02/15/11 Baltimore, Maryland – First, let’s step back and look at the big picture.
In 2007, after 60 years of stretching credit, the US economy snapped.
Savings rates went up…from near zero up to 7%. Houses went into foreclosure. People tossed away their credit cards. Wall Street wobbled…and almost fell.
The feds rushed in, trying to stop the correction.
They threw everything they had into the fight against the big D – deflation, de-leveraging, default, and depression.
Fiscal stimulus, monetary stimulus, unorthodox stimulus – trillions of dollars’ worth. The biggest stimulus program of all time – with budget deficits of 10% of GDP…special stimulus spending on “shovel ready” programs for $800 billion…zero interest rates…and a total of $1.7 trillion in Fed purchases of mortgage backed securities and US Treasury debt.
What happened?
Well…not much. Unemployment rose to nearly 10% (after President Obama promised that his stimulus program would hold it at 8%). About 30 million people are still jobless.
House prices are still falling. Foreclosures are still rising.
GDP is positive…meaning, technically, the recession is over. But after such overwhelming stimulus (negative interest rates for more than 2 years)…you’d expect more than a tepid increase.
Besides, who knows what is really going on? The figures are all in terms of dollars. And now, who knows what the dollar is worth?
The feds’ hot money has swamped the world. Food prices are soaring. Oil is approaching $100 a barrel. And a prominent analyst predicts that it will hit $300 by 2020.
The feds say the US core inflation rate is still less than 2%…but the core rate doesn’t include the things that are going up – food and energy. Properly adjusted for real cost of living increases…
…and shorn of the curly growth caused by government’s deficit spending (which it can’t continue forever)…
…real GDP growth might actually be negative!
The Great Correction continues, in other words. Confusing and frustrating…with mixed signals and false starts. And it will continue for a long time. For the harder the feds fight against it, the tighter the ropes become.
The feds’ hot money boosts stock prices. But prices for the raw materials go up too. And food and energy prices paid by consumers. The consumer has less real purchasing power. Business profit margins are squeezed.
Meanwhile, the Fed continues printing dollars – $600 billion of them scheduled for January to June of this year. Alert dollar holders wonder how long it can continue. Shrewd investors wonder how it could stop.
If it takes a $1.5 trillion budget deficit and negative interest rates to produce 3% growth…what would a balanced budget and a 3% lending rate do?
We don’t know. But we know one thing: no one in Washington or in a position of authority wants to find out.
The Financial Times yesterday reported that Mr. Obama will propose cutting $1.1 trillion from US deficits over the next 10 years.
Hey… Wait a minute… That’s $110 billion per year…out of a $3.7 trillion annual budget – a cut (please sit down, dear reader) of 3%…or only 7/10ths of 1% of GDP!
Woo hoo! Hallelujah…
Our problems are solved.
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 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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Mogambo Bonner needs a bit more anger and revulsion to pull this alias off.
My mogambo…. Ok I am a poor(not lazy) person In this wonderful world of USA.. I have a few questions that I would like to ask about the past/future.ok on with it right, ok I started this comment with stating the fact that my income thermometer just bleeps red biweekly and then deminishes with a blink of any eye..question 1: is there any investments or us financialy f+cked people.. Question 2: compared to the past how much faster are we moving into hell(collapse)..I think u know what I am putting down thnks a lot. I will keep spreading the good freaking word (GFW) about your post thanks,doug
Where is Bill Bonner?
A personality swap of Bill Jekyll and Rick Hyde?
I think this is a mix-up. But I’ve never noticed Steven Pearlstein being mentioned in these articles?
WHAAA!!! IS THIS, MOGAMBO THE SERIOUS?
There is no mix up. More and more columns every day begin to describe the same issues- a nanny state eroding our freedoms, imposing the views of our betters, while at the same time buying the votes of those on the dole with our grandkids’ futures. Banksters and politicians run amok and drunk on taxpayer $$.
Essentially, the take away becomes, “We’re freaking doomed.”
And the advice dances around, “How did those who were freaking doomed in the past suffer the least, or perhaps even maintain some quality of life?”
In other words, the Schopenhauer of finance.
Words to live by:
“I demand what every Bahraini should have: a job and a house,” said student Iftikhar Ali, 27, who joined the crowds in the seaside Pearl Square. “I believe in change.”
Obama said he took a scalpel to the budget, but it resembles more a paper cut and a very small one at that.
Gary North and Bill are correct in that no pol is going to cut spending until they are forced to.
The left wants military cuts and the right only wants SS and Medicare cut. All three need cutting. Whole agencies need to be eliminated, but that takes courage and our pols lack courage.
Cut the F Ed
1. Employment is bad compared with what? What are your assumptions for employment without the stimulus?
2. What portion of inflation stems from QE and QE2 and what portion comes from growing demand in developing countries?
I mean I can see how this would convince a skimming reader who already agree with you, but the level of analysis befits that of a distracted child.