t cure a debt problem by borrowing more money. Net debt is going up. So, there’s something wrong. The economy isn’t recovering… It’s just not possible.

Which brings us back to our new theory…

Here we offer a new and improved theory with a dynamic of its own: the producers vs. the parasites...

A bigger illustration can be found on the front page of yesterday’s paper.

BP has agreed to provide the zombies with $20 billion dollars of raw meat:

“BP backs $20 billion spill fund,” says The Financial Times.

BP is a producer. It makes something valuable. In fact, it makes the thing that is the pentagon’s most valuable and most important resource – liquid energy. It does so at a profit, also rewarding all the little old ladies, lonely orphans and rich sons-of-a-gun who own its shares. BP normally pays dividends; those dividends are currently suspended, as BP diverts cash to the spill fund.

Yes, it also makes mistakes, for which it must pay.

But circling BP today is an army of parasites. Zombies who toil not. Neither do they spin. Instead, they file lawsuits and try to get something from the producers without paying for it. BP’s Gulf disaster is a godsend for them...

Remember the giant tobacco settlement? In 1998, the tobacco companies lay down and opened their veins. A quarter of a trillion dollars was paid out in a huge class action settlement. The money was supposed to go to redress the damage done by smoking. But $19 out of every $20 found its way, instead, into the pockets of the lawyers, the activists, and the bureaucrats. That is to say – the zombies got it.

Will the oil settlement be any different? Not likely. The zombies will take most of it. Much of the rest will be used to turn honest working people into zombies. Instead of finding new work in new areas, for example, Gulf-area residents will be encouraged to stay put and collect checks. If they take up new work, the measure of their ‘damages’ will go down!...

The zombies win. And then…there is collapse, war, revolution, bankruptcy… The zombies are killed off…new life begins.

read the entire essay