A Doozy of a Depression

Remember our dictum: the force of a correction is equal and opposite to the deception that preceded it. As we looked out over the absurd hallucinations, delusions and lies of the Bubble Years – oh, those happy days! – we warned that the coming correction “would be a doozy.”

And a doozy it is.

‘Doozy’ is a technical term we feral economists use. “Depression” is what most people call it.

“Slump worst for 50 years,” is the big headline in the Financial Times over the weekend.

“Data reveal recession worst than feared.”

And the full weight of it has yet to fall upon the economy. A correction takes times…especially when it is not merely a cyclical recession, but a structural depression. The whole structure of the world’s economy is being reshaped. The banking system is insolvent. Thousands of businesses are broke. Millions of households are upside down financially. Joblessness is rising into the tens of millions and may reach 100 million worldwide.

“One of the severest downturns in generations,” said U.K. Chancellor Alistair Darling.

The downturn is going to be tough for almost everyone, almost everywhere. The French have to learn to live with fewer tourists at home and fewer bottles of champagne exported abroad. The English have to learn to with less revenue from financial services. The Chinese – and Asians generally – have to figure out what to do with all those TV sets that junk Americans aren’t buying anymore. Arabs wonder what to do with their oil.

Americans, meanwhile, have to figure out how to get by in a world where strangers aren’t so kind. You’ll remember what made the world go round this last quarter century. Those nice strangers made things and shipped them to Americans. The Americans paid for them with I.O.Us. The foreigners were so accommodating, they never asked for payment. Instead, the I.O.U.s just piled up in their vaults.

All that has come to an end. Trade is collapsing. And now it’s every man for himself. Sauve qui peut. Americans aren’t buying. Chinese aren’t selling. So far, the strangers are still being nice about America’s I.O.U.s. They’re politely holding onto their Treasury bonds and not insisting on payment. But they’ve made it clear that they’re not exactly looking for a lot more of them…not when the value of America’s collateral is falling so sharply. And they’ve made it clear that if the United States lets these I.O.U.s go down anymore, they won’t be very happy about it.

But what we’re wondering is whether we should add a corollary to our dictum: Yes, the force of a correction is equal and opposite to the deception that preceded it. And the measures taken to stop the correction will be just as absurd as the crackpot ideas that got the economy into trouble in the first place.

We don’t know what particular good this insight does for us. But it just shows that the show isn’t over. One hallucination may have run its course, but there are plenty more. And they have consequences too.

What the world waits to see is how long it takes these consequences to reveal themselves. No one doubts, broadly, what the consequences will be. Governments are doing their level best to create inflation. Sooner or later, they’ll get the hang of it. But when? How?

That’s the thing…no one knows. The depression is taking the stuffing out of prices. Trillions in nominal purchasing power have disappeared. Workers have been laid off by the millions. There are too many Starbucks…too many malls…too many factories. All these things are dragging down prices…even while the feds inflate the money supply. Where will the turnaround come? When will prices stop going down and begin going up?

No one knows…

*** We have come back to Nicaragua – for the first time in three years. It’s the kids’ winter vacation. But now, we only have one kid with us – Edward, 15 years old. All the others aren’t kids anymore. They’re away at college…or working.

Even Elizabeth is away at college. She is studying at the Sorbonne and can’t join us until next week. Until next week, it is just us…the sea…the sun…the tropics…and all that goes with it.

Right now, we are sitting on the veranda of the Rancho Santana clubhouse. The sun is bright and hot over the ocean…a sea breeze cools the air…the palm trees sway…the waves crash onto the shore, spinning the surfer’s head over heels.

Eat your hearts out, dear readers…

“What’s this?” Edward was pointing at a strange animal that looked like a giant cockroach.

“It’s a bug,” his father, the naturalist, answered.

Darwin seemed to have no natural enemies last week. It was the 200th anniversary of Darwin’s birth. His theory was blessed in every account we saw. Everyone was on his side. As a result his ideas reproduced and multiplied until they were in practically every newspaper.

Commentators saw Darwinism at work everywhere. In the current worldwide financial meltdown, for example, they thought they saw not the beneficent ‘invisible hand’ of Adam Smith, but the bloody claw of natural selection. “It’s the survival of the fittest at work,” said one opinionist.

Ideas, like rats, need predators. Otherwise, they get out of hand. Seeing none to cull the weak parts of Darwin’s pensee, we will do it ourselves.

There are two parts to Darwinism as it is popularly understood. One part is based on observation – at which Darwin was a master. The other is extrapolation – not so much on Darwin’s part, but his followers. The problem is that the part that is probably correct is child-like and obvious. And the part that is more grown up is nothing more than empty guesswork. He notes that some animals are better suited to their environments than others. If a polar bear were suddenly born to a hog here in Nicaragua, it probably wouldn’t last long. On the other hand, if a mutation produced a naked polar bear at the North Pole, it wouldn’t stand much of a chance either. Both would probably perish, leaving no heirs or assigns…and thus removing from the gene pool whatever crazy aberration that created them. Some things survive and reproduce; some don’t. The essence of Darwinism is nothing more than that simple-minded observation, as near as we can tell.

But the application of this notion far and wide is a threat to the intellectual eco-system. Because of it, people think they know a lot more than they actually know. To the question, why is the polar bear white, rather than black, they have a ready answer: because evolution made him white. But this is no answer at all…it just postpones thinking until the next question: why did evolution make him that way?

Then, the guesses begin: because he can blend into the snowy background and sneak up on seals. Oh. They tell us, for example, that he covers his nose – which is black – with his paw, so he can get closer without being spotted.

Smart bear. But you’d think if evolution could turn his whole body black it could whitewash his nose too. And what about the seals? Are they morons? You’d think those that couldn’t tell the difference between a bear with his paw over his nose and an iceberg would have been weeded out by now. Besides, why aren’t seals white?

Of course, the biologists and know-it-alls have their answers, but they are just putting 2 and 2 together in the clumsiest way. They really don’t know why polar bears are white. All they know is that nature hasn’t exterminated the white polar bears – yet.

Many of these deep thinkers also believe that Darwin proved that God didn’t create man. Instead, man arose by the process of evolution, they say, one accidental step at a time. Man is the product of pure chance, they claim. As if God couldn’t make it look like an accident, if He wanted!

Enjoy your President’s Day,

Bill Bonner
The Daily Reckoning