Bill Bonner

That we live in an age of miracles has become common knowledge. A man may sit on a beach near Sydney, with nothing but the bucket bottom of the universe over his head, and still carry on a casual conversation with an Eskimo near the North Pole. Using an Internet-based phone service, he may do so at negligible cost. If this were not miracle enough, he may now grow himself a new nose, if he needs one, on his own arm.

In this age of miracles, people seem ready to believe that anything is possible. Recklessly crossing the street at the end of the Late Bubble Epoque, the world economy got hit by a cross-town bus. Now, the feds propose to reverse and run over the poor fellow again. It will be as if they had reversed the film; the economy will be as good as new, they say.

But we are suspicious. And we begin today’s rumination by examining the bus driver’s motives.

In its naked form, government is not evil; it is merely a self-interested parasite, like a bank lobbyist. Its main value comes from its ability to elbow out other parasites. Of course, the typical citizen is no saint either. Instead, he is merely a parasite in the larval stage. If he is lucky enough or cunning enough, he could grow into a parasite himself. The citizen, generally, doesn’t mind being lied to and robbed – just so long it is by someone he elected. Or at least by someone whom tradition or local connivance put in place. He does not usually resent his homegrown government, even though it routinely costs him a substantial part of his output. On the contrary, he grows so fond of it he even dons his helmet from time to time to protect it. Naturally, the feds return the favor.

The basic business model of government is to keep order, protect campaign contributors and lure supporters with the promise of other peoples’ money. The game plan of the typical citizen is even simpler: to be on the receiving end, not the paying end. Over time, more and more of them get into position. And the whole society becomes more costly, and more corrupt.

In the United States, entire industries now operate as wards of the state. They may have too little capital. Or, their operations may be too costly. Or, their products may be simply out-of-date and unattractive. Still, government keeps them going – even at the cost of at the expense of competitors. And the money doesn’t only go to business. Cities stay solvent only by the grace of federal government grants. Whole sections of the population depend on government – including 34 million who draw their rations directly from the federal food stamp program. The spectacle is breathtaking and alarming at the same time – like a Pakistani bus on a mountain road, freighted with passengers clinging to the roof. The old rust bucket could tip over at any time, but what politician would tell a voter to get off?

That preface on the state out of the way, we turn to the state of the economy. The key to understanding the great credit bubble of 1945-2007 is to capture the codependent relationship between China and the United States of America. It seemed to serve both parties well. Each enabled each other’s excess. China added mightily to the world’s supply – far more than was actually needed. America, meanwhile, did heroic work on the demand side. While the growth in the United States was led by consumer spending, the growth in China was led by capital investment; factories expanded, towns were built, and output was revved up. But there was a flaw. Americans ran out of money. After the ’70s, they could only increase their buying by going into debt. This they did with insouciance bordering on insanity. Total debt rose 370% of GDP and then blew up in 2007, with major lenders forced into bankruptcy and mergers, while GDP sank at its fastest pace since the end of WWII.

Now, the old formula no longer works – neither for Americans nor for the Chinese. Despite the urging of their government, Americans cannot be expected to take on more debt in order to consume more stuff from China. As savings rates grow toward 10%, demand from the United States will collapse by an estimated $1 trillion per year. With the China trade now accounting for 83% of America’s non-oil trade deficit, you’d think the Chinese would panic. They already have as much as two times the output capacity needed to meet real demand. They should trim their manufacturing sector, not expand it.

We draw out that relationship only to show how hopeless it would be to draw it out further. Borrowing to consume is merely tricking stuff from the future to enjoy in the present. By 2007, some $30 trillion worth of spending that would have occurred ‘in the future’ had already occurred in the past. Factories that would have produced consumer items for 2009 discovered that they had already produced more than enough of them in 2005 and 2006.

It would be better to invite the future in…let her collect her debts…and then get on with things. Yet government officials on both sides of the Pacific continue their numbskull efforts to revive the bubble economy. On the US side, the feds are trying to stimulate demand for more stuff. On the far side, Chinese stimulation is going into producing more stuff. As if the world didn’t have too much stuff already.

But the role of government is neither prosperity nor plausibility…but protection of the pests and parasites. They will keep paying them off and carrying them along…until the bus runs off the road.

But it’s not prosperity that government really cares about. The big bus keeps trundling along – picking up pests and parasites along the way. It will keep going until it runs off the road.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • Harry

    And up we go as the rally continues. Home sales up again. Manufacturing up. Just about all quarterly reports have beat. Yet the pessimism continues.

    Bernanke announced that the world was brought back from the brink with swift monetary decisions. Yes, they did “save the world” and I’m enjoying every uptick along the way!

  • John

    Hate to admit it Bill but I have to agree with everything you are saying. Wasn’t it Kunstler that predicted big government would squander the remaining wealth of empire trying to sustain the unsustainable?

  • Bloomer

    Oil is up again today. It will continue to do as it has throughout this decade, and that is to act like a brake, on any economic growth.

  • Phelps who can’t swim

    I don’t know what will happen in the future, but Bill and others who follow history can and do see the warning signs for a collapse of our once mighty empire. History would show us, if we would just look, that all empires have managed to save themselves temporarily just before the big crash. My fear is that smarter parasites in D.C. are going to take many lives around the globe before they let go of their power and the many privileges they have accumulated for themselves.

  • teresa

    how is that possible you can easily see and have clarity of what is, yet overwhelming majority of professional analysts are blind…

    do they fear to tell the truth which might be in opposition to gov truth?

  • Harry

    Bill has no more clarity than any other analysts. Actually, he’s been quite wrong over the past few months. Yes, some day it will come crashing down but whether that’s 100 years or 500 years isn’t known. I know I’ll die some day but I don’t just sit around and wait for it, I live and make money while living. Get it?

  • John

    All governments tend to be self-perpetuating and self-serving i.e. to maintain the status quo at all costs. It’s not in their self-interest to fix the system as long as they are beneficiaries. For parallel behavior look at the Roman Empire circa A.D. 400. Notice how the Congressional parasites are cancelling Town Hall meetings as the sheeple become fed up with their excesses. They have forgoten one essential fact, they work for us not the other way around. Expect some big changes come mid term elections.

  • airbil

    It could be argued that only the invention of the printing press has freed people to educate themselves and bring us to where we are today… 560 years later.
    That said, we are smarter in many ways but still reliant on major media and gov’t for information.
    Our only hope is that, like the printing press, the internet can educate us to get to the next level. And while it will not take 560 years to fix this economic mess born of greed, it will take more time than most of us have left. And too, I wonder if it even can be fixed.

  • Counrty Gent

    One of the most sad but true tales i have ever read. i think of the one million plus good men and women in uniform that have given their lives for this country to keep it free and safe-it took a long time, 233 years, but it seems it was all for nothing. My son was a US ARMY Airborne Ranger with the 101st WIA Aug 26th 2006 Paralized from the shoulders down, what must he think when he watches FOX news, and sees our “elected” representatives running this country into the gound? My mom was a lady ahead of her time a true southern lady. She told me 30 years ago “Arthur, the South will rise again” how she could see where this country was going back then was truly remarkable, and truer words have never been spoken. it does my heart good to see the town hall meetings where the true patriots and citizens are standing up for our rights. maybe there is hope – only God knows. God Bless America

  • CommonCents

    Country Gent, I’m sorry to hear about your sons paralysis. Tell him I said thank you for his efforts to keep our country free. I hope that the loss of his body only makes his mind stronger and more determined to continue to fight to keep this country free. Regretfully, we are not on that track, we can use his help to right this as he still has a voice to raise his concerns.

  • James R

    Harry, a favorite quote of John Maynard Keynes was, “In the long run, we are all dead.” This childish insolence was—and still is—looked upon as great wisdom.

    But today is the tomorrow that Keynes and his early followers never had to see. We are paying a dear price for the folly of those who believed—and still believe—that an economy can be managed.

    One truth is inevitable: all fiat currencies—and all empires built upon them—eventually end. We can’t change that.

    But we can influence how the empire ends. It can end just awkwardly—or it can implode magnificently. It’s up to us.

  • Scott

    Dear Bill,

    You make economics so fun by the way you write…”And we begin today’s ruminations by examining the bus driver’s motives” – hilarious! And “the Pakistani bus on a mountain road” – living in Asia I can easily see the graphic picture you are painting. Thanks for taking the effort to bring economics to life for us all.

  • Lost & Found

    “As savings rates grow toward 10%, demand from the United States will collapse by an estimated $1 trillion per year.”

    That statement isn’t true though it sounds quite logical, plausible and reasonable. Think about it hard and you’ll find out why it is not true by yourself.

  • Lost & Found

    Also don’t be fixated too much on China. China plays a role only since the eighties.

  • Andrew Montgomery

    God luck Harry
    Blind Freddie can see the games up.
    You may well make money out of the current rally and so are many other wise guys. Check out the performance of a random selection of managed funds. You will find that most of the managers weren’t feeling too clever earlier in the year.
    Economists are entirely useless, narcissistic and grossly overpaid.
    They are wrong as often as right.
    Bernanke – one of the better known currently – was wrong all the way into the current mess and is almost certainly wrong wrt the future.

  • charleydan

    Wrong Bernanke?—keynesian economics was to manipulate economics for the government. He is doing the best he can. Government will do every thing imaginable to keep the bus afloat so they can rob citizens another day.

    The government stimulus is your stimulus spending. So there will be no recovery as long as Uncle Sam things he is in charge of the recovery.

    I for one will rebell.

  • Don

    The whole thing is going to crash, brought on by exporting our factories and jobs, by fighting endless unwinable wars, by unchecked population growth, by developing and ruining our agricultural land, by not keeping corporations from getting too big and monopolistic, and by not taxing the wealthy enough. To blame the liberals and the government is foolish.

  • Andrew

    Harry – or any other Bernake acolyte
    If you’re still there I would be interested to get your analysis of the endgame.
    Do you think Bernanke et al have it right or wrong?
    There is no doubt they have achieved a stay of execution and permitted many to profit from what I believe is a dead cat bounce.
    But what next?
    I would like some supporter of the current rescue policy to offer an analysis predicated upon fundamentals.
    To me it looks very bad
    I very much hope the outcome is positive – as does the recipient of palliative chemotherapy.

  • Alan Lewis


    comes the revolution?

  • sierra

    Our economic “system” has been “….between the rock and a hard wall” since 1991 (and the terrible decisions made by the government to “save” the banks then.

    “….we’re gonna’ pay dearly” for those mistakes.

    (Where oh, where can I get a supercomputer like GS has?)

  • Toru kubo

    I can dell you this , ‘Government effort never reach to streets’.
    Experienced through Our Japanese lost decades.
    I said never.

  • Dottie

    We did not start trade with China in 1945, but in the ’80’s, under Nixon. Another, equally valid way of looking at things is that there was a struggle between the people and special interests to allocate the benefits of modern invention – special interests won, have taken over government, and are willing to throw this country under the bus to maintain their position.

  • Bill Fold

    One small fix they should try is closing the immigration door once unemployment in this country reaches 9%. Take care of the people here, not new ones trying to get in!!! And get rid of the ones here illegally (like someones’ Aunt)……..

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