Friday, August 7, 2009

Economists Lead the Way to Calamity; Bill Bonner on the Perils of Reaching into the Future to Pay for the Present

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The Daily Reckoning
Friday, August 7, 2009

  • Crackpot ideas! Corruption! What's next?
  • Back to business as usual at Goldman
  • The future caught up with consumers...
  • Bill Bonner on reaching into the future to pay for today...and more!

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    Economists Lead the Way to Calamity
    by Bill Bonner
    Ouzilly, France

    Goldman gets a hidden bailout...Wall Street uses bailout money for bonuses...Cash for Clunkers...nationalizing GM...quantitative easing...Geithner lies to the Chinese...

    Crackpot ideas! Corruption! What next?

    But the most breathtaking scene is the one no one seems to notice...

    Perhaps it is because we have our head in the far above the surface of everyday life that we can look down and see what is happening...

    ..or perhaps because you have to be a connoisseur of absurdity to appreciate it...

    ..strange...bizarre...almost surreal...even when you see it, you don't quite believe it...

    First, the voters ruined it's the government's turn!

    The US federal government is digging its own grave...bankrupting itself with its eyes wide shut. And it's not alone...

    Look back a little more than 100 years ago, and you'll see that something similar happened. Europe went to war. No one knew why. No one knew what he stood to gain. But whether he was a kraut, a frog or a Tommy...he kept at it for four years - until every major government of Europe was broke. Most of them collapsed completely. All of them were broke. Germany and Russia, with the added burdens of war reparations on the one hand, and Bolshevism and civil war on the other, forgot their manners. Both were soon butchering their own people.

    In the Great War the generals led the way to calamity. Now it is economists...

    Some observers think the economy is recovering already. Others think it is not. If it is not recovering, it is because it didn't get enough stimulus, they say. If it is recovering, it's because the stimulus has worked.

    "Fewer layoffs expected as recession winds down," says a headline this morning from one of the wire services.

    The Dow fell 25 points yesterday...but it's still in bear market rally mode. With a little luck, it could go to 10,500.

    (Of course, it can do whatever it wants...we're just guessing, based on the experience of other major crash/depression episodes in history.)

    Oil trades at just under $72 this morning. Gold is at $960.

    It is "business as usual at Goldman," says a news report. Which is to say, big bonuses for the bankers. The top eight US banks got more than $170 in bailout money last year. They paid about 20% out in bonuses.

    But now the press and the politicians are on their case. It looks like they might have to ease up on the least until the heat is off.

    The news is mixed. German factory orders are up...but the Bank of England says the recession is worse than expected; it says it will continue buying bonds.

    Americans are raising chickens in their backyards again...even in places like Brooklyn. But the latest headlines tell us that requests for unemployment benefits are running below expectations.

    The housing market is supposed to be stabilizing...but new waves of defaults, resets and foreclosures are coming. Half America's mortgages will be underwater by 2011, says a Reuters report. And Deutschebank warned that construction loans were starting to go bad too.

    But the big story? Stimulus!

    [This next wave of the housing tsunami is nothing to scoff at. In fact, these loan contracts also carry a "reset" risk in the fine print, when already high monthly mortgage payments could as much as double - right at the height of the second biggest market meltdown since the Great Depression. Learn how to protect yourself by clicking here.]

    More below, but first, let's see what The 5 Min. Forecast has in store for us:

    "In this economy, this is as close as it gets to 'good news,' reports Ian Mathias in today's issue of The 5 Min. Forecast.

    "America lost 247,000 jobs in July, the Labor Department announced today. That blows all popular expectations out of the water: ADP's guess on Wednesday of 371,000 lost jobs didn't come close, and even the Street's expectations of 325,000 was beaten handily. At an official 247,000 jobs, it's the best monthly report since August 2008.

    "According to the government, the unemployment rate actually fell, from 9.5% to 9.4%. The Labor Department revised June and May job losses for the better. The average hourly workweek inched up from a record low 33 hours in June to 33.1 hours. The number of workers seeking full time employment but regretfully working part time fell 2%. And thank heavens; the government is adding new jobs at a slower pace.

    "But of course, it's all a matter of perspective:

  • July was the 19th month in a row of net job losses
  • Since the start of 2008, 6.7 million jobs have been lost
  • A record 5 million people have been unemployed for more than six months
  • The unemployed have been jobless for an average 25.1 weeks, a 61-year high
  • And at the risk of belaboring the obvious, a quarter of a million lost jobs in one month is hardly worth celebrating.
  • "Still, looking back, there's a clear trend over the last six months - the job market has stopped plunging into the abyss. 'The recovery is on!' we heard a CNBC anchor rejoice.

    "But we want to look WAY back today. Since everything in this Great Rescission is so akin to the Great Depression, how do the unemployment rates compare?


    "Of course this argument has a million more layers that we couldn't possibly cover in our humble 5 the method by which unemployment rates are calculated now and then, the differences between the two downturns, etc. But you get the idea - the same way this is no garden-variety recession, we don't expect a quick and easy recovery."

    Our friend over at Breakthrough Technology Alert, Patrick Cox, did receive some 'real' good news - he recently closed a position for a 235% gain. Says one reader, "I made about $35,000 in about 10 days." Not too shabby...if these kinds of gains sound good to you, see here.
    And back to Bill, with more news:

    Here is the International Herald Tribune on Monday:

    "More Stimulus is Needed to Spark a Strong Recovery," is the headline. According to the IHT, stimulus is working. And it will work even better if there were more of it.

    Once underway, the WWI generals used the same sort of logic. If they were winning, it was because they put so many resources into the campaign. If things were going against them, they called for more men...more guns...more ammunition.

    Of course, once a war has begun, it is hard not to want to win it. One hundred years later, it seems obvious the combatants should have called the whole thing off. They could have spared themselves a lot of misery.

    But that's not the way history works. She may be absurd, but she rarely does things by half measures. Once called to action, soldiers fought to win...even at the cost of their own lives.

    And now the world's central banks, Treasuries, and legislatures are at war. With economic strategists egging them on, they have declared war on all that they find unholy about capitalism - deflation, bear markets, and the down swing of the business cycle. John Maynard Keynes, that much-revered strategist from the Depression Era, tells them this is a fight they can win. And they believe it!

    Of course, these are the same people who saw nothing to worry about in 2006...the same people who have no idea what is going on - and have the track record to prove it!

    Can you really fix a debt-saturated economy by pouring on more debt? We know the answer, don't we? When you borrow money you take something away from the future and bring it into the present. That is not a bad thing...if you are doing it to increase your future output. In that case, you'll be able to pay back the loan with your extra earnings. But if you borrow from the future only to consume, the future waits for Shylock waiting for his pound of flesh...

    The future caught up with American consumers in 2007. But the feds learned nothing...and soon it will be a ton of flesh the future will want.

    [Most Americans have become resigned to the fact that the bailouts are not going to help those who funded it: the American taxpayer. But it doesn't have to be that way...because of a legal 'loophole', you can get your share of the bailout - starting as soon as August 19. Learn more here.]

    "Life seemed much more simple when I was growing up," said mother, reflecting back on her youth during WWII.

    "People were so much more modest. I had a job at Bergstrom Air Base in Texas...[she was in the WACs]; we would show movies to the soldiers who were going overseas. Some of the movies reminded them not to talk to people about where they were going... 'Loose lips sink ships' was the phrase.

    "And there were some awful movies such as 'Kill or Be Killed' showed them that they had to be on-guard...and they couldn't hesitate. Of course, it is an awful thought - that you had to kill someone before he killed you. And then there were the movies about social diseases...I don't remember what we called them then...but these were training films that warned the boys that they might catch a disease overseas if they weren't careful. But we weren't allowed to show those movies...we weren't even allowed to see them.

    "To tell you the truth, it was so long ago I can't remember very accurately. And it was such a different world; I can barely believe it existed. It seems unbelievable now...I can barely believe I lived through it."

    Keep reading for today's essay...

    Editor's Note: Want a free copy of our newest book, Financial Reckoning Day Fallout? We'd like to offer you a complimentary copy of the newly updated bestseller if you'll do us the favor of reviewing it on your blog or website. No strings attached...all you have to do is email us at with your blog URL and mailing address.

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    The Daily Reckoning PRESENTS: From one scam to another...from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus. Bill Bonner explores...

    Stitch in Time
    by Bill Bonner
    Ouzilly, France

    At least something good has come out of the economic crisis; it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don't deserve the beating they're getting in the press - with snide remarks and sarcastic comments; they deserve better. A beating with sticks!

    Even Alan Greenspan admitted he had "found a flaw" in his own thinking. We will have to imagine the giggles from the back of the room - if anyone had been awake. If was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn't seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you'd hope he'd be a gentleman about it and hang himself.

    Meanwhile, the queen of England visited the London School of Economics and had a question: why weren't economists on top of this thing?

    They replied to this question last month. In a three-page letter, they avoided the simple truth - that their trade was no more reliable than fortune telling and marriage counseling. The letter claimed that a "psychology of denial" prevented government and financial eyes from seeing the catastrophe in front of them. It was "a failure of the collective imagination of many bright people", they said.

    In fact, it was the exact opposite - imagination run wild. Economists imagined a world without yesterday or tomorrow...a world in which you could run up debts forever and never have to pay them back.

    Last week, Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America's biggest creditor that the public sector wouldn't continue to run huge deficits - practically an outright lie. But it's one thing to stiff the Chinese; it's another to stiff time.

    Adjusted for inflation, the US consumer's earnings barely rose from the '70s. By some measures, he had actually less disposable spending power in 2007 than he had in 1973. And now his income is going down. The June number reflected the biggest drop in income in 4 years. Salaries and wages fell 0.4% in June...the 9th drop in the last 10 months. How is it possible for him to spend more?
    "The automobile bought in 2006...the house bought in 2005...the vacation taken in 1999 – the ghosts of yesteryear spending reach for Americans' paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back – ever."

    We pose the familiar question only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future, and into Never Never Land. Consumers spent money they hadn't earned yet...thus bringing forward purchases that should have been made years later. The accumulated effect of this was to add $35 trillion in extra spending to the world economy - from America alone - over the course of the great credit expansion, 1945- 2007. That's why we have a depression now - because consumers already spent what they would normally be spending now.

    Time always gets even. Now, it is the past that is doing the reaching. The automobile bought in 2006...the house bought in 2005...the vacation taken in 1999 - the ghosts of yesteryear spending reach for Americans' paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back - ever. They reached so far the poor ghosts are disappointed. Lenders realized that they'd never get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five - Bear, Lehman, Goldman, JPMorgan and Merrill - only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.

    From one scam to another...from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus.

    What are they thinking? Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future. (Setting aside 'quantitative easing'...or Zimbabwe-style even bigger fraud.)

    The purest illustration of how this works is in the popular 'cash for clunkers' programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn't expect 2010 to ever if they thought they could stop the sun and the seasons...and the Chinese...forever. Like moths in amber, their wings will never tatter...nor will their faith flag. The dollar will always be strong. US bonds will always be in demand. And the future will never arrive.

    But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011...and then 2012...all the way to the end of time.

    Enjoy your weekend,

    Bill Bonner
    The Daily Reckoning

    Editor's Note: 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. He is also the author of, along with Lila Rajiva, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics.

    Bill's latest book, an update of Financial Reckoning Day, co-authored with Addison Wiggin, is now available for purchase by clicking here:

    Financial Reckoning Day Fallout: Surviving Todays Global Depression

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