No Recovery in Sight

We have spent the last few days holding back tears…

Michael Jackson! Robert MacNamara!

And now our heart goes out to Nantucket Island. Word came this morning that the rich are not living it up like they used to. The New York Times reports that it’s the slowest summer on Nantucket locals have ever seen. There are over 600 properties for sale – and none of them are selling. Even at discounts of up to a third off! Restaurants and bars are offering discounts too – anything to lure in the customers.

Here at TheDaily Reckoning, we champion lost causes. We join the diehards. And we take up the banner of despised, persecuted minorities everywhere. So we are aggrieved by the plight of the rich. They’ve lost $10 trillion in the downturn, according to our estimates. They’re being blamed for every sin and crime, from teen-pregnancy to shopping on Sunday. Fashion has given them its fickle finger – their big houses, big cars, and big carbon footprints are as out-of-style as spats. And just yesterday, a press report told us that Congress was considering a surtax on the rich – to be slipped into the latest health care bonanza. No wonder they’re having such a bummer of a summer.

Our oldest son, Will, proposes to open up our private family office as a kind of support group for the rich. His father cleverly off-loaded the burden of managing the family money (such as it is) onto his strong, young back. Will figures there must be thousands and thousands of readers facing the same challenges he is…more on this in future issues.

Yesterday, the Dow rose 14 points. Oil fell to $60. Gold lost $19.

According to the headline in the Financial Times, the International Monetary Fund says the recession is ending. Digging deeper into the story, we find that the IMF thinks the recovery may be “weak” and may require more stimulus to get consumers spending again.

As usual, the bank is wrong about everything. There is no recession; it’s a depression.

And it’s not ending; there is no recovery in sight. And more stimulus won’t cause consumers to spend more money.

“It’s really not very complicated,” we told our audience of publishers in London yesterday. “We’re in a depression. Not a recession.”

Sometimes when you are giving a speech, words come out more self-assured than you expected. The occasion calls for confidence…oratorical certainty, not doubts and nuances. Out come fully formed sentences – often elegant or powerful in themselves – that you barely recognize as your own. You listen…surprised at how clever the speaker is.

“It’s a depression. And it will remain a depression until this huge pile of debt accumulated over the last quarter century has been paid down. Until businesses and banks that are no longer viable have gone broke and been restructured. Until consumers have real money to spend – not just more credit. Until those things happen, there is no way for a genuine recovery to take place.

“For more than half a century, the driving force of the world economy has been the willingness of English-speaking consumers to go further and further into debt. That permitted businesses to expand sales and profits

“Now, that trend – that lasted longer than the lifetimes of most of the people in this room – is finished. Consumers aren’t going further into debt. Bankers aren’t lending them more money. Their houses aren’t going up in price…so they have nothing to borrow against. It’s over. And now, after working your whole careers in a growing economy…you have to figure out how to survive in a declining one. ”

“We could have gone further. But our listeners were already looking a little blue.

Or we might have provided evidence that consumer credit is contracting…not expanding. The feds have put trillions into the financial system. And that’s where it stays. The banks don’t lend because consumers can’t borrow. Their houses – the major source of collateral for the middle class – are going down in price. The Financial Times is on the case; it reports that consumer credit fell again in May, for the 4th month in a row. “Delinquencies at record high,” says another FT headline.

We might have explained that not only is the shift from credit expansion to credit contraction the biggest thing to come along since WWII…there’s also a major shift of wealth and power taking place. The Anglo-Saxon commercial (and military) empire has peaked out. The wealth and power of English speakers has been expanding, relative to the rest of the world, for the past three centuries. That trend, too, seems to have come to an end.

Lord Rees-Mogg invited us for lunch at his favorite gentlemen’s club – the Garrick.

It is our favorite too. A club originally founded for actors and writers, it was the club in which Dickens and Thackeray had a legendary feud. More recently, Prince Charles dined in a private room with intimate friends. And now your editor goes there for lunch from time to time

It is a grand old building…with ornate trimmings…hung with paintings of great actors and theatre scenes. The place seems perfect for a conversation about monetary policy. It is as old as the South Sea Bubble…and a monument to an industry of make-believe.

William made an interesting point.

“The Obama team doesn’t seem to know what it is doing on economic matters, does it? They had a good man on the team – Paul Volker. He was the only one who really knew what he was doing. And they seem to have edged him out.

“This is a very bad sign. It was Volker who saved the day the last time the US dollar seemed to be headed for the scrap heap. This time, it looks as though they have no intention of saving it.”

The dollar hardly looks like it needs saving now. It rose slightly yesterday. Generally, throughout the crisis of the last six months, the dollar has been favored as a safe haven.

Yesterday too, prices of gold and commodities fell – in dollars. The greenback rose against cotton, coffee, silver – just about everything

Why is the dollar so (seemingly) strong right now? Master FX Options’ Bill Jenkins believes it is because the United States isn’t facing the same sort of ‘social upheaval’ that the Eurozone has.

“Across the Eurozone riots and outbreaks of violence have been touched off by escalating economic problems and disagreements between members and neighbors. People involved in civil unrest are a multifold problem. First, they have too much time on their hands because they are not working. Jobless citizens, especially in a heavily socialist culture, are a continual drag on the system. Second, it costs money to keep repressing social upheaval — presenting another drag on the system. Additionally, the passions and fears of men being what they are, such activities tend to draw in more normally productive folks as the snowball gains speed and volume.

“Here in the United States, we are not facing such difficulties (yet). This means a more reasonable system of work and distribution of goods and labor. All in all, this is good for a culture, the body politic and the economy. As a result, it also breeds greater confidence in the currency. And when all is said and done, investment money will go where there is a reasonable likelihood of return, even if the return may be lower.

“This is what has been good up to this point in the recession/depression for the US dollar. And if this continues to unfold over the next year or two in similar fashion, this would still produce US dollar strength compared to the euro simply by the ‘fear factor.’

“Additionally, as I have tried to show, the situation in Europe is actually more severe than in the United States. I believe in the end that will make them copy, at least percentage wise, the same devaluing practices that have happened here. Should that occur, it would once again be advantage-USD.

“However, when I look at the dollar, I wonder ifwhat we have done may be past the point of no return, the point of repair or recovery. The next generation may well find that the US dollar has gone the way of all fiat currencies before her. What will replace it? I can’t say. But in the present environment, more shocks to the system will ultimately favor the dollar… at least for the time being, because it is supported by stability. And in unstable times — stability draws the highest premium.”

Though the dollar doesn’t look like it needs saving right now, there are two things going on…two things that appear contradictory…and which lead investors to make big mistakes. On the one hand, the world economy is contracting – which is naturally deflationary. Demand goes down…prices go down…the currency in which prices are quoted goes up. On the other hand, the people who control the currency are doing all they can to cause it to go down. The Congressional Budget Office tells us that the US national debt is rising by about $1 trillion per year. It will hit $12 trillion this fall. By next fall, it will be at $13. The interest alone this year is $565 billion – about 4% of the nation’s total output.

The last time the United States overspent on anything approaching this scale was during the ‘guns and butter’ years – the 1960s. Lyndon Johnson wanted a war in Vietnam and a Great Society at home. He got both. He also got inflation. Inflation rates hit double digits in the late ‘70s. The dollar seemed to be going the way of all paper money – to nothing.

But “Tall Paul” Volker was called to the Fed. He said he was going to snuff inflation…and he meant it. Against widespread criticism – his effigy was burnt on the steps of the Capitol – he took the yield on 10-year T-notes all the way to 15%. The economy entered its worst recession since the Great Depression. Politicians howled. The press roared. Everyone seemed to want Paul Volker’s head. But Reagan backed him up. And he beat inflation and saved the dollar.

But that was then. This is now. Now, the country is far deeper in debt…with a much weaker economy…and much stronger rivals. Not even Paul Volker could play Paul Volker’s role this time.
Until tomorrow,

Bill Bonner
The Daily Reckoning