Bill Bonner

The fixes are more costly than the problems.

“Systems of problem solving develop greater complexity and higher costs over long periods… the destructive potential is evident in historical cases where increased expenditures on socioeconomic complexity reached diminishing returns, and ultimately, in some instances, negative returns…where [the system] starts to become vulnerable to collapse”

Joseph Tainter – The Collapse of Complex Societies

We have ridiculed bailouts. We have railed against them. It did not seem fair to pay off bankers with the sweat of labor’s brow. With privilege comes responsibility. It was the privilege of the banker to stay at the Four Seasons while lending someone else’s money to the Greeks. His bet failed. Now, it is his responsibility to take his beating like a man.

But today, we appeal neither to the dear reader’s sense of humor nor to his sense of justice. We appeal to his sense of futility. As W. C. Fields put it: ‘If at first you don’t succeed, try, again. Then give up. No sense in being a damned fool about it.’

Little appreciated in the economic literature are the benefits of giving up and letting things collapse. This is a pity. While successful fixes are celebrated, it is to the failed fixes that we owe much of our contentment and our progress.

Joseph Tainter explains, for example, that while the first fix may be beneficial, later ones often produce negative returns. Then, you’re better off letting the whole system collapse. By examining ancient human bones, for example, he reports that nutritional levels actually improved, for most people, after the collapse of the Roman Empire.

But the financial history of the last 20 years is a story of one successful fix after another, each grander than the last. The Asian debt crisis and the LTCM crisis were solved at trivial cost. But, trailing each solution, like shame following indiscretion, was a new problem. Two years after the Asian crisis came the dot.com blow-up. Then, the cause of the problem of sub-prime debt in 2007 was the solution to the problem of the post dot-com debt-driven recession of 2001. Bailing out the US economy with low interest rates begat a bubble in housing. Within 5 years, banks all over the world found themselves with too much mortgage debt and too little assurance of getting paid back. This problem was solved by the bank bailouts of 2008-2009. The bailout of Bear Stearns cost $29 billion. The TARP program cost more than $700 billion.

Soon after, bad bets in the banking sector became bad debts in the public sector. Now, the bailers themselves are sinking. In particular, Europe’s seaside states are taking on water. This led to the biggest bailout ever –Euro-TARP – at a cost of $1 trillion.

As yet little noticed by investors is the gaping hole in America’s hull. James Davidson reports that while the Greeks need to raise an amount equal to more than 20% of their GDP this year, the US funding requirement is more than 32% — more than any of Europe’s storm toss’d states.

Each story has its unique twists. But the outcome is always the same: the world’s total debt increases every time. And now, the returns on solutions are negative.

Bob Janjuah, chief strategist at RBS, sees where this leads:

“We are trapped in some horrendous Keynesian/monetarist nightmare, where policymakers, aided/abetted/advised by their buddies in the media, in the lobbyist cabal and in financial system, have YET AGAIN decided to go down the route which merely delays the problem/pushes it down the road, but which virtually guarantees that when the NEXT bubble collapses…there is NO pleasant way back.”

With so many frightful successes we wonder if it isn’t time to give up. So, we look south of the Rio de la Plata for inspiration. When it comes to financial failure, Argentina is a model of success. In 2001, instead of getting a successful bailout, it collapsed — defaulting on nearly $100 billion of debt, the largest default ever.

Judging from a recent visit, the world did not come to an end. People took the streets, beat on pots and pans, and lost 2/3rds of their savings. By some accounts, the middle class was virtually wiped out. But life went on. And today, life in Buenos Aires seems about as agreeable as ever.

And last week, Argentina celebrated a happy milestone. The country gave its creditors a last chance to re-coup some of their losses. They could swap their old Argentine paper for new Argentine paper – and recover about 30 cents on the dollar. Take it or leave, said the Kirschner government. Apparently, enough creditors took the offer to permit the nation to re-enter the global debt markets, we will know for sure in a few days. Soon, the Argentines may be able to repeat their mistakes.

Compared to the bailouts, the Argentines’ failed fix looks more and more like a success.

Bill Bonner
for 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. 

  • Max Power

    how much money did you make today harry??

  • Bill Bonner’s Biggest Fan

    BB quoting the ever prescient Joseph Tainter… i’m not sure if there are two writers with a better grasp on what history can teach us than Joseph Tainter and BB

  • reb

    I would think that declaring the insolvency of the dollar would have much greater impact on the world economy than the action in Argentina.

  • Eamon

    Well, perhaps an adjustment of our perspective might prove helpful. Neither the men behind the curtain nor their principal agents are good-willed bunglers. This economic annihilation is no accident. Indeed, it is the main tool for the utter temporal destruction of the Western, formerly-Christian world. We are meant to be so caught up with merely surviving that we are oblivious to the fact that our infinitely-more-important spiritual interests have also suffered complete ruination. Temporally, we cannot ever be renewed until the Money Masters are cast out, but we will never have the light and strength to put our temporal house in order until our minds and hearts are purified.

  • Curmudgeon

    Bailouts of sovereign nations involves fiat money with interest paid to international bankers. The bankers create the money by a ledger entry then charge interest on the principal. The interest is never created, it does not exist, and the loan can never be paid off. The debt is into perpetuity and bankers receive interest forever. The contract can never be fulfilled and is an act of fraud. Contracts based upon fraud are void from their inception.

    The fiat money is a way of government and international bankers stealing from the populous by inflation.

  • Pancho

    Point of order, Mr. Bonner. Kirchner.

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