09/21/11 Buenos Aires, Argentina – Not much market movement yesterday. Dow basically flat. Gold rose $30. Gold investors don’t seem to be able to decide. Is the economy good for gold…or bad?
Here’s our opinion: This is a good time to own gold. But it won’t seem like a good time. Not now. Because the Great Correction just gets worse and worse. And as the correction bites the economy, the dollar goes up against almost everything.
“Gold is not going down,” says David Rosenberg. But we’re not so sure. Gold investors bought gold to protect themselves against the dollar. But in the short and medium term, they won’t need protection against the dollar. They’ll need protection against everything else! They’re likely to be disappointed with gold and drop it as this period of de-leveraging drags on.
Yesterday, we promised to explain what was really behind what Tyler Cowen calls “The Great Stagnation.” We haven’t forgotten. We’ll come back to it. Just hold on.
First, let’s look at how this world economy is slipping into a worldwide depression.
Just check out the container shipping volumes at California ports. They’re down nearly 10% from a year ago. That’s a big drop in world trade. What happened? Did Americans finally get enough gadgets and gizmos from Asia? And what does it mean for the Asian exporters? Their economies depend on buying from overseas. They’re export economies. Of course, it is true that local demand is increasing. Eventually they’ll adjust to fewer exports and more domestic consumption. But adjustments take time…and are usually linked to major financial crises. What will happen?
Here’s an answer from Britain’s Telegraph newspaper:
China ‘faces subprime credit bubble crisis’
Monetary tightening in China threatens to pop the $1.7 trillion (£1.07 trillion) credit bubble in local government finance and expose the country’s simmering “subprime” crisis, according to the Communist Party’s economic guru.
Mr. Cheng said China is entering a “very tough period” as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice.
“The tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults,” he told a meeting at the World Economic Forum in Dalian. “Our version of subprime in the US is lending to local authorities and the government is taking this very seriously.”
“Everybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare.”
Meanwhile, in Europe, Italy got downgraded by S&P. Angela Merkel lost a critical vote. And Greek bankruptcy is right around the corner.
And back in the US the typical American is suffering. He had equity of 61% in his house back in 2001. Now, he’s got a paltry 38%. And he’s lucky to have that. There are 11 million homeowners who have less than zero equity. They’re ‘under water’ and still sinking.
One in four young people is jobless…with sentiment among the youth at a record low. The old people may be optimistic, but not the young.
And 15% of the population — a record number — is now below the poverty line. That’s 46.2 million people living in poverty in the richest nation on earth.
But don’t worry, dear reader, president Obama is on the case. He says he has a solution to the US debt problem. He says he’ll cut expenses and raise revenue. Why didn’t we think of that!
A quarter of the cuts are supposed to come from the military budget. But they’re totally fraudulent. The feds don’t really know how much their wars will cost. So when they talk about ‘cuts’ and ‘savings’ they are talking about reductions in projected costs, not real costs. They’re made-up numbers, in other words. Even they admit that the savings are “illustrative” — rather than real. And there’s no way these illustrative savings will turn real — not as long as America stays on the imperial path.
Obama also wants the rich to pay more in taxes. Heck, Warren Buffett is on board. And so are most of the voters.
Of course, most of the voters don’t pay taxes at all! Not net. About half of the people eligible to vote get more from the feds than they pay in taxes. That leaves the “rich” shouldering an outsize burden. Already, the top 1% pays 30% of the taxes.
But if you’re rich, don’t expect any sympathy from us or anyone else. The rich have rigged the system in their favor. Everyone else has gotten poorer while they’ve gotten richer. Voters will be happy to soak the rich. Heck, they’d drown them if they could get away with it.
But let’s go back to the big picture. Tyler Cowen thinks the US enjoyed the low-hanging fruit. Fertile farmland, cheap energy, abundant water, easy credit…getting rich was a piece of cake.
He mentions too that investments in health care and education seem to have reached points of diminishing returns. The US spends far more on both than other countries…and gets no extra benefit. Our schools are not better. And Americans don’t live as long as people who spend only half as much on health care.
Can we fix this problem, asks Mr. Cowen? Wasting no time answering his own question, he responds that we just need to boost the prestige of scientists…and count on human ingenuity and innovation to come up with a solution. Heck, even Thomas Friedman could have come up with that! In other words, he thinks the system can heal itself.
But the real problem is not a ‘low hanging fruit’ problem. It’s a declining marginal utility problem. And a zombie problem.
As a society ages its institutions become brittle and inefficient. They are no longer dynamic and productive. And, they become nests for dead-head zombies. The two things go hand in hand. On the one hand, declining marginal utility undermines the productivity of future inputs. And the zombies take over…making it impossible to direct inputs elsewhere. The zombies protect their turf; they make sure they get more resources, not less.
Take education, for example. A little of it goes a long way. When a person learns to read and write, the whole world of ideas and information opens up to him. Whether more inputs of formal education actually pay off or not is open to question. Clearly, beyond some point, they don’t. Americans spend twice as much per student as they did 40 years ago. The educational attainment results are about the same. Which suggests that the marginal utility of investment in the education industry declined to zero 4 decades ago.
Most the world’s great ideas…great books…and great inventions were produced by people who spent relatively little time in formal school settings. But now, every goofball and half-wit is expected to have a college degree. What do you expect? A college degree isn’t really worth very much.
But the zombies want their children to go to college. And the zombies want cushy jobs as ‘educators’ and educational administrators. (They don’t want to teach…that’s too hard!) And children are no dopes either; they know it’s a lot more fun to spend 4 years at Party U., at someone else’s expense, than 4 years out in the real world. Especially now, when it’s hard to get a job. That’s part of the reason student loans have quadrupled since ’07.
Obama promised to bring ‘change’ to the nation. But change is the last thing the zombies want. And it’s the last thing that Obama would want to give. The voters wouldn’t stand for it.
Instead, we have a Great Stagnation…an economic deadend…where further inputs into traditional, zombie-controlled institutions no longer pay. More credit? More military spending? More Medicaid? More Social Security? More education? More consumer spending? More hiring? More capital investment? More energy consumption? More programs? More unemployment compensation? More taxes? More laws? More regulations? More lawyers? More educators? More security guards?
Will they pay off?
Not a chance.
Tune into tomorrow to find out how to really fix the problem.
Regards,
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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I’m all for soaking the rich, who have rigged the system in their favour, as Bill writes. The problem is, I’m considered rich by most other Americans. And yet I’m among the worst-off, taxwise, since I belong to the working upper-middle class.
Someone like me is “rich” in terms of total income, but since all of my income is generated through salary – and not investments, which are taxed at a mere 15% for capital gains – I pay exorbitant taxes as compared to fatcats like Warren Buffett.
Last year I paid 31% in taxes, literally more than anyone I know (amongst friends, family, celebrity CEOs, and politicians). Obama paid 26% in income tax, and Biden paid 23% last year. I made less money than BO but paid more of my fair share than he did.
Call me a communist, but I am all for taxing income over $50 million at 80%. Is there a difference between, say, $52 million and $73 million? There is a vast difference, I assure you, between $520k and $730k. Neither earner would be poor, but neither could retire just off one year’s salary. Both men would have to continue to work. So leave the multi-hundred-thousandaires alone. We’re still working stiffs.
DR won’t let me post. I’m not Shawn. What gives, BB?
Is there a word count limit, BB? I wrote a 200-word reply to this article and it will not appear (while my one-line whine above made it).
What gives, BB?
Be patient. It’s not you, it’s me.
There may be deflation in US-dollar terms, but so it is in the true/honest money: gold. Why would I want to hold the brittle paper form of money instead of the latter, especially when even yourself admit that brittle paper may implode at an unspecified time in the future?
Also, considering things are changing (China growing > 50 times in the last 30-40 years), any analysis should include what EM will do in the coming years (when incidentally they will for the first time constitute the bulk of the world economy). During the last gold bull market, EM where pretty much isolated in their own backyards growing rice and the like.
And about China: they may face strong headwinds in the short term, but they still have a lot of room to grow, because they are still backward in many areas and they have a lot of room to catch up to the current technological limits.
My third or fourth post attempt yesterday never made it. Clearly BB has some strange rules that prevents long posts or too many posts.
My apologies to my many adoring fans who sometimes have to live without my wisdom.(if you can call that living)
Boost the prestige of scientists?
All they need are some new Nobels.
It’s easy to solve the problem to this Greatest Depression, first: trust in goods, exchange goods to goods, second: dump all fiat money, third: only YOU can solve the problems, anybody come to solve that for you. Jobs that know this time (a person that sell your work force for a wage)will to disappear!!
I’d never ventured over to the “Investor’s Friend” site, but found these gems:
investorsfriend.com/Summary2008dko.htm
investorsfriend.com/Summary2007lio.htm
Look at the performance charts at the bottom of the pages….
In 2007, our wise and learned “Friend” managed to pick 10 winners and 14 stinkers…. But that might have just been a bad year – everyone has one.
In 2008, our “Friend” would have guided us to just 23 losing stocks out 25 total recommendations. And only 6 would have lost us more than half of the nut we invested in it!
Now…. what if we’d invested our money in gold…. or oil…. or one of the other tangible things that our “Friend” likes to denigrate because he can’t wrap his brain around buying a thing that isn’t levered to consumer behavior? What if we had, instead of listening to this “Friend”, invested our money weekly at the absolute high point of the week in a basket of tangible, barbaric and traditional non-money items that don’t pay dividends or have an attached coupon or even have the Buffett-seal-of-approval? Even hamstringing our portfolio with mandated high price points for each entry, would we have been better off with this portfolio or taking our “Friend’s” recommendations?
Hmmm….. with friends like him…..
The US neither knows nor learns anything from history. The Russian people didn’t revolt in 1917 because they disliked like their masters. They revolted because their rulers claimed to own everything in Russia by divine right and treated their populace as animals. Just as the current system in the US does today.
Mr. “Crack in up” (interesting handle)
Thank you for the advertisement… Good of you to illustrate that The InvestorsFriend reveals all his performance figures honestly, in good years and bad years.
It’s been a while since I visited this site. Was a regular reader when they were a lonely voice warning of the financial mess to come. Only a handful of people saw the ruin ahead.
Bill has an interesting take as always. Thanks for sharing your invaluable insights on the sins of TPTB, and the inevitability of the downward slide.
Bill B said: “Fertile farmland, cheap energy, abundant water, easy credit…getting rich was a piece of cake.”
Did the people of Hong Kong, Singapore, hell, Japan, have all this?!?
No, and they managed to build a prosperous middle class.
What they DO have is “Tiger Moms” and that is what is lacking in American society. We need Moms and Dads who care and work at bringing their children up with discipline and who value hard work and sacrifice and eduction.
Please don’t feed the trolls.
Bill: Keep scratching the low part of everybody’s brain. It’s good entertainment.
Joanie Smith:
You’re kidding, right?
There are tens of millions of poor who would love to see you burned at the stake for making as much as you do.
They think YOU should be paying 80% in taxes.
To them you’re no different than those making millions per year.
It’s all relative buddy, because in your philosophy the money isn’t really yours to begin with and you accept that elected officials have the right to decide who gets to keep only 20% of what they earn.
There is no REAL difference at all.
Thanks to folks with that attitude – like Warren Buffett – ALL wealth creaters are going to have more of their hard-earned wealth confiscated.
“Crackin up….” (I spelled it right)
Thank you for the warning… Good of you to illustrate that The InvestorsFriend is an honest stinker, because it is better to be an honest stinker than a dishonest stinker.
DR won’t have let me post many times in the past. :’( I’m an ardent fan of Shawn! What gives, BB?
My guess is there’s a glitch on the website, because my post to Mr. Miagi from a few hours ago never posted either – and it had nothing to do with BB or InvestorsFriend/Pal/DMV Clerk being b**ch-slapped.