06/26/09 London, England This just in…Ben Bernanke and Tim Geithner have rushed to Los Angeles. If they can revive an entire world economy…why not the ‘King of Pop?’
Fans are hopeful…but here at The Daily Reckoning we take a discouraging view of these revival efforts. We admire the achievements of science and technology; as for the works of economists and central bankers, well…we’ll wait to see how things turn out.
Yesterday, we took up the biggest illusion of the Bubble Era. We held it up to the light…and noticed:
So deeply rooted is this illusion that it will take more than a strong wind to uproot it.
We’re talking about the idea that government bureaucrats can do a better job of allocating capital than free markets. Everyone seems to believe it. They’re allowing a handful of economists – who failed the critical test; not one of them noticed the market tsunami coming last autumn – to direct the flow of trillions worth of savings. They’ve already put at risk more than $12 trillion. Right now, they’re denying the need for more ‘stimulus,’ but that is likely to change.
$12 trillion is a lot of money. Adjusted for inflation, it is still more than twice as much as America spent in all of WWII. But it’s not just the money…it’s the future of the world economy that is at stake.
In a nutshell, the meddlers believe they can borrow their way out of debt. If you say that the key problem in America is debt, they won’t argue with you. But they think that they can overcome that problem by borrowing trillions more.
Many times have we argued that they will fail. We laugh at building dog walks …bailing out businesses that have lost their way…and paying huge bonuses to Wall Street execs. But those are just the obvious flaws. Down deeper, in the dark, corroded heart of the government economist is a fatal conceit.
We know from the experience of the 20th century that Friedrich Hayek was right. He called it the “Fatal Conceit”: the idea that central planners working for the government are free from sin and error. He wrote early in the century…when National Socialism and Communism were still popular.
Now we know; central economic planning doesn’t work. Everywhere it was tried it was a disaster. The more the bureaucrats planned, the bigger the mess they made. But now we are supposed to believe that central financial planning will save the world from the mistakes of the bubble era. That is the grand illusion waiting to be toppled. What fun it will be to see it come down!
In the news yesterday, the Dow rose 172 points. Oil rose a bit, after a pipeline in Nigeria was attacked. Gold was up a little too – plus $5.
All of this market action is just noise. The real plot to this story is the one we’ve been following here in these reckonings. The world economy is entering a depression. So far, nothing the feds have done has managed to stop it.
In Japan, analysts keep an eye on exports as a way of gauging the health of the global economy. If Japan isn’t selling, other nations aren’t buying. And if ships stop loading goods ‘Made in Japan,’ global trade is in trouble.
In the month of May, Japan’s exports declined 40% year on year.
Yesterday came similar news from Europe. Industrial orders in the Eurozone dropped 35% in April, from the year before.
“Fed on hold as slump eases,” reports The Wall Street Journal. What exactly is meant by ‘slump eases’ is unclear. As near as we can tell, the slump is getting worse.
“New home sales plunged 32.8%.” Bloomberg reports that house prices in California and Las Vegas are being hit hard by a wave of foreclosed properties. Yes, dear reader, the anklebone is still connected to the leg bone.
Bloomberg also reports, “jobless claims are up.”
A fellow loses his job; he can’t pay his mortgage. The house goes onto the market and pushes down prices. Prices in California are off 30% year-to-year, with the median house at $267,000. In Las Vegas, the median house is only $135,000 with 75% of sold properties coming from foreclosures.
The housing market is slow. But it works like other markets. It reacts…then, it over-reacts. It shoots. Then, it over-shoots. One study we saw said that housing prices were now down to “reasonable” levels. But there’s no law that says they can’t go to unreasonable levels. They were very unreasonable two years ago; they’re likely to be very unreasonable in the other direction before this depression is over. Hold on; maybe you’ll be able to get the median house in California for $199,000.
The WSJ notices that the leg bone is connected to the knee bone too, “house price falls are cutting into economy,” it says.
Well, what did you expect? That’s what house price declines do. People feel poorer because they are poorer. And with no source of ready cash – they spend less. Then…the whole economy weakens…etc….etc.
We’ve been over that enough times already. You don’t want to hear it again.
And remember how we warned of a big increase in credit card defaults? When the slump began…and consumers could no longer “take out equity” from their houses…they turned to credit cards to fill the gaps in household budgets. Since then, there has been no increase in household earnings. To the contrary, household earnings have gone down. So the fellow with more credit card debt and less revenue is in a predictable jam. What does he do? He defaults.
“Credit card delinquencies at record,” says one headline.
“Credit card charge offs break record,” says another.
Elsewhere in the news, we find GM closing plants and Ford cutting out half its suppliers.
Yes, the Fed is on hold. It dares not do anything else. Its voodoo revival program has not worked. The corpse of the real world economy is as lifeless as ever.
What will it do next? We wait to find out.
And poor Michael Jackson: RIP.
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“But now we are supposed to believe that central financial planning will save the world from the mistakes of the bubble era. That is the grand illusion waiting to be toppled. What fun it will be to see it come down!”
And:”Down deeper, in the dark, corroded heart of the government economist is a fatal conceit.”
You know, for most of us, I suppose, what’s true or what feels like being true is that it will neither be fun watching to see when push comes to shove nor do elements of governments seem to have hearts. I mean it is fun to notice that oneself turns out not to be crazy and the bulk of the rest of the people obviously are, but that doesn’t help much when depression rules and people who lack the ability as well as the opportunity to survive will redefine the concepts of what’s yours and what’s mine.
Think beyond depression. Yea…
In a depression the banks could still work. In a collapse nothing works. Sorry guys, it was inevitable, thinking all this time that the economy and productivity were growing. Not!. Heads up LaRouche is coming…. But who will listen? He’s got a plan. Or is it Ostensible reality that is more comfortable?
So unregulated capitalism doesn’t work as evidenced by our current depression, and state controlled, regulated economics don’t work.
So what is it that will lead us to a sustainable economy?
Perhaps this question is naive. The oligarchy of the world doesn’t suffer from these bubbles much, and can even profit from them. Who does that make the enemy?
There are now, and there were then, plenty of regulations, if enforced, would have easily prevented the collapse of our economy. Capitalism, and capitalism alone is the only way out of this DEPRESSION. We have the regulations in place, just not the political will to enforce them
We are in a real corundum. How can you cut government spending without increasing unemployment? At the same time we have to raise taxes (nationally and locally) in order to bring down the debt so that our currency doesn’t collapse, thus foregoing an advantage to business in picking up the slack in falling unemployment. Printing money (“creating fool’s gold out of thin air”) has implications that are very dire. The rich are fine as long as the currency doesn’t collapse. So until then the “status quo” will continue, but by then, it will be too late. I just have to wonder why we did not elect Ron Paul? I think there are too many “special interests” and not enough of “The Special Interest”.
Moon,
When the dust has settled, the value of the dollar will be a lot less than it is now, and that will mean, the effective economic power that various currencies have will redress the output/productivity mismatch of the overpaid American workforce. Benefits, Pensions, social security, medi-care, medi-cash, and other fringe benefits will all need to be cut to bring the economy into balance with the Chinese, Indians, Brazilians, Russians and perhaps even Africans.
When all is done, those new economies will be the new gold-rush economies. BUT it might take another 50years before the dust fully settles as one economy then the other risesand falls.
It won’t be a good time to be alive in my humble opinion.
WWIII anyone? Water wars?
I wouldn’t bet against them…
Guess you haven’t been in an Apple store lately. People eagerly line up to buy phones that end up costing a minimum of $100/mo. Until that slows, and it has no appearance of doing so and actually sells more and more daily, I fail to see a consumer that’s actually fearful.
So what really needs to happen is a less surplus of everything and less people. Since the price of household formation is still high, there will be a baby bust and a swift die off of the older generations. The first world populations will dwindle, and the third world populations will collapse. Only when the need for human labor is in high enough demand due to this population crash, will the world economy regain its footing(don’t anyone hold their breath, it’s over!)
5 billion by 2100 is optimistic and 4 billion looks more likely. Of course, an apocalypse unrelated to the economy could dwindle population numbers much more than a baby bust, but the die off has already begun, and has a long,long way to go.
This-is-all-a-scam.Fascism-is-the-goal,recently
attained
Ian said,
So unregulated capitalism doesn’t work as evidenced by our current depression, and state controlled, regulated economics don’t work. So what is it that will lead us to a sustainable economy?
……………..
Ian, a slightly regulated capitalism would work like a charm, but that is not what we get. Also needed are strong penalties for any wrong-doing. ………..
It is a shame that we lacked reasonable rules or laws in a few critical areas, such as capital requirements for the banks. (There would be no recession today if only the leverage and derivative area of the banks had been held in check through a minimum capital regulation.)
And we kept far too many idiotic politicians in place that should have been run out on a rail, because they are bankrupting us through their ridiculous excessive spending.
Laissez-faire capitalism WILL WORK. What we’ve had is unregulated capitalism on one hand but a neat little socialistic safety net to prevent the experience of failure. When that safety net is there, people will do stupid things; however, without a safety net, people will take risks only after making a serious decision based on a very real possibility that it could HURT real bad to be wrong. Right now, Uncle Gubbermint is trying to protect people from the consequences of their poorly-thought-out actions, and when gummint gets involved, it’ll bring us ALL down and is doing so spectacularly. Ultimate socialism: We will all fail equally.
Harry, I htink you need ot read a little more before making such naive statements.
The British tried Laissez-faire capitalism in the 1700’s, and whilst it did wonders for us in terms of economic activity, it also brought about absolutely awful conditions and slavery, as people undercut one another. (Labour pricing is a function of availability, and skills levels.)
At the moment, the BRIC nations et-al, are undercutting the West. However, the value of currencies plays its part too, and the Chinese are not allowing their currency to float. Which would make their products slightly more expensive (in a true laissez-faire world)
Politics eh… Bugger!
In 1945 the US dollar represented freedom and liberty.IN 2009 the US dollar represents an out of control socio nationalistico fascisto military/industrial/financial complex that invades countrys and blows their inhabitants to smithereens for fun so it can then appropriate their natural resouces. Whats wrong with this picture?
All this negativity, I choose to believe that in time, things will get better. In the short term however, they’re going to get worse…. a lot worse. We as a people, have to hit bottom, there has to be a fundamental reset in the way we think. That hasn’t happened yet. For far too long we have lived in a fantasy world of our own creation,at other’s expense I’m afraid. The “American Dream” will prove to have been a short lived historical anomaly but we will survive this and become of this the better for it.
Finally you said it loud and clear enough to be heard by those who want to hear;
Depression is the result of nation spending orgy which made us all high, and blind…
John, during the 1800s, the British had the British Dream… it didn’t last, and the american one won’t either.
The American Dream was largely built on the Brentwood Agreement, and not having to re-build its entire economy from the ground up like Europe had to.
Of course having a large Gold holding, and the world’s reserve currency gave it an advantage also when it came to buying commodities of all sorts.