03/30/10 Baltimore, Maryland – Probably the strangest things of all are the conclusions and advice given by some of the smartest economists in the business. We mentioned it on Friday. But our mouth is still open and our eyes are still glazed. In the run-up to the crisis of ’07-’09, almost everybody made mistakes. The spenders spent too much. The savers over-did it too. They built too much capacity.
Both need to make corrections. That’s what a Great Correction is for.
But the advice given Martin Wolf, Paul Krugman and others is the kind of thing that is hard not to laugh at. When the bubble blew up, everyone lost. But some lost a lot more than others. The spenders were in debt and broke, while the producers had money and factories (they didn’t know what to do with). So what do Wolf and Krugman suggest? They advise the winners to act more like the losers. Germany and China (the countries with savings…) should spend more money and stop working so hard.
Readers will note that Krugman is an American economist. Martin Wolf, the lead economist at The Financial Times, is English. They represent the losers, of course.
Wouldn’t it make sense to follow the winning strategies, not the losing ones? Wouldn’t it make sense to listen to the winning economists – those in Germany and China, not those in the spendthrift economies?
Nah, those economists may not understand the secret to a healthy economy – spend, spend, spend. That’s the secret…stimulate spending. Consumers spend. Government spends. Business spends. Everyone spends until they run out of savings…then, they spend till they run out of credit. And then they’re busted.
Hey, what kind of secret is this? Well…that’s what’s so strange about it.
Now, there’s a new federal program.
“Expanded mortgage aid should cut foreclosures,” says another headline. The new aid program requires lenders to reduce mortgage payments when a borrower loses his job.
Now the feds are using their brains. Let’s see, if you lose your job your mortgage payments go down… But what happens to the money you were supposed to pay? Wasn’t it owed to someone? What are they going to do?
Well, one thing they’re going to do is to be a little more careful before making any more mortgage loans.
But the number of foreclosures is still going up anyway. There are now 4.5 million houses in the process of foreclosure or 90 days delinquent.
A Great Correction takes time. Stocks go down. Revenues go down. A business gets in trouble. It sends out dismissal notices. Then, the ex-employees get unemployment comp. They run down their savings. And then they fall behind on their mortgage payments. And then, with their house worth less than the mortgage, they give up and move out.
And then the house price falls.
Patience…dear reader…patience.
Maybe Porter is right. Maybe we’re wrong. Maybe there’s no voluntary de-leveraging going on, after all. The most recent numbers show the savings rate in a decline.
Maybe that’s the way it works. Maybe nobody ever really tightens his belt unless he absolutely has to. Maybe it takes a crisis…a catastrophe…a disaster. Maybe that’s the way of the world. Maybe thinking doesn’t matter at all. Maybe markets make opinions after all.
In the businesses where we’re directly involved, in 2009 we paid down debt, stopped making capital investments, reduced the payroll and saved every penny. Now, we’re starting to lighten up again. We’re considering new investments. And the payroll has climbed back almost to where it was before the crisis.
Regards,
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 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.
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“In the businesses where we’re directly involved, in 2009 we paid down debt, stopped making capital investments, reduced the payroll and saved every penny. Now, we’re starting to lighten up again. We’re considering new investments. And the payroll has climbed back almost to where it was before the crisis.”
-So you admit now that this recovery IS real otherwise you wouldn’t be considering new investments. If you had listened to me several months ago, you’d be a much wealthier man and in a much more secure position to continue adding investments.
It’s refreshing to see someone like BB finally accepting what the economy and markets are telling him – we’re fine and getting much better way faster than anyone thought possible.
It feels nice, doesn’t it?
Investing is so…so…so easy when gazing into Harry’s rear-view mirror.
I followed Harry’s advice and bought GOOG at 602. When’s it going to make me wealthier man in a more secure position to continue adding investments?
HARRY, YOU LIE!
Now the feds are using their brains
when did they ever stand up?
In the current situation, do you want to listen to a pollyanna like Harry or a doom-n-gloom like BB? It’s like following the grasshopper or the ant.
Sure, as a pollyanna, you get to enjoy the summer more. And as a doom-n-gloom, life doesn’t seem so jolly.
But when the storm comes, will the pollyannas regret their folly?
not_harry: Did you buy everything else I mentioned: SSO, SPY, DIA, AAPL? If so, you’d be doing very, very well right now. Give it up, this market is heading higher and higher.
I GAVE it up, Harry. Now I’m DOWN after listening to your advice!
HARRY, YOU LIE!
Credit where credit is due – Harry has been more right than Bill over the past year or more. MUCH more so.
On the other hand, Marc Faber is in agreement with Bill’s overall thesis but understood the timing better and has been investing more like Harry over the past year.
I think Bill’s thesis is more correct than Harry’s – but in investing timing counts for ALOT!
Some people never change until they have to. Other people change BEFORE the catastrophe. The difference is, some people see it coming and change their behavior to prepare for the NECESSITY of doing things differently. That’s what we did. We’re so so glad we did.
Harry is getting famous in this blog…what’s your url?