09/29/10 Baltimore, Maryland – Epithet for a doomed economy…
What will they say? How will they describe the ’00s and ’10s?
Irish Prime Minister Brian Cowen was accused of being drunk when he gave a “croaky” radio interview two weeks ago.
He denied it.
But we’d be tempted to turn to the bottle too if we were in the fix Ireland is in. Ireland’s banks got into trouble. So the government threw them a lifeline…forgetting that the line was tied to its own neck. It guaranteed bank liabilities equal to four times Irish GDP. But isn’t that going to be the story of the whole period? Private sector banks and speculators got in trouble. Then, the public sector went down with them.
Irish bond yields hit a new record high yesterday – over 6.7%. Investors are afraid Ireland will default. If it does, its bonds will fall even more.
This is either a great opportunity or a trap. Investors could realize a huge windfall. If Ireland is bailed out…yields could fall in half. Then bond prices would double.
On the other hand, the Emerald Isle could actually default. Bonds could take a big hit.
Which will it be? We don’t know.
But we’ve been thinking a lot about the big picture. If you had been in the 1930s, the big picture would have been as difficult to see as ours is today. You would have had a lot of the same questions. Are stock prices rising or falling? Is the economy recovering or falling apart? Is it inflation we should worry about, or deflation?
But now we have a narrative. We know how it turned out.
There was a huge rally following the crash of ’29. Stocks rose up more than 50% in the “suckers rally.” There were several “recoveries” too. And there were 6 separate quarterly bounces between ’29 and ’33. They averaged 8% each.
Investors were entitled to think that the economy “had turned a corner.” Or, that the worst was behind them. Or, that they were “on the road to real recovery.”
But they would have missed the big picture. Looking back at it, the US economy was in a Great Depression. Investors would have been better off just staying away…from ’29 to ’49. Yes, dear reader, a 20-year period of abstinence would have made the heart grow fonder of equities – even though there were several good years as well as several bad years during that period.
What about now? Are investors kidding themselves by trying to make money in this market? Would they be better off taking a leave of absence for the next two decades?
We have to wonder about the big picture. What will people say about this period 30…50…years from now? How will they describe it? What will be the standard narrative?
Will they say it was a recession followed by a recovery? Nope. That story has gone with the wind. What then?
Maybe they will say it was a credit cycle correction…a balance-sheet recession…much like the ’30s. “Investors should have taken a long sabbatical,” they might say. “They should have sold in 2000…and come back in 2020…”
Maybe… But this time there is more to the story than there was in 1930. Back in the ’30s, the equity market turned sour…but the bond market was still safe and sound. The dollar was still as good as gold. Hundreds of local governments went broke, but there was never any question that the US government would default…or inflate…or ditch its own currency. Investors could take a break from stocks. All they had to do was to sell out…and hold onto their cash. They could buy the same stocks 20 years later for more or less the same prices. Why bother with risk? Why bother with the headaches?
But don’t try that this time, dear reader.
Why can’t you just hunker down…hold cash…and wait until this Great Correction is over? Because this time money itself is up for correction. Yes, that’s right. The dollar is no longer good as gold. Not even close. It was cut loose back in ’71. Ever since it’s been floating on a sea of debt, inflation, and hallucination. The feds imagine that they can create as many dollars as they want. They think inflation is good for the economy.
The US money supply has increased 1,300% since 1970. And now that the economy is correcting, the feds think they can fix the problem with the same thing that caused much of the problem in the first place – more notional dollars.
According to The Financial Times, Ben Bernanke is asking himself: should I, or shouldn’t I.
“Bernanke mulls launching QE2 to keep America afloat,” says the headline.
That’s it! That’s the solution! Flood the economy with dollars!
So, that’s what we’re wondering. When they tell the story of the ’00s and ’10s, they’ll probably omit the ups and downs…the “recovery” sightings…the inflation and deflation fears…
The story will probably go something like this:
“The private sector took on too much debt. It hit the wall. Then, the public sector took on too much debt. It hit the wall a few years later.”
Or, a slightly more detailed version:
“The stock market peaked out in real terms in January 2000. The feds responded with huge inputs of fiscal and monetary stimulus, causing bubbles in housing, finance, oil and other sectors. But the credit expansion had reached its end by 2007. Then, the stock market, real estate market, and the economy all turned down. Despite several futile ‘recoveries,’ the correction continued for the next 10 years. Investors should have gotten out in 2000…and stayed out.
“But not in dollars. Governments pumped trillions into the economy, beginning in 2008 – first borrowed money…and then printed ‘quantitative easing’ money. In the two years following the crisis, for example, only one out of every two dollars spent by the federal government came from tax receipts. The rest was borrowed. Or printed. For a few years, the gravity of private sector de-leveraging kept these additions to the money supply in check. But the feds just kept printing more and more money. And as they printed more paper money, the price of real money – gold – rose.
“And then, all hell broke loose. All of sudden, people lost faith in the dollar. They fell over one another trying to get rid of it. They bought houses, cars, stocks, toilet paper – anything. Most of all, they bought gold. When they could get it. The price rose to $5,000 an ounce…
“…and then it was over. The debt had been washed away. Savings, pensions, insurance plans… They announced a new currency, backed by gold, at $5,000 an ounce. It was over.”
Bill Bonner
for 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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“yields could fall in half. Then bond prices would double”
I dont think it works like this. Sure bond prices would go up, but double?
A perpetual bond would exactly double in price…
But bonds of less than infinity would not double…
Here is the math
http://www.investorsfriend.com/Zero%20Interest%20Rates.htm
Speaking of Gold…
Let’s say it is the one true money…
So its value could be calculated as the grand total of the value of everything in the world divided by the number of ounces of gold in the world (counting reserves in the ground at say half an ounce since it costs money to extract it).
What is that value? $100 per ounce? $1000, $10,000, $100,000
And what are the implications of that value?
Bill, have you what it takes to make this calculation and reckon its meaning?
As bonds prices rise, yields drop. When the yield finally reaches zero, has the bond become infinitly valuable? Or becasue the bond yields nothing, has it defaulted?
Philosophy all aside, 6.7% sounds like almost nothing to me. 16.7% might be fodder for a little more discussion. Ask anyone who has owned Russian bonds over the last few decades what they think of the current yield.
This is how the French Revolution started. I just hope I live long enough to see Obmama bin laden’s head roll along with his criminal buddies, Bernanke and Geithner.
Bill, if the Value of “everything in the world” excepting gold itself divided by the total number of ounces of gold in the world fails to approximate the current $1300 per ounce value of gold, can we then assume that Gold is not the defacto one true currency?
It would mean that 0.0001% of all the gold in the world fails to buy 0.0001% of “everything”?
Also on a pure world wide gold standard as the amount of stuff to buy grows faster than the amount of gold, there would be constant deflation? Would that be good for the economy?
Gold, at its present valuation, represents a vanishingly small percentage of the strictly monetary wealth in the world. Add in the “everything else” of real estate, physical possessions, etc., and the percentage is even smaller.
As for your deflation question, absolutely, unequivocally, YES. The biggest benefit is that the holders and users of money (read, you and me) are protected from the ***tards that inflate the money supply to their own ends (read, banks, the Fed, and the US Gov). What would happen is gently falling prices – not deflation. Deflation means the supply of money is decreasing. The effect on prices (lowering) is an effect of that cause. Gently falling prices under a stable money supply is a result of technological progress. When the US was on a gold standard, prices were nearly constant for 150 years. From your view as a consumer, doesn’t that sound grand? You can save, and expect to be able to take care of yourself. You don’t have to protect yourself from the government’s devaluation of the currency you are forced to use. Poke around on mises.org if you are interested.