01/21/10 London, England – “China’s lending curb sparks a rush for safety.”
That’s how The Financial Times describes what happened yesterday. Investors were more moved by fear than by greed. Dow sold off 112 points. Gold dropped $27. The dollar and bonds were up.
The first thing we note is that investors are idiots. They’re looking for safety in the wrong places. Sell gold? Buy the dollar? And bonds?
It may be a good move in the short run…but this kind of safety is too dangerous for us.
The second thing that comes to mind is a question: is this the beginning of the end? Today, stocks in Asia are still falling…presumably for the same reason. China is reporting such hot growth that the authorities will be forced to throw a bucket of water on it. At least, that’s what a lot of investors are thinking.
What we’re thinking is that the Chinese economy is just waiting for an excuse to blow up. You can’t grow at a double-digit rate – with such massive investments in new plant, equipment, and infrastructure – without making a lot of mistakes. In America, developers put up condos that are left empty. They begin sub-developments that are never completed. They abandon a new building from time to time.
But in China, they build entire cities…which become ghost towns before they ever lived.
The Chinese are human. And humans err. Corrections, recessions, crashes, bear markets and depressions are nature’s way of fixing the mistakes and punishing the mistakers. And the longer the feds try to hold off these necessary corrections, the bigger mess of things they make.
Here’s another headline for you:
“World Bank: growth may wilt as stimulus fades.”
Why is that? Because government spending ain’t really very stimulating. In fact, it’s depressing. We’ve explained why in past editions of The Daily Reckoning. We’ll add today that the same is true, in a slightly different way, for monetary stimulus. They lower interest rates to try to revive a dying economy. The lower rates buy time – and more debt. Debtors are able to hold off the day of reckoning by refinancing at lower rates. But then what? Then, even lower rates are needed so they can refinance again.
Imagine a fellow who’s built a group of condos. He spent all his money…and borrowed millions more to do the project. Now, he’s waiting for buyers…and paying interest. The buyers don’t show up and he runs out of money. So, he refinances his old debt…adds more new debt…and he’s able to keep going…waiting for a ‘recovery’ that brings the buyers back.
But there are no real buyers. He made a mistake. In the heady days of the Bubble Era it looked like people had much more money than they really had. Now, where did their money go? He doesn’t know. But no one is stepping up to buy his condos – except for a few bargain hunters, who buy at such low prices, he still can’t pay his debt. So, he needs to refinance again. And so, the feds need to lower rates again so that he can get a better deal…otherwise, what’s the point?
But sooner or later, as the depression drags on, the feds eventually lower rates down to zero…the banks realize that his collateral is permanently impaired, not temporarily under-priced…and he realizes that the jig is up.
The real problem is not a lack of affordable credit. It’s a lack of able buyers. People are not really as rich as they seemed. It was a mistake, in other words; it had to be corrected.
But don’t expect mainstream economists, financial commentators, or the feds to understand what is going on. They are lost in their own claptrap theories and corrupt politics. What Wall Street bank will tell clients that the economy is in a depression? What Fed official…or elected politician…will admit that there is nothing they can do – except make the situation worse? What financial advisor will tell his customers that they should get out of US Treasury bonds…and the dollar…and stocks…?
Not many.
And so…dear reader…the depression continues. Few people have any idea of what is going on. None knows what to expect.
Of course, that is true for us too. We don’t know when the tools for being able to foretell the future were handed out, but we must have been out sick that day.
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 true china just built the biggest mall in the world and its practically empty saw it in msn 20 biggest things
The economy is not the only one depressed.
Harry? Harry? Harry?…..
:-/
People always are so naïve; they always have in mind that by creating or producing something then they are productive, contributing to the national economy. In fact this
very often may add more trouble to the economy. As what Bill had said, human beings are no infallible, no angel and no saint; they make mistakes after mistakes. The more actions we undertake, the more mistakes we will make. At times, we would better off doing less and contemplating more on the course we are heading. It would be a thousand times wiser to spend more resources in charting a right direction
Hey folks, looks like capitalism will be saved when the Volcker rule comes to fruition. For some time at least. Yesterday was a day people should keep in mind, anyway.
Could it be that Harry is making himself rare when tanking markets aren’t stimulating his moral highground? Just asking.
I’m contrarian to concept of holding gold right now
during depressions people have less and less money and gold is the last thing they need;
gold price is blown way too high and has to see the “floor” within this depression time to be attractive enough to buy
Hi Lost and then found,
Capitalism means money. Every things has a price tag. You would not be suprised, soon, officially, women also has a foreign exchange rate related to them, forex. Do you think this will materilise ?
Doomsday would not be too distant.
My Dear Bill,
I think that is why we need a great helm-man to steer our course. When we apply money and incentive, production of goods and services will definitely go up. With incentive in mind, worker can even work overtime risking their health throughout the night. That’s why you can see so many ghost cities around. A 3 years old kid can also tell me this.
China wanted to flood U.S. with their crappy products the same way builders here wanted to flood the market with over-priced houses. It all had to come to an end someday and that end seems to be approaching.
Bill, the other folks have a crystal ball (Made in China) that tells them the future.
Dear Phelps
Once upon a time, the world was divided into 2 camps – the iron/bamboo curtain and uncle sam. There was gun battles in the eastern heaven but the western heaven was always often too quiet to be reckoned with. Few goods moved over the drawn border. Everyone seems satisfied. Live healthily and be happy !
Then, out of nowhere, someone demonstrated their shelves fully stuff much to the envy of the other. So, the other rose up cranking his gadgets day and night, in the same manner that he wanted his shelves fully displayed. Much to my regret, the other’s gadgets has over fired, all shelves were clogged up. Ha ! ha !
I think we’re entering that icky part of the depression after the temporary rally part, you know?