09/28/10 Baltimore, MD – After so much traveling, we’re happy to stay at home this week and do our reckoning here.
This past weekend, we got back from Florida only to depart immediately to a wedding in New York. The roads are a lot worse in New York than they are in Florida. Maybe it’s the weather. Maybe it’s the tax system. But as you drive up from Maryland, the roads deteriorate as it costs more to drive on them. You run into more and more potholes and shabby tollbooths as you go north.
That’s not likely to change. Local governments are going broke. So are national governments. The politicians will have to make choices. Repair the roads…or keep the libraries open? Day care…or default?
At the wedding was a former Goldman bond trader. “How long do you think it will be before government debt blows up,” we asked him. His reply, “no time soon”…more below…
Not much happened on Wall Street yesterday. The Dow lost 48 points. Gold went nowhere.
And so far, almost everything that we thought ought to happen is happening. More or less. The crisis. The feds’ reaction. The market’s lack of reaction to the feds’ over reaction. Then, the feds’ reaction to the markets failure to react. One dumb thing begets another.
But so far, government debt market hasn’t blown up. But even when things happen that we expect, they don’t necessarily happen the way we think they ought to or when we think they should.
We’ve had the crisis we expected. Then, the feds poured good money in after bad…as expected. They said the economy would ‘recover.’ Of course, the economy would do no such thing. Instead, it has only just begun its “Great Correction” – with high unemployment, falling house prices and treacherous asset markets. And now Obama and Congress are paralyzed by upcoming elections. And Ben Bernanke is thinking about Plan B…and hoping it won’t be necessary.
Unemployment is really far worse than the ‘official’ numbers suggest. The feds take people off the unemployment roles if they go too long without finding another job. In that regard, this slump is the worst ever. People wait longer than ever before to find another job. So more of them slip off the jobless tally before they ever find work. They are disappeared by fed statisticians. We haven’t done the numbers ourselves but John Williams of ShadowStats tells us that if they still did the figures the way they did before Clinton-era “adjustments,” we’d have an unemployment rate between 15% and 17%.
Gradually the financial media and investors are catching on. They’re beginning to realize that this was no ordinary recession…and there won’t be any ordinary recovery either.
The New York Times brought the story to readers this weekend:
“In the old days — before 1990 — American recessions tended to be fairly sharp. But the recoveries, when they came, were also rapid. Laid-off workers were recalled and consumers who had deferred purchases out of fear they might lose their jobs were willing again to buy cars and homes.
“The newer version of recessions — in 1990-91 and 2001 — provided shallower downturns. But the aftermath was also slow and painful. They came to be known as jobless recoveries.
“The National Bureau of Economic Research determined this week that the recession that began in December 2007 ended in June 2009. That made it the longest downturn since World War II, and data had already shown it was the deepest in terms of decline in gross domestic product.
“And now that we know the recovery is more than a year old, it appears that this cycle is combining the worst of both worlds: deep fall followed by slow recovery.”
“There are some aspects of this cycle that have no direct precedent. One is the performance of service industries. For most of the years after World War II, the United States economy became more and more oriented toward service jobs, and both employment and spending rose, whatever the state of the rest of the economy. But this time service businesses suffered, and they have been slow to recover.
“That is particularly true for the industry that bears the most blame for the recession — financial services. The big banks were bailed out — Lehman Brothers excepted — but employment fell sharply during the recession and has continued to decline.
“Another area that is weaker than in previous recoveries is the condition of state and local governments. Working for them was always considered safe, if not particularly rewarding. Neither of the two recessions before the latest one had any significant impact on those jobs.
But in this cycle, governments are facing severe budget shortfalls, and layoffs are accelerating.”
What kind of cruel fate is this, dear reader…when even the zombies on the public payroll aren’t safe from layoffs? Have the gods turned against us?
And more thoughts…
The Great Correction is good news, as far as we’re concerned. Finally, the financial gods are kicking the right butts. You can’t really get rich by spending money. And you can’t really create prosperity by building houses for people who can’t afford to pay for them. So to the Bubble Epoque, we say: ‘Goodbye and Good Riddance.”
America needs a correction; it’s getting one. It was wasting too much of its resources on phony, unsustainable ‘growth,’ while actually going deep into debt.
Why was it doing that? Well…blame Alan Greenspan…blame the Fed…blame the US Treasury…blame Richard Nixon…blame Milton Friedman and John Maynard Keynes. They all had a hand in it.
We’re beginning to see more clearly how economists and the feds connived and conspired to rig the system. The dollar-based monetary system they created has a huge bias towards debt and inflation. Almost everyone likes it. And the others don’t know what’s happening anyway… But has any pure paper money ever survived an entire credit cycle – from the boom years through the bust years – intact? Nope. Never.
And now the Great Correction has begun. And the serious question is: how much of this scam is it going to correct?
We don’t know. But there’s a lot to be corrected.
*** “Well, I think the bond market is the most misunderstood market in the world. Everybody is talking about how bonds are the worst place for your money. But I think they are the best place for your money.”
Speaking was one of the best bond traders in the US. At least, that was the judgment of other bond traders and industry experts. We wanted to know more…
“Some of the best investments you can make now are in the bonds of places such as Ireland and Greece. Everyone thinks they’re going broke. But they’re not. The European Central Bank will give them the money to make their payments. They’re not going to default.
“That’s what is great about bonds. We’re entering a difficult period for the world economy. There is simply too much capacity. This correction is going to take a long time. People are worried about defaults on sovereign debt? They can forget about it. Neither Europe nor America will default. The central banks won’t let them. Instead, they will announce a program of long-term deficit reduction. In return for correcting structural budget problems, European nations will get the money they need to meet their obligations. These will be pure cash “awards,” not debt. So their debt won’t increase. Bond investors won’t have anything to worry about.
“I don’t know if they will actually correct their long-term finances or not. It depends on the growth rate. If they can grow their economies fast enough, they may not have a problem. But whatever problem it is, it is far in the future. In the meantime, these sovereign bonds will go up. Because the payers won’t default. And everything else will go down. Want some good advice? Buy bonds.”
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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Note to best bond trader: Like all salesmen, you have bought your own line of BS. And you can take no other position without great risk to the reputation you’ve built your entire career on. Poor sap.
Cash “awards”? Not debt? How does that work? How can I or anyone else get cash without working, producing or owing?
Never mind my silly questions, just hook me up with plenty of it and I promise to correct all my “structural problems” and not default.
Of course there won’t be default in sovereign debt. Simply paper can still be created out of the thinnest air. There will only be ‘default’ in the value and purchasing power of money. Depreciation could grow from a humble beginning to a relentless strange beast. In the end, default in any manners, styles, postures, forms would only mean the same thing – oxidation of paper where you will get paper oxide in return. Worse, if the paper reacts with oxygen to produce poisonous paper monoxide. Unless you are able to secure a material ‘stainless paper’ akins to ‘stainless steel’ that prevents rust, nothing on earth could save your money from deteriorating. Or, the alternative is to galvanize the paper material with a layer of gold.
Dear Zorro
There is a sword coming down, sheep over here goats over there.It has nothing to do with buying bonds.
i am really disappointed. bill bonner telling us to buy bonds? am i missing something?
What should the price of Gold be?
It’s the only real money, right?
So let’s take the total dollar value of everything that exists in the world today. Everything except gold, which we will deal with in a moment.
Every house, all the furnishings inside, all the clothing in the world, every retail and office building, every government building, every collectible, every spec of food, all the land in the world, all the roads, every factory, every car and on and on, every corporation and all its assets, every ship, every mineral deposit other than gold, every gem stone, every tree, all the jewerly except gold. What is the grand total of everything that exists today that could possibly be purchased with money.
This not just GDP for which there estimates but is more like the sum total of all the GDP in history minus what has been consumed, used up, rotted away,etc.
A tough thing to estimate but surely sombody knows. So get that estimate and hold onto that figure.
Now how much gold exists in the world in ounces? Count all the goivernment gold reserves plus all the gold coins in the world and all the gold jewerly. Count also some measure of the gold reserves in the ground. Say there is 1 million tons in the ground, but the cost of extraction will be hal of that then count half a million tons.
Now you simply divide the sum total of the value of everything in dollars by the grand total of all the gold in the world in ounces.
Voila you have a measure of the value of gold as money.
What is that value? I have no clue. Is it $100 per ounce or closer to $1000 or perhaps $10,000.
Woundn’t that figure even though it would be based on estimates be some kind of a guide to a rational price for gold? Assuming that is that gold is the one true real money.
Bill, I challenge you to make a rough estimate of this for us.
Once you hae the two estimates the calculation should be so easy that even Jethro from the Beverly Hill billies could do it. Let’s see X million ounces of Gold goesinta Y trillion dollars(being the sum value of everything in the world) Z times which is the estimated true value of Gold in dollars per ounce.
Then reckon the implications of the figure.