Friday, July 24, 2009

What's Good for Goldman is Bad for the Nation; Bill Bonner With a Brief History of Monetary Madness

Celebrating A Decade of Reckoning
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Friday, July 24, 2009

  • Happy 10th Anniversary of The Daily Reckoning...
  • Bankers, like undertakers, benefit from human frailty...
  • Almost all the indicators are worse than those seen since WWII...
  • Bill Bonner with a brief history of monetary madness...and more!

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    What's Good for Goldman is Bad for the Nation
    by Bill Bonner
    Vancouver, Canada

    We're attending a financial conference here in Vancouver. Yesterday was actually the tenth anniversary of The Daily Reckoning. A group of readers took your editor to dinner and roasted him.

    He was flattered...and grateful for the attention.

    But we're not kidding ourselves. Readers come up to us at conferences and tell how much they enjoy reading the DR. We wait for questions about Quantitative Easing, the Trade of the Decade, Empire of Debt or any of our other important themes. Instead, what they want to know about is:

    "How's your gardener doing? What's Maria doing in Los Angeles? Did you ever figure out what happened to your missing cows...?"

    Readers know what's important. They want to know more about what really matters.

    Still, we are foot soldiers in the lonely battle against economic claptrap; we must march on!

    Yesterday, came more evidence that the depression is over. The Dow shot up 188 points. From a technical point of view, if you believe that kind of thing, it looks as though the rally has farther to go. We recall setting a target of Dow 10,000. Perhaps we will get there.

    Oil traded at $67 yesterday. Gold rose to $954 and bond yields on the 10-year T-note rose to 3.7%.

    All of this sounds vaguely inflationary...and vaguely bullish. Besides, Goldman stock is rising. And as we all know, what's good for Goldman is good for the country.

    Wait...we're kidding...right?

    Yes, we are kidding. What's good for Goldman is generally bad for the country. Goldman makes money by separating investors from their money. Nothing wrong with that; someone has to do it. But the big banks are most profitable when speculation is rampant and debt is growing. That is, when people are going further and further into debt...and speculating on rising asset prices. We know you don't really prosper by borrowing and gambling. But that doesn't make casinos unpopular, or lenders unlawful. Bankers, like undertakers, benefit from human frailty. At least, they benefit as long as the government bails them out. Otherwise, they fall victim to their own human frailty.

    But this is a minority opinion. Most economists disagree with us. And there are so many of them...if all the economists who disagreed with us were laid would be a good thing. They believe that the economy is stabilizing...and on its way back to normal. Trouble is, 'normal' ain't what it used to be.

    [Indeed, 'normal' is hard to come by these days, as The Rude Awakening's Eric Fry pointed out in his speech at the AF Symposium on Wednesday. If you couldn't join us in Vancouver this year, don't worry - we've been recording all the main session presentations for you, so you don't have to miss a single insight or forecast. Get your AF Symposium audio recordings here.]

    Wall Street banks are making money, 'tis true. But they're not financing new businesses...or factories. They're not aiding the process of capital formation nor allocating capital in ways that will result in new jobs and new industries. Instead, they are refinancing old debts...and speculating on zombie assets. This will not increase the real wealth of the planet. Instead, money just changes pockets. Which, of course, raises an interesting question; where did all this money come from?

    If Goldman's pockets are fatter, whose are thinner? If the four biggest banks earned a combined $11 billion in the last quarter...who did they take the money from? Who's got that kind of money?

    Meanwhile, we found out this week that the feds have wagered an amount equal to 170% of GDP in their attempt to bailout the world (more below). Part of that money was used to buy Wall Street out of the investments that they didn't want. Which ones were those?

    Well, the ones that didn't work out.

    No wonder the banks are making money.

    But while the banks are making billions, cometh another report from another sector - manufacturing. Caterpillar announced its results for the second quarter too. Profits were down 66%. In other words, while the banks were making money speculating with taxpayer's money, Caterpillar was trying to make things and selling them to customers. Caterpillar not only makes things; it makes things that help other companies make things. Things with motors...big things...things that make noise and give off exhaust...things you use to dig holes and move dirt...things you need if you're going to have a real economic recovery. Unfortunately for CAT, these things aren't selling.

    So what does this tell us? suggests that there is no real economic recovery at all. The real economy is suffering...sinking...and shutting down.

    More news from the Agora Financial Investment Symposium:

    "The conference certainly did not disappoint yesterday, with presentations from Alan Knuckman and Doug Casey - just to name a couple," says Kate Incontrera, reporting from the Fairmont Hotel in Vancouver.

    "'Commodities are not a dirty word,' Resource Trader Alert's Alan Knuckman told the crowd at the conference yesterday.

    "The average investor is notoriously wary of investing in commodities, because the volatility in the natural resource market makes it seem like you are gambling. However, Alan pointed out if you go into the natural resources market armed with exit rules, discipline, and a methodical implementation of trading plan, you will be all set to flourish in this market.

    "'As a trader,' Alan said, 'you are always trading for tomorrow. If one trade goes bad, so what? There's always tomorrow, there's always a new opportunity.'

    [You can hear Alan's full speech - along with all the other main session presentations - from the comfort of your own home. Get the full audio recordings from this year's AF Symposium by clicking here.]

    "Then, there was the always-entertaining and 'pot-stirring' Doug Casey. Not everyone in the crowd always agrees with what Doug has to say, but yesterday, the audience was glued to their chairs when he took the stage.


    "The only thing that will solve the economic situation, according to Doug, is the total deregulation of government, the elimination of all taxes, the abolishment of the Federal Reserve, the collapse of overstuffed, corrupt financial institutions and a default on the national debt. But since none of that is likely to happen in our lifetimes, Doug offered what he believed will ultimately solve what he calls, 'The Greater Depression.'

    "'Forget about the government,' he told his audience, 'it serves no purpose, and encourages the worst habits. Individual people saving will make a difference. Savings will directly impact growth in technology, which is also very important to helping the economy.'

    "And what should you be doing with your money right now? According to Doug, you should buy precious metals and put them aside. Short interest rates because he believes that they will inevitably go higher. Buy real estate in a foreign country - but choose these countries wisely.

    "'The situation is hopeless - but it's not serious,' Doug concluded.

    "We could go on and on about the other all-star presentations we saw yesterday, but time is running short - and our own Bill Bonner is about to take the stage. Look for the full report in the weekend edition of the DR, which will be in your inbox tomorrow."

    [If you weren't able to join us in Vancouver for the Symposium (we know it's a hike), don't worry - we are recording all of the main session presentations and putting them in both CD and MP3 format. And until Monday, July 27th at midnight, you can get these audio recordings at a significant discount...get yours now.]
    And back to Bill, with more thoughts:

    The banks are not earning their money helping Caterpillar expand. They're making their money not because of a recovery, but because there isn't one. In other words, they're profiting from the financial stress of the early stages of a depression. There's a post-crash bounce...and the government is sending a lot of money their way.

    As for a real recovery - forget it. There's no evidence of it. Unemployment is getting worse. Housing is still going down. Profits are going down. Those aren't the things that presage a recovery...they herald a deeper, darker depression.

    The depression darkens because people are not just being laid off - their jobs are disappearing. They do not get called back to work. Instead, they stay unemployed until they run out of unemployment benefits...and then the statisticians in Washington drop them off the unemployment rolls. Currently, the first batch of those people to reach the end of their benefits came this week. Last we looked, the Pennsylvania legislature was passing a law so they could continue drawing benefits for a few weeks more.

    We've mentioned John Williams and his excellent service called Shadow Government Statistics. He looks at the numbers and figures out how they are twisted and tortured...and then figures out what they would be if they were treated properly. Currently, the unemployment rate nationwide officially is almost 10%. But if you computed the unemployment numbers the way they did back in the Great Depression, Williams says one in five people are out of work. In some places the figure is as high as one in four.

    In other words, the unemployment numbers are already beginning to look like those of the Great Depression. But that's true of almost all the numbers. They've all got a '30s era look to them. And if you stopped water boarding them, they'd tell a similar story. Almost all the indicators are worse than any we've seen since WWII.

    Unemployment, trade, defaults, foreclosures, bankruptcies, prices, name it and you have to go back to the end of WWII to find similar numbers. Of course, at the end of the war, the wartime economy shut down. Millions of people who have been in uniform...or making tanks and airplanes...were suddenly out of work. Economists thought the economy would go right back into the Great Depression. Instead, it boomed.

    Those soldiers and their families had savings. They had pent up demand - they hadn't bought a new car in 10 years...they were young...they got married...they had children...they needed baby cribs and houses. We remember going to look at one of the first major suburban developments as a child - Harundale - in Maryland, built by the Levitt Company.

    It was a horrible place, but you could buy a house for peanuts...on credit. And it set the pace for the suburban consumer credit expansion of the next half a century.

    But what was normal for so many years is not normal any more. Now, consumers are paying off debt faster than any time since 1952. The government, however, is making up for them. Goldman may no longer be able to push more credit onto the public; but it can push one heckuva lot of debt onto the public sector. Wall Street firms helped households ruin themselves in the Bubble of 2003-2007. Now they're doing the same for the government, helping the feds raise money on a scale never seen before in human history.

    As we wonder they're making money. Too bad.

    Keep reading for today's essay, below...

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    The Daily Reckoning PRESENTS: Money that seemingly comes with no strings attached always ends up causing the most problems...just look at lottery winners - or the US stimulus program. Bill Bonner points out, below, that without the sweat of honest toil on it, money seems to play a pernicious role in history. Read on...

    Romulus, Remus, Stimulus: A Brief History of Monetary Madness
    by Bill Bonner
    Vancouver, Canada

    Those whom the gods would destroy are first granted stimulus. When a man wins the lottery, for example, it has a stimulating effect on everyone around him. He usually spends the money quickly - often even before he gets it. But no matter how much he wins, he is usually broke within a few years...often, even broker than he was before he bought the winning ticket.

    A recent example from the British press: One of the first lottery millionaires punched a plumber and ended up in court, says The Telegraph. Michael Antonucci won 2.8 million pounds in 1995. But he "blew his entire fortune," reported the paper last month. Now he's reduced to stiffing tradesmen. The amount in dispute was just 400 pounds, what he was billed for a "gigantic ceiling mirror fitted above a whirlpool Jacuzzi." He had the mirror installed when he was still flush. Now that he's broke, he can't pay...hence the altercation.

    The phenomenon is little different when it happens on a national or even imperial scale. Any money that you don't earn is stimulus. Without the sweat of honest toil on it, money seems to play a pernicious role in history. There are no examples - none - where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it is soon spending more than it can afford...and getting into trouble.
    "Without the sweat of honest toil on it, money seems to play a pernicious role in history. There are no examples – none – where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it is soon spending more than it can afford...and getting into trouble."

    The Roman Empire is in some measure a stimulus story. It conquered. It grew. Each conquest brought more, silver, land and slaves. And each led to more conquests, which brought forth more booty. But the stimulus of this booty stimulated only the need for more stimulus. It did not stimulate real prosperity. Instead, it undermined it. First, slaves bought by rich landowners destroyed the free labor market and ruined small farmers. And then, imported wheat from the provinces - paid as tribute - put the large-scale farmers out of business too. Italy was then dependent on foreigners for its food.

    In the first century AD, Roman conquests reached the point of diminishing returns; the stimulus came to an end. But borders still had to be protected. And Roman mobs, made up of displaced small landowners and out-of-work laborers, needed bread and circuses which drained the Treasury.

    The first financial crisis of the imperial period came early. Caesar Augustus tried to solve it...with more stimulus. Neither paper money nor the printing press had yet been invented. So, Augustus increased the money supply in the only way he could; he ordered slaves in the silver mines in Spain and France to work around the clock! This extra money did not bring prosperity; it caused price inflation. In a period of about three decades, Rome's consumer price index almost doubled. Then, when output from the mines could be increased no further, Augustus's great nephew, Nero, found a new source of stimulus; he reduced the silver content of the coins. This source of stimulus proved ineffective, but enduring. By the time barbarians took over, the silver denarius contained almost no silver at all. Of course, Rome itself was played out too.

    Another early and dramatic example of stimulus-in-action came in Spain in the 16th century. The conquistadors increased their supply of money in the time-honored fashion - by stealing it. Galleons brought treasure from the Americas; increasing the Spanish money supply substantially and fatally. The Spaniards had so much stimulus that they laid down their tools. Why should they work? They could buy things.

    The discovery of a whole mountain of silver - Potosi - in the middle of the 16th century insured a supply of stimulus that would last for nearly a century. Results? Predictable. Inflation. In the "price revolution" from 1540 to 1640 the cost of living went up throughout Europe. In England, for which we have the most reliable data, prices went up 700%. And Spain, though it covered 40% of its state budget with this easy cash, still defaulted on its debts about once every 15-20 years, from 1557 for the next 10 decades. Spain, like Rome, welcomed stimulus; it never recovered from it.

    Now we turn to the biggest misadventure in stimulus ever - the period after the United States 'closed the gold window' in 1971. In the 150 years before then, nations could stimulate their own economies with cash and credit, but only to a point. They could overspend; but they had to settle up in gold. After 1971, on the other hand, the sky was the limit - especially in the United States of America. The US could settle its bills in paper, which was then used by foreign central banks as monetary reserves. Since foreign banks were eager to add to their supplies of reserves, there was no effective limit on the amount of stimulus available. The Fed's adjusted monetary base grew 900% since 1985, and more than doubled this year alone. Total US debt tripled - as percent of GDP.

    As it did with Rome and Spain, more and more stimulus stimulated spending and speculation, but not real output. During the 2001-2007 period, for example, credit in the United States increased by $22 trillion. The nation's GDP increased only by $4 trillion. For every extra dollar of output, Americans took on $5.50 of debt.

    But now the bubble has blown up; the feds are on the case. What do they offer? More stimulus! Cometh a report this week that $23 trillion has already been put at risk in the various bailouts and credit guarantees. As for the US public debt, it is expected to increase until the country goes broke.

    Future economic historians will look at these staggering efforts with awe and wonder; they will wonder what the Hell we were thinking.

    Enjoy your weekend,

    Bill Bonner
    The Daily Reckoning

    Editor's Note: Bill is presenting today at the Agora Financial Investment Symposium - and even if you weren't able to join us this year, you can still be privy to all the investment advice that he, and all the rest of this year's presenters, have to offer. That's because we are recording all of the main session presentations, and you can get them delivered straight to your front door at an amazing value.

    But this offer is only good for a short while. You have until midnight on Monday, July 27th, to get these CDs at this low price...after that, the price will jump by at least $100. Get them now.

    Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

    Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

    Mobs, Messiahs and Markets

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