02/03/09 London, England There it is, dear reader…the future of the United States of America.
This just in:
We have it from our usually unreliable source in Washington that Gideon Gono, now head of the Zimbabwean central bank, has been called in to aid the Obama Administration. In secret talks, Gono has agreed to replace the out-going Ben Bernanke, who is said to be going to work as a helicopter pilot. Gono will take over the Fed. And a new bill has already been designed – our source was able to sneak out a copy of the new note – for 1 million U.S. dollars. That’s Gideon Gono’s picture on it.
According to reports, Gono insisted on getting his face on the bill as part of the deal. “Dead presidents are a dime a dozen,” he is said to have remarked. “And this is just the beginning; we can add zeros later.”
Gono was in the news yesterday for other reasons too. Zimbabwe has taken a couple of bold steps recently. First, it announced that henceforth citizens would be allowed to use currency other than the stuff produced by its own central bank. This came as a great relief to the people of the nation – who were already using U.S. dollars to replace the Zimbabwean brand. With 230 million percent inflation, the Zimbabwe dollar has not been so much a store of value but an incinerator of it. Second, Gono announced that he was taking 12 zeros off the Zimbabwean currency. Twelve seems like a lot. And it seems like only yesterday that Gono introduced the first note with 12 zeros on it – the 1 trillion Zim dollar note.
But that’s the problem with zeros. They’ve got holes in them. You add nothin’ to nothin’ and you still got nothin’. Easy come. Easy go. You can as easily add zeros as take them off. At the end of the day, the extra zero gets you zilch.
Still, dear reader….
In Gono We Trust. Our economy is in a terrible mess. We need inflation; only Gono seems to know how to get it.
Yesterday, the report card on the economy came in. It showed growth in the last quarter of last year at MINUS 3.8%. “Could have been worse,” say economists. It WILL be worse, we reply. This Depression is just getting started.
The Dow fell 40 points yesterday. We’re in February already. Investors look back and see that stocks have lost more than 8% so far this year – the worst on record. In 87% of cases, what goes down in January goes down all year long. Last year, we had the worst stock market performance on record. But what the heck…records are made to be broken. This year will probably be worse still.
Macy’s said it laid off 7,000 people. California says it is kiting checks. And Republicans say they are digging in their heels about Obama’s Bailout Boondogglization program. They favor boondoggles of their own.
Consumer spending fell last month – for the 6th month in a row. Consumers are exhibiting the quality that economists fear… “the propensity to save.” Until last year, of course, they had a propensity to spend. Now, all the news tells us that what ought to happen is happening now; consumers are closing their pocketbooks.
According to mainstream economists, this “propensity to save” thing is as welcome as halitosis. It’s a conversation stopper, for sure. One man’s expiration is another’s inspiration. One’s spending is another’s income, in other words. So when he stops spending, the whole system of consumer spending comes to a halt. Sales plummet. Incomes fall. Jobs are lost.
Hey…welcome to the Depression of 2008-? And get ready to welcome Gideon Gono to the Fed. We need him.
*** Yesterday, we promised to take up a theme…hmmmm….what was it…? Oh yes, the critical issue…when.
When? When what?
Oh yes…when will deflation turn into inflation?
You want a date, don’t you dear reader? You want to know exactly when you should switch out of Treasury bonds and into stocks, gold and freeze-dried food. Alas, that we can’t give you. Not even an approximate date.
This past weekend, we sat down in the Dr. Richebacher chair that we keep next to the fireplace. It’s the chair where Kurt Richebacher used to do his heavy thinking. We inherited it from the family after he died.
We sat and we tried to channel Kurt. What would he think…we wondered.
“Imagine you are in a small town,” we thought we heard him say. “Imagine that the banker printed up the town’s money in his basement. One day, he went a little crazy and started making huge loans, even to unqualified borrowers, at very low rates of interest. You would soon have a boom on your hands, with everyone paying for everything with IOUs, all derived from the bank’s easy credit policy. But, eventually, when it was discovered that people couldn’t repay their loans, there would be a terrible bust.
“That is where you are now. (I say ‘you,’ because I am no longer among the living…but I have to say, heaven is not a bad place to be… There is almost a total absence of economists, lawyers…and not a politician anywhere.) It is a period of price discovery in the credit market…because no one knows who can pay his bills and who can’t. The IOUs are being marked down. Unemployment is rising, too, as the local economy slows down. Consumer demand has been greatly reduced as every has gotten poorer.
“Now, the banker sees what a mess the place has become. Naturally, he wants to do what he can. He tries to lend more money, but people have been down that road; they are reluctant to borrow. Then, he undertakes to build a new ballpark…you know, for playing baseball. And he decides to upgrade the town hall too…printing up the money to pay for it, as necessary, and to pay for a variety of projects to keep his friends and relatives employed.
“But while he is trying to get the boom going again, the bust is still going on. For every dollar he puts back into the town economy, $2 or $3 is taken out. Instead, of spending money like they used to…citizens stuff it in mattresses and bank accounts (much of it comes back to the bank where it started!)
“This process can go on for much longer than you think. Because the banker is, in effect, standing in the way of what needs to happen. He is blocking the process of price discovery…by lending money to deadbeat debtors and propping up businesses that are no longer profitable. The baker, for example, had built a fancy oven to produce 200 pastries every day. When the boom was in full swing, he sold every one of them. But now that people are cutting back, he sells only half as many. His investment in the new oven is now a losing proposition. But it takes the market a long time to find out; because the banker gives him enough money to carry on…when he should have declared bankruptcy months ago. And so with the tailor and the hat-maker and all the rest.
“Eventually, the banker realizes that his efforts to restart the boom have failed. Instead of spending money, people use it to pay down their debts. They cut their expenses; they reduce their output; and they’ll continue to use their cash surpluses to pay their debts until their they are back down to where they usually are, he reasons. Even then, people are likely to save because they’ve gotten in the habit of saving; this could go on for a long time, he figures.
“And then, he realizes that the only way to prevent people from falling into the ‘propensity to save’ trap is to make them realize that the currency is not worth saving…that it is losing value. That is when he will turn to Gonoism. He will go down into the basement; print up stacks of $100 bills…and begin passing them out on street-corners.”
Inflation is needed. Not just more credit from the bank. But money…cash…free cash…piles of it.
The U.S. currently has about $1 trillion worth of spare output capacity. It has about $6 trillion worth of private debt – above and beyond what is traditionally considered ‘normal.’ And unemployment is rising. As long as those things persist, prices are not likely to go up. First, because business has no pricing power – not when there is excess capacity. In our example above, for instance, the baker can double his output of pastries with no further investment nor additional costs. He cannot raise prices; instead, he’ll probably lower them in order to compete with the baker down the street who also has excess capacity. Nor are labor rates going to go up – not when workers are still being laid off. The proletariat has no more pricing power than the bourgeoisie. And as for consumers…they won’t go back to consuming until they’ve lightened their debt burden. With $6 trillion, more or less, to unload it will be a long time before they’re ready to spend again.
So don’t expect miracles from the Boondogglization programs. Prices won’t rise until central bankers Go Gono. And once they’ve gone Gono…things will really start to pop! Stay tuned.
*** Our friend, Nassim Taleb, author of the The Black Swan, told the Davos crew that “we should not trust these bankers. Look at their track record. The only way to stop the process is for the government to own those banks.”
Yes, dear reader, everyone is jumping all over the bankers. As we pointed out two weeks ago, there are two schools of thought. Either the bankers are evil. Or they are just very, very stupid.
Jamie Dimon, chief of JPMorgan Chase, joined the ‘they are stupid’ camp.
“God knows, some really stupid things were done by American banks and by American investment banks,” he said. But he went on to suggest that maybe the bankers weren’t the only morons. “To policy makers, I say: ‘Where were they?’”
The grammar suggests he really is stupid enough to be a politician. He probably meant to say: “To policy makers, I say: “Where were YOU?”
But the thought seems correct to us. Where were the regulators…the policy makers…the economists…the commentators…the media…the analysts…the rating agencies.? And where were investors? Of course, they were all in the same place as the bankers – fantasyland.
And now, guess what? They’re still in fantasyland…imaging that these trillion-dollar boondoggles will erase the mistakes caused by their earlier fantasy.
Oh, Mr. Gono, wherefore art thou?
Until tomorrow,
Bill Bonner
The Daily Reckoning
All of you at Agora Financial frighten me, but in a good way. Really! Having read “Empire of Debt” and “Financial Reckoning Day,” I was one of those silly people who took on a second job while the boom(?)of the 2000 decade was at its peak
(I work nights at Barnes and Noble which actually helps you out as well). Anyway, we paid off the credit cards, the auto and the house before all the nastiness started hitting the fan. We (the Mrs and me) only owe on a Condo purchased for my aging parents to reside in, which was done before the housing market went ballistic. Have we taken some financial hits during the early stages of this depression? Well, yes, but certainly not as badly had I been one of those who thought debt was a good thing. Having learned from our economic history (as well as from my grandparents), never eat something bigger than your income. We thank you from the bottom of our hearts. And when people come into B&N wondering what is going on and how to deal with it, I send them to the Economics shelf and hand them four books, the first two I mentioned and IOUSA (as well as “Crashproof”). Keeps us on the edge of our seats, please.
Absolutely spot on!
There is no way this is going to end without bankruptcies, liquidation, reduction in debt and lower standard of living (which was anyway a mirage … having a income of $100 and enjoying the lifestyle of $500 .. with $400 of debt every month mind you for quite a long while)
Common sense tells you that .. take a household … see how they would deal with this … and MULTIPLY
Why can’t these cartoons (policy makers) see it and have it done with soon enough.
at least we can have a recovery early …
While I know that the Daily Reckoning believes that deflation is what we *should* get, I would like to draw readers’ (and writers’) attention to Roman Britain.
The legions were withdrawn at the beginning of the 5th century, and very suddenly, civilization seems to have disappeared.
The conventional explanation is that the Saxons and Angles invaded. But looking more closely at the historical record, the Saxons took more than a century to take over.
And yet, almost immediately, neither public nor private buildings were maintained; the rich started to bury their treasures in their gardens, never to retrieve them. No locally minted coins have ever been found.
Of course, with the legions left the spending power of the soldiers. But on the other hand, Britain no longer had to pay tribute — in net, surely a gain, as Britain was known for its rich harvests. Also, Roman Britain was not nearly as ossified as Byzantium a thousand years later. Right up to the end their was bubbling religious controversy, homegrown attempts to save the empire; you could purchase silk in Colchester. With much farmland claimed relatively recently from forestland (in comparison to the Mediterranean), Britain must have been the “Asian Tiger” of the empire.
What happened is the velocity of money decreased drastically — and, it turned out — never recovered. Payment of soldiers and payment for wheat, collected back in taxes, insured that money circulated. All of a sudden, this circulation ceased — real collapse and the psychology of collapse feed off one another. The institution of the church continued, but, as Hamilton observed, (sometimes) taxes are necessary to overcome mankind’s natural laziness, and the Church, in those days, neither taxed nor spent enough to make a difference.
Consider this, Daily Reckoners, when you advocate that the Fed simply take back the credit it has unwisely extended. As a poet once wrote, in a vision contemplating another ruin:
Go, go, go, said the bird: human kind
Cannot bear very much reality.
Dear Sir,
Your description is wonderfully exact.
The USD base economy will have to come to an end for the good of mankind.
Never again will US have the capacity to create aggression all over the world.