Bill Bonner

Beware the Ides of March…and the rest of the year too!

This is the day Caesar was assassinated. What’s it to us?

Well, it just reminds us that things go wrong. Even when you’re on top of the world. There are always countercurrents…undercurrents, beneath the surface, where you don’t see them…plots…conspiracies…and just bad luck.

On the surface, the US economy is recovering. Well, not even. It is stabilizing.

The Dow has been creeping up. It rose 12 points on Friday. Gold fell $6. Oil held at $81.

The most recent figures show the consumer becoming a little freer with his money. But look beneath the surface and you find government statisticians juking and jiving with the numbers. They seasonally adjusted downward the figures for January…which boosted the figures for February. Had they not done so, the figures for February would have been negative!

Still, consumers are not as lifeless as they have been…and on the surface, this is good news.

And who can blame consumers for being a little more ready to spend money? The newspapers tell us that the Great Recession is over…and that we’re in a recovery. The lumpen consumer probably thinks he’s going to find a job soon…and that his house is going up in price.

But beneath the surface, there are powerful downtrends still underway. These trends began in 2007. They were misinterpreted, naturally, by leading economists and policymakers as a “liquidity crisis.” In fact, they were signs of a debt crisis. The private sector had far too much debt.

Economists who never expected trouble, reacted to it in a predictably moronic way – they rushed to the rescue with more debt. Now, they think they’ve triumphed… They’ve prevented another Great Depression. They’ve saved the world!

We’re written so much about that; you surely don’t want to read any more on that subject.

But here’s the interesting point: by failing to address the real causes of the crisis, the feds only allowed those undercurrents to grow more powerful and more dangerous.

Instead of reducing the world economy’s reliance on debt, they increased it!

On the surface, the rescue efforts look vaguely like a success. The private sector stopped spending. Government increased its spending to make up for it. Okay so far.

Alas…net, the world’s debt is still increasing – by a huge margin. Over the next 3 years, the biggest 20 economies in the world – the G20 – are expected to slip over the 100% mark, with more debt than GDP.

Now, let’s do a little math. The US has total tax receipts equal to about 15% of GDP. If the interest on the debt is only, say, 3%…that means you’re spending 20% of tax receipts on debt service. But suppose inflation rises…and interest rates go back up to where they were in the late ’70s. Back then, the feds had to pay 15% interest to borrow money for 10 years. At that rate, financing the whole federal debt would take 100% of tax revenues – just for the interest.

Obviously, that’s not gone to happen. Something else is going to happen. What? Hard to say. Some combination of default and inflation, most likely…

Of course, this doesn’t bother the feds. That story is still beneath the surface… It’s a crisis that hasn’t happened yet. They couldn’t see the crisis in the public sector coming in ’07. They can’t see the next one coming either.

Economists can’t tell a government job from a private sector job…and can’t tell $1 of government spending from a dollar spent by the private sector…and can’t tell a dollar’s worth of GDP from a dollar’s worth of real prosperity…

…which means, they can’t tell the difference between what’s happening on the surface to what’s happening underneath.

In a sense, this is just another manifestation of the same “battle” we wrote about years ago. On one side are the feds. On the other is Mr. Market.

The feds want to inflate. Mr. Market wants to deflate. The feds want a boom. Mr. Market wants a bust. The feds want to inflate another credit bubble. Mr. Market has a knife in his hand.

On the surface, the feds are winning. At least, that’s the way it looks if you get your information from reading the newspapers or listening to CNBC. And in a sense, these reports are correct. Superficially, the battle is going the feds’ way.

But deeper down…the debt is still there…and it is growing bigger. And Mr. Market sharpens his dagger.

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 ReckoningDice 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. 

  • Harry

    ““We’re seeing an economy that’s recovering, which is good news, and I think we’re seeing a market that’s valuation is not fully reflecting the potential earnings in 2011,” he said.

    “I think [that] says that this is just a brief hiatus and that we’re going higher.” -Jim Hardesty

    Couldn’t agree more. I’m trying not to laugh too hard as BB pulls in the reins on doomsday. Tempering a bit now? Too funny!

    The single dumbest thing in the world is to put your money in gold. Equities will fly while gold falls safely back to the $400 level where it belongs.

    The economy, once again proven by the numbers, is strong. Only fools who follow this drivel are the losers!

  • harry

    The sound of crickets in nice here. All the doomsday permabears have finally seen the light? Thrown in the towel?

    To be bearish now is as foolish as saying the sun won’t rise tomorrow. 1250 is certain on the S&P by July.

    Just think of all the money you could have made by following my lead a few months ago. No, keep throwing away your money on gold while the world basks in economic growth.

  • Kitaro

    The economists can see very clearly. They pretend not to see. Needless to say, between personal gain and public interest,
    no one will let go the former. In theory, all system, whether capitalism, communism, marxism, leninism, stalinism all are perfect. All cannot go through the test of reality. Haha !

  • Michael

    Harry, how does it feel when every time you blow your knows (nose), people scramble because it smells like a septic tank?

  • JMR Alan Greenspan

    Harry is always the first to post. He eagerly awaits every article just to say how stupid this is, and how a recovery is here. Day after day after day. He fails to ackowledge, or even try to refute, all of Bill`s perfectly crafted arguments and facts, and instead he just keeps saying the same thing over and over. Harry, we ARE in equities. The difference is we dont put ALL our money in it, and we save a good portion for Gold and Silver. And we are ready to jump off soon. Medium to long term, you WILL be broke. We won`t.
    Now why don`t you leave your parent`s basement and go have a life?

  • daddysteve

    Harry doesn’t care if the system is fraudulent as long as he can turn a profit. Normally this is prosecuted as conspiracy. Screw the grandkids as long as he gets his.

  • Don

    why don’t we look at what really is going on if, the government keeps giving tax breaks to the companies to leave our own country, we as a nation will never bail out. what should be done is bring the jobs back to the American people!!! So why we all sit back and point the finger at every thing and every one it will never get better here in the great land of the US of A. By the big cooperations closing the doors here has caused the common man to be out of a job will really hurt the market, I cant say what is going on in the other nations but here this is for sure.

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