Bill Bonner

For the shepherds have become stupid and have not sought the LORD; therefore they have not prospered, and all their flock is scattered (Jer 10:21).

The unfaithful shepherds…and the jackasses…

A big day up yesterday. The Dow rose 275 points. Gold dropped $55.

What’s the matter with investors? They should be selling gold AND stocks.

Why? Because we’re in a Great Correction. Not a boom. Not a recovery. Not anything except a Great Correction.

What does that mean? It means Mr. Market is correcting the errors of the past. We don’t know exactly which errors — it depends on how rambunctious he gets — but we know we won’t ever go back to where we were in 2007. We have to go on. Forward. Adelante, to give it a certain Latin sashay.

But where to?

C’mon…you don’t seriously think we know, do you? Of course, we don’t…nobody knows the future. But just wait until Mr. Obama gets on the TV screen. He’ll tell us where he wants us to go.

We’d like to tell him where to go too…

But, heck, he’s the POTUS. We’re just a lowly scribe…a miserable molder of mediocre memes. A financial Jeremiah…always warning…worrying…predicting doom and gloom.

But wait. Didn’t we tell you the bubble would pop in 2007? Didn’t we tell you that real estate would go down 30% or more? Didn’t we warn you to get out of stocks and into gold 10 years ago?

Sometimes right. Sometimes wrong. Always in doubt.

But what we see now is an unfaithful shepherd…

A central bank that has turned its back on the currency it is meant to protect…

A government that has betrayed the principles it was set up to defend…

And an economy that has turned into a zombie. It’s somewhere between alive and dead… Pretending to be a capitalist system…but a capitalist looking for a handout.

Consumer confidence numbers continue to sink…

Housing prices continue to fall…while housing starts bump along at depression levels…

More and more people are moving into long-stay motels…more and more are on food stamps.

An ABC poll tells us that Obama’s DIS-approval rating has increased to 60%…with most Americans convinced that his jobs proposal (to be announced today) will not work.

The output gap — roughly the difference between what the economy should produce and what it actually does produce — is at 7%. It’s never been this high at this stage of the business cycle.

Had enough?

Well, it gets worse. Because the effect of the unfaithful shepherds’ bailouts has been to shift more and more wealth to the people who were wealthiest already. Business profits — especially in the financial sector — soared. Wages fell.

And now, even old people can’t pay their mortgages…so they’re stuck in jobs, leaving the young with nothing to do. The youth unemployment rate is one in four; it’s a wonder they are aren’t burning cars and rampaging through cities. But they live in the suburbs and probably can’t afford the bus fare to get into town.

This is becoming a dangerous situation. Former Labor Secretary Robert Reich explains:

The 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics.

During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Starting in the late 1970s, the middle class began to weaken… The middle class nonetheless continued to spend, at first enabled by the flow of women into the work force. (In the 1960s only 12 percent of married women with young children were working for pay; by the late 1990s, 55 percent were.) When that way of life stopped generating enough income, Americans went deeper into debt. From the late 1990s to 2007, the typical household debt grew by a third. As long as housing values continued to rise it seemed a painless way to get additional money.

Eventually, of course, the bubble burst. That ended the middle class’s remarkable ability to keep spending in the face of near stagnant wages. The puzzle is why so little has been done in the last 40 years to help deal with the subversion of the economic power of the middle class. With the continued gains from economic growth, the nation could have enabled more people to become problem solvers and innovators — through early childhood education, better public schools, expanded access to higher education and more efficient public transportation.

Of course, Reich goes on to misunderstand everything. He thinks the rich got richer because government was not ambitious enough. The real problem was that the rich were able to use ambitious, activist government to their own ends.

The unfaithful shepherds rigged the game in their favor.

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. 

  • Scott Walker & the dread elephants

    Ignore Robert Reich at your peril.

  • Alan Osborn

    Ignore Jeremiah at your peril . . . :- )

  • c.l.shannon

    although one might expect a little ‘culling of the herd’ of the rich, they will, for the most part, do very well during this great correction.

    at the other end, however, there exists a rather large group of our fellow citizens who will never hold a job of comparable worth to their pre-crisis employment. There are a large number who were doing reasonable well who will bump along the bottom of the economic fish tank barely staying housed and fed till then end of their days.

    and, worse yet, a large number of people who never did work much with a good new excuse to never work at all that we will have to find a way to keep (and keep in check).

  • Andrew B.

    Some sell gold to pay their way out of debt… but I doubt they have any. Some people that are not in debt, like me, buy gold because as you said, no one knows what’s coming. And I’d rather have return-of-anything than maybe-some-return-on-something (if that makes any sense).

  • Man from GB

    “The unfaithful shepherds rigged the game in their favor.”

    THE issue of today in a nuttshell. Why is it that more don’t see this is the biggest problem we face? Instead they wast all their time obsessing over healthcare, education, and other secondary issues.

  • Fred Gibson

    The question that troubles me most, is: WHY? Why did the super wealthy let the economy get in such a dreadful state? Why didn’t the middle class fight back? Why doesn’t anybody seem to care what happened if they aren’t one of the ones who are currently suffering? Why is ther so much political support for the very people who caused the problem in the first place? Why doesn’t anyone seem to know how to really solve the problem? Why aren’t the mainstream opinion leaders trying to explain the facts instead of seeming to be wrapped up in all sorts of politically polarizing reteric? Why, Why, Why?!!! Why doesn’t anybody seem interested in listening to the public any more? The wealthy seemed to be doing better than they ever had in history. Why weren’t they satisfied? Above all, What should we do about it?

  • http://www.goldsmart.co.nz Anita

    Great article.

    “Because we’re in a Great Correction. Not a boom. Not a recovery. Not anything except a Great Correction.”

    Correction in other words means, time for shopping. For instance, if you think gold prices are high, wait until couple of months after Mister Ben S. Bernanke have injected more fiat currency into the system.

  • Barnaby

    What I can’t understand is why Bill still refers to “Mr Market” as if there was anything organic left.

    Mr Market is dead, in his place is a zombie.

    Look, the Fed outright acknowledges that it manipulates bonds, so why is it a stretch to think that they are also into stocks and PMs?

    We all know they are, it’s just that some refuse to discuss it in public.

    Admit it, the Fed/Government/banking elite has long since rigged the whole enchilada.

    Why pretend otherwise?

  • Rusty Fish

    “What’s the matter with investors? They should be selling gold AND stocks.”

    “Why? Because we’re in a Great Correction. Not a boom. Not a recovery. Not anything except a Great Correction.”

    It is era of Great Debt. If another inquisitive guest, depression is invited, then it is also Great Depression. Then zombies/morons certainly will be honour great spirit. The 3 Greats mix to form a 3-in-1 formidable economic gang or gang of three that would almost rip the globe into 2 semi circles.
    The world need leadership of non-zombie like BB or non-moron like MG to run the show.

  • Paul Blanch

    Mr Reich never explains WHY wages have stagnated. It is in fact our government that is responsible. Thanks to Greenspan, Clinton, and the BLS, the government has been systematically under-reporting inflation for over 15 years. Today, the BLS reports inflation as 3%, while Shadowstats.com, using the pre-Clinton inflation calculation shows it 11%. So, an employee who gets a 3% cost of living raise and a 5% raise tomorrow, has still lost 3% of his or her purchasing power this year. Indexed for the real rate of inflation the purchasing power of American wages has been falling for years.

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