09/08/09 London, England
Clowns to the left of us…jokers to the right…
The Simpleton’s Analysis:
Consumers cut back. The economy sank.
Now, government must take action. It must help people out and take up the slack.
The downturn took $12 trillion off Americans’ net worth. The feds have pledged about $12 trillion to fix the problem.
But wait, where does government get any money?
Hey, they borrow it, just like consumers did. And besides, it’s ultimately the same money – taxpayers’ money. So what’s the big diff?
The big diff is the subject of today’s Daily Reckoning.
The first big diff is that the feds don’t spend your money the way you would. Private citizens spend money they don’t have on things they want but don’t need. The feds spend money that doesn’t belong to them on things that the rightful owners don’t even want.
Wait a minute. Markets were closed yesterday. With no figures to report, we should talk about something important. What’s important about macroeconomics? Nothing. It’s 95% claptrap. The other 5% is pure fraud.
At least as practiced by the leading macroeconomists of our time – such as Ben Bernanke, Tim Geithner and Larry Summers. It’s just a show-off sport…the idea is to impress the world with some fancy data-heavy formula…win the Nobel Prize and save the world. That way, you get what all men crave…money and power. Why do men (and women) want money and power? Aww, c’mon…we explained it already. Because it improves their chances of survival and procreation. In a DNA study, for example, they found that Genghis Khan, today, has something like 6 million male descendants. Is that success or what?
The great Khans of today are no longer the steppe warriors on horseback. They’re basketball players, rock ‘n’ roll stars, actors, and hedge fund managers…and, oh yes, occasionally – economists.
The link between economic theory and procreation is probably very weak; but that doesn’t stop economists from wanting to strut around and show off. And the way for an economist to show off is to get himself appointed to the President’s Council of Economic Advisors…or to the central bank…or get a professorial post at Princeton…etc. etc. This you do by producing tomes, formulae and hypotheses. And, don’t forget to write a piece for The Wall Street Journal from time to time.
Another important hint: your work has to suggest that you can manipulate the business cycle, control the credit cycle, or generally make things turn out the way people want.
If you are a Daily Reckoning-type economist, you can forget fame and fortune completely. Who wants to hear from a macroeconomist who tells people to leave well enough alone…and to let the forces of natural economics sort out their own problems? No one…at least no one who is running for public office. Instead, they want someone who will promise to “Save the World.”
Save the world from what? Why…from the damage done by other economists!
Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists…and Daily Reckoning commentators…laugh at the idea. You don’t really get rich by consuming; you get rich by saving and investing.
But they had their charts and graphs…their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds’ ears too – since every politician wants to promise more consumption. The feds favored home ownership, for example…even by people who were bad credit risks. They set up Fannie and Freddie to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren’t likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed.
And now…wouldn’t you know it…Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion…about $124,000 per household. Total debt/GDP tripled since 1980.
And now, it’s payback time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)…
And so what do the simpletons do? Private citizens are unwilling to consume…so they push the government to consume their money for them!
Gold futures tapped the $1,000-an-ounce mark in early morning trading, a level the precious metal hadn’t reached since February.
“As long as the Federal Reserve and the US government take actions that debase the dollar, the dollar price of gold will rise,” says GoldMoney.com’s James Turk. “Similarly, as long as the Bank of England and the UK government take actions that debase the pound, the Sterling price of silver will rise. It is a certainty, just like night follows day.
“Years from now we will look back at today’s action with amazement at how low the price of gold and silver were, just like I can today look back to my college years when gold was only $35 and an ounce of silver could be had for 46 pence. It is a distant memory – and those prices will never again be seen. Eventually a three-digit dollar gold price and single-digit Sterling silver will never again be seen, as long as those currencies continue to be mismanaged and continue on the path to the fiat currency graveyard.
“…the dollar and pound are being debased, and in the absence of any policy advocating sound money in the US and the UK, inevitably gold will hurdle $1,000 and silver will clear £10.”
“Frugality is the new normal,” says an Associated Press report. One study suggests that consumer will spend 14% less – even AFTER the recession is over.
Boomers are out of time. Out of money. And they’ll be out of luck unless they trim expenses and begin saving.
They’ve figured it out. Personal spending has fallen in 4 of the last 6 quarters. It hasn’t done that since 1947 – when they first began tracking it.
Consumers’ net worth has taken a big hit – down $13 trillion, from $62 trillion to $50 trillion.
And so, the simpletons think the government has to rush in where fools foundered…that is, they rush in with more money.
But where do the feds get any money? They have to borrow it…or print it. There’s a big difference between federal borrowing and private borrowing. When the private sector borrows the risk is that people won’t be able to pay back their loans. That is a risk that lenders live with. They know the risk; they factor it into their decision-making. Sometimes they’re right. Sometimes – such as when economists mislead them with a lot of gibberish numbers – they’re wrong. And when they’re wrong, borrowers default…and lenders lose money.
The feds, on the other hand, can’t default. At least, not when their debts are calibrated in money they control. But there’s the risk right there. And it is a different kind of risk. It’s the risk that the feds may choose to pay back the loan in much cheaper currency. Or merely make a mistake that results in much cheaper currency.
Imagine a private borrower who could print up a few extra bills in his basement to pay his monthly mortgage. He may not do so…perhaps his sense of honor would prevent him. Or maybe he would fear that he wouldn’t be allowed to borrow again. But if his back were to the wall, there is little doubt that he’d soon be in the print shop.
The feds are in the print shop already. They’re printing up more dollars intentionally – to try to get inflation rates up…and to finance federal borrowing. It will be a miraculous thing if their new dollars don’t eventually cause inflation. But the macroeconomists who run the print shop tell us not to worry. They’ve got it all under control. They’re already talking about when and how to withdraw the dollars they so helpfully provided during the crisis period.
The simpletons – who had no idea that the crisis would come…and then thought it could be easily contained…and then mistook it for a monetary, banking crisis…and then judged it over before it had really started…
…these same simpletons still do not understand that the problem is not a lack of money, it’s a surplus of debt…
…they now reassure us that they know just how much money to put into the system…and just when to take it out.
If you believe them…you might want to stay in stocks and US bonds. If not, you should head for cover.
The country is being run “by a gang of clueless bozos,” says Lee Iacocca, in his new book.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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Was out shopping this weekend. Malls were like Christmas time. Unreal how many people were out shopping/buying/spending. Even I was a bit surprised. The economy’s stronger than it even appears!
BB you need to read, and everyone else here, The Failure Caucus at Newsweek. Describes BB and the rest of the doom crowd to a “T”.
“But at a certain point, negativity becomes a shtick. Just because somebody was right in 2007 doesn’t mean he’ll be right in 2009.”
Couldn’t have written it better myself.
Newsweek…..now there’s a place to get all of your economic news!
I was out shopping this weekend also, this time for running gear. I bought my favorite Saucony running shoes for $39, the lowest price I have ever paid for them in the 10 years that I’ve been buying them. But I was not surprised, because the economy is far weaker than it appears….in Newsweek.
$124,000 per household debt doesn’t seem like alot if you consider all of the jumbo mortgages, Lexuses, Volvos and construction loans!
Seriously Harry, wake up. Spending usually equals debt. Take a survey at the mall and see how many of them purchased with cash.
Harry-
I think those people were actually looking for jobs.
Although you may see the malls busy this time of year, did you happen to notice if it was due to back to school sales?
My bet, people may have been at the mall, but that did not mean they were making purchases.
I held a garage sale last weekend, lots of people dropping by to gawk at what I was selling, but nobody bothered to crack their wallet. Maybe it was my personality.
When I go up to the mall in my small home town, also a small mall, the mall for all practical purposes is dead. A few stores have gone out of business, the rest I believe are hanging on by their teeth.
The only place I see doing any amount of business is Wal-Mart. Whenever I go to K-Mart at the mall I feel as if I’m in a cemetery in the middle of the night. Nothin’ but ghosts of better times.
I was there the other day, saw mostly families shopping for back to school.
Lots of empty store fronts in the strip malls, and a motorcycle dealer just closed his doors. Seeing a few businesses being burned down, just had a restaurant burn down in the last week, I suspect arson. Not sure what the Fire Department thinks.
I’ve seen lots of businesses closing with For Sale or For Lease signs out front. Somebody just took over a restaurant property that the previous owner closed down due to lack of customers. Drove by today and noticed that they had a modicum of customers.
Every Thursday in the local paper you can read about all the foreclosures in the local area, and this has been going on for months.
Somebody just put a sign up down the road informing all that their 315 acres is up for auction, I guess the property tax bill is in arrears.
My neighbor finally sold his house after being on the market for well over two years. I guess he finally dropped his price low enough to find a buyer.
Lots of houses in my neighborhood with For Sale signs out front.
I think if you look around a little more closely you’ll see clear signs that the Greater Recession is definitely here.
I didn’t want to call it the Greater Depression for due reverence to Ben Bernanke not wanting to be responsible for causing said greater depression.
Harry ;your clearly cruising the wrong demographic.I’m 55 I don’t go to malls,i went to a lonely beach with my wife and dog .We went out for coffee but prepared three of the summers best meals at home.
What’s yer background Harry?
Mine is medical science.
I see people regularly who know that antibiotics fix the common cold and that homeopathic remedies work.
I know that they are wrong because the empirical evidence is secure.
My point is simple – present your reasoning and/or evidence and we can all benefit from your wisdom rather than suffer your wisecracks.
Economy = Nature
Manipulation = destruction
Time to whip.
Harry, I dont go to the mall anymore, I buy all my goods second hand on ebay and I can tell you one thing, even the number of buyers looking for second hand bargains has dropped, many items now don’t even receive a single bid, now i know the reason why, obviously poeple have so much money during this ressesion that they are all paying top price at the malls!
Re inflate Burst credit bubble with another credit.
Cure hemorrhage patient with blood transfusion.
Cure hangover with another whisky.
Man are you educated!
Harry, seriously, what planet are you living on? LOL!
Did any of you take time to read that article? Thought so.
I don’t care where you buy your goods or what great dinners you made at home. Point is, malls were packed, people were buying. This is all great for the economy. But no, you all keep your heads in the gloomy sand of BB, Roubini, Schiff, et. al. Wake up! Maybe make a little money.
The country is being run “by a gang of clueless bozos,” says Lee Iacocca, in his new book.
I suggest that the country is being run “by a gang of elitists” bent on bringing down the U.S. economy in order to bring in a World Government that is Feudal.
Suggesting that they are “clueless bozos” is simply naive!
That Newsweek article said nothing. It just stated that some people are negative on the economy and that all the news isn’t bad. It didn’t provide any examples of data that isn’t bad. Using this article as an example of shy we should be bullish is crazy.
What’s happening is in the past, recessions lasted about a year at the most and then things improved. Why? Who knows exactly, but many believe this is the way things work and will continue to work.
I read today that social security went in the red in August. I thought we didn’t have to worry about this for a decade or so. To me, this is very bad news. Maybe I’m a member of the Failure Caucus, but the way I see things is either the gov’t runs deficits of several trillion a year for the next few years or we have a depression. Not exactly anything to be bullish about IMO.
The malls here on weekdays are like ghost towns. (Phila suburbs.)
Whereabouts are you from Harry?
@Johny: I live in Seattle.
@KidHorn: It appears you missed the point of the article. Those who predicted the down turn and were right are now wrong. It’s in their best interests to ignore any positive news (and there’s alot IMO) to keep predicting gloom. At some point, they have to realize they’re wrong. (Hope you’re listening BB).
the shoppers were out buying farts with plastic air cards.
why are my comments never posted?
thank goodness this mess trashed boomers’ 401(k)s while they are still alive – for the last decade or more they have been acting as if they can spend at will and leave it to future generations to pay for all the glory they created while alive.
Boomers are the ones who vote for the fools in government – R’s and D’s alike – who create these policies. Thankfully they are suffering the consequences now rather than Gen X, Y and Z dealing with it on their own.
Boomers: stop voting for candidates who ignore the federal deficit!
The malls are not quite as busy as they were but they are still brisk. The motorcycle traffic must be decreasing as the noise level seems to have dropped a bit. I can now carry on a conversion and not be interrupted that much. Last year and before, forget it, all Harley. Motorcycles are a good marker as to how the economy is doing. They are purely discretionary.
Harry you said :
I don’t care where you buy your goods or what great dinners you made at home. Point is, malls were packed, people were buying. This is all great for the economy.
If you actually had little understanding of what Bill strives to make a point of, which obviously you don’t (but do you care to read him with attention anyway?) you wouldn’t write such things.
Bill’s point, exposed many and many times, is that a return to a bubble economy powered by debt and consumption is not only highly improbable / impossible, but that consumption of savings is also the best way for an economy to ruin itself in the longer run, which would seem obvious to about anybody except you.
Yes BIll* – again you hit the “bleeding” nail on the head…
CLOWNS & JOKERS are a wonderful analogy but I wonder if the entire house of cards is filled with a pack of jokers…
Bill—Excellent article!
I’m just waiting to hear “Pay no attention to the man (printing money) behind the curtain…”.
Godspeed!
William
Has anyone watched the “Esoteric Agenda” on google or youtube?
Explains one hell of alot. The Central Bank want’s Central Government. They are creating this. They’ve been doing this for a long time.
Hey Harry
It’s terribly (or terrifyingly) simple … gold continues to rise ($1,005 as I write) because the dollar continues to lose value … simple arithmetic … the dollar is falling because is is following simple supply and demand rules … there’s too much of it about, therfore the value falls … and will continue … RIP $
I was at the mall yesterday (I really HAD to go). It was dead. And I am in San Jose, the center of the Silicon Valley. The few people there were not buying. Two store owners said that never saw that before.