07/29/09 London, England
Despite what you are most likely reading in the press, the folks getting bailout money are pretty sharp. They’re very good at gaming the system.
More about that in a minute. First, the Dow went nowhere yesterday. Gold fell $14 to $939. And Newsweek magazine announced, “The Recession is Over.” Newsweek hedged its bets; adding that the recovery won’t be a piece of cake.
Elsewhere in the news is word that the housing bust is over. The papers are reporting the first gain in housing prices in three years – based on the latest Case-Shiller numbers. Hallelujah…right?
Hold on. There’s too much statistical noise in the monthly figures. They just don’t mean anything. A better measure is the annual trend. The Federal Housing Finance Agency says its index for May registered the smallest drop in 10 months…but is still headed down. (More on why it is destined to continue going down…later in the week.)
Back to the stimulus and how it works…
An article in today’s International Herald Tribune tells the story of one area in Tennessee that has gotten stimulus money.
“The cash that salvaged a county,” says the headline. Perry County, southwest of Nashville, must be one of those places you don’t want to stop when you’re driving across the country. With 25% unemployment and no significant industry, it sounds dreadful – at least from an economic point of view. It might be a nice place to live – if you don’t have to work for a living.
So the county honchos figured the county needed a little stimulus. They managed to lay their hands on cash being passed out by the feds. It doesn’t seem to bother anyone that the money belongs to someone else. Nor does the fact that it is now being frittered away in a bunch of make-work projects that nobody wanted to pay for even when they had some money. Nor that the stimulus-assisted businesses of Perry County now have an unfair advantage over their honest competitors in other parts of the state.
The Armstrong Pie Company, for example, used taxpayers’ money to expand: “New workers [hired with stimulus money] have helped the company triple its pie production and expand its reach through central Tennessee.”
A quick question: what happened to the pie companies that lost market share to Armstrong? And another: how is the economy any better off by stimulating one pie company to make more pies at the expense of other pie companies? And a final one: even if total pie consumption goes up – a larger pie! – where’s the benefit?
The whole thing is a scam!
Talk about scams… Elliot Spitzer is back in the news. Speaking to MSNBC, the disgraced crime-fighter described the Fed as a “Ponzi scheme”:
“You look at the governing structure of the New York [Federal Reserve], it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy.
“The Fed needs to be examined carefully.”
Poor Spitzer resigned as governor of New York in March 2008. At the time, he had been warning about sub-prime mortgage loans. Some think the feds found a way to silence him – by revealing that he had a bad habit…$1,000-an-hour hookers.
Investigative reporters maintain that federal enforcement officials had the option of leaving Spitzer out of the news. Instead, the Bush Administration Justice Department decided to out Spitzer.
The former NY Attorney General had this to say about regulatory reform:
“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”
Stimulus is a scam – on both sides of the Atlantic.
In Europe the banks have a good hustle going – almost as good as in the United States. They borrow money from the European central bank and then lend it back to the government.
The ECB loans money at low rates to the banks – hoping to encourage consumer and business lending. In June, for example, the banks borrowed 442 billion euros at a fixed interest rate of 1%. But lending to business and households is at its lowest level since record-keeping began – and slowing down, says James Saft in the International Herald Tribune.
In May, Europe’s money supply grew at a 3.5% annual rate, he notes. But lending to the private sector in June slowed to 1.5% from 1.8% a month earlier. Loans to nonfinancial corporations actually fell in May, while lending to households grew at less than 1%.
If they didn’t lend the money out…what did they do with it? Well, they did lend it – back to the people they borrowed it from. In June the banks bought $75 billion worth of government bonds and lent nearly $30 billion directly to European governments.
Of course, the banks are doing well. They earn money without taking the risk of lending to the real economy. But what good does it do? None.
And here’s a letter from a Dear Reader:
“It is about five years since I first read the DR and agreed with your recommended ‘trade of the decade.’ At that time it was clear to anyone who saw the busts of 1974, 1991 and 2001 that the next one was imminent, even though politicians, ratings agencies, financial services and real estate company directors and mainstream financial journalists were all ‘asleep at the wheel.’
“But were they? Maybe they saw it too but it did not suit them to take measures to prepare for the bust. After all, those in positions of power and influence are using other peoples’ money to feed their ambitions and egos, and would probably have made very different calls had their own money been at risk on such a huge scale.
“Fortunately, with my conviction stiffened by your comments in the DR, I sold down all the holdings in my family property investment company in the UK between 2004 and 2007, repaying £18m of bank debt in the process. 50% of the proceeds went into gold and silver. We have not made any money in the last year but this strategy has resulted in no loss in the credit crunch…yet!
“So well done, Bill, on giving the baby boomer generation a lifeline in the form of sound common sense comment – and as you remind us, it is free!
“Keep up the good work. I still await Gold:Dow – 1:1 although I may not live that long!”
Ah, there’s the rub…we may not live long enough…
Surely the Dow will trade at a p/e below 8… And gold will trade at one times the Dow.
But when?
As we told the group in Vancouver, it will happen…but there could be a whole lot of depression before it happens. Depression could drive down gold prices…and discourage gold bulls. It could ruin stock portfolios…bankrupt pension and insurance funds…and put millions more people out of work.
We don’t doubt that the feds have the power to destroy the currency and create inflation. We doubt that they can do it in a controlled, gentle way. As the depression worsens and lingers…they’ll become more and more desperate to raise inflation rates. They buy more bonds. They increase the money supply. They’ll become more and more reckless as prices fail to reaction.
Then…inflation rates won’t go up gradually…they’ll go up all of a sudden…surprising almost everyone. Holders of dollar bonds – notably the Chinese and Japanese – will panic and sell. All Hell will break loose.
Will it happen in our lifetimes? Depends on how long we live…
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 Reckoning. Dice 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.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
>> Of course, the banks are doing well. They earn money without taking the risk of lending to the real economy. But what good does it do? None. <<
However, there might be some “good” in it. The ECB stimulus enables banks to keep buying bonds from EU governments, that otherwise’ld have had difficulties in rolling over their debts, like, say, Italy. So, this scam is keeping the circus going, and guanrantee low interest rates to stay.
These banks can hardly object to puny interest rate levels, as the ECB might scrunch them, if they did. Maybe, they’re both in it, a perfect double bind, and a win-win both ways.
I always enjoy your insightful articles, Mr. Bonner.
“Poor Spitzer resigned as governor of New York in March 2008. At the time, he had been warning about sub-prime mortgage loans. Some think the feds found a way to silence him – by revealing that he had a bad habit…$1,000-an-hour hookers.”
This is the first source I’ve found with that piece of information, interesting. If there is a conspiracy to protect the crooked Fed, should Bonner be looking over his shoulder? LOL
Poor Spitzer, he didn’t feed a need to watch his back while he took on powerful banks, insurance companies, and brokerages. If he had been careful, he might have slowed the corruption a bit, not much though. Most companies escaped with fines under his watch.
**feel a need**
When push comes to shove all women are hookers. So who cares?
If it is true, what you wrote earlier, that the feds restrained themselves from opening the gates as much as they had wanted resp. as they had intended to do (because Marc Faber and other voices of criticism) why should they start accelerating their idiocies when prices fall (deflation)? The point of their monetary policies wasn’t to save the economy but to save the financial system in the first place which they think they achieved.
Bill,
while I agree with you generally that stimulus is a scam, I think stimulus money could be actually useful if arranged properly. What I mean is that instead of wasting the money on pie factories etc., stimulus money should be spent on projects that actually make a difference. I know what you are thinking about my last sentence and therefore I need to give you an example.
The era with value systems based on grabbing as many resources as possible to become “wealthy” as compared to the poor chaps from whom you took their wealth will end. I am not a communist or a socialist, and don’t need to be any of the other curse words in order to think and feel that a society that values scarcity as wealth is doomed in the long run. What makes a community strong is the collectively added value that makes the whole community more than just the collection of its parts. But a community where 1% of the members own 90% of its wealth can not possibly be strong, and will be doomed. When wealth is measured as a contrasting figure against poverty and not a general measure of well-being, the community will be doomed because the key ingredient for its strength is missing.
The only meaningful way I can see for the stimulus money to be spent is to change the society’s value systems to value community as a whole, not just some of its members who have been successful at grabbing resources. And although this sounds obscure, it is possible to come up with projects that fit this criteria. I know this because I am working on projects like these and am planning to apply for some of the stimulus money. But pie factories etc. – I completely agree that all that is just BS. It is very unfortunate that most of the stimulus money is being spent this way or even in way more stupid ways. The fact is that the people who put that money out there have absolutely no clue how it should be spent to make a difference. Very unfortunate.
Tarp money, Stimulus plans, takeover of auto industry, banks, housing, healthcare . . . .
In the previous post, Ik says, “What I mean is that instead of wasting the money on pie factories etc., stimulus money should be spent on projects that actually make a difference.”
Then goes on to say “It is very unfortunate that most of the stimulus money is being spent this way or even in way more stupid ways.”
LAdies and gents – that is the whole point: the corruption is so expansive and invasive, and permeates every crack of our economic and political landscape, that we have become, by default, a veritble 1st World Banana Republic.
The only power we have – and I mean ONLY POWER – is when we call our representatives and rattle their cages to no end, until they shiver at the thought of being thrown out of office and losing their power. This is the equivalent of waving the crack in front of a crackhead -the politicians will do ANYTHING to keep that high.
That is what America has come to: unless we rise up with our anger and discontent, we will be steamrolled.
And Spitzer was right. Google “Secrets of the Federal Reserve.” Or “The Creature from Jekly Island”.
You will never look at our power structure the same again.
Turns out, our whole country, politically and economically, is controlled by the Fed. But who is the Fed?
Turns out, a cartel of international bankers that goes all the way back to 1773 and the Rothschild family of Hanburg, Germany.
See for yourself. Look it up.
I will immediately grasp your rss feed as I can’t find your email subscription hyperlink or newsletter service. Do you have any? Please permit me recognise in order that I may just subscribe. Thanks.