10/09/09 London, England
“It was at Rome, on the 15th of October, 1764, as I sat musing amidst the ruins of the Capitol, while the barefooted friars were singing vespers in the Temple of Jupiter, that the idea of writing the decline and fall of the city first started to my mind.”
– Edward Gibbon
Warren Buffett famously says that people do not make money by betting against the US economy. But two years ago we decided to take a chance.
“We are short the United States of America,” we announced from the comfort and safety of our headquarters in London. “Sell its stocks. Sell its bonds. Sell its money. Sell its real estate. Sell the equity. Sell the debt. Sell everything.”
What we saw was an over-stretched empire getting ready to snap. But we were also allowing ourselves to be lazy. Rather than deconstruct the capital structure of the world’s largest economy, we decided to sell the whole damned thing.
All Hell broke loose in September 2008. Since then, US stocks have gone down about a third. Real estate too. Unemployment has doubled. Consumer prices are going down at the fastest rate since the ’50s. And the economy is in the worse recession since WWII.
Meanwhile, Americans’ per capita wealth has fallen from $172,000 in September from $212,000 two years earlier. And the UN reports that the quality of life in America has gone down too…from #5 on its list in 2000, it fell to #13 in 2007. No doubt it is below #20 now.
Buffett has lost billions betting on the US economy while our gold positions are handily up; gold was the most profitable major asset over the last ten years.
So you see, we were right; America was a sell two years ago.
And now it is the dollar that is falling. It’s gone down 12% in the last six months – a huge move for a major currency.
“Asia tries to slow dollar fall,” is the lead story in today’s Financial Times.
Today, a buck and forty-seven cents will buy you only 1 euro. Ten years ago, you could have gotten a euro for less than a single dollar. A falling dollar makes imports more expensive, say analysts…raising the cost of living in the homeland. But you wouldn’t know it from walking around on the streets of Miami or Las Vegas. You can get a house at 50% off its price three years ago. As for the breakfast special – for less than 3 euros you can get enough food to kill a Pakistani.
By European standards, America is cheap.
“Europeans again interested in Florida houses,” says a headline in The New York Times.
House prices are down 30% to 50%. The dollar is down about a third too. That makes the United States a bargain.
But is the United States of America about to become even cheaper?
One thing we were wrong about when we issued our ‘sell America’ call two years ago was US debt. Treasury bonds have resisted the general downward trend of things with the stars and stripes on them. Bonds have not gone down; they’ve gone up.
Private households are buying them for their retirements. Banks are buying them for risk-free profits. Speculators are buying them in anticipation of deflation.
David Rosenberg:
“The big story yesterday was the further massive $12 billion decline in outstanding consumer debt in August – the consensus was looking for an $8 billion contraction. This was the seventh month of debt retrenchment in a row. In other words, the tidal wave of the credit collapse continues unabated, and this is the primary reason why bond yields are still in a fundamental downtrend.
“Over the past year, consumers have run down their debt by a record $113 billion (and this does not include mortgages). This is an absolutely epic shift in household attitudes towards credit and discretionary spending.”
Americans are saving. And they’re buying US Treasury bonds. (More below…) But how safe is their money? Is it a good idea to buy US debt now?
On Wednesday, Latvia tried to raise a trivial amount of money. It offered $17 million worth of 6-month bonds. How likely is it that Latvia will default before Easter? We don’t know, but investors judged it not worth the risk. Not only did the bond auction failed, it failed with no bids.
That’s what happens when lenders lose faith in a government. They refuse to lend it money – except at high rates of interest. But the high rates of interest work like a noose on the neck of a cattle rustler. They block the vital flow of oxygen – not to mention breaking his neck.
Note that the US federal government is still functioning like an empire at the peak of its power. The Pentagon is still rustling up trouble all over the world – at a cost of trillions. US government employees are growing more numerous and richer – with twice the annual incomes of the private sector. And the Obama Administration – apparently unaware that the total unfunded debts and obligations of the federal government have soared to nearly $120 trillion – is considering new ways to get rid of cash.
Remarkably, investors still lend the US government money – asking only 4% annual yield on a 30-year loan. As for 91-day money, they practically give that to the feds for free; it sports only a yield of 0.066%.
This will surely be a point of puzzlement for the financial historian of the next century. It is certainly a point of puzzlement for us.
Yesterday, gold hit a new record at $1057. Doesn’t gold go up when inflation rates rise? And don’t bonds go down when inflation goes up?
So why are people buying bonds with such puny yields?
There is a lot of whispering in this market. Gold is trying to tell us something. Bonds are trying to tell us something. The dollar seems to have something on its mind too. Stocks are just babbling.
If gold is trying to signal that inflation is coming, the bond market is not paying attention. Bonds seem to be saying that it is deflation we should be worried about; but the stock market doesn’t seem to hear.
And there’s the dollar. The greenback is in the same choir with stocks and gold, as near as we can tell. They all seem to be chanting about inflation coming back.
But what if they’re all wrong?
Just look at what is going on in Washington, if you can bear it.
The feds have a budget that anticipates inflation and growth. Spending is supposed to remain flat until 2013. Tax receipts, which are no higher today than they were 10 years ago, are supposed to rise, gradually filling in the Grand Canyon of deficits. The number crunchers think we’re headed back to the Reagan years – when the tough-love policies of the Volcker Fed squeezed out inflation and created a real boom. Then, tax revenues rose 9% per year between 1984 and 1989.
How likely is that today? Not very. Instead, what is likely to unfold is a deflation story. Instead of staying flat, federal expenses are likely to rise as one failed stimulus gives way to another failed stimulus. Then, instead of going up, tax revenues will go down…digging an even grander canyon between out-go and income.
Then, or long before, there will be a panic out of bonds, the dollar, stocks – practically everything. Everything goes down!
At this point, the US will be in about the same situation as the Roman Empire as it approached retirement. Expenses kept rising. Rome had to pay the Blackwater-type military contractors of the era…in addition to keeping Roman mobs supplied with food stamps and unemployment benefits…while its tax base fell. Gradually, the empire lost the ability to defend itself.
When Edward Gibbon began his history of Rome’s decline and fall, Roman real estate had probably been in a bear market for at least 1300 years. Rome’s population fell from over a million to under 20,000. Politically, Italy had broken apart more than 1,000 years before Gibbon was born, and it wouldn’t be put back together again until nearly 100 years after he was dead.
It’s far too early to write the story of America’s decline and fall. That job will fall to some future historian, perhaps seated on the ruins of the Lincoln Memorial, wondering how people made such a mess of things.
Our guess is that he will come to the same conclusion we have: Stocks? Bonds? The dollar? Investors should have sold them all!
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Right, Gold it´s a barometer, we saw the same pattern in second day of January 2008 when Gold rise and rise, then september-october we saw the financial system crisis, then western governments tried to relive bank corpses like CityGroup Et. Al. This time we will see the fated financial system collapse. England is the prelude that will happen in US, problems will appear first with brits.
I’m starting to wonder if the Chinese Govt. has been manipulating the market to keep a lid on the gold price. This way they can get as much of the glittery stuff as possible without sending the price into the stratosphere. Additionally, their citizens are encouraged to buy gold, even though the price (numerically speaking) is at historic highs. If the worse came to the worst, they could always confiscate their peoples’s gold Roosevelt style.
Christ, Bill! Aren’t we just Merry Sunshine? Or is it Mary?
The United States Empire has ended.
The American Empire is dying, and I’m not feeling too good myself.
Better said, the U.S. empire is in it’s death throes. The actual collapse will be much worse for its people than that of the soviet empire, because greed and selfishness is all that was preached in the post-ww2 years.
I sincerely hope for the best for the american people and that they manage to survive and fight for the constitutional principles given by their founding fathers that are being taken away.
Good luck U.S.A.
An European
So, the deflation story is inflationary.
We’re all freakin’ doomed
When a starving TV store owner, trades a plasma TV that he has on stock, with a loaf of bread to feed his family, what do we have? Inflation on the price of bread, deflation on the price of plasma TVs or both? Or is it a realignment of values? Where does the mediator of those values stand in this case?
So where are we all moving?
I vote we all follow Bill around… to London and the Gold Balls, France at the money-pit mansion and Argentina next to his dust-eating cattle ranch.
Henri Pirenne (1862-1935), unlike Edward Gibbon (1737-1794), believed the fall of the Roman Empire (476) was not caused by the Germanic tribes, but by the Islamic expansion and conquests, which started in the 7th century. According to Pirenne, the Roman Empire did not fall with the Roman Emperor, but continued to chug along, weakened, but intact.
What should those of us do who are stuck in the US? What would have been a good investment for someone in the declining days of the Roman Empire?
That the US Empire is almost at an end is beyond question. What is in question is how it will end. Debt will undoubtedly be the cause but what I’m worried about is will there be a peaceful transition ala British to US or will the US Empire go out spitefully throwing their nukes around.
I’m thinking that it’s the latter. Seriously, look at the psycho’s in charge.
Really?
It’s called “peak America”. The USA has peaked and is on the downhill slide.
So, get ready for the post “peak America” new world economy. The liberals and the Keynesians (is that redundant?) are working hard to bring down the USA and accomplishing their fete admirably.
Bill.. you are the best read in the Universe. Mish is right.
Time for America to unilaterally create the gold backed AMERO and leave the investors of the world hanging like all the other banana republics have.
Just do it America!
Create a gold backed Amero? Backed by what? Banana peels?!? If the U.S. had sufficient gold bullion reserves the national debt problem wouldn’t exist to start with!
Wake up America. You are being robbed blind by banksters and their corrupt puppet politicians (Obama-fraud to start with).
Wake up and take action or you will kickly find yourself and your progeny (debt)enslaved for eternity!!!
The problem now is that the US, and Europe cannot offer real money. They have to offer paper money. Because the entire system is institutionally dependent on over-valuation. The entire system since 1967 has been about recklessness, selfishness, and impulsiveness.
And the societies that rectified their errors, during the Marxist age, are getting right, because they are turning away from the nonsense. But in the West, the leadership is populated with liberal Marxists like Barosso, Gordon Brown and Bernanke, whose entire philosophy is to give each careerist according to the mess that he created.
The West lost the plot, as a result of the Spoiled Brats Revolution in 1967. Intellectually everything has been on a downward curve since then.
I cannot post a comment pertaining the inexistence of such a thing as a “liberal marxist”. Go figure.
America is really doomed!
America is doomed? In its death throes? Its a big country with plenty of natural resources. Wall Street is doomed and in its death throes. America has the opportunity to build a new economy, it does not require the banking system to survive. New economies rise from the ashes of old ones. Gold is a place to start, but it is not the whole ball of wax. It is a standard for valuation of goods and services. Although olive oil was probably a good investment in the waning days of the Roman Empire. Incense for rituals became precious.
“apparently unaware that the total unfunded debts and obligations of the federal government have soared to nearly $120 trillion – is considering new ways to get rid of cash.”
Bill
Good column….where do you get the 120 trillion figure?
You see so many variants of this number and the general consensus figure is usually in the 50t area so I’d like to look into the 120t number which I have seen elsewhere al well.
Thanks
Zap
Personally, I’m more concerned with loss of liberties and proliferation of the prison-industrial complex than I am with the failure of Wall Street.
Bingo LAGirl.
Wall Street current model of greed that brought us to this mess can and should be substituted, but life in the States (and abroad) will only get better if a new, fairer and sainer model is implemented. We currently are not on that track
the roman empire was divided into a western empire and an eastern empire.The western roman empire ended C:500. The eastern roman empire (centered in Byzantium) continued until its destruction in the eleventh century by the crusaders. The eastern roman empire had successfully maintained a hard currency regeme, i.e. gold.
This talk of an American empire ending is a bit over-the-top isn’t it? The Pacific and Atlantic oceans are essentially “American Lakes” with the American Republic at the epicenter…we can’t help but flourish, granted this Depression-lite has to be worked out of the system first. When it is worked out those of us reading this now 11 years hence shall look at this current period as unpleasant but a speed bump on the continued rise of American hegemony. Rome had a few centuries to dictate policy with her Mediterrean “lake”. American has had, what…60+ years. We are still in the 2nd inning of a 9 inning game here.
I have nothing against America, much less against it’s people but…times move much faster now than 20 centuries ago… The mighty soviet bloc crumbled (from within) in 4 years. The U.S is currently in it’s 2nd year of fall… Wake me up in 2011/2012.
America may not end, just the empire. It is in its final stages at present. The international obligations our politicians have placed upon us cannot be sustained. We just don’t have the money to defend against phantom threats and meet all our domestic obligations. I’m not at all convinced that the country won’t break-up and divide into new countries along cultural lines. Time will tell. Some may think America “too big to fail”. Many thought the same about Goliath.
When the United States fails, I think an obvious conclusion will be a world wide nuclear war. Note past histories. It took WWII to get the USA out of the first Great Depression. Also, all nations use fiat currency-and when the world currency goes down-i.e. the dollar, all others will get burned too.