08/20/09 Ouzilly, France
The dollar will probably go up. Still, we’d stay away…
Here is Warren Buffett’s view:
“Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
“They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
“The United States economy is now out of the emergency room and appears to be on a slow path to recovery.”
This is probably the view shared by most economists and most investors. It is not our view. From where we sit there is no recovery underway…and there never will be one. You can recover from a hangover. You can recover from a nasty divorce. You can even recover from an earthquake. But once a depression begins, you can only endure it. Get on with it. Get it over. And then, you can begin rebuilding again. You will never recover the economy you had before the crisis. You must find a new economic model.
A headline from yesterday: “Reluctant shoppers hold back recovery.”
That’s one way to put it. Shoppers don’t have any money. They need to cut back. Most likely, they will cut back until their savings rates reach 10% of disposable income. That will take $1 trillion out of consumer spending. The economy cannot possibly recover under those conditions; it can’t return to its same old, consumer-led, credit-fuel self. Instead, it must go through a period of transition – in which output is depressed – until it finds a new personality, better suited to the new economic circumstances.
But Buffett is not worried about the depression. He’s worried about how the recovery is financed:
“…enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.”
Buffett does the math. This year, the US deficit will total $1.8 trillion. Since 1920, the largest peacetime deficit was 6% of GDP. This is 13% of GDP. The magnitude of it alone should be cause for alarm. But there’s more. Where does this money come from? Even if you could direct 100% of the net US trade deficit (about $400 billion, the money that ends up in foreigners’ hands as a result of American spending) and 100% of American’s savings (estimated to be about $500 billion), you’d still be $900 billion short.
Desperate borrowers should expect to pay high rates of interest. A borrower who doesn’t need the money can shop for the best rates and hold out for a good deal. But when a person needs to borrow, he takes what the market gives him.
Yet, one of the most curious things about the financial world circa 2009 is the yield on the 10-year Treasury note. It has fallen to under 3.5%. Despite record borrowing by the feds, lenders content themselves with the lowest yields in nearly half a century. Go figure.
The market seems to be anticipating a depression. Why else would bond yields be so low? If the economy sours…and the stock market sinks…the safe yields on Treasury bonds will seem like a good alternative. But Buffett believes the Treasury yields are not as safe as they appear. That other $900 billion has to come from somewhere. And the feds can’t allow interest rates to rise significantly; that would undermine all their stimulus efforts. High real interest rates depress economic activity. So, what can the feds do?
“Washington’s printing presses will need to work overtime,” says Buffett prophetically. Of the two ways of financing the deficit, one is a flimflam; the other is robbery. In the great credit expansion consumers borrowed so they could buy things such as automobiles. Now, the feds borrow and bribe the voters with money to buy automobiles.
No matter who does it, borrowing for consumption is merely taking from the future. Then, when the future comes…the account has to be settled. Result: no net gain. What was consumed in one year is not consumed in the next.
Of course, the feds don’t spend money the same way consumers did. Consumers wasted their money on frou-frou and watchamacallits of their own choosing. The government wastes money on different things – like turtle crossings and billion-dollar bailouts.
Not that we’re complaining about government spending. We’re just pointing out that it’s not the same as private spending. What makes goods good is that people choose them and buy them with their own money. They get what they’ve got coming. But the feds are spending other peoples’ money. If they get any goods at all it is practically an accident.
But what we’re talking about this morning is the dollar. According to Buffett, the dollar is in danger. He’s worried about the larceny, not the flim-flam. Printing up additional dollars robs savers. Each new dollar created to buy US debt makes each one already in existence – say, in a vault in the Bank of China – worth less than it was before. If that isn’t true, the whole body of economic thinking from Adam Smith to Irving Fisher is nothing but a fantasy. And the only way to protect the value of the dollars held by savers, theoretically, is to withdraw the stimulus money before inflation sends prices soaring.
Buffett is an optimistic fellow. He believes that responsible authorities will turn off their dollar-printing machines in order to protect the greenback. Here at The Daily Reckoning, we’re not so sure.
First, the depression is likely to be worse than people think. This will mask the effects of dollar printing. Plus, it will make the need for more dollars – more federal spending, more US debt – seem more urgent than ever. Instead of pulling the plug, they’ll turn up the speed.
Second, the feds are not really interested in the health of the real economy anyway. This is an insight, which while it may seem obvious, it only came to us recently. When the feds put in place absurd policies to delay and restrain the inevitable correction, they are making things worse, generally, for everyone. But the politicians are responding to their constituents’ demands. One campaign donor wants to keep his business alive. Another wants to keep his job. Still another promises the feds high paying jobs on Wall Street, after their term in Washington is over. Millions of others – more than enough to turn an election – want free pills and mortgage subsidies and so forth. When the feds try to bailout the economy, they are only doing their jobs! They’re not going to stop doing their jobs – especially in a depression – just to protect foreign dollar-holders.
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.
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“First, the depression is likely to be worse than people think. ”
Ok, now you’re just sounding silly. Please, I know you think you’re past the point of no return and risk looking the fool by changing your mind but really, we’ll forgive you.
There’s no depression. There’s no recession. Economic indicators are all pointing toward a recovery. You were and remain wrong. I know it’s hard to accept that but we’ll forgive you and move on. Just stop sounding silly!
BB writes: “…the feds are not really interested in the health of the real economy anyway. This is an insight, which while it may seem obvious, it only came to us recently.”
__________________________________________
Well, good morning, would you like some coffee? You look as if you were up late. Did anything come to you as a dream? Or is that look (which is not good for you) one of recent awareness of reality?
The Fed never really had any concern for the health of the economy. It is more cvoncerned that China and others lap up the newly minted Treasurys without complaint, in the faint hope that soon in the future, inflation will chip away at the towering debt owed by Uncle Sam.
There is way too much meddling going on inside Washington to benefit John Doe. No congeressional represetative, nor Senator is really concerned about the little guy. They have bigger fish to fry. Just consider the latest out of DC; the cash for clinker program is about to be nixed. It was too good to be true, so voila, it is soon to become another piece of legislation meant for the dungheap.
Sorry, but the US of A is a ship slowly sinking. As much as Americans are incredibly adept at bouncing back, I think this generation is less willing to do so, than their own parents. Don’t get me wrong, there are still many conciencious people out there, I just don’t believe that there are enough this time around.
And this time, it is realy different.
Institutions like FED are made to protect Elites, don´t think they come to save you when things become worst, then The People must be prepared making food nets, good nets, barter nets. We can do this without government.
…. “The Federal Reserve can buy 300 billion of US debt. The world market will likely allow the Reserve to buy 1 trillion, 3 trillion, 10 trillion, and 30 trillion in necessary incremental quantities to maintain the flow of wages to the 50 percent of US workers dependent on federal, state, and local revenue to continue repayment of personal debt and maintain the global credit system. ” ……. The Federal Reserve is doing what is necessary in the end game of private debt default. There response is a measured linear response which will have a nonlinear ending. And the global angst ending will be bad for humanity.
Their response….
Harry-
When you say “we’ll forgive you”, who is the we? You got a conjoined twin?
When you say Mr. Bonner was wrong, what exactly was he wrong about? The “soft depression of the 21st century”? The housing crash?
There were precious few predicting these things and none of them were in the mainstream media.
You can’t even go two sentences without being wrong. e.g. “There’s no recession. Economic indicators are all pointing toward a recovery.”
What are we recovering from if there was no recession?
Before you type “all economic indicators are pointing toward a recovery” check the unemployment level.
Cheers.
No depression Harry? What about the 300 plus laid off people at the plant where I work at? I bet it feels like a depression to them. Unemployment in both Canada and the U.S. is still rising. I hope your job is safe Harry, cause for many people, myself included, we are waiting and wondering, when the axe will fall on us.
I have three comments, first for Harry:
You frequently state economic indicators point to a recovery, but never provide data to support your claims. Why not? Second, in regards to Warren Buffet: Is it me or is he talking out of both sides of his mouth or perhaps wallet? First he commends the “government [for displaying] wisdom, courage and decisiveness” as they spend – borrow – trillions saving corporate America that has as he says put the US on a slow recovery but then raises alarm to the vast debt the government is racking up. What am I missing here?
And third, cash for clunkers; giving cash to the consumer to buy a new car and take on a new debt in the process. So this new car buyer is triple slammed; 1)incurs increased personal debt; 2) incurs an eventual increase in tax liabilities with the gov who will have to someday pay back what it borrowed to fund the clunkers program; and 3)all this with interest…so who’s the real clunker in the deal?
The seeds for this Great Depression were planted long time ago when corporations such as GE betrayed the American worker by opening up factories abroad. The short-term corporate greed followed the Keynesian dictum that ”in the long run we shall all be dead”. While the CEOs responsible will surely be all dead, the next generations will pay the price.
The Fed cannot correct major structural problems in the economy by monetary policy. However, those are the only tools available to them. They may only delay the inevitable, but make things much worse to deal with later. Thanks to Greenspan’s monetary policies, we now face the worse Depression while Bernanke fights the wrong one -the one that he apparently studied well in school.
Harry – BB has been around a long time, seen an awful lot. BB has been right about the US economy for years. Calling him ‘silly’ without exposing your credentials only tells me you’re the silly one.
“Buffet is an optimistic fellow. He believes that responsible authorities will turn off their dollar-printing machines in order to protect the greenback.”
Well, if that is what WB really thinks, he wouldn’t have written that piece on how he worries about the dollar right? Anyway I won’t listen to the ‘Oracle’ too much. He is only an investor and he talks with forked tongue whenever that will serve his investment interests.
“Second, the feds are not really interested in the health of the real economy anyway. This is an insight, which while it may seem obvious, it only came to us recently.”
That insight that seemed to have flown to you from outer space…, nonetheless, did’nt help you to make a new point. How come?
@ Kurt
You know in the end it boils down to corporate responsibility or, as is, corporate irresponsibility. When humans are seen as human capital only and are treated accordingly, it is by no means wondering when human capital isn’t as fast as monetary capital and thus looses the race.
We’re running towards the least wished scenario: deflation and high interest rates – impossible? Wait and see…
Problem is: which bank or what treasury will survive to pay you for your savings in the future (after 2011)?
My advice: find some land to grow your own food, organize with people you trust and buy good weapons and bullet-proof jackets.
I fully agree with Bill Bonner’s staying away from the Dollar. There is a huge propaganda machine (Dow Jones news, for instance) talking the “safe-haven” dollar up. The dollar is not a safe haven, its a sure proposal to loose your shirt over the medium-term. Sitting in Switzerland and trading it since 1968, at 4.30 agst CHF to start with, and 1.06 and odd now, I know what I am talking about. And the race to the bottom for all fiat currencies is not finished yet. I just hope my currency will be the slowest one in this race.
I am not an economist by training, but I did take the mandatory Econ 101 back in college. As I understand it, there is the money that is in circulation say M2 and then there is all this debt out there – government, business, real-estate, and consumer credit card debt. A lot of the debt is failing, specifically mortgages and credit cards. So financial value (or money) is vanishing out of the system. Meanwhile the government is borrowing what it can from the Social Security trust fund and the Chinese and making up the shortfall by printing more money. Yet inflation is nowhere to be seen. Why is this? Simply because bad debt is causing value to disappear faster than can be offset by printing money. The end result is that people are getting poorer, because the instruments underlying the debt are losing value (houses, cars, educations), but the value of money seems to be increasing. This is very counter-intuitive but I think it explains what is going on.
Hahahahahaha, you dumb Americans. You infidels and your lavish lifestyles bought this upon yourselves. Hedonism and wars that you couldn’t afford to fight. Now that we have our al’Queda inside men controlling your economy – both the Fed and Treasury – expect your future and your children’s future to be one of doom and grinding poverty, god willing.
“Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.”
Warren Buffett.
Hey, someone should wise up Buffett. There is nothing courageous about these spineless governments always taking the soft-option!
As if that weren’t enough, he is advertising to the world that he is delusional when he puts the word wisdom and government in the same sentence.