02/02/09 London, England Oh…we got a good laugh this morning. Our favorite philosopher, Thomas L. Friedman, suddenly seemed to have understood something important:
“There is no magic bullet for this economic crisis,” said he.
Then, (will wonders never cease!) he actually seemed to draw forth an insight:
“We are going to have to live with a lot more uncertainty for a lot longer than our generation has ever experienced.”
Whoa. That’s like, deep.
We’ll get back to Friedman in a moment…and to why a real depression is arriving…
First, a quick look at the headlines:
“Americans saving more, spending less,” sets the tempo of the times.
On Friday, the Dow lost 148 points. But gold gained $20. The ratio of gold to the Dow tells us that either stocks have much further to fall…or gold has much further to increase. We’re looking for a ratio of one to one. At its peak in 2000, you needed 43 ounces of gold to buy the Dow stocks. Now you need only about 10. Still a way to go. Most likely, the Dow will fall …and meet the price of gold on the way up…at about 3,000.
“America’s love affair with malls is on the rocks,” says a report.
And talk about deflation! India, which is now producing $2,000 cars, announced a project to build laptop computers that will sell for 20 bucks.
But let’s get back to Friedman. What happened to him? Did he drop the hair dryer in the bathtub…and give himself a jolt? Suddenly, he’s saying something that is modest and sensible.
But Friedman’s brush with intelligence lasted only three paragraphs. Then, it’s back to the old simpleton Friedman…with a solution to every crisis…and a fix for every problem his last solution caused:
“The fact that there’s no single pill doesn’t mean there’s nothing to be done. We need a stimulus big enough to create more jobs. We need to remove toxic assets from bank balance sheets. We nee the US Treasury to close the insolvent banks, merge the weak ones and strengthen the healthy few. And we need to do each one right.”
Good luck on that, Tom. These people doing all these wonderful things are the very same people who didn’t notice that anything was the financial sector in the first place. Mr. Geithner was right there at the New York Fed, hobnobbing with the masters of the universe, dining with the captains of the financial industry, nodding in approval as the biggest bamboozle in history was put over on investors and the public.
And even if Geither were a genius who had warned us about excesses on Wall Street, he still wouldn’t be the fixer Friedman imagines.
You can fix a recession with this kind of tinkering. But you can’t fix a depression. And what we face now is a depression.
*** Yes, dear reader, the picture is becoming clearer and clearer. It is not very different from what we expected…but it is drawing closer. We see more detail. Like an asteroid that is on course to destroy the earth, it is getting close enough so we can make out the hills…the craters…and the dusty plains…
Many thanks to David Rosenberg, an economist at Merrill Lynch, for training his telescope on this rock from Hell.
He notices two disturbing features.
First, it is not a recession; it is a Depression. While there’s no precise difference between the two, a depression is regarded as more severe…and NOT susceptible to normal government fixes. Typically, a downturn is met with lower interest rates and higher government spending. These twin missiles of increased consumer credit and higher deficits blast the asteroid smithereens before it reaches earth.
But as we have opined many times, this time it’s different. We have a real, structural Depression on our hands…caused by too much debt. When people get in this situation, they can’t spend more – even if someone offers them more credit on easier terms.
“People make a very conscious decision not to by, and that kind of decision is not reversed quickly,” said an analyst to the New York Times.
How much debt is too much? Well, private debt is usually about 80% of GDP. Now, it’s about 140% of GDP. That’s about $6 trillion of debt that needs to be paid off…or written off. And that’s after $1 trillion of write-offs in 2007 & 2008.
There are only three ways to attack this debt: inflation, liquidation, or boondogglization. Friedman…and practically all mainstream economists and politicians…favor the third choice. A little of this…a little of that…and something for everyone…
“In order to pass a piece of legislation,” explained a Democrat from New York, “items are added that are necessary to secure the votes.”
The International Herald Tribune tells a bit of what has been put into the Obama plan:
“…there is $54 billion in the bill in the House of Representatives for new forms of “American energy,” a phrase with an air of nationalism, along with a series of ‘Buy America” requirements of dubious legality under trade treaties; $141 billion for education; $24 billion for lowering health care costs; and $6 billion for broadband service…” etc. etc.
Colleague Porter Stansberry adds this assessment:
“Congress wants you to believe we can dig ourselves out of the financial crisis by spending $400 million to research global warming, $650 million to convert analog TVs to digital, $7 billion to ‘modernize’ federal buildings, and $20 billion on food stamps, etc. According to the Wall Street Journal, ‘only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus.’”
We don’t doubt that all this corruption is well-meant. Heck, who doesn’t want to blow up this Depression Asteroid before it hits us? But boondogglization won’t work. Because it doesn’t solve the real problem – the debt. It merely moves debt from the private sector to the public sector; overall, debt actually increases.
There is about $6 trillion worth of debt that needs to be eliminated before the economy can begin to grow again. Liquidation would do it – quickly and painfully. People would get what they had coming. The U.S. dollar-based system would collapse. Everyone would learn a lesson and be better off for it.
But that could happen only over the dead bodies of Ben Bernanke and other key policy makers. Which is our preferred approach. But we are in a tiny minority. Everyone else believes that somehow some hocus-pocus will get us out of this mess without pain or suffering.
Let’s “get all the right people into the room and close the door and put a solution up on the wall,” said Jamie Dimon of JPMorgan Chase.
Eventually, the solution these simpletons are going to look at is the only one that will really work: inflation. Overt. Shameless. Explicit inflation.
Eventually, when their boondoggling is clearly not working…and when unemployment is over 12%…they will turn to Gideon Gono and ask for his help.
When? We’ll take up that issue tomorrow…as The Daily Reckoning continues!
*** Our daughter, Maria, began her US television career during the Super Bowl. You see her for about a second .
Tough business, acting. You spend three years in acting school…you try out for hundreds of parts…and you get a little gig in a commercial, without a single line.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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Preferred the old layout.
Sir,
Nice (in a mathematical sense) but it doesn’t go far enough. Google ‘PEAK OIL COLLAPSE’ and make up your own mind.
It’s not a depression, it’s a collapse. All empires eventually collapse. Please either say the word ‘collapse’ or deny it and prove me wrong.
I’d love to be wrong !!!
Me, too.
1. Actually there “is” a definition of both a recession and a depression. A recession is classically defined as 2 consecutive quarters of negative GDP (which we have just experienced as of Q4 08). A depression is classically defined as 5 continuous quarters of negative GDP. So by the end of the year we will know.
2. Ways to attack the debt.
Actually, your estimate of the total outstanding debt is probably way too low. I have seen figures that, worldwide, between personal, corporate, state, federal, and overseas debt, the total outstanding debt world-wide is over 55 trillion dollars. This debt needs to be extinguished somehow.
It is quite obvious that there is not enough after-tax profits available from global GDP to pay down this debt that has been accumulating since WWII.
A. Liquidation.
Granted, this would be one way to go. Everyone who owes debt does not owe debt any more. Good thing for them. However, this means that probably all the banks in the world, all the retirement accounts, all the funds of cities, towns schools everywhere who own debt owed to them are also bankrupt. The fallout from this would lead to a great deal of unintended consequences.
B. Inflation. Version 1
The nations of the world print enough money to pay this debt, and somehow distribute it, either to the debtors or the creditors. If they distribute it to the creditors, then the debt still remains, and thus the problem still remains. The only way that this version of inflation would work is if the new money were somehow distributed to the debtors so that the debt could be extinguished.
C. Inflation. Version 2 (your “boondogglization)
The nations of the world print enough money to pay this debt and spend it, hopefully on things that have been long neglected and are necessary for the infrastructure going forward. (I realize this will be controversial, one persons necessary infrastructure upgrade is another’s pork barrel project). The result? The required amount of money is put into circulation, which results in needed upgrades, and also wends its way through the economy which results in earned income being earned, which in turn results in the ability to pay off the debt.
For those who fear this would result in inflation, let me remind you that the governments of the world also possess many means of taking money out of the economy such as taxes, increased bank reserve requirements, etc.
You pays your money and you takes your choice.
Your preferred approach is also shared by a handful of others. It’s the only one that even has a chance of working. The miasma must be cleared before rationality can gain a foot hold.
Ok, I read. I’ve been following the crisis since late 2007.
What I’ve gleaned here is that Bill Bonner hates inflation as much as he rails about deficits. So the extrapolation here is that any government spending to save the day will of course lead to high inflation. Which is really all Bill and his bondholding buds are really concerned about. The degradation of sitting, useless piles of personal wealth.
This is classic bondholder tripe we’ve seen time and again throughout history whenever gov’t action goes against the saver and investor.
They scream the loudest about inflation. They love Volker and truly adore unbearable interest rates. And they use any crisis to their advantage to the point of wearing sheep’s clothing among those truly concerned about the bailouts of the zombie banks.
Nice try Bill. Same old prescription = High interest rates and maybe a return to gold. ugh.