07/12/11 Paris, France – Dow down 151 points yesterday. Asian markets down again this morning…
“Panic in markets caused by debt crisis,” says the headline in the French newspaper, Le Figaro.
Which debt crisis, we wondered?
In Europe, no sooner was one can kicked down the road than another one showed up. Greece disappeared from the headlines. Italy took its place.
We haven’t studied the Italian problem in any detail. It may not be a problem at all. But the amounts are larger – too big to bailout, according to one report.
Europe seems to be taking a tried and true approach to its debt crises. It kicks the can down the road a few times. Then, when it has exhausted bad choices, it turns to a good one. Having run out of foolish and phony solutions, in other words, the authorities are taking up one that works. They’re telling Greece to drop dead. The latest news: Greece will be allowed to default.
Of course, you knew that was the thing to do from the get-go. Remember Gerald Ford’s famous reply to New York City in the ’70s? New York was on the verge of bankruptcy. So it appealed to Washington for a bailout. Ford, who had more sense than any major politician since, responded: Drop dead. And if he didn’t actually say that, he should have. For those were “les mots justes” – exactly the reply that the occasion called for.
Having no other recourse, NYC had to shape up. Which it did. It got rid of many of its unionized zombies…cut expenses…and the Big Apple was a better place for it. (It didn’t hurt that New York was also the center of America’s financial industry, which began a historic boom a few years later.)
Greece would be a better place too if its pols would stop spending more than the people can afford.
But now we turn to the other part of the world with a debt crisis – that part of the world which sits between the world’s two large oceans, and between the 49th parallel and the Rio Grande. Yes, dear reader, we are talking about the USA.
Yes, the USA still has plenty of bad choices to make before it is finally forced to make a good one. Sometimes a great empire goes broke. Sometimes it is defeated militarily. Usually, it suffers both calamities before coming to its senses.
So, dear reader, make sure you put yourself and your wealth out of harm’s way. And lay up a good supply of alcohol and anything else you might need to enjoy the show. It’s going to be exciting.
The problem for the USA, in a nutshell, is that there is no one to say ‘drop dead.’ New York had Washington. Greece has Germany. Philip II had Sir Francis Drake. Custer had Sitting Bull. But who does the USA have? Abroad, its armies meet no effective opposition. At home, its spendthrifts run wild.
Perhaps most important, it has a printing press with no lock on the door.
Eventually, bond investors will have their say. But that could be far in the future…long after the nation has done itself irreparable harm.
Yesterday, we reported that people are coming around to our point of view. They’re beginning to realize that these are not ordinary times. The recession was not ordinary…and we have no ordinary recovery. What’s more, the slump looks like it will last for years. Even the Secretary of the Treasury seems to see it that way.
Investors are still bullish. They’re heavily invested in stocks at very high prices. They see high earnings and no reason for the bull market to falter. What they don’t realize is that those high earnings are part of the problem. First, because earnings are ‘mean reverting.’ When they are low, they are likely to go higher; when they are high, they are likely to go lower. And second, because the earnings represent efficiencies which actually herald a weaker economy. A business increases its earnings by spending less on labor, for example. The result: working people find fewer jobs and earn less income.
Investors still don’t realize what is going on. They have largely recovered their stock market losses from the ’07-’09 crisis. But the economy has not recovered. Working households – especially those in the middle – still have huge losses on their houses. More than $7 trillion has been lost so far…and the losses continue to grow.
And it is harder than ever to find a good job. Two years after the recovery supposedly began, and real unemployment is going up.
Can QE3 be far away?
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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Dear Mr. Bonner,
Young Man (I was born in June of ’47). I am more confused than ever. Not about this article, but recommendations of late. I receive many of the audio “video” which lather me up to shed every last penny US before it goes bad, but then you want me to pay some of my $US for advise on what to invest in, and receive more of the soon to be worthless $US. Well, what is it? Is the paper going to be worthless so that I should buy more gold now? Or is it just going to be worth less (as it has done all of our lives) and I should buy stocks in hopes of them out pacing inflation?
Oldbill
“Perhaps most important, it has a money-printing press with no lock on the door.” America also has the world’s “reserve currency” though the reserve is running on low.
She still has a relatively optimistic youngish and vital society. This allows America to more easily believe that “anything is still possible”.
Perhaps it also means that America sometimes does not know how to be prudent or more careful with its ventures. This used to be seen as a good thing — in comparison to old staid Europe, America was where it was seen to be ‘happening’.
But now we see more clearly what has ‘happened’.
Being a ‘happening’ or ‘unhappening’ place has not seemed to make much difference —— many staid parts of Europe are in trouble, along with many unstaid ‘happening’ parts of the world as well.
We don’t know whether China is a ‘happening’ place or not —— we have never been there. But it likely does not make much difference. China will likely fall into the same kind of trouble.
This is because China seems to do most things that the West can do even ‘better’ than we can —— there seems to be no reason that China cannot join the Credit-Implosion Party too, sooner or later.
For me, there is something admirable in the reluctance of so many non-expatriate (and thus still optimistic) Americans to know how much trouble they might actually be in.
The loyal DR reader knows better —— DR distributes its pessimism very generously (free) and very optimistically, I must admit.
I discussed the current imbroglio in the American Congress with a friend. We decided that all this stuff about raising or cutting taxes, raising or retaining the debt ceiling, and so on, is not a discussion easily understood in the left-versus-right context. That ‘staid’ way of seeing this tragi-comedy in our opinions was not particularly useful in detecting what underlies all the commotion.
The conclusion we came to is that institutions are stupid. That the individuals in those institutions can actually be very smart. They can all individually balance a checkbook and tie their shoelaces, and even sometimes successfully manage their own investments or perhaps even successfully run their own private business initiatives. But having smart people in “Institutions” does not mean that those institutions have the same IQ-s as the smart people who make up those institutions.
What happens when you put all these relatively smart people into an institution like the Congress, or into the President’s Office, or into the average University Endowment Fund (managing other people’s money, and not their own), or say into any government position (elected or appointed or hired, as in the bureaucracy, where decisions are often made on a “consensus-basis”)?
Sometimes there is a dynamic that causes IQ to go down at the institutional level even for engineering-type enterprises like NASA. It’s a little like Climate Science. Once you get “consensus” you may find that you are dumber than you were before you joined that institution or cause (a “Cause” is really just a Virtual Institution in today’s Social Networking paradigm).
So, at least as measured by the decision-making and output of the whole, most institutions are kind of mentally ill, compared to the members who make up those institutions.
I suppose this observation has been made by countless other people, perhaps by management gurus of the Peter Drucker sort. We just came upon it now.
So it is not socialist versus capitalist that defines the discussion in any productive way. America is really socialist already, certainly if measured by someone like Ayn Rand.
What better defines the discussion is that the Institution (which makes the rules for us, and many of the Operating Decisions) is too stupid, (as one example) to know what “too much debt” means in any practical sense. An person balancing their own financial affairs would know, but not the institution.
This resolved in our minds why America (and so many other nations) have on just this one issue of Debt — there are countless other ones of course — HIT THE WALL.
The institution never saw it coming, and if it did, it did not know what Hitting The Wall meant.
Tax the rich.
Pay your bills.
A NEW SYSTEM is the path: A system without greedy bankers, greedy enterprises, fiat money, where all people live exchanging goods, not money, that is the path to dodge this greatest depression!!
Great shot over the bow of The FED by Newt Gingrich at “Gingrich joins Bernanke Bash Party” mentioning the “Bi-Polar Mandate” of The FED:
http://money.cnn.com/video/news/2011/06/22/n_gingrich_fed.cnnmoney/
Wonder if Bernanke realizes that The FED’s mandate’s days (in its current form) are numbered?
If he does, does he really care? (I know he has said he does not want the current mandate tampered with, but?)
Nope.
QE III is getting closer by the second.
And, it may be hugely international.
As US ambassador to the UN, I welcome all the nations, and urge your complete co-operation.
Consider this an offer you can’t refuse.
“Can QE3 be far away?”
probably not …
but the Law of Diminishing Returns (IF you will be able to speak of any “return” …) will prove of tempered steel …
Tax the rich.
Let Uncle Sam pay your bills.
All in the distant future.
It is a shame poor people don’t understand that it takes a lot of money to play rich.
Here’s a thought… QE III will come… and for a few weeks months everything will seem to stabilize… then the crash still comes by year’s end. Why? QE III’s been baked into the cake. Everyone’s been expecting. And they expect the markets to get a boost from it. M’thinks the markets are floating on toxic expectations of more stimulus already. And a major crash right after injecting more untold trillions is the last thing the Fed will expect. I say QE’s IV and V will be here in short order… but before that happens… unparalleled ugliness. Happy investing. Smirks……
Nice post. Nice work Bill.