03/03/10 Baltimore, Maryland – There’s good news and bad news…and a lot of news in between.
Consumers spent a little more than was expected of them. And manufacturing did a little better than expected too.
On the other hand, the federal government’s tax receipts plunged in the month of February…and bank lending is still contracting. Last week it shrank $33 billion – the 7th week in a row it has contracted.
How does an economy expand when the banks are lending less money? Beats us.
We believe the “expansion” reported in the GDP figures is mostly counterfeit. It’s government spending and hot money filtering into the economy. Still, it’s amazing that the GDP figures are positive.
The Dow was flat yesterday. The euro rose a little – on expectations of a settlement of the Greek affair. Greece only had a month to sort out its problems. That was two weeks ago. The “clock is ticking,” say news reports. Most likely, the Hellenes can’t really sort their problems out on their own. Greece will need some sort of bailout – even if it is limited and tentative – from Germany. Stay tuned.
It will be interesting to see what happens when Britain runs into trouble financing its deficits. It won’t have the Germans to help. Britain never took up the euro. It will be on its own.
But the big news from yesterday was the $19 boost in gold. Why did gold suddenly shoot up?
We don’t know. But our guess is that gold will suddenly shoot up a lot more. We’re in a deflationary period. That means everything is going down in price. But against what? Well, against money. Against real money that is – gold.
So gold should continue to go up until this deflationary period is over. That doesn’t mean there won’t be more hiccups and reverses in the gold bull market. But one of the surest trends of our time is the crack-up of the paper money system. And that is bound be good for gold.
Chris Wood of CSLA says he gives the dollar standard 5 more years. Maybe it will be a bit more…maybe a bit less. But one thing is sure. Governments cannot continue to run such huge deficits forever. There will come a day of reckoning…
The feds are hoping it comes at a time and place of their own choosing. They all want to ease their way out of their troubles…with the help of consumer price inflation. You heard central bankers talking last week about increasing the inflation target from 2% to 4%. If they can actually control inflation so precisely, it will be a miracle. But that is what they hope to do.
A few years of 4% inflation would do wonders. In ten years, they would have cut a third of the national debt – in real terms, of course (supposing that they don’t add to it even faster). Not only that, the debts of the private sector would be eased too. At 6%…debts would be cut in half in a decade. With half the debt burden – the private sector might be ready to begin a new period of growth. That is the feds’ real strategy…to de-leverage the private sector enough that it can grow…and increase tax receipts.
By the way, that was what happened in the Reagan administration. The inflation of the ’70s forced up interest rates and caused the worst recession since the Great Depression. But it also lightened debt loads – so much that the economy was ready for another big growth spurt.
This growth really paid off in the ’90s…and the very early years of the Bush junior administration. Thanks to growing tax revenues, both Clinton and Bush were able to pay down the huge debts of the Reagan years…and still increase spending. The economy was able to “grow its way” out of debt.
Then, with the war on terror and the micro-recession of 2001, the budget magic of the ’90s was lost. Bush apparently never met a spending bill that he didn’t like. Spending exploded…especially time bomb spending for health care, which increases automatically year after year.
Then came the depression…known popularly as the Great Recession of 2007-2009. Tax revenues fell. Spending increased even more. And now the deficits come hard and fast. And there seems to be no way to “grow our way out” of them. All of the conditions that made for a boom in the early ’80s are making for a bust in the early 2010s. Interest rates are at record lows, not record highs. Stocks are high, not low. Bonds are high, not low. The government is the solution, not the problem.
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.
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
Maybe this has nothing to do with this post, but is a question that came to my mind today. If Greece has to go on austerity because of its debt problems, why do the US gov dont do something like that? Instead of printing money It would be better to rise taxes and cut spending. Is not nice, but it works.
Bernardo, the Greek government wouldn’t have announced the package they did without investors and the EU holding a gun to their head. As it is, they’re courting political suicide.
It will be interesting to see how the Greek public takes it. For example, raising taxes on Ouzo in the middle of a recession may not be very popular.
If the Greeks had a printing press, they would use it. Inflation is always more popular than raising taxes or cutting spending because fewer people understand the effects.
Well yes, but dont forget that inflation destroys purchasing power and wages never grow the same. In México we know how this works. Inflation means a big burden to the mayor part of society that is not able to go with inflation.
So rising taxes and cutting spending, from this view, is better than inflation. You do an economic diet if you have eaten too much!
Bill – You are a common sense genius..and I greatly appreciate that because there is a shortage of common sense these days. Fact is, there is technical analysis that supports your common sense arguments quite remarkably and accurately. Elliott Wave Analysis has predicted the same predicament you’ve called for. In fact they call for a similar sequence of events…deflationary depression, printing presses (hyper inflation), then default. Problem is, timing is difficult to determine…does hyper inflation arrive in 2 or 5 years? I guess you don’t care if you own “Mogambo Guru” gold, silver, and oil!
Only time will tell…as for me…I have no idea. I just know that the incompetent slobs in Congress and at the Fed have no idea what they’re doing. With that being said, I’m going to dollar cost average into physical gold and silver.
Keep on with the great posts Bill…you know what “they” say…”the truth shall set you free”…hahahaha (“they” not being the federal govt.)
>How does an economy expand when the banks are lending less money? Beats us.
Maybe people are stopping to use money.
A plumber and a hairstylist both have $200 in their pockets.
The plumber repairs the hairstylist’s bathroom and charges $200 for it.
The next week the plumber goes for a haircut and pays $200 for it.
Both have again $200 in their pockets.
But the government taxes them $60 on the “income”, so both are left with only $140
If they hadn’t used money both would still be with $200.
So, yes an economy can expand with less money being used, or even no money being used at all.
And more great news today, Bill! Claims unexpectedly fell more than anticipated and retail sales are alive and booming! Put that together with great auto sales and even with the worst blizzards in a hundred years, people were out spending.
This is great news for the economy and fantastic news for stocks going forward. Forget about gold, it’ll be back in the 700 range before you know it. Everyone will be flooding into equities soon, as they should, and we’ll see an explosion to the upside!