08/07/09 Ouzilly, France
At least something good has come out of the economic crisis; it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don’t deserve the beating they’re getting in the press – with snide remarks and sarcastic comments; they deserve better. A beating with sticks!
Even Alan Greenspan admitted he had “found a flaw” in his own thinking. We will have to imagine the giggles from the back of the room – if anyone had been awake. If was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn’t seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you’d hope he’d be a gentleman about it and hang himself.
Meanwhile, the queen of England visited the London School of Economics and had a question: why weren’t economists on top of this thing?
They replied to this question last month. In a three-page letter, they avoided the simple truth – that their trade was no more reliable than fortune telling and marriage counseling. The letter claimed that a “psychology of denial” prevented government and financial eyes from seeing the catastrophe in front of them. It was “a failure of the collective imagination of many bright people”, they said.
In fact, it was the exact opposite – imagination run wild. Economists imagined a world without yesterday or tomorrow…a world in which you could run up debts forever and never have to pay them back.
Last week, Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America’s biggest creditor that the public sector wouldn’t continue to run huge deficits – practically an outright lie. But it’s one thing to stiff the Chinese; it’s another to stiff time.
Adjusted for inflation, the US consumer’s earnings barely rose from the ’70s. By some measures, he had actually less disposable spending power in 2007 than he had in 1973. And now his income is going down. The June number reflected the biggest drop in income in 4 years. Salaries and wages fell 0.4% in June…the 9th drop in the last 10 months. How is it possible for him to spend more?
We pose the familiar question only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future, and into Never Never Land. Consumers spent money they hadn’t earned yet…thus bringing forward purchases that should have been made years later. The accumulated effect of this was to add $35 trillion in extra spending to the world economy – from America alone – over the course of the great credit expansion, 1945-2007. That’s why we have a depression now – because consumers already spent what they would normally be spending now.
Time always gets even. Now, it is the past that is doing the reaching. The automobile bought in 2006…the house bought in 2005…the vacation taken in 1999 – the ghosts of yesteryear spending reach for Americans’ paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back – ever. They reached so far the poor ghosts are disappointed. Lenders realized that they’d never get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five – Bear, Lehman, Goldman, JPMorgan and Merrill – only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.
From one scam to another…from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus.
What are they thinking? Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future. (Setting aside ‘quantitative easing’…or Zimbabwe-style stimulus…an even bigger fraud.)
The purest illustration of how this works is in the popular ‘cash for clunkers’ programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn’t expect 2010 to ever arrive…as if they thought they could stop the sun and the seasons…and the Chinese…forever. Like moths in amber, their wings will never tatter…nor will their faith flag. The dollar will always be strong. US bonds will always be in demand. And the future will never arrive.
But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011…and then 2012…all the way to the end of time.
Enjoy your weekend,
Bill Bonner
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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Americans since the mid-70s have stolen from the future in more ways then just monetary debt. Even though income hasn’t improved much in real terms, we felt richer our buying power nevertheless increased. This is primarily due to two factors:
1. The industrialization of agriculture and the shift in government farm subsidies towards a preference for unlimited cheap corn.
2. The offshoring of manufacturing jobs and the Wal-Martization of America.
Food and consumer goods became cheap, and we were happy. We FELT like we were making more money. Now we’re obese from the cheap, low-quality food and unemployed, underemployed, or employed with zero hope of job security.
Debt is not the only thing we traded forward for “future us” to deal with.
1968–graduate school (with other draft avoiders)–The Q: How do you know when a person is rich?…….The Ans.: A rich person can borrow a half-a-million dollars. …… Today, it would be about $2.5 mil., but the underlying “economic principle” still applies…til ???
Hi Ho!!
Erik: we felt richer, but the reality was that we were buying junk that needed to be replaced all the time, either because it was just plain junk that broke or it was quickly outmoded by a new technology.
“But the more economists try to stitch up the future; the more it gets away from them.”
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Sew faster! The bastards who have subsumed reason and humanity have established a mentality of ‘Do more, better, faster, for less money.’
Sew faster!
A person is rich when he does not have to borrow any money to sustain what he considers a satisfying lifestyle. Those who are truely wealthy, aren’t concerned about borrowing. They are concerned about their health.
We didn’t go to college. We volunteered for the Marines and went active in the month the Marine Corps had its largest draft in history, June, 1966.
This visit to the real world taught a lesson that cannot be learned in books, about life and wealth.
Be content with what you have and enjoy today. Don’t take your next breath for granted. Life is not the things you possess today or tomorrow. Let no debt go unpaid. Owe no one anything but to love them.
Brilliant article and some really insightful comments from those posters before me.