12/11/09 Dakar, Senegal – Nothing is quite as disagreeable as a neighbor who has made a lot of money by not following your advice. After 9 months of ‘recovery’ they are all around us. They think they have perfected the art of bubble riding.
Here on the back page, we alert investors. We wag our fingers and shake our heads. Little good it does. We might as well warn surfers about an approaching storm. They don’t head for cover; they rush to the beach, hoping it’s not too late to catch a big one.
As of this week, investors are still making money. Almost everything has outperformed cash over the last 9 months. Stocks, commodities, gold – you name it. This wouldn’t be happening were it not for the government. The feds are making waves from Malibu to Manila. ‘Don’t worry about the depression,’ they tell us; ‘we’re on the case.’ That, of course, is what we’re worried about.
Instead of allowing things to settle down, the feds are doing all they can to keep them stirred up. Amid the foam and splash, nobody knows what is really going on. For example, they’ve driven the yield on cash down to near zero. What’s a borrower to think? Why are interest rates so low? Are there so many trillions in idle savings that he can have them for nothing?
Investors don’t know whether they are coming or going either. They’re buying S&P stocks at more than 80 times earnings, while people who know what they are doing – the insiders – dump 82 shares for every one they purchase.
And in the economy, last Friday, came a puzzling report from America. According to the feds, unemployment dropped by 0.2% last month. That leaves only 15 million without work. Another report tells us that each job created by US government stimulus costs $246,000. What were they hiring, bankers?
While the feds muddy the waters, the de-leveraging of the American consumer continues. Consumer credit fell in the US in October, for the 9th month in a row. As long as consumers are cutting back there is no way a real recovery can begin.
What to make of it all? We turn to a ghost for an explanation. Friedrich Hayek described a similar situation 76 years ago:
“There can…be little doubt that …a deflation process is going on…Central Banks, particularly in the United States, have been making earlier and are more far-reaching efforts than have ever been undertaken before to combat the depression by a policy of credit expansion – with the result that the depression has lasted longer and has become more severe than any preceding one.
“…all conceivable means have been used to prevent the readjustment from taking place; and one of those means , which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion… To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about…”
He could have been describing Japan’s 20-year depression, too. So far, we have no evidence that the authorities can improve a depression. All we know is that they can stretch it out.
A real recovery is a process of discovery: it begins in misery and ends in prosperity. Investors figure out what their boom-era investments are really worth. Businessmen figure out how to turn a profit in a new environment. Households learn how to match their incomes against their expenses in a world where credit is less forthcoming and jobs are harder to find. Needless to say, the faster these discoveries are made, the better.
But the first thing people realize is that they have been idiots. Then, they call for the government to prove it isn’t so. In Britain, the government has spent about $8,000 per family to bail out the banking sector. As a result, we don’t get to discover what the bankers would do if they were forced to seek honest employment. Nor do we discover what the poor taxpayers would have done with that $8,000 if it hadn’t been forcibly transferred to the City.
Likewise, what we want to know about an insurance company is how well it holds up under pressure. But when the feds rushed in to save AIG they corrupted the facts. Then, in the US alone, there were Bear Stearns, Citigroup, Washington Mutual, General Motors, Chrysler, Fannie Mae and Freddie Mac, not to mention the small fry. Our curiosity remains unsatisfied; what kind of world would it be if they had gotten what they deserved?
Alas, the feds have created a world of darkness and depression. No one knows anything. And what they think they see clearly is often a mirage. Employers don’t know whether to hire or fire. Consumers are blind too; they don’t know whether things are getting better or worse. Finally, government even pokes its own eyes out. Relying on ‘funny money’ to cover its deficits, it has no idea how far it can go before it falls off a cliff.
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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Without the ability to prudently evaluate risks all investments today are nothing but crap shoots. The only certainty out there, as Mogambo Guru repeatedly pointed out, all fiat currencies through history have failed.
The timing of the dollars failure is the key to investing, but it’s just another crap shoot.
By the way, where is The Great Mogambo Guru? He is sorely missed and I Wish Him Well(WHW).
Great article! But seriously, where is the Guru? Can’t we at least have an explanation?
Bill, the value of government intervention is not to rescue the businesses, but to insure the survival of the victims until businesses figure out how to solve the economic problems.
$246k per job “created,” wow, can’t WAIT until that kind of thinking “cuts costs” in health care!
Michigan has been spending that much – and more – to “create” jobs here too. Sadly, it isn’t working, but let’s hope the same programs work better in your neck of the woods.
Kick the can, that is all that has been accomplished. We are very close to running into the wall that stops the can in its tracks. Too bad the wall is just cardboard and hiding the cliff we are getting ready to plunge off of.
why did you use the word retarded? trying to be a hipster? sorry it didn’t work.