Bill Bonner

Yesterday, Silvio Berlusconi said he will leave government…once the legislature has agreed on an austerity program.

Too bad. We’ll miss “The Cavalier.”

Once, in Rome, we heard him speak to a crowd. We didn’t understand a word of what he was saying. But he said it well. He was at ease…friendly…joking…enjoying himself.

And now what? The poor man will be out of politics. No more will he get to work with the great men of finance, trying to solve the historic problems of the day. He’ll have only his bunga-bunga parties with plenty of alcohol, music and beautiful young women. Poor fellow.

Our guess is that the great men of finance won’t be able to solve Europe’s debt problems. At least, not without a few blow-ups. And the European Union will probably end up less united than ever. (Gold is trading over $1,800 this morning…looks like investors are worried too.)

Until recently, both economics and politics argued in favor of a more centralized Europe. Now they are pulling it apart.

But we’ve made so many guesses over the past few months and years…we’ve lost track of them. Herewith a review:

First, back in the mid-’00s, we guessed that the housing market, stock market, and the financial industry would all blow up. They did.

Then, we guessed that this would not be followed by the typical recession/recovery pattern of the post-war period. It wasn’t.

Instead, we had a hunch that the economy had entered a Great Correction…from which it would not emerge for many years. So far, that appears to be what is happening.

As to what gets corrected, when and how…we admit ignorance. But ignorance never stops us here at The Daily Reckoning; it is like red meat to a hungry dog. We thrive on it.

We guessed that the main thing to be corrected was the credit bubble. Debt levels are too high. They need to be reduced. That’s why the feds have been unable to turn the situation around. In a recession, they can make credit cheaper and more abundant. That usually does the trick. At lower financing costs more projects make sense. People begin to invest and spend again. But it doesn’t work that way in a debt correction. It’s not a question of the price of credit…but of there being too much debt. Debt levels need to be reduced.

The price of credit has been reduced to zero (the fed funds rate)…and the US government is running trillion-dollar deficits. Neither monetary nor fiscal stimulus has worked. Both add debt; instead, debt needs to disappear.

We also guess that this correction will end with the end of the dollar-based monetary system that was set up in 1971. No paper money has ever survived a complete credit cycle. The dollar won’t be the first.

De-leveraging will keep prices low while cutting profits and sales. As it develops, stocks, real estate and other assets will eventually be marked down to real bottom-of-the-bust levels. You should be able to get a 5% yield on your stocks…about twice what is available today. That will mean prices at about half what they are today.

The slumpy economy…combined with periodic liquidity crises (such as is now happening in Europe)…along with falling asset prices will drive investors to the safety of US bonds. This will keep US government financing costs low — despite huge deficits. It will also convince the feds that they can pump large amounts of cash into the system without fear of inflation. This they will do…

The price of gold may fall in the early de-leveraging phase. Then, it will rise as the late de-leveraging stage begins. This is when the feds’ money-printing will move into high gear. Sophisticated investors — including foreign central banks — will be wary. They will buy gold.

The price of gold will rise. The Dow will fall. They will intersect at about $5,000.

But our guesses don’t stop there. We also guess that…

…the developed countries will find it very difficult to grow. First, because of the weight of debt. Second, because much of their capital is “invested” in unproductive, zombie industries. Third, because their populations are stagnant. Fourth, because they have already gotten most of the above-trend growth resulting from increased use of cheap fossil fuels.

…since the developed economies cannot grow…and since they are up to their chins in debt…they cannot fulfill the promises made to their citizens. The grand bargain of the modern, social welfare state will begin to look more and more like a bad deal. Young, unemployed men will become increasingly fed up. They will look for radical solutions…and more radical leaders with jingo answers.

…governments, which are inherently reactionary even in the best of circumstances, will respond with repression. They will not adapt peaceably. They will not throw their zombie clients under the bus. Instead, like the Ancien Regime, they will dig in their heels and protect them. The defense industry, for example, will try — probably successfully — to direct the citizens’ rage against imaginary foreign enemies…and thereby increase its own power and wealth…

…the real economy will weaken. Revolution will begin…probably coincident with hyperinflation. Finally, the middle class will be broke (the poor are already broke) and the country will be ruined.

There, that pretty much sums it up. Any more questions?

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • phelps

    No questions. You covered it all. I don’t know whether to laugh or cry. Cryin won’t help ya, cryin won’t do you no good….I guess the levy is about to break.

  • http://www.investorsfriend.com The InvestorsFriend

    Yes, when is the next bunga-bunga party with all the alcohol and beautiful young women and how to I get invited?

  • http://ChairmanOfTheBored.org/ ChairmanOfTheBored

    The upcoming war would be a great spectacle…

  • http://TheinvestorsPal.org/ The InvestorsPal

    … and then the Phoenix will rise with Shawn at the top.

  • me

    and then who has cash will get all he needs cheaply
    cash will be a king

  • Bill B. Bonner

    Shawn, nous avons déjà assez de serveurs. Nous vous maintiendrons dans l’esprit pour de futures considérations.

  • elegance

    Yes. I got one. What will be the time scale? I realize you called it all right until now. The problem is you always seem to underestimate for how long these things can drag on, the sheer ferocity (and imbecility) with which the governments and other institutions will try to delay the inevitable.

  • Glenn

    Mr. Bonner,

    I have great respect for you and you are one of many sources of education and elightenment for me.

    But I have a simple question on your certainty. How can you be so sure? Is every empire doomed to the exact same fate?

    England, had debts that far exceeded ours at various times in their empire. They went from the world’s superpower to an also-ran.

    And up until the last 20 years or so, they seem to have gotten along pretty well.

    Thanks in advance.

  • John

    Alright Bill, now give us the bad news!

  • El Rosarino

    Yes, C U A N D O ?!

  • Wiz

    You still don’t blame capitalism. Capitalism is to blame! And we can still avoid disaster! Nationalise all banks, and nationalise all finance!

  • RobM

    Bad things happen when growth stops. Worse things happen when the economy declines. Declining total net energy exports and increasing demand for energy from developing countries guarantees our economy will decline. Buckle up.

  • Scott Walker being b***h slapped by a DMV clerk

    And nationalise everything else, except for firms with fewer than 5 employees!

    Then, just for the hell of it, collectivize all agricultural land!

  • Mack

    No, Wiz, capitalism is not to blame. It was not allowed to work because the government tried to bail out the zombie finance and other industries. It took away the fear of risk, a fear that in sane times prevents people from making bad financial decisions.

  • http://www.investorsfriend.com The InvestorsFriend

    How about we scrap democracy and try a benevolent dictator in combination with total capitalism?

  • CommonCents

    All coming to a movie theater near you! Grab your popcorn and fasten your seat-belts.

  • http://www.bradmcevoy.com Nuke Em Til They Glow

    Sure, InvestorsFriend.The best form of government is dictatorship with an occasional assassination to moderate abuse of power.

    Sadly tank technology tipped the balance in favour of incumbent dictators, but hopefully new cheap, autonomous DIY drone technology will tip the balance back in favour of revolutionaries.

  • filonn1

    I just want to eventually retire in peace , debt-free with a little bit of money in the bank, but how is that possible if all around you are the walking dead.

  • Yoshinori

    It’s too bad the United States could not go bankrupt when Japan was on top.
    Japan not only started a war against the United States, she suffered a humiliating defeat. Ever since Japan has been subservient to the needs of America. A sense of guilt still drags on. I know because I live in Japan. Now the two largest holders of the US treasury bills are China and Japan. They both have similar balance sheets in that most of their assets lie in the form of the US treasury bills. One day their assets will turn into nicely decorated pieces of paper of no value. Both governments will be upset indeed but how they will react on their discontent I would guess will be totally different. The Japanese will meekly say, “O. K., boss, can we call it even now?” Not so the Chinese. The Chinese did not lose the war. Their economy will be in shambles too like the rest of the economies so the Chinese authority will do their best to make it look the blame rests entirely with the United States. It is this movie that I want to see. Historically, the United States tended to lean towards China over Japan as America’s friend in Asia but for some reason things never panned out. I don’t think things will pan out well this time either. I’m right behind you Mr. Bonner. It’s gonna be fun to watch!

  • Rusty Fish

    Great article. Good guesses. Everything is encapsulated in piece. For the time being, no question. Till then.

  • The Rhythmic Slapper

    Bunga Bunga Boys! Ohh Oohhhgaaahhh~!

  • Merciadri

    @Filonn You are asking much! Try the Bunga Bunga style :P

  • Lori

    Wiz wrote : “Capitalism is to blame! And we can still avoid disaster! Nationalise all banks, and nationalise all finance!”

    Oh and you think the US government is to be trusted to control the financial system. The very same government that isn’t prosecuting the fraud we’ve already seen in the last few years? That’s actually quite funny. Thanks for the laugh.

  • Jackson

    Bill,

    You did leave out the part where the Mogambo Guru emerges from his bunker of extreme paranoia the richest man in the US because he stocks no dollars in his bunker, just gold, silver and yummy pizzas which will probably sell for a couple silver rounds. Oh, and he stocks lots of ammunition.

    The people left after the destruction will realize Mogambo is possibly the wisest man on earth and will carry him out of retirement and into the white house where absolutely nothing will get corrected unless they simultaneously throw out and replace all the senators and congressmen…and maybe the supreme court justices.

  • *Sparkie*

    Hey BB don’t b so hard on your self. Don’t it feel good 2b right once in awhile? The followers of the DR,r finally c’in things in the world 4 what they really r. Thanx 2u. The comments r really maturing & starting 2 hit home. BB with all yr wisdom,knowledge & understading of the things go’in on in the world,how do-ya manage 2 stay happy? Hey i know,its hitting those groovy Bunga-Bunga parties once in a while. Ain’t it? May b,the D&R beleivers & me,will cu at the next 1! Wouldn’t that b gr8? Cower-a-Bunga Dude! *S* PS and the zombies will create,or (instigate)an imaginary(enemy)in order 2 protect there “Hand-Outs!” Boy BB,ain’t that the TRUTH!!! PPS save the read meat 4 mans faithful friend…

  • kamran

    I don’t mind a hyperinflation. It may help payoff my house quicker, lol.

  • kamran

    If you have nothing but gold to buy things and others have cash (since gold is limited supply), you end up getting cash for the balance of your transaction. Somehow in this case a global currency is more realistic than metal changing hand (been there done that scenario). Not to say that gold won’t increase in value.

  • http://silverandgold101.com Randy

    But other than that, everything will be OK?

  • rono

    Yo have forgotten one event War it is the salvation of corrupt government give the population some one to hate outside your own border’s and bingo you are once more off to the race’s feed the sucker’s the same old drivel that you have been feeding them for centuries and you have got a whole new country to pillage

  • gman

    @ filonn1

    it’s called heaven.

  • lsdnotlbj

    I’m so sick of this rose-colored-glasses, pie-in-the-sky crap from Bonner.

  • david

    the daily reckoning has some insights on the markets that i appreciate but its not all that. Please, no offence here but one of the most popular posts boasted how you projected the market crash in the mid 2000’s , bravo. the housing crash, bravo. But i do recall one advertisement that called for a great housing crash that year, yet he was off a year or two and eventually his prophecy came true but not in the year he said. so i am weary of some of your advertisers for as a options investor if you off a month then you can be wiped out- let alone a year or two off.

    also, bravo, you called the market top griping about until it occurred in 2007, the qqq’s hit a high of 55 dollars and tanked. now its all over right? today The qqq’s are at 56 dollars now and this is after greek and italy crisis news. yes, there may be some more down side and the italy debt crisis should apply heavy gravity to the markets but all in all its all hot air for the last decade.

    the qqq’s were 19 dollars in 2002 when doomsdayers like prechter were calling for more downside. when it didnt happen but rallied huge the elliot wave newsletter called it a rare event, ‘extended wave’ up that should stall. remember the qqq’s are at 56.80 now.

    and the daily reckoning has been all doomsday since 2002. stock 19 dollars to 56 is not much of doomsday victory. maybe all this fear is causing the market to rally? maybe this is the top again?

    will the dollar die and go to zero? maybe. but they have been saying this for a decade now and i ignore much of the hype now.

  • Don

    This may have been said here before, but it bears repeating: BILL BONNER FOR PRESIDENT!

  • El Rosarino

    @Daivd Everyone try to guess what will happen but no one knows the future. So the only guide that you have are some basics principles that are convenient to belive. It’s better to stick to some sensible ideas… and hope for the best.

  • Buddy Rojek, CPA

    You are all wrong.

    Thus is a game changer.

    Got Nat Gas. Got http://WWW.westport.com

    Got cheap transport. Better than ZIRP.

    Get on board Doomers. The Middle East is finished. Diesel and Benzine (Gas) is so dirty and so last century. Nat Gas. Abundant, clean and cheap.

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