02/06/09 Paris, France We live in a world run by simpletons.
In this morning’s paper is a front-page article describing how Japan “wasted trillions” on its various stimulus programs.
The International Herald Tribune:
“Japan’s rural areas have been paved over and filled in with roads, dams, and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s.”
Public spending was so aggressive, it boosted Japan’s government debt to 180% of GDP – more than two times the current U.S. level. But did all that cement buy Japan out of its slump?
You be the judge. Housing prices in Japan are now back down to where they were in 1975 – nearly 90% below the late-’80s peak. And stocks? The Nikkei index is back down to where it was a quarter century ago. Stocks sell for half their book value – and they’re still considered too expensive for beaten-down, hyper-fearful Japanese investors. The downturn began in 1990. Over the following 19 years, it did more property damage than the Great Tokyo Fire of ’23 and the Enola Gay combined, wiping out wealth equal to three times the country’s GDP. This was despite interest rates at zero…and a heroic effort at Keynesian stimulation.
If America were to follow Japan’s example, it would have to leave its interest rates near zero for the next decade…and add about $10 TRILLION to its public debt. And if it got the same results, you’ll be able to sell your house in 2026 for the same price you paid in 1992.
But the simpletons have no other idea.
“In a nutshell,” continues the IHT report, “Japan’s experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists.”
Are these, perhaps, the same economists who thought America’s super-consumption, eternal-debt economy would never fail? The same economists who thought the bankers were providing a public service, by offering so many people so much credit…and then planting their debt bombs all over the planet? The same economists who forecast rising stock prices in 2008?
Probably.
The Dow gained 106 points yesterday. The dollar gained ground too – rising to $1.27 to the euro. And gold rose too…plus $12 to $914.
In the United States, jobs are being lost at the rate of 6 million per year. New jobless claims just rose to a 26-year high.
Little by little, the word “depression” is creeping into the press. Yesterday, GE’s top man warned that the downturn could turn into a depression. And Britain’s Prime Minister, Gordon Brown, let slip the d-word during a parliamentary session.
The TIMES of London reports:
“Gordon Brown appeared to acknowledge for the first time today that the world economy was heading for a 1930s-style ‘depression’.
“Mr Brown stumbled slightly over his words at Commons question time, just a week after admitting that Britain was facing a ‘deep’ recession.
“As the financial gloom deepens, he told the Tory leader David Cameron today: ‘We should agree, as a world, on a monetary and fiscal stimulus that will take the world out of depression.’”
But not to worry…the simpletons are on the case. The price tag on Obama’s emergency plan had risen to nearly $1 trillion last time we looked. The Senate bowed to global scorn and ridicule, taking out many of the “Buy America” provisions. Of course, they didn’t do it as a matter of principle…they don’t have principles. Instead, someone must have warned them that if Americans insist on “buying American” the Chinese might insist on “investing Chinese.” And then the whole game would be up. The Ponzi scheme that is U.S. finance requires new money from foreigners in order to pay off the old money that foreigners put in last year and the year before.
The news this morning is that the senators burned the midnight oil…taking out the protectionism and putting in more boondoggles – including a $15,000 tax break for people who buy houses.
So, here at The Daily Reckoning, we have no worries. The feds are on the case. And they’re going to spend, spend, spend…until daddy takes the T-bird away!
*** Wait a minute. The feds are on the case…but haven’t they been on the case for the last 18 months…ever since Bear Stearns went broke? And wasn’t Tim Geithner right there in the room when they decided to let Lehman Bros. go broke…while saving AIG?
Albert Einstein: “Never expect the people who caused a problem to solve it.”
And aren’t the feds’ new plans to save the economy little different from their last plans? Bailouts, stimulus, tax breaks, new, looser credit…aren’t these the same things that were used not only for the last 18 months…but in the Great Depression in the ’30s…and in Japan in the ’90s? Have they ever worked? Nope. Never.
Of course, there’s a good reason they don’t work. As we explained yesterday, you can’t really buy your way out of a depression. Because the problem is deeper than that. The economy is not just taking a rest. It is dead. It needs to be restructured, not revived. And for that, the old structures must be destroyed. That’s what Schumpeter’s ‘creative destruction’ is meant to do. But the feds don’t appreciate it. They talk “change,” but the only change they want is for things to go back to the way they were. So, they’re trying to stop the correction. And they’re using every worn-out trick, every blunderbuss weapon and every claptrap theory they can think of. Bailout the banks…create a ‘bad bank’…nationalize the banks…stop the foreclosures…send out checks…lower interest rates…build bridges to nowhere – they’ll do it all. But it won’t work. All these measures are designed to encourage consumption…in order to support the old structures. But more consumption is just what the economy doesn’t need. It is in trouble because people have spent too much. Now, they have to cut back…and when they do, every enterprise, speculative investment, and household that depended on excess consumption is in trouble.
Ah yes, dear reader…that is where we are. In trouble. At the beginning of a depression. The old structures must be swept away to make way for new ones.
Change! Can it be stopped? Yes we can’t!
“So, what’s the solution?” asked a colleague this morning, after we explained why the stimulus programs cannot work.
“The solution to a depression is a depression,” we replied.
*** Here’s another idea that won’t fly, abolish America’s central bank, the Federal Reserve. From our old friend, Dr. Ron Paul:
“From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial ‘boom’ followed by a recession or depression when the Fed-created bubble bursts.
“With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America’s exports or the low rate of savings should be enthusiastic supporters of this legislation.
“Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of special interests and their own appetite for big government.
“Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.
“In fact, Congress’s constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation’s founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true free-market economy.
“In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans’ standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.”
Enjoy your weekend,
Bill Bonner
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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So….is this “commentary” being delivered to those it mentions, rather than to those who agree? It will just be “commentary” if the words are not heard by those in power? “those in ‘power’, now that’s a scary phrase..”
Since the Japanese “wasted trillions” on its various stimulus programs (like the U.S. is now doing), why hasn’t the yen lost value due to inflation? Is it because they have a current account surplus and/or don’t have a federal budget deficit? Are predictions of a dollar collapse based on the fact that the U.S. is dependent on foreign capital to finance its deficit while Japan used its own citizens’ savings to fund its stimulus spending?
OK Ok now i’m confused, if we do as the Japanese do we are still looking at deflation on all assets but we are being told that inflation is what we have to worry about. How is anything going to inflate if everyone is losing their jobs and there are no goods or services left to deal in? By the way what is property worth in Zimbabwe now?
i don’t understand how gold is anymore or less a commodity than the American dollar it value is complete dependenant on how desired it is and it will fall just like anything. Money is a measurement of trust that is the reason for this depression no can trust anyone it is the fall of the algorythme yes i can’t spell
or type
THE FAMILIES WHO OWN THE FEDERAL RESERVE ARE JUST DOLLING OUT ENOUGH TO KEEP THEIR SYSTEM AFLOAT,THAT IS WORKING FOR THEM.If every us citizen 18 years+ received equal portion of this so called bailout money that we are already paying for,things would pick up,but would we really get the lesson this time is bringing to us all?We need to wake UP, thanks,Marcia
Where is the forum? Put it back up dolts!Where is the forum? Put it back up dolts!Where is the forum? Put it back up dolts!Where is the forum? Put it back up dolts!Where is the forum? Put it back up dolts!