Bill Bonner

In the reign of Emperor Zhao, in 81 BC, 60 Confucian scholars were asked to consider the effect of government meddling in the economy. The Middle Kingdom was in a fix. Mongol raiders were pressing it from the East; the government was going broke. Taking the advice of Sang Hongyang, the feds of that era had put in place various state monopolies and price controls. The result?

“People live in houses with badly-made beams and shoddy thatched roofs. They wear clothes of rough fabric and eat out of bowls made of dirt,” the sages explained. “We waste our time on vain efforts…and lack the essentials, food and clothing.”

The scholars gave their advice in moral terms: “Above all, emphasize virtue and suppress get-rich-quick speculations.” Too bad they didn’t have The Financial Times or The New York Times to guide them! These journals offer a world without wickedness or moral lessons. Economy in a funk? Forget the real cause. Stimulate it! We can worry about the real problem “after the economy has recovered,” writes Paul Krugman in The New York Times. “Only those who believe the economy is a morality play,” would want to suffer the pain of a correction, adds Martin Wolf at the FT.

Readers are urged to focus on the hilarity of the scene rather than on its gravity. It is as if a fat man were bending over. The further over he goes, the more his seams split. First to go was the subprime seam in the back…then the Greek seam on the side. But no one wants to say the obvious thing: that he should stand up straight and lose weight. Instead, the FT and the NYT want the government to buy him a larger pair of pants.

You have read a number of unpopular views in our Daily Reckonings

That this was not a typical post-war recession; it is a Great Correction. Over-indebted American and British economies need to de-leverage.

…That no recovery is possible, because the preceding model of debt-fueled consumption was unsustainable.

…That ‘stimulus’ efforts were not only a waste of time and money, but also harmful; people who made bad bets should take their losses with dignity instead of trying to get others to pay.

In the 10 million or so years since our ancestors have walked on two feet, many were the challenges that arose. We learned to hunt and gather…to build shelter…to clothe our bodies and to kill each other. We made tools and were able even to split atoms and remove body tattoos. We evolved into a practical, problem-solving race. But never could we solve the problem of an economic downturn.

Why? Because the Confucian scholars were right. A properly functioning market economy gives people neither what they want nor what they expect, but what they deserve. In that sense it is ‘moral’ not mechanical. You can’t pull levers nor turn screws to stop a correction. Like old age, the best you can do is to endure it with good grace; the alternative is worse.

Central planners don’t create wealth. They can only move it around, robbing Peter to pay Paul. This only ‘stimulates’ an economy if Paul uses the resources better than Peter. Don’t make us laugh. In most cases, Paul is the same clown who made the bad bets in the first place.

In the present instance, instead of robbing Peter to pay Paul, the feds judged it prudent to borrow from Peter. But Peter is no dope. First, he turned his eyes on Greece. Then, he noticed all the other peripheral players in the Eurozone… Then, he put his wallet back in his pocket. It became obvious that the jig was up. As Nouriel Roubini put it, we reached the point where “austerity is not optional.”

Stoicism went out of style in the economics profession 100 years ago. Activism paid. Stoicism did not. Since then, busybodies have advised presidents, headed central banks, run multi-national agencies, appeared on covers of TIME magazine, won the Legion d’Honneur and the Enron Prize…and run billion-dollar hedge funds. And now, after 18 months…and approximately $12 trillion worth of stimulus, bailouts and debt guarantees…we see the results of a live test. Have our modern economists done better than Sang Hongyang?

The latest evidence came in last week, from the US. The biggest source of employment lately is the US government itself, which has hired hundreds of thousands of census takers. Obviously, if you could make people better off by having them count things, why not hire more of them and have them count the hairs on our heads? Employment in the private sector is still going down. One in ten Americans is officially unemployed…one is six is working at less than capacity. Twice as many people have been out of work for more than 27 weeks this year than the year before. Not surprisingly, real incomes are going down too. Meanwhile, one of every 8 houses is delinquent or in default on its mortgage. Statistically, 7.2 million of them will be foreclosed, most likely leading to another drop in housing prices…and a drop in household wealth.

Prices are falling too. M3 fell at a 5% rate in May. Consumer prices, officially, are increasing at the slowest pace since 1966. Unofficially, adjusting for the real cost of housing, the actual cost of living is in outright deflation.

In short, the ‘recovery’ is a flop.

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 ReckoningDice 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. 

  • 99 cent Nation

    “Readers are urged to focus on the hilarity of the scene,” it is funny in the sense that for 40 years a few people have been telling others that the form of capitalism we practice is not sustainable and have been called doom and gloomers. Now that the chickens have come home to roost a few people are still warning of the pending collapse of the great capitalist growth fantasy and still people are talking about the great recovery soon to happen. funny.

    like .99 cents is so much lower than $1.00. Pathetic

  • Sterling Too

    You cannot transfer wealth. Wealth is not a thing. It is an activity comprising physical components such as buildings, infrastructure, machines, and supplies; a system of manufacturing that takes inputs and has outputs, a set of procedures that employ the components to run the system; and educated, trained, and experienced people that carry out these procedures. If you try to confiscate this wealth and give it to others who know nothing about how it works they inevitably will destroy that wealth. Ergo. The term transfer of wealth actually means destruction of wealth.

  • karl

    excellent analysis.
    The free market should be allowed to work
    then the prudent and industrious can take over the imprudents assets and progress
    can begin again.
    I hope justice can prevail at some point

  • 99 cent Nation

    Sterling Too: Interesting take on the concept to wealth.
    “The term transfer of wealth actually means destruction of wealth.” Does transfer of wealth include the stealing of wealth? This seems to be what happened when the banks pulled off the biggest heist in the history civilization.

    like .99 cents is so much lower than $1.00. Pathetic.

  • Tiu

    One conundrum which hasn’t yet been broached by any of our great leaders is just how we are going to rebuild the wealth given that a lot of was created on the backs of people who might not be keen on letting ‘western’ corporations back in: e.g. Asians, coupled with the technological revolution which has wiped out many jobs and processes on which the wealth was also made… or perhaps we all become web-designers and data-miners?
    What I would give to come across Tony B Liar, the man who’s reign spans the worst of the recent deregulation which everybody else had little choice but to compete against by also deregulating. Short-term profit by a short-sighted PM who wasn’t working for his nations benefit.

  • Silent Snake

    If we can solve the economic downturn then we can solve the economic upturn. All economic activities will be under due control. Up and down, business cycle, boom-and-bust will be unfamiliar.

    I believe what has to happen then it has to happen. Not even the almighty one can prevent it.

  • http://nunya.com Adam Smith

    @99 Cent Nation.

    The “form” of capitalism that you claim to have failed is precisely that–a “form,” more precisely “a deviation form.”

    Statist economist-kings seek to take control of the free market and credit themselves for its successes, when in fact they done nothing but begin its forced decline.

    When the market they have taken over finally, and inevitably, fails, the same statists then act like spectators and bemoan the failure of the “free” market.

    They then get even more power to take over whatever it left, and the cycle continues.

  • 99 cent Nation

    A. Smith: Yep, there are those that just love the rat race and will do anything to keep the fantasy going. Perhaps it is the only “form” of reality they can imagine or will tolerate.

    like .99 cents is so much lower than $1.00. Pathetic

  • JMR Alan Greenspan

    Wealth can be “stored”, v.g., paper money, gold, silver, oil, etc. Ergo, it CAN be transfered without necessary destruction; in fact, sometimes the transfer INCREASES that wealth (ask any retailer, who buys in bulk and sells to Joe Doe by twice that price).

  • Hyperion

    JMR that isn’t a transfer of wealth when a retailer buys in bulk and sells to consumers. They are adding value through a change in location and division of that bulk order. They allow the consumer to travel to a store near them to purchase one item instead of having to go to the point of manufacture and purchase 10,000 units. That is a very valuable service to consumers, which is reflected in the prices they pay.

    Central control over an economy is simply unsustainable. The free market works the best by allocating resources in the most efficient manner through the use of prices as signaling mechanisms. Central planning simply cannot compete with that efficiency. No matter how much people hope it can.

    It may sound great to an uneducated ear that the government needs to come in and “control” things, but such action always produces unintended consequences that always hurt society in the long run.

    These boom and bust cycles would not last nearly as long if the government would just stay out of it and let the system weed out the malinvestments and transfer capital to more productive industries.

    Every stimulus just prolongs the eventual recovery by funneling more money into unsustainable endeavors, just like counting people doesn’t actually add any value or solve a real problem for an individual.

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