08/10/09 Ouzilly, France
“It looks like things are finally turning around,” said a friend at Saturday night’s dinner.
“Not at all…” we replied.
Paul Krugman says the world “avoided a second Great Depression.” He’s wrong too.
The stock market crashed in ’29. The market then bounced. After a few months almost everyone was persuaded that the “worst was over.” But the worst was just beginning. It wasn’t until 1932 that the stock market finally hit bottom. By then, it was beginning to seem like a depression…and only years later did economic historians tag it as a ‘great’ depression.
This depression is still wet behind the ears… We’re still in the bounce phase. On Friday, the Dow went 113 points higher. And as the bounce continues, more and more investors will come to believe that stocks are in a new bull market and that the economy is back in growth mode.
Neither will be true.
The stock market is in a bear market rally, not a genuine bull market. The economy is entering a long depression…possibly a ‘great’ one.
How can we be so sure? Well, we’re not sure of anything. But all the signs point in that direction. Household debt as a percentage of disposable income hit a low of about 2% just at the end of WWII. It’s been going up ever since. By 2005 it nudged against 15% – seven times higher than it had been 60 years earlier. Household debt represents spending that has been taken from the future. But you can’t take an infinite amount from future earnings. You reach a point when the future can’t handle it. As more and more future earnings are absorbed by past consumption, pretty soon there’s not enough left to live on. At some point, so much of earnings are devoted to paying the interest and principle on past borrowings that the poor householder cannot to pay his expenses. And imagine what happens if his disposable income goes down.
Guess how many jobs the US private sector has added over the last 10 years? Almost none. Private sector employment is back to levels of 1999. There are more jobs in restaurants and health care…but many fewer in manufacturing. Net gain: zero.
The only job gains have been in the parasite sector – government. On the evidence, this trend is going to continue. Now, the feds have a new post called “pay czar.” As near as we can tell this is a busybody who undertakes to control salaries in the industries that the feds have bailed out. There will be a lot more jobs running the regulatory/bailout apparatus. Then, too, there are all the make-work jobs of the shovel ready boondoggles the feds began in an effort to replace private spending.
Back in the private sector, 72 banks have failed so far this year. And a record 34 million Americans are getting food stamps.
Naturally, incomes are falling. Now, imagine the consumer…he’s already paying 15% of his disposable income to debt service…and then his income is cut in half! This means that 30% of his remaining income must be used just to service the debt. Impossible to do without big cuts in spending…
The poor consumer hit the wall in 2007. He was spending all he earned…and paying more of his income in debt service than at any time in the last 60 years. He couldn’t continue to living on future earnings – there just weren’t enough of them. That is why the finance industry has topped out. It loaded Americans up with enough debt already.
And it’s why the credit cycle has turned. All of a sudden savings rates are back up to 7%. Consumers are cutting back…raising chickens in their back yards…driving less…planting gardens and squeezing their nickels. The private sector is de-leveraging. And there won’t be any durable economic boom or lasting bull market on Wall Street until this process is finished.
Harvard professor Ken Rogoff says it will take 6-8 years for households to reduce their debts to a more sustainable level. Let’s see. We reported on Friday that the big upswing in credit over the last 60 years added about $35 trillion in excess debt to the system. But not all of that is private debt.
Taking the period of the bubble years, in 2000 total debt in the United States came to $26 trillion. Now, it’s twice that amount – $52 trillion, of which $38 trillion is private…or more than two and-a-half times GDP. At this level, the private debt absorbs roughly one out of every seven dollars in consumer earnings – in interest and principal payments.
If the private sector undertook to reduce debt back to 2000 levels, it would mean eliminating all the debt accumulated during the bubble years – or about $19 trillion. How long will it take to pay down, write off, inflate away and otherwise shuck $19 trillion? Well, inflation is running below zero – so that is not now a source of debt reduction. Between write-offs and pay-downs, about $2 trillion has already been cut – over, very roughly, the last 2 years. At least the math is easy. At that rate, it will take 19 years.
Now, let’s go back and look at the Japanese. How long have they been deleveraging? Gosh all mighty…19 years. From 1990 to 2009.
Are we looking at a 20-year period of on-again, off-again deflation…of bear market rallies followed by real bear markets…of weak employment and weak or no growth? That’s what we argued, along with Addison Wiggin, in our first book, Financial Reckoning Day. Then, the stock market took off…and the bubble years came. It looked like we were dead wrong. Maybe we were just early. Or maybe those bubble years were just a feint…a fake-out that convinced the entire world to invest in stocks and property, just before the biggest crash in history.
In that book, we guessed that the crash in the tech sector marked the beginning of the end. By 2005, it didn’t seem at all as though we were in a down-cycle. But adjusted for inflation, stocks never beat their January 2000 high. And outside of government, the economy has no more jobs than it did in 1999. We’ve had wars against terror, bubbles in practically every sector, trillion-dollar boondoggles, bailouts, bamboozles and Michael Jackson’s tragic cooling…but what is the only durable thing to come out of the last 10 years? Just Google and debt.
Until tomorrow,
Bill Bonner
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You just keep hammering away on your score. I respect and admire you and all that you and yours do. It’s not about being right on time, it’s more about being right in the final analysis.
But, you may well consider getting a spiffy hat. It’ll help the economy a bit and who knows; you might look good in it.
It’s mighty uncharitable to call government the parasite sector. It seems that while private employers aren’t adding jobs (they are busy offshoring them for cheap labor) only the government can keep fueling the US consumer to consume. And besides, does privatization work better? Private prisons, mercenaries, etc. aren’t cheaper nor are they better. Private schools might be, but that’s because they are supported by tuition, not government contracts.
US is not Japan
Collapse of Japan was not crucial for a sistemic fail, nor Iceland, but US is the head of the economy, then If US will fail and fall, all countries will. World economy won´t bear 10 years of winter US economy, like Japan did. We will see a social-economical and political transformation.
US is not Japan; and, this ain’t the 1930’s.
The world and this country are vastly changed over the past 80 years. It seems rather naive that people still want to make comparisons between two completely different situations.
When someone says, “it looks like things are finally starting to turn around”, they are, in fact, correct. Space is limited here but I could go on with data point after data point to confirm that observation. Maybe you should step back a bit and quit casting a dark cloud over dinner parties.
“Space is limited here but I could go on with data point after data point to confirm that observation.”
I suspect that if you did list those data points, your position that they indicate better times ahead could be easily refuted.
Did you see Kuntsler’s recent article and his data points? Pretty compelling stuff…
…there are private prisons in the U.S.??
My experience backs you up.
I work in high tech, and had to leave the private sector 13 years ago. IPO’s and startups dried up. Multinationals moved out.
Only Government related high tech remained.
But I will always have the memories (and money) of the good old days.
“Space is limited here but I could go on with data point after data point to confirm that observation.”
1m x 1m = 1 trillion
1 trillion/365 = 2739
We owe 12 of these now and 52 of them total, a total that is constantly rising as well, that’s 52 million a day every day for 2739 years.
How are we going to pay this?
Hope my calculations are not wrong because the numbers are so gigantic it would be easy for me to make a mistake.
Unsustainable!
Andy
Jason says it is uncharitable to call government “the parasite sector”. What else do you call the sector that steals your money and time to pay folks to do jobs that don’t need to be done (IRS, BATF, CIA, TSA, etc.)? Using tax money to pay for somebody to job is still theft at gunpoint. I’d go to jail if I did that, but a IRS employee gets a raise.
Harry whenever anyone says its different they are always wrong . The Housing bubble was different, the internet bubble different,the stock market bubble was different. And yet in the end they were exactly the same ,but you go on being a apologist or dreamer or whatever it is you are.
I really dont waste my precious time trying to educate “Harry the Recovery Troll”…
I just wonder if he will show up here the day US falls facedown and his apple stocks sell for $10 bucks…you know, the day no one shows up at treasury auctions, the day Us debt service becomes unsustainable, the day central banks start unloading dollars and dollar-denominated treasuries in the market…
Austrian
Bill Bonner is basing his comments on knowledge of fundamental economic principles which apparently have not been grasp by many of the responders. For example: Jason seems not to understand that on net balance government and its employees are not producers of products, yet they consume products. In other words, without government interference, taxpayers produce commodities and exchange them with each other via the medium of exchange called money. In this type of environment production and consumption are balanced and production must precede consumption. But government intervenes and takes part of the producers’ claims to commodities (money) and consumes them. This type of environment is inherently unbalanced because there is (government) consumption without production. Money facilitates this legal plunder. In ancient civilizations (such as Sumer), government directly confiscated commodities and stored them in warehouses called ziggurats and there was no deception about what was happening. This is not a free market exchange – it’s a one way street. Taxpayers produce and government consumes.
Eventually, producers tire of having their productive efforts confiscated and they reduce, or stop, producing. When this happens, the entire society is in serious trouble – it is already happening in the U.S. This is exactly what happened to Rome and they sank into a 700 year dark age.
Since increasing government means increased consumption without production, the result is scarcity for producers – and eventually for government. It should be obvious that every addition to the size of government increases the burden on producers. Bill Bonner is absolutely correct. (Incidently, government employees at all levels are not taxpayers from a basic economics viewpoint, even though they file the same kind of paperwork as taxpayers.)
A final comment about the comparison of the U.S. with Japan. The Japanese collapse was caused by expansion of the money supply which is exactly the same thing that is causing ours. What are we doing to solve the problem? Vastly expanding the money supply, just as the Japanese did and still are. Yes, there is a basis for direct comparison of the Japanese debacle with our own. The philosophy seems to be that dramatically accelerating the cause of the problem, government spending and creation of money by banks, will somehow solve it. Indeed it will – there will be a total collapse of the economy (and perhaps society). Then maybe we can get back on the upward and onward road again – provided there are enough survivors with the brains to figure out the problem.
Americans don’t understand Japan. I worked for them for ten years at a US manufacturing plant. What they are going through is the alternative to a national year of Jubilee. They could have ended their financial problems in one year, 1990, simply by taking the year off, and starting over from scatch in 1991. We could do the same thing. Shut the country down for a year. Restart from scratch next year. Those pesky wealthy folk won’t allow that, now will they?
Tie a string to the tooth then to the door knob and slam the door shut. Or spend days nursing it until it falls out.
Harry doesn’t get it.
What Harry doesn’t understand is that nothing has changed in thousands of years. The basics or the fundimentals never change. It’s like the apple falling from the tree. It never has changed and never will change No matter how much man would like to change gravity. He can’t. Man can’t change the fundimentals of economics either. Instead of learning to live within the paramaters of something that will never change. Mankind gets this idea that somehow we’re bigger; better; smarter; somehow more knowledgeable that people from the past. He doesn’t realize that there “IS NOTHING NEW”. Anything that could ever have been thought of has been thought of and been tried many times over in the thousands of years of mankind. Yes. The world and this country have changed over the past 80 years. As recently as this last election. Ron Paul made the statement that” I’m afraid that what we have learned from history is. That we have learned nothing from history”. Get away from Ecno.101. Conjure up some variation of something and we will screw ourselves “AGAIN & AGAIN”. Duh.