Bill Bonner

Yesterday was another exciting day on Wall Street. The Dow rose 131 points…and gold shot up $25 to a new record, $1043.

Investors must be pondering the future.

What will the future look like? No one knows. But investors thought they saw things they liked.

For one thing, there was the Federal Reserve governor from New York, who told the world that there was no risk of a rate hike anytime soon. Bill Dudley knows which way the wind is blowing. He said the Fed would hold money policy loose “indefinitely.”

Indefinitely is otherwise known as “as long as it takes.”

But as long as it takes for what? Ah…as long as it takes until the economy appears strong again.

How long will that be? Ah…maybe longer than anyone realizes.

Yesterday, we were calculating how long it would take to get the jobless number back down to ’90s levels…that is, around 5%. There are now about 131 million jobs in the United States…and about 15 million people who would like a job but can’t find one. Meanwhile, population growth adds about 1.5 million new workers every year. That means the economy has to grow at 1% (in real terms) just to stay even with population growth. Currently, the economy is going in the wrong direction – backwards. It’s losing jobs…maybe 3 million this year…and maybe another 2 million or so before it finally stabilizes (who knows?)…for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.

Let’s suppose, by some miracle, the economy turns around…and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half – 1.5 million – gradually reduce unemployment. Now, let’s get out the calculator…20 million divided by 1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!

But what if the economy doesn’t grow at 3% per year? Ooooh…that’s the problem, isn’t it? All the feds – and practically all other economists too – are projecting a return to normal. They expect a ‘recovery.’ But what if there never is a recovery?

Heck, yesterday, the central bank of Australia said it was so sure that everything was going well it raised its key lending rate by 25 basis points.

“Canberra says risk of serious retraction over,” The Financial Times reports.

But they get a lot of sunshine down under. Possibly, the heads of the Reserve Bank of Australia got a little too much of it yesterday. Australia is also a supplier of natural resources to China; possibly, the sun burnt bankers failed to notice that China is a bubble.

Or maybe they failed to notice that China’s biggest customer is broke.

Right under The Financial Times’ article about Australia is the following headline:

“No sign of credit revival for US households.”

“The latest data from the Federal Reserve show consumer credit declined at an annual rate of 10.4% in July – the fastest rate since the crisis began two years ago.”

Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.

Another headline in The Financial Times tells us, “Holiday sales [are] set to fall.”

Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?

Perhaps China is focusing more sales on the domestic market; we don’t doubt it. But you don’t refocus the world’s second or third largest economy in 12 months. It takes years. And you don’t get this kind of rebirth without some kind of suffering. The big, old oak tree has to fall down before the sapling can take its place. And when the oak falls – it makes one helluva mess.

Meanwhile, President Obama is adding more gin to the party punch. He says he’s considering ways to create more jobs without a new stimulus program. Among the schemes under consideration is a $3,000 new job tax credit.

Hey, why not! They had such great success with the Clunker tax credit…and with the first time house buyer tax credit. Of course, when you pay people to do things, you can’t be too surprised that they do them. And then, you can’t be too surprised when they stop doing them after you stop paying them. Thus, when the Clunkers program conked out in August car buyers stopped buying. And when the new house purchase tax credit expires in November, don’t be surprised if house sales collapse too. So, if the feds are going to pay people to hire other people, they better be prepared to do it for a long time.

Which brings us back to our calculations. How long will it be before this economy can walk without the feds clutching both arms? A few months ago, we wondered how long it would take consumers to put their finances back in order. Five years? Ten years? There are so many assumptions required that the numbers barely make sense. Still, if you think the total debt burden is headed back to under 200% of GDP, where it was for most of the last century, that would require the elimination of debt equal to about 160% of GDP…or more than $20 trillion worth. How do you eliminate debt? Well, some of it simply disappears…through defaults, foreclosures and bankruptcies. The rest is paid off. How? By saving. Now, imagine that the United States could put an amount equal to 15% of GDP to work paying down its debts. That’s savings and capital formation of all types – corporate as well as individual. It ignores government, which is going in the other direction. At 15% of GDP per year, paying America’s private debt down to under 2 times annual output is still about a 7-year project.

So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.

And in the worst of cases? Oh, well…that’s a different matter. The aforementioned US government is desperate to short-circuit the process of balance sheet repair. It is propping up the old tree every way it can. Thus, the whole period of adjustment may take much, much longer than it should. Instead of coming down with a crash, the limbs fall off one at a time. At this rate, the whole process could take nearly forever.

As the private sector eliminates debt, for example, the feds add it. The deficits are scheduled – by the Congressional Budget Office – to be monstrous, but controllable. Cash for clunkers, cash for houses, cash for jobs – it adds up. But the CBO projections are based on very optimistic assumptions, in which the economy ‘recovers’ quickly and grows strongly. They do not take into account the real nature of the slump. It is not a pause…it is a permanent change. The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.

Until tomorrow,

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 ReckoningDice 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. 

  • CommonCents

    I hate to say it, but, I totally agree with you. Once again!

  • Bernardo

    But a lot of countries won´t support the dollar hegemony, all people in US will get angry, there are a lot of fronts to cover. Tell us more information from Latvia and the problems in Sweden and its links with eastern countries in Europe, maybe there begin a failure! Thanks

  • Bill from Tennessee

    Well, as this long-time DR ‘sufferer’ has insisted on at least one prior occasion…Bill, you are a treasure. We only request more frequent family updates!

  • ArmyWifeScientist

    The economy of yesteryear is dead, and many of the old “rules” for how and in what one can succeed and how one can “get ahead” have died with it.

    The road back to prosperity will not only be long, it must also be paved anew and will lead us to different places.

  • BarryCAL

    Hey everyone…consider the delicious irony at the end Bill’s (insightful, artistic even) post.

    “The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.”

    For a candidate running under the banner “change you can believe in” …. doesn’t his actions mock his promise?

    And why would Obama’s actions be different than his promises? Clearly, somewhere in the campaign there was a meeting with some very wealthy,powerful interests who effectively said “we will support you IF”.

    That IF is now killing us.

  • jason

    Barry, Obama’s actions haven’t been anything like his promises…I think that Obama is Bush-lite, and that he is mainly an opportunist who will say anything to get elected.

  • Mitch Gurney

    Jason: There is nothing new here. Obama is an opportunist like any other candidate that has run for office be it President or Congress over the last 30 plus years, perhaps even longer. They are allowed into the political playground by agreeing to the rules established by the wealthy and powerful interest and get elected by promising any thing an ill-informed electorate wants to hear and once elected they are allowed to stay in the game for as long as they abide by the rules. The rules and the promises are never in alignment therefore neither are their actions and their promises and haven’t been for a very long time but the vast majority of the electorate never figures this it out or even notices. This is dysfunctional but effective politics in that it serves the few over the many.

  • Harry

    Gosh I feel so depressed I think I’ll go wait for a parking spot at the very packed mall to buy something to cheer myself up.

    Get over it! Alcoa turned a profit. Retail sales look much, much better. Depression is naive fear mongering. Recession is over. Please, just get over it.

  • Froggy

    Could america inflate their way out of debt-this appears to me the reasoning behind the fed’s actions
    1)Print enough dollars so the debt burden is relieved and the toxic debt situation does not blow up
    2)Everything get’s more expensive but your debt stays manageable
    3)Genaral population will probably not take drastic action although they slowly would get poorer
    4)Make false promises to other countries that hold dollar forex and threaten them if they step out of line in a way that can drastically effect the dollar

    This could explain the rise in equities and why there might not be a w corrction to the market, the last bit of the W correction is happening but smoothed out by inflation.

    Any fiews on this?

  • Sailor

    Everything drop as last pull back soon.
    Because the market is running on Big lies since March.
    “people will believe a big lie sooner than a little one; and if you repeat it frequently enough people will sooner or later believe it.”
    Hitler’s propaganda technique

  • CommonCents sie

    Harry, once again, what planet are you from? Alcoa has gone from over 97k employees to 61k. They operate in 31 different countries. Main use of aluminum is in automobile manufacturing. Therefore this company, now days, has little impact on the US economy.

    I agree the recession is over as the Depression has begun.

  • ArmyWifeScientist

    Froggy,
    I totally agree with you. I think the only way out of the mortage/debt mess for most Americans will be for the Fed to inflate their way out of it.

  • Bloomer

    Welcome back Harry. Always nice to see a eternal optimist. Someone has to be on the other side of the trade.

  • Lost & Found

    CommonCents, the whole Alcoa thing gets even more ridiculous when you know that with Kleinfeld they hired a guy who was more or less short of going to prison in Germany for helping to organize the corruption activities in the most corrupt economic entity of all times in Germany, Siemens. Siemens corrupted and bribed people and clients in the billions under his leadership and was in fact not much more than a huge criminal organization. We will see how and if Alcoa stands when he takes his next parashoot.

  • Lost & Found

    To be more concrete with “billions” I meant billions of Euros not billions of people of course.

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