02/24/10 Baltimore, Maryland – A couple of years ago, we used to get such a kick out of making fun of the financial industry. Its pretensions were absurd and shocking. Its delusions were breathtaking. Its leaders were lunkheads and grifters.
But the financial industry blew itself up in 2007-2009. Now, what do we have?
The government! Doing all the same things…making the same mistakes (only worse)…and working hard to blow itself up.
“Basically, it’s over…” says Charlie Munger. Warren Buffett’s partner figures the glory days of the US economy/empire are behind it. He spelled this out in what he calls “a parable,” in Slate Magazine.
This puts Munger in direct opposition to all those economists, bankers, politicians, pundits and meddlers who think they can do better than the financial industry. Martin Wolf, in The Financial Times, says the challenge is to “walk the tightrope” between too much additional stimulus and cutting off stimulus too soon.
Richard Koo and Paul Krugman think the feds need to give the economy a lot more stimulus in order to offset the forces of contraction.
Most people think the economy will muddle through somehow…thanks to all those geniuses working at the Department of the Treasury and the Fed.
Dream on! The economy might muddle through or it might not. (The Wall Street Journal says growth rates have already retuned to normal.) But if the economy does pull out of this depression…it will be in spite of all those ham-handed central planners who are telling it what to do, not because of them.
Yesterday, the Dow fell 100 points. Gold dropped $9.
As far as we can tell, we’re still in a depression – that is, a deflationary contraction. You’ll see a lot of contradictory statistics and BS analyses for the next 5 to 10 years. What you won’t see is real growth…not until debt is substantially written off, costs are reduced and a new economic model is discovered. The ‘growth’ we’re seeing now is largely an illusion, a mirage, and an attractive nuisance. We’ll have to pay for it later!
To put it another way, you won’t see real growth until there’s something solid to build on – a new foundation of lower costs and fewer leeches.
Yes, dear reader, the problem is not a liquidity problem. It’s not a banking problem. It’s not even just a debt problem. The bigger problem is that the US economy – but nearly the same could be said of Japan…the UK…Italy…and other places – is too expensive, too rigid and too full of zombies.
Munger is right. At least, he’s right about what has gone on so far. The financial industry turned the country into a casino…and too many people lost their money.
We don’t know what happened in the second part of Munger’s parable. We couldn’t get the 2nd page of the Slate article on our laptop screen. But he’s a smart guy. We doubt he missed the government’s role. First, the private sector loaded itself up with debt. Now, it’s the feds’ turn.
Was it Ronald Reagan who said of the Soviet Union, that it was on the “wrong side of history?” The derelict Bolsheviks were definitely on the wrong side of history in 1989. We knew it. They knew it. It was such a glaring problem; they had no choice. Their economy was imploding – thanks to rigid central planning. They gave up and switched sides.
But now it’s the US that is on the wrong side of history. Like the Soviet Union, it tries to impose its will, by force, on Afghanistan. Like the Soviet Union, it has too many expenses and not enough income. And like the Soviet Union, it tries to impose its will on the domestic economy too – by central planning. Not exactly in the heavy-handed fashion of the old apparatchiks… This is post-Berlin Wall central planning. Collectivism with a clown face.
The US nationalizes key industry and borrows heavily…shifting the weight of economic ‘growth’ from the private sector to the government. Everything from home finance, banking, insurance, automobiles, employment and food is now owned, provided or subsidized by the US government.
After the Soviet Union fell…the rest of the world went over to look down the collectivist hole…and then slid in too. In October 2009, the IMF counted 153 separate stimulus or bailout programs. If you bought a house or a car in 2009, you may very well have had the government to help you. And now, if you hire a new employee, you will have the government by your side again. If you get sick, you will have the comfort of knowing that the feds are in practically every examining room, every operating room, every drug laboratory, and every pharmacy. And if Obama has his way – there will be even more of them. Is there any economic act, howsoever trivial, that no longer involves government support, approval, or funding?
Munger may have pointed out. Or maybe he didn’t. In either case, we will: the US economy was at its strongest before it was burdened by so many people depending on it…and so many smart people helping it along.
It won’t make much progress again until it gets rid of those people. And that won’t happen until it has crashed…and become desperate. Living at the expense of others is a hard habit to break.
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
Got our 100 points right back! Bernanke will keep rates low as long as needed and that’s the absolute right thing to do. We’re seeing growth, so it’s working. Why take that away? It would be foolish at this point. If it’s working, don’t mess with it.
Even one of your favorites, David Roche, had this to say:
“Households lose about 20% of their wealth. But if the price of things (either stuff in the shops or investments) falls by more than the combined contraction of wealth and income, they have become cheaper in terms of the ability of most households to buy them. Those with money do so. They don’t borrow to buy or invest but they have the cash. Those that don’t are still busy paying down their debts. But the ‘haves’ can have enough purchasing power to move the economy off the bottom. This sort of recovery is self-sustaining.
He believes this is the self-sustaining recovery we are now seeing. And I agree 100% as I’ve been saying all along. Now I have one of your own backing me up!
…they say the rich are getting richer while the poor are getting poorer…so, as the rich who are getting richer buy stuff that rich people buy, the price of that stuff rises….and as the poor, who are getting poorer and thus buy less stuff that poor people buy cause the price of “poor people” stuff to fall…then voila…the rich think the poor are getting poorer and the poor think the rich are getting richer, but not so…harry thinks that the rich people are going to buy more “poor people” stuff…we’ll see about that…!…because if they do, then the rich may as well be getting poorer…
UH Harry if the fed is keeping rates low that means they do not see this imaginary growth you see . This is not good news anymore then the fact that new homes fell to record lows . I believe you were hyping this coming announcement yesterday. How did that news work out for you?
I like how this F8*^@ blog won’t let me threaten Harry…
Doug: It is good news, Chairman Bernanke is seeing growth. Like I said, why change it if it’s working. And it’s clearly working. We are seeing some pretty strong numbers.
Mike: I’m just quoting David Roche, whom I must say is a favorite around these parts until he’s rational, then no one wants to listen to him.
The brilliant author/speaker Chris Hedges coined the term “inverted totalitarianism” to describe the U.S.’s emulation of the old Soviet “central planning” government.