08/05/11 Poitou, France – Investors were staggered yesterday. Stocks got walloped.
Dow down 512 points.
Today, bond yields are falling… oil is below $86. London, Paris, Frankfurt – all down heavily. Only gold has resisted the general rout. It lost only $7 yesterday.
Why?
The reason is debt. It won’t go away. It won’t say ‘adios’ and get on a bus. Like a bad houseguest, it won’t leave!
The feds have tried to ignore it. They’ve tried to postpone it. They’ve tried make the problem go away by stimulating the economy to grow faster.
But nothing has worked. Day by day the debt grows larger… And day by day, the moment of truth grows closer.
What truth?
That you can’t make excess debt disappear. It has to be paid…either by the borrower, or by the lender. Someone has to suffer.
Why is that? Because borrowing takes from the future. Sooner or later, the future shows up and wants to be paid. It wants its ‘pound of flesh.’ Its recompense. It wants what is due.
Yes, dear reader, a high speed train may have changed the world of travel. The invention of Viagra may have changed man’s love life. And don’t forget Facebook; it’s had a big effect on social life. All around us is Progress with a capital ‘P’!
But where is the progress in the world of money? How is debt today any different from debt 1,000 years ago? How are bankers’ mistakes any different? They lent too much to the wrong people in the time of Caesar; they make the same mistakes today.
And what about money itself? There was good money back then…and bad money. Good debts, and bad debts. Good investments and bad investments.
The life of money never changes. It’s not a technical system, in which progress is made. It’s a moral system, in which the same lessons get learned over and over again.
The lesson investors are learning now is that there are bear markets as well as bull markets. Stocks go down as well as up, in other words. And sometimes, a downturn in the stock market is not a buying opportunity…it’s just a step on a long stairway to Hell.
It’s too early to know whether yesterday’s big drop was a step down the bear market staircase…or just a feint…or just an emotional reaction to bad news – or all of the above. So, let’s turn back to what we do know for sure: there’s too much debt in the system; it’s gotta go away somehow.
Tuesday, the US hit a landmark. It joined the Losers Club. Here’s the report:
The United States Public Debt Surpasses its Gross Domestic Product
By Zachary Keck, DC Foreign Policy Examiner
On Tuesday the United States net public debt to GDP ratio reached 100%. That is, the federal government’s accumulated debt is equal (actually surpassed) the United States Gross Domestic Product in 2010.
After Congress and the Obama administration passed the debt ceiling limit, the Treasury borrowed $238 billion on Tuesday. This brought public debt to $14.58 trillion dollars, slightly higher than the United States GDP in 2010, which was $14.54 trillion.
Richard Haass, the President of the primer Foreign Policy organization, the Council on Foreign Relations President, has repeatedly argued that the nation’s growing debt is the greatest national security threat the country faces. As Yale diplomatic historian Paul Kennedy has convincingly demonstrated, the rise and fall of great powers since the time of the Roman Empire has been driven by the economic vitality of the country. Countries that aren’t economically dynamic can’t maintain large military. Traditionally, the red line has been when debt-to-GDP ratio reached 90%. At this level, it was difficult to reign in debt as growth remained stagnant if not decreased altogether. 100% is therefore quite worrisome indeed.
It’s also worth looking at which countries that puts the United States in a league with. According to Agence French-Presse the only countries besides the United States to have a public debt-GDP ratio of 100% are “Japan (229 percent), Greece (152 percent), Jamaica (137 percent), Lebanon (134 percent), Italy (120 percent), Ireland (114 percent) and Iceland (103 percent).”
And more thoughts…
*** Larry Summers is talking about a “double dip” recession. He’s wrong twice. First, because there was no recession. Second, because there won’t be another one anytime soon. This is a correction, not a recession.
A recession is a different thing. In a recession, an economy takes a break…it’s like pulling into a rest stop along the highway. You fill up your gas tank, and you can start out again.
But what began in 2007 was no rest stop. It was a complete stop. Time to check the map. Change direction.
David Rosenberg explains:
Plain-vanilla, garden-variety business expansions and contractions that are influenced by the manufacturing inventory cycle tend to have recessions separated between five and 10 years apart. That was certainly the experience that economists came to understand and appreciate in the post-WWII era…
This time, we are dealing with something different. This is a balance-sheet downturn…when businesses and households begin paying down debt and rebuilding the asset side of their balance sheets. Instead of spending…they save.
It is a very natural thing to do, but it hasn’t happened in 80 years. And it changes the whole nature of the economy. The US economy has developed to provide goods and services to household spenders. That’s why there are so many malls in America – 10 times as much retail space per person as in France, for example. And that’s why a large percentage of the US population is employed in “service sector” jobs – lending, selling, installing, maintaining and otherwise helping households spend money. Manufacturing may have declined in America, but at least there was the service sector.
What happens when households stop spending? Time to check the map! And change direction.
The latest jobs report shows that even the service sector is no longer creating new jobs like it used to. And no wonder. Consumer spending is slumpy. It hasn’t been so weak since WWII. And it actually went down last month. Considering that population and price levels are still going up, an actual decline in consumer spending is a sign that the Great Correction is intensifying.
*** Advice to dear readers: if you’re still in the stock market, get out; stay out until the Dow drops below 6,000.
Regards,
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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got my answer, a little late, but i got it.
in anticipation of the answer, i sold everything, except “tgldx”. we’ll see how things go. this should be very interesting.
S & P downgraded the United States credit rating on Friday. The reason seemed to be more because they lacked the will to tax the wealthy to pay the debts, not because it could not be paid.
Sooner or later, the American rich are going to have to pay taxes, like everyone else does.
CBS News) Investors are well aware that money markets pay next to nothing in interest these days. Now one bank has announced a policy to actually charge clients a fee to hold their cash.
The policy by Bank of New York Mellon Corp. will apply to some large depositors to hold their cash, reports the Wall Street Journal.
Now you can pay the bank to keep your cash in their vault!
Sweet.
DOW 6,000? Sounds a little optomistic to me. I was thinking more like 3,500 –or about where it was in 1995 before the bubble economy became fully ramped up.
Perhaps even more degenerative than a debt to GDP ratio exceeding 100% is a democracy where less than 50% of the electorate contribute to the common weal.
Its interesting to realize that no one and that is no one knows what things will be like tomorrow. Just one big guessing game. What you are afraid of the most will probably become reality.
“The reason seemed to be more because they lacked the will to tax the wealthy to pay the debts, not because it could not be paid.”
Go to the IRS tax stats and do the math. Soaking the rich won’t work. The money isn’t there.
“Sooner or later, the American rich are going to have to pay taxes, like everyone else does.”
Those same stats say they do and at a higher rate than “everyone else.”
46.9% of those making over $250,000 paid no taxes.
w3.newsmax.com*newsletters*franklin/zero_tax_2011.cfm?s=al&promo_code=CC55-1
The market thinks the Federal government is so grid locked that they are unable to solve problems (like the debt ceiling) in any meaningful way.
It sort of reminds me of France in 1789, just before they had their revolution.
Washington politicians do not understand how the U.S. economy works. It’s not that complicated: a robust economy depends upon steady consumption by average Americans, not millionaires and billionaires. Working folks aren’t consuming because they either don’t have the money or are saving it because they are fearful. These Americans aren’t going to spend more because the debt crisis got resolved. They understand the debt-limit was a phony crisis had nothing to do with jobs. Thats why average Americans are pissed off at both Parties.
Thanks for the warning Mr Bonner. Just one question: Where does one store his capital if not in the market? Physical PMs can only be carried so far.
1. The Chinese credit rating agencies downgraded the US a while ago. MSM more or less dismissed that news. Of course, the Chinese still kept on lending the Americans money anyway. When idiots are at the steering wheel, what use are the road signs?
2. Mantra, poorer Americans get hit hard by consumption and payroll taxes. Unless you actually think those Social Security premiums represent savings…
3. Cheer up, Americans! Our marvellous global free trading marketplace should balance out worldwide labour costs soon–meaning “soon” in historical terms, at least! Your grandkids will reap the splendid efficiencies, although you can forget about the family’s accumulated assets. They will be like fresh newborns coming into an exciting and competitive world…
4. Or maybe we’ll all decide to do a Western equivalent of Tahrir Square. That’s what one might call “a sharp correction in the political marketplace” …
The wealth of a nation is it’s production and savings – not consumption.
If you want to become wealthy do you work hard and save or spend?
If there was a village where one man made and sold everything and everyone else spent all of their money at his store – who would be wealthy, the store owner or his customers?
If two people were on a deserted island with no economy and no money whatsoever and one had say, the sole means to obtain food, The other would quickly find some way to be of service to the first and you would have an economy.
Consumption is NOT wealth. How many times does QE have to fail for people to realize, you don’t “create demand” and “fix” an economy by handing out money.
High taxes merely discourages producers and wealth creation at the high end – on the low end it discourages honest work. Why work if the fruit of your labor is confiscated? Why work if someone will pay you not to with someone else’s money?
Somalia has no rich people. Is this what you want? Give every Somalian $50k and see how ” vibrant” their economy is in 4 years.
On the other hand – relocate google and Microsoft and Boeing and Toyota there and see what it does to their economy.
The benefit of “the rich” for society is not their damned taxes which is taking their hard earned property. Didn’t they earn it after all? Who should have a claim on what they worked, risked and educated themselves for?
The benefit of these producers is the THINGS they bring to society, the inventions, the skills, the arts, the entertainment.
Why do you want to punish them for this gift?
By taking their reward for this activity which isn’t yours nor anyone else’s?
I was thinking the market would drop to where it was when Netscape went public. That’s when the mania began and it would make sense to retrace this entire era. Plus, PE ratios would drop to the mid single digits and likely stay there for a while.
Not to mention jobs…
For Aticus: What is the point of all that production you fantasize about, if not to be consumed by someone somewhere?
If there was no demand for a product. Why even make it?
“Didn’t they earn it after all?” Well, yes, but not on their own Aticus. Without infrastructure, services, law and order those who are rich would never have had the opportunity to become rich. Society is the platform on which they have built their wealth. They must return a fair share (certainly greater than an ordinary citizen) if the system is to remain viable – for economic as well as ethical and moral reasons. Agriculture is a simple analogy – unless something is put back, the soil eventually becomes depleted and unproductive.
Random Reader,
According to 2008 tax data, the top 1% wage earners paid 39.9% of all taxes, the top 5% paid 60% and the top 10% paid 71%. The bottom 50%? They paid 3%. Essentially, you have the bottom 50% sucking the life blood out of the productive 10%. As with all experiments with socialism, the host eventually dies and you don’t have a productive workforce left, just a population of leeches who are unable to do anything but stick out their hands. This is US tax data.
Said another way –
The producers have contributed DISPROPORTIONATELY to society by their production. They have given MORE to society than the rest – just by their production. We would do better to thank and REWARD them for this – the ones we still have here that is.
Taxing them DEPRIVES society of their energies, their genius, their artifice. We are all the poorer for it.
America became a great nation without an income tax. The only taxes paid were various local fees.
WITH an income tax the Federal government grew immense, arrogant, foolish and hopelessly corrupt. Historically what comes next is for it to annul our freedoms and openly oppress us.
Can anyone here seriously make the argument that our Overlords are taking good care of us, wisely building infrastructure for us? With a legal system that serves us? That their pimping of ‘services’ has been good for the People?
No. They have squandered trillions on polictical kickbacks and… dogparks. A trillion to bankers here, a series of wars of conquest there… Their taxes eat out our substance. We must fear our own legal system and their services have laid waste to a large proportion of the population who have slipped into lives of dependent dissipation.
They have thoroughly destroyed us, we just don’t know it yet. Has so great a heritage as the United States of America ever been thrown away in so short a time?
Because this is barely still America. I’ll hazard a bet that half of this readership has had to seriously reflect on whether to leave this place, or at least make alternate arrangements.
I don’t know about you but I don’t feel free. I fear and loathe our government and its various freedom-trammeling police organs. I don’t fear arabs, I do fear what this crew in power is up to however. So many nations in history have slipped into madness at this point.
“I’ll hazard a bet that half of this readership has had to seriously reflect on whether to leave this place, or at least make alternate arrangements.”
you don’t like your nation so you want someone else to make you a new one.
there is nowhere to go.
Production rises up to serve the latent demand in people.
Who intentionally makes products that no one wants? Who would build an umbrella with giant holes in it or something?
And this is important too, because producers take tremendous risks trying to make lives better for people. If they fail, they suffer loss and cry tears.
Don’t we all know someone who tried to build a business or invent something or become an artist but failed? Very, very painful. But thank God for all of those who tried because it lifted us out of the mire.
When they succeed – let them enjoy the fruits of their success and wish them well!
People have infinite demand on the other hand. This is why you can make a killing inventing the Snuggie.
The government didn’t have to tell millions of people that they need a snuggie – they had no idea. People weren’t going around clamoring for one either.
Some guy came up with the thing and now he, presumably, is rich. Everyone who bought one had their lives enriched by it – or else why would they have bought it?
Kids who have no money go out and find a way to be useful to get money to buy a bike. It will probably be a job. This is their production. So production inspires others to also produce and we’re all lifted up.
Multiply this attempt to be useful and productive by every human being and every transaction and you have an immenseley enriched society.
But you can’t short-circuit the hard work, the energy, the inventive genius by QE..whatever…
You have to create an environment that favors people trying to find ways of satisfying needs and PRODUCE for REWARD. Attack the rich and you ruin the incentive to become rich. Society suffers.
I love this nation enough to grieve over what’s happening to it.
But I don’t conflate the Federal Government with my Nation.
My Nation is people like the Founding Fathers, the people who worked hard and played by the rules to make this land great. People like you probably. It’s also the system that made all of that possible. A system based on true liberty based on individual rights and yes PROPERTY rights. Because without property rights all other rights are academic.
This means were are not part of a collective – a hive, like ants to be spent for the greater good. We are individuals and we OWN ourselves and we OWN our property and this means no one else is entitled to it or to us.
“Free-born Americans” we used to call ourselves.
America for me is most definitely NOT Nancy Pelosi, Harry Reid, Obama – or Mitch McConnell – God help us.
Gman is a fool – Atticus is right. There are plenty of places to go – the America firsters idiots like Gman always think that there is no where else. Look around, buddy, plenty of countries have a superior standard of living and more liberty than the sinking USSA. People like Gman are one of the main reasons the USSA is in the shape it’s in – they can’t open their eyes and see what’s happening and that there is no future here. Smoke some more meth, Gman, you need it like the rest of your white trash countrymen.
Aticus said: “Can anyone here seriously make the argument that our Overlords are taking good care of us, wisely building infrastructure for us? With a legal system that serves us? That their pimping of ‘services’ has been good for the People?”
Our corporate overlords suck.
They also own the government lock, stock, and barrel.
All the Federal welfare checks, food stamps, and unemployment benefits don’t begin to add up to the more than $1-trillion in indirect tax breaks awarded annually to America’s middle- and upper-classes.
It is way past time for revolution or a military coup. I don’t care which – I just want to see our entire government in DC removed – preferably executed on TV! We could have a national day of liberation from these thugs in suits.
Perhaps, Ray, the reason that the bottom 50% pay so little tax is because they have had the life blood sucked out of them by the top 1, 5 or 10%. Look at the history of real wages and the minimum wage in the US compared with Canada or Australia. Ayn Rand would be pleased but most of the world has gone way past the notion that the ‘market’ takes care of things. The ‘market’ (the top 10%) takes care of itself and good luck to the ‘collateral damage’ (the bottom 50%). Others here have pointed out the problem – a government that is too gutless to stand up to the ‘market’ – a government that is owned by the ‘market’. I wish you all well if you live in the US, most of you have a hard road to travel.
It just came to mind… with the idiotic rapid expansion of the european union the last couple of years, what is going to happen with these east block countries? How is THEIR bookkeeping? If they start recieving less financial suport from the richer european countries, their economy will fall, and the western european countries will be swamped by even MORE immigrants with all due effects, not to mention bailouts ging that way too! Is anybody aware of this? I envisage this being a golpe de gracia for this whole farce of a “union”
I would much appreciate an article on this please Mr. Bonner.
“Essentially, you have the bottom 50% sucking the life blood out of the productive 10%.
And just where is this top 10% sucking their blood from?
“Essentially, you have the bottom 50% sucking the life blood out of the productive 10%.
And just where is this top 10% sucking their blood from?”
Classic zero-sum thinking on both sides. For me to gain you must loose. Marx would be proud.
@Emma,
Anything less than 100% taxation is an indirect tax break, no?
Truth Speaks and said : “Sooner or later, the American rich are going to have to pay taxes, like everyone else does.”
Do you know that the bottom 40% don’t pay any taxes and some get money from the FED they didn’t put into the system. I think they should start paying there part.
That has provided the ripe timing for Adolf Hitler to sent his idle rusting war machineries bursting into wonderful life.
“Gman is a fool – Atticus is right. There are plenty of places to go – the America firsters idiots like Gman always think that there is no where else. Look around, buddy, plenty of countries have a superior standard of living and more liberty than the sinking USSA.”
if the united states tanks then half the world economy goes away, and that superior standard of living and liberty will prove a mirage. superior living and liberty are where you make them, not where you find them. go ahead and leave, but seriously, good luck being the rich foreign refugee in a stressed nation.
Sugar Mountain (live)
*** Advice to dear readers: if you’re still in the stock market, get out; stay out until the Dow drops below 6,000.
While I enjoyed this entire article, your irrational advice at the end is not to be discounted. If I had sold every share I owned yesterday or Friday I would have wiped out all profits I have made on my holdings. If you are holding stocks of solid companies you got into at good positions why would you sell them when everybody else is selling? I guess I am just supposed to take huge losses, and then get back into the market with my diminished buying power? Are you trying to sucker the American people or am I missing something? I think you should have advised a little less fear in that last sentence…
I have just lost close to 100,000 due to an incompetant trader. “Very annoying,” 6 months ago same thing happened he had a theory that when leveraged you should not sell. I have learned to find and source alternative information and not that of a intuitively colourblind trader. I would be better off recieving my information form my neighbours cat, if you catch my drift. My email is j_fraser@clear.net.nz iff anyone has some good tips and or info it would be very much appreciated because I am getting a little pissed off donating my profits to a bunch of reptilian fraudsters aka fed, when the money could just as easily benn put in my pocket. Thank you again