* Pausing to take stock of the largest financial gamble in history,
* Credit not backed by real savings – the ultimate governmental fraud,
* Plus, the art of burning money, Coca-Cola offerings and plenty more...
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Joel Bowman, reporting from Taipei, Taiwan...
There is a specter haunting Taiwan...
As another tropical storms draws near, the people of Taiwan busy themselves...burning money in the streets and offering pineapples, dumplings and bottles of Coca-Cola to the dead. Shopkeepers throng the sidewalks, peeling off paper notes to cast into the flames. Passersby gather around to burn incense and bow in a seemingly random fashion to the wayfaring spirits.
It's the seventh month on the Chinese Lunar Calendar, you see, informally known as "Ghost Month." Tradition holds that, during this most unlucky of months, ancestral spirits from the lower realm awaken to "live it up" among their earthly progeny. In order to avoid incurring any unwanted ghostly wrath, the Taiwanese people lavish gifts on their unseen visitors. (Ghosts without families to return to simply wander aimlessly across the earth, though they still enjoy the offerings other families outlay for "homeless ghosts.")
Where possible, locals stay inside and avoid making any large purchases or conspicuous engagements during the month for fear of encountering an agitated apparition. Special care is taken to avoid walking near riverbanks where, it is believed, a water spirit may easily steal the body of the living. And, as for buying a house or a car...forget about it.
"Home purchases in the Greater Taipei area dropped nearly 20 percent in August, due to the Ghost Month," according to the China Post. [The government also cancelled a NT$200 billion ($185 million) loan program to redirect financial aid to victims of Typhoon Morakot...but, back to Ghost Month.]
Now, your editor isn't here to poke fun at personal superstitions and antiquated ceremonies. The participants usually do that well enough for themselves. Besides, heaven only knows what those of the Eastern religions think about, oh, say, transubstantiation. It is worth pointing out, however, that most faithful Buddhists here don't actually burn real money. Only an idiot would do that. Instead, they burn representations of money; little joss paper cut outs with ink markings on them.
In this way, the believers follow in the footsteps of the world's largest debtor. The United States, doesn't burn through real money either. It too relies on a special kind of faith, particularly on the part of its creditors, to make it real. You might call it "numismatic transubstantiation," or, "pecuniary reincarnation."
Over the past few decades, blind faith abroad and deliberate currency abasement at home has allowed the United States to amass a deficit of biblical proportions. Addison Wiggin, executive director of Agora Financial, explained the dire situation in a recent interview with Fox News:
"What we're all witnessing is a mutation of the housing and consumption bubble into a much greater bubble of government debt. The CBO [Congressional Budget Office] projections, which came out last week, look at a $9 trillion deficit over the net 10 years.
"We were horrified when we were putting together I.O.U.S.A. at the 2006-07 deficits", Addison continued, "but, since the credit crisis, we've really jumped track to a much more unsustainable path."
Put simply, the United States relies on the "good faith" of those abroad, mostly in Asia and the oil-producing nations of the Middle East, to continue buying dollar-denominated bonds. The U.S. government then dolls out proceeds from its global collection plate to prop up its zombie banks, failing auto industry, penny stock mortgage lenders and any other ill-conceived, poorly managed institution that happens to fall in arrears.
As long as there are believers, there will be liars. The trouble, however, is that, with the debt swelling to such gargantuan proportions, many of the U.S.'s creditors are beginning to suffer a crisis of faith.
"We've had a lot of rumbling from China, South Korea, Japan, our major creditors," Addison explained. "They're worried about their investment in our country. If they even start slowing down their consumption of U.S. debt, then that's going to create a much bigger problem than what we saw during the credit crisis."
In their book, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, Addison and Bill Bonner warned readers about the unsustainable levels of personal and government debt being pursued. Since then, much of the catastrophic events they foretold have come to fruition, including the "tech wreck" and the housing and consumption bubbles of the early and mid-naughts.
Today's essay, below, is actually an extract from the second edition of that book, which Addison and Bill have updated in light of the recent crises. Please read on and send any comments to the address at the bottom of the page...
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Moral Hazards By Bill Bonner and Addison Wiggin
Not infrequently, governments "shoot themselves in the foot. " But in 2009, they have brought out the biggest cannon in history. We look on with amusement as they blow their fool heads off.
Readers are reminded of our Daily Reckoning dicta: "The force of a correction is equal and opposite to the deception that preceded it." Now, we offer a corollary: "The greatness of a depression is commensurate to the government's efforts to prevent it."
Since these iron laws seem to contradict almost everything one hears on the subject, the burden of proof is on us. So, to the witness stand, we call our first expert, Angela Merkel. Alone among the world leaders, she seems to have kept her head:
"The crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable," explains Germany' s chancellor. She went on to suggest that maybe we shouldn't repeat the errors of the past.
As a proxy for "deception" in our handy dictum, substitute "money." And now consider it in its two misleading forms— credit and deficit spending. "Credit not backed by real savings is a fraud," the great economist, Kurt Richebächer, used to say. It is a fraud when it comes not from willing lenders, but from central banks, artificially reducing lending rates in order to spur the economy. Deficit spending by government is a flimflam, too. Governments rarely have extra funds to spare; they have to borrow the money. Eventually, that debt will have to be paid.
During the entire last half century leading Western economists imagined a world that couldn't exist for one minute — where consuming wealth makes people wealthier...and where simply making more credit available can stimulate consumption. Each time the economy slowed down, the authorities induced people to buy more of what they didn't need with more money they didn't have. This produced " growth. "
But it was an ersatz growth. Every dollar of borrowed money would one day have to be paid back. Every step forward would have to be followed, eventually, by another one to the rear.
In the first four U.S. recessions after the Great Depression, from the mid-1930s through the mid-1950s, the total amount of monetary stimulus was actually negative. Instead of lowering rates, the feds— witless, as usual—often increased them or left them alone. But deficit spending went up an average of 2.2 percent of GDP each time. Later, the feds began to get the hang of it; every recession after 1958 was met with both more credit and more spending.
As the feds put in more money and credit, they found that more money and credit was needed. At the beginning of the period an extra $2 of credit would result in $1 of extra GDP. By the time the lights went out in 2007, it took about $6 of additional credit to produce a single extra dollar of output. Each new dollar of credit had to support not only the new growth the feds were after, but all the accumulated debt and mistakes from previous stimulus programs.
In the recession of 1973, Brookings Institution economist George Perry told Congress that "we should be pulling out all the stops" to fix it. The resulting fiscal and monetary stimulus program cost the U.S. 4 percent of GDP, according to an estimate by Jim Grant.
Future generations of Fed governors and Treasury secretaries found more stops...and, of course, pulled them out, too. In the micro recession of 2001, for example, the combined fiscal and monetary boost amounted to 7.2 percent of GDP, according to Grant.
The deceptions of the bubble epoque, 2001–2007, were enormous. The correction has been enormous, too. And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke. That this will result in more misery is a foregone conclusion—at least, here at the Daily Reckoning.
The measure of that misery, if our iron law holds, is how adamantly governments fight to keep their mismanagement going. Just looking at the numbers, the toll will be monstrous. All over the world, interest rates have been cut and budgets padded. France's deficit is running at 8 percent of GDP. England is running a deficit of more than 12 percent of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18 percent of GDP, according to Grant. As to spending, $ 13 trillion has been pledged...an amount equivalent to a full year's annual output of the United States.
This response is three times more (adjusted to today's dollars) than the U.S. spent to fight WWII. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression.
What will happen next?
We know no more about what will happen than the forecasters at the Federal Reserve or at the Dial-A-Psychic Hotline. Recently, a news item told us that the Dial-A-Psychic business was doing so well, the companies needed to hire new people to take the phone calls. "Will Train" said their help wanted ads. We thought about answering the ad. For as hard as we have tried, we have never been able to master the skill on our own.
Lacking clairvoyance, we take a guess...
Joel's Note: To commemorate the release of the second, updated edition of their book, Financial Reckoning Day: Fallout, we'll be featuring a selection of Bill and Addison's "guesses" over the next couple of weeks.
In the meantime, you can pick up your own copy of Bill and Addison's bestselling book right here, complete with additional chapters and updated charts to reflect the predicted collapse and, most importantly, where to go from here. Order Your Copy Here: Financial Reckoning Day: Fallout
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