Bill Bonner

Sweden to GM/Saab: Drop Dead!

Finally, a nation with a little backbone…a little integrity…a little good sense.

And guess what, it’s that dreary socialist refrigerator – Sweden. Asked to bailout its GM-owned automaker, Saab, the country’s Prime Minister just said ‘no.’ Good for him…

“Voters did not pick me to buy loss-making car factories,” he explained.

But it’s a time of contradictions, paradoxes and oxymorons. Up is down. Right is left. In is out. Good is bad.

The socialists are the only ones protecting the free market, now. Americans are scuttling it with every chance they get. The stocks of capitalist companies are going up in communist China…but in America, they’re going down. Since November, the Shanghai index has outperformed the S&P by 75%.

And back in the United States, projects that were considered too marginal to justify spending money a year ago are now thought to be indispensable. And the IOUs of the biggest spendthrift on the planet are the hottest item on the market. Ten-year Treasury notes are now priced to yield only 2.99% – just as the Obama administration announces a $1.75 trillion budget deficit.

Even crooks and criminals are flummoxed. A guy walks into a big downtown bank. He points a gun at the teller and says: “Give me all your money.”

The teller replies calmly: “You don’t understand. This is a bank. We don’t have any money.”

The only people with money now are the people who never earned any…the people who print the stuff.

But back to China:

All the things that used to convince pundits that China was hopeless now persuade them that it’s the hope of the entire world. “China’s autocrats can announce a stimulus – and get on with it,” writes John Authers, admiringly, in the Financial Times. They don’t have to beg and bicker with the dunderheads in Congress. They can just do it.

And China’s banks are more solid, too. “China’s are in good health, with both loans and deposits rising. American counterparts are not.”

But our irony cup runneth over when we read Auther’s next comparison:

“Finally, there is confidence in officialdom.” The markets have lost confidence in Tim Geithner and the rest of the feds, he says. “Meanwhile, hope…is pinned on the audacity of Chinese officialdom and is ability somehow to keep their economy on course.”

Everything is so topsy-turvy, dear reader, we think we’re going to throw up.

The whole world now turns its weary eyes…not to that bastion of free-market leadership, the United States of America, but to a country that has only had a quasi-free-market in goods and services for less than a quarter century…a country still run by Maoists. It is to them that we supposedly look to save the world economy!

What a great time to be alive! Practically every headline makes us want to reach for a drink. And we’re finally getting to see something that we only read about in the history books…yes, we’re going to find out what makes a depression so great.

Bankruptcy filings in the United States were up 37% in February, over the year before. House sales plunge, say the papers. Auto sales plunge, say the websites. Joblessness soars, says this morning’s news. Corporate America laid off 158% more workers this February, as compared to a year ago. Since the beginning of the year, layoffs are running 191% ahead of the same period in 2008. Almost a half a million people have lost their jobs so far this year…and there are 10 months left to go.

The Dow gained 149 points yesterday. Our “Crash Alert” flag is still flying…but the Dow is probably going to rally for the next few days.

Gold, meanwhile, continues its correction. It fell to $906 yesterday. Goldbugs, don’t despair. Have faith. The commies aren’t going to pull the world economy out of its tailspin. The bailouts and boondoggles in the West aren’t going to do it either. Buying gold is still the smartest long-term decision that you can make for your portfolio…

Remember, this is a depression, not a recession. Both America and Chinese economies have lived in a grand, symbiotic delusion for the last 10 years. America believed it could let the Chinese do all the sweating and saving. China believed it could make money by selling to people who couldn’t afford to buy. Now, both economies need perestroika. Both need to be refocused. China will turn its economy towards domestic consumption…and military spending, no doubt. America will have to accept a lower standard of living with fewer imports.

These adjustments take time. The last time the world went through a depression was in the ’30s. Every major economy – except Britain – fell backwards…all of them losing more than 20% of GDP. It took three years before they hit the bottom. Then, some bounced back quickly – Germany and Japan – thanks to military spending. Others – the United States and France – barely bounced at all.

*** More bubbles ready to burst. In the United States, public pension systems are under-funded by about $1 trillion. Firemen, teachers, policemen, municipal workers…state bureaucrats. Every one of them is looking to the feds for a bailout.

Oh…and AIG is getting its FOURTH go-round of rescue money. The fifth one will come around soon enough. And there’s Detroit…California…student loans…commercial loans…the banks…the homeowners…the unemployed…the sick…the halt…the lame…the blind…the plain stupid.

Where will the feds get the money?

They’ll continue to borrow it. Then, when lenders get tired of lending, they’ll print it. That’s when gold will really fly…but that might not be for another few years.

For the moment, lenders like buying U.S. government IOUs. It’s the only thing they feel they can trust. One way or another, they’re sure Uncle Sam will make his payments.

But, as we’ve been saying, we live in an upside down world. If and when the fear subsides, investors are going to look elsewhere for yield. Prices will begin to rise again. So will yields. So, the U.S. government will have to pay more to borrow. Thus, as things get better for the economy…they will get worse for the U.S. Treasury. It will find itself with higher and higher interest costs…and no way to pay them.

What will they do? Throw up their hands and admit they can’t make their payments? Or print money? We’ve already made our guess; they will do the wrong thing.

*** What is the right thing to do?

“Leave it to time to affect a permanent cure by the slow process of adapting the structure of production…” said Friedrich Hayek.

“Depressions are not simply evils, which we might attempt to suppress,” added Schumpeter, “but forms of something which has to be done, namely, adjustment to change.”

The economy needs to be restructured. The dead wood needs to be burnt off. But the feds are trying to stop the fire.

Alas, said Schumpeter, “most of what would be effective in remedying a depression would be equally effective in preventing this adjustment.”

Bradford Delong explains:

“…certain investments should not have been made. The best that can be done in such circumstances is to shut down those production processes that turned out to have been based on assumptions about future demands that did not come to pass. The liquidation of such investments and businesses releases factors of production from unprofitable uses; they can then be redeployed in other sectors of the technologically dynamic economy. Without the initial liquidation the redeployment cannot take place. And, said Hayek, depressions are this process of liquidation and preparation for the redeployment of resources.

“As Schumpeter put it, policy does not allow a choice between depression and no depression, but between depression now and a worse depression later: ‘inflation pushed far enough [would] undoubtedly turn depression into the sham prosperity so familiar from European postwar experience, [and]… would, in the end, lead to a collapse worse than the one it was called in to remedy.’ For ‘recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead.’

Until tomorrow,

Bill Bonner
The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • http://www.newgeography.com/users/kenstremsky Ken Stremsky

    I discuss dealing with the financial crisis and other topics on http://www.newgeography.com/users/kenstremsky

    The federal government and state governments should stop taxing interest from savings accounts, dividends, capital gains, and estates.

    It is NOT about government revenues.

    It is about jobs in the private sector.

    The highest federal income tax rate on individuals should not be greater than 15 percent.

    The highest federal corporate tax rate should not be greater than 15 percent.

    My website is http://www.myspace.com/kennethstremsky

  • Paul

    It seems logical to me that if and when the Dollar reaches zero value because of the forces of hyperinflation, the Feds will declare bankrupcy and zero the debt, thus creating a new coinage and monetary system. Possibly a new world currency will be the outcome. Could this be why the monetizing of our debt is “no big deal”?

  • http://Ziggo A.D. Pereboom

    I agree with Paul: in the endgame, possibly after countless civil wars and WorldwarIII (reducing human population on earth by half), there will be one global currency…My hope and dream…but still so far, so far away!
    So, for the next ten years: protect yourself and your beloved ones, in a period that mankind, our planet, will form the fundamentals for a better and greener future, in which not money will be the key, but simply all life on our beautiful earth will be key in all we do!

  • Tax Man

    Dude, didn’t warren buffet complain about that a few years ago. No tax on dividends or capital gains = extremely rich people not paying any taxes at all. Is that fair? Clearly tax system need to change to favor those that are productive, not those that are NOT productive. But I don’t think that that is the answer.

  • http://greenearthoneonta.com dean roberts

    Hi Bill
    As usual this article is insightful and well written.If I can get our local daily newspaper (the Oneonta Star 16,000)to run it every day would that be alright with you?
    thanks
    Dean

  • Helvetica

    The Chinese stimulus plan is ambitious, and certainly their governing style allows for less debate than in the US, but will China’s plan be enough to keep their growth at 8%? It seems like they will be affected by depressed US markets no matter what, given their reliance on exports. This news clip has some perspectives from Chinese citizens, and they sound a lot like American citizens being interviewed about the economy.

    http://www.newsy.com/videos/china_pushes_for_growth/

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