02/01/10 Baltimore, Maryland – Well, it’s a new world, after all…
Maybe we were wrong. Maybe the mainstream economists are right.
You know, up to now all they’ve been good at was explaining why the forecasts they made in the past didn’t work out. But maybe they’re right, after all. Maybe up IS down. Maybe better IS worse. Maybe you can squander trillions of dollars and yet have more!
It is all too much for us. Our head aches thinking about it. But there it is, right there on the front page of the weekend news:
“US growth accelerates…” announces The International Herald Tribune.
Right there in black and white. And it must be true. The newspapers wouldn’t lie, would they? And, the economists who fiddle the numbers for the US government wouldn’t hit a false note on purpose, would they?
Nah, that never happens. But how is it possible for the economy to go right back to Bubble Era growth rates after taking only a couple percentage points off of US GDP? We all know it was a credit bubble, right? We all know it couldn’t last, right? We all know, too, that the fuel for that growth – bubbly gases coming out of the banks and the real estate sectors – has disappeared. So where is this growth coming from?
On Friday morning, the stock market got excited about the stronger-than-forecast growth numbers, along with news that Ben Bernanke was around for another four years. The Dow rose more than 100 points. But by the afternoon, investors were asking questions again.
If the economy really is recovering, maybe the feds will reduce their stimulus…
If the economy really is heating up, mightn’t it melt all that money and credit frozen by the depression? Doesn’t that increase the odds of inflation – and higher rates from the Fed…?
If the feds tighten, won’t the US economy fall back into the second part of the W-shaped recession…just like Paul Krugman says?
By the close of business the Dow had lost 53 points, which makes us think the final push to the bottom has begun. Even good news can’t stop it. When 5.7% growth – after the worst slump since the ’30s – doesn’t get investors excited, there’s something wrong.
Wait a minute…
“The biggest lift to economic activity,” continues The New York Times, “came because businesses ran down their stocks of unsold goods at a much slower rate than earlier in the year…”
In other words, the ‘growth’ came because businesses restocked their shelves at a faster rate. So, there’s more on the shelves to buy. Hmmm. Wonder if it will sell…?
The only way you could have real, sustained growth is with a recovery in employment – and earnings. Looking at it broadly, Americans were earning a certain amount of money in 2007. Then, they discovered that much of what they were doing was not worth doing. They were building houses for people who couldn’t afford them, for example. And they were spending money that was “taken out” of their houses. At the peak, a substantial part of US GDP – and virtually ALL the growth – came from these sources.
That money has disappeared. People aren’t getting paid to build houses that no one will buy anymore. And shops aren’t selling to people who pay with money from mortgage equity extraction. They’ve already extracted so much that there’s nothing left. Or less than nothing. Many homeowners have net negative equity.
What does this mean? It means that people are earning less, borrowing less, and spending less. What else could it mean? A substantial part of the economy, 2003-2007, was fraudulent – in which excessive consumer credit masqueraded as real purchasing power. That part of the economy has gone away. So should that portion of the GDP. In theory, GDP should go down and stay down until new industries, businesses, and jobs are found.
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.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
You don’t have to look far to see the true impact of the mal-investments. I lived in Sarasota, Fl from 1995 to 2005. I moved there when is was affordable. I am in the building industry. I witnessed the growth and then the boom. It was unreal, money was getting used like monopoly money. Prices went up weekly during the height of the market bubble. I got out when the gettin’ was good.
I go back now and visit. You can see the horrible impact that was left; jobs lost, foreclosures, business failures, bank failures, scam artists revealed, lives ruined. Most of my friends in the business are struggling, fired, moved or are moving out. Who know where to? Recovery, hah!