Bill Bonner

Pity the poor rich! Pity the poor! Pity us all!

Here at The Daily Reckoning, we always take the part of the humble…the despised…the oppressed…and the misbegotten.

Today, that means the rich…

Yes, dear reader, the rich are getting beaten up. Maligned. Mistreated.

Their governments all have in it for them…taxes on ‘the rich’ are rising. The Democrats are talking about financing the entire nation’s health care system on the backs of the super-rich.

And prosecutors and politicians are targeting their salaries. No more million-dollar paydays…not with the feds looking over their shoulders. Oh…and their investment earnings are down too. The dividend yield on the stock market is scarcely 3% – try living on that, you rentiers! As for the 10-year T-note, the yield is only 3.5%.

And capital gains? Fugetaboutit. Stocks have been rallying (bouncing) since March 9th. The bounce has helped investors recover about 45% of what they lost. But, overall, there have been no gains in the stock market for more than 10 years. None. Factor in the effect of inflation and the story is worse; investors have lost about 25% to 30% of their money.

But everyone is pointing a finger at the rich – as if they were to blame for the financial debacle of the last few years. Some economists even blame the “growing inequality of incomes” as a cause of the crisis.

This is completely unfair. The rich didn’t cause the problem – they merely took advantage of it as best they could. It was a time when ‘financialization’ was on the rise…when money made money, at least in theory. Speculation and lending paid off. Obviously, you have to have money if you’re going to lend or speculate. Some of ‘the rich’ – those in the financial industry – cleaned up.

But come the revolution of ’07-’08 and the rich lost their heads. Who lost $50 trillion in stock and real estate? It wasn’t the poor. Whose derivative positions went belly up? Whose stocks went down? Whose mega McMansions got re-priced as cracker shacks?

On this last point, we have new information. The housing crisis may have begun in the subprime trailer part of town. But now it’s in the older suburbs – it’s the prime and super-prime homeowner whose back is to the garden wall. A third of foreclosures in the 2nd quarter were of houses financed by prime, fixed-rate mortgages. Of prime borrowers, 41% are expected to be underwater by 2011, says a forecast from Deutsche Bank – nearly three times as many as at the beginning of 2009.

And now nearly half of all jumbo mortgages are underwater. Yikes, the rich…and bourgeois classes…are up to their necks.

And now this sad report from The New York Times:

“Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

“Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price . In one ZIP code in Vail, Colo., only five homes sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage.”

(More on this in today’s guest essay, below…)

And so, we pause to wonder. What does it mean? Where does it lead? Who gives a flying fig?

At a certain level, all of this concern about who earns what…and who has what…is just so much envious claptrap. For most of us – who have enough to eat and a roof over our heads – money is just sport. We aim to win, just as we would try to win a croquet match. But what difference does it make?

We don’t know. So we turn back to the game. How can we get more wealth than our neighbors?

And here…a bit of perspective…

When the Great Khans road across the heartland of Eurasia in the 13th and 14th centuries, nothing could stop them…or so it seemed. Their soldiers were practically born in the saddle. From childhood they learned how to ride, and fight…and little else. Europe’s population, meanwhile, was more settled…and more soft.

But Europe was hardly the brightest bauble on the tree. The Mongols had their pick. West – to conquer Europe. South – to conquer India. Or East – to conquer China.

They attacked Europe, but only half-heartedly. Instead, they devoted most of their efforts to India and China. Why? India and China were richer! There was more stuff to steal.

It’s hard to make comparisons. But, at the time, the East was at least as rich as the West. But then, along came the Industrial Revolution and the East was left behind. People in the West learned to save…and to invest their savings in capital improvements – machines, factories, canals, railroads, mines, ships and all the other things that allow people to be more productive. This extra production made them rich. Not to put too fine a point on it, but they could make more stuff!

Then, with the ability to produce more and better stuff came the ability to produce the kind of stuff that you can kill people with. So, pretty soon, they were making machine guns. And pretty soon, the horse-mounted warrior of the steppes was as archaic and irrelevant as the Roman legions. He could still charge with great élan. He could still raise his saber and his bow…providing a rich subject for artists and poets. And he could die so well! All you had to do was to open up with your new, factory-made 50-caliber machine gun and down he went.

But what goes around comes around. Who’s saving now? The Chinese save 25% of their earnings. In America, the rate is rising…from zero to five percent!

Who’s building factories? Who’s harnessing the industrial revolution? Who’s getting rich? Who’s innovating? Who’s building cities?

Who’s the world’s biggest creditor? Who’s got the biggest pile of money?

Oh, dear reader…you already know the answer…

“West will languish; Asia will lead…” says a headline in Barron’s this week.

And what’s this?

“China commercial property sales higher than US,” says a headline at Bloomberg.

Yes, dear reader…it is the way of the world… Losers become winners. Winners become losers. Day yields to night; summer gives way to winter. Life goes on…always as it always was…but never the same.

And we leave you with that philosophical reflection…and go back to the financial world…

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. 

  • Lost & Found

    “But everyone is pointing a finger at the rich – as if they were to blame for the financial debacle of the last few years.”

    Me, too. Because they are to blame. Nonetheless I like your almost obscene lingering around them. One could easily imagine that Goldman Sucks pays you for your justifications of super rich incomes and the likes and so forth. As a matter of fact, the super rich instigated the crisis and leveraged it up to the point where it is now and you know where it is now. Of course, the super rich lost more than others, too, during the crisis, but they made more by immoral, if not to say criminal means before it.

  • JRod

    L&F-

    Calm down a little…I wouldn’t read everything quite so literally, Mr. Bonner likes to stir the pot a bit. He has spent plenty of time pointing the finger at some wealthy people. I haven’t seen him say anything positive about Goldman Sachs. I would have a hard time imagining GS paying him. Have you read his book?

    Cheers,

  • JMR bayou bobby

    It doesn’t take much to rile the less informed.

  • LAGirl

    What a unique blend of history, philosophy, poetry and economics, only Bill Bonner can deliver.

    The only small point I’d like to add is, even though Americans’ five percent savings rate might seem puny compared to the Chinese, it is not because Americans are still out buying big screen TVs, plastic surgery, vacations or even back to school supplies. In this country, it is almost impossible to save, because the price of everything — even necessities — is so inflated. It is now 35K to attend a public professional school at a U.C. (University of California), only to be shoved in a lecture hall with 300 other students with one professor. Then there’s car insurance, health insurance. A single textbook can now cost you hundreds of dollars. And that’s before you even think about room and board!

  • historybuff

    The historical comment about the Mongols and their choice of India and China as the richest pickings at the time is historically accurate. But it doesn’t quite go far enough and the missing piece may say something about what the future will hold for global economic and financial power distribution.

    In 1820, admittedly imprecise, economic analysis indicates that China accounted for 33 percent of world GDP. Yes, that’s 33 percent. It had by far the largest economy in the world using the much questioned metrics of GDP calculations. In contrast, the U.S., prior to our present difficulties, accounted for slightly more than 25 percent of world GDP.

    To put the above in perspective, Britain, which everyone probably would agree was THE global force in the world of that era, had a GDP of 5 percent. India, in the process of being made a colony, had a much larger GDP than its conqueror, Britain. Perhaps GDP is less of a determining factor for determining global roles than superficial logic would dictate?

    To summarize, discussions of relative GDP amount to little more than a Victorian era drawing room chat over cigars and brandy. The determinant of future economic, and thus social and political, dominance, will be where the center of international finance will lie and who will be capable of enforcing, with soft and hard power, a global trading system. China? Count me skeptical, to say the least.

  • Bernardo

    Nature of market is inmmorality. Nature of Capitalism is suck the blood of the ingenuous than think life is only make money, and fight all his life trying to live like rich people but they can´t afford it because they are only appendices of the economy. It´s unfair when banks collapsed are rescued with public money! why not rescue all americans from poverty?

  • President Obey 1

    Never has it been explained so simply and eloquently. Great writing column today. Losers become Winners, winners become losers, and democrats become republicans

  • http://www.laconfluencia.com mark jordan

    personally, this is, to date, my favorite bill bonner diatribe

  • John

    Thanks to Bill Bonner and “historybuff”! I consider your points and wonder: Should I therefore teach my young sons “to ride and fight… and little else”? The way things appear to be going China will be ripe for the picking in 15 years; just as the boys are in their prime. Or should I teach them to work hard and produce and hope the Chinese competition will not be willing to work as hard in 15 years as they do today. Or should I retreat to the mountains, buy enough land to leave them each a piece, and advise them to hide from the government and only shoot as a last resort… what a smorgasboard of options! It does seem their lives will be harder than mine, as mine has been harder than my fathers.

  • James

    I just spent the last week touring a key industrial province in China. They seem to be producing for the sack of producing, building for the sack of building. Everybody is focused on targets, not efficiencies, quality or demand.

    My feeling is that China is a big bubble that will burst badly.

    India looks more interesting to me.

  • James

    Typo, should read “producing for the sake of producing, building for the sake of building”

  • LAGirl

    You know, there are rich people who made their money in ways that did not involve trading derivates. Jeez.

  • Spencer

    “Nature of market is inmmorality. Nature of Capitalism is suck the blood ”

    “It´s unfair when banks collapsed are rescued with public money! ”

    Hey bernardo, do you realize that banks being saved by the gov’t has nothing to do with real free-markets and real capitalism ? Actually, that’s called fascism.

  • Brown Rice

    Could Over capacity ever replaced by fresh money?
    Fresh money can easily make bubble like present.
    Can this bubble regain capacity?
    Result of jobless report show No.
    Answer is here.
    This additional credit bubble making a partial big money flow,
    and simultaneously another bubble of destruction power .

  • Tron

    Americans can keep playing the bubble game only to the extent that other countries keep financing the american real economy (the real consumption).

    The external (real) financing of the american (real) economy is not made of dollars, bonds or other recycled bits of financial-monetary paper. The real financing is made of arabian oil, japanese cars or chinese clothing.

    Because the bubbles do not create wealth but americans need to continue to consume real goods, while blowing bubbles, the real foreing financing must keep flowing, in exponentially increasing amounts (the bubble game is a exponential game), to the USA to avoid the bubbles collapse (dollars or bonds can not be eaten nor wear, food or clothing can not be printed)

    This external real funding has colapsed. No matter whether japanese and chinese buy more or less treasurys or other paper debt, they only exchange some bits paper (dollars) by other bits of paper (bonds). The real financing occurs when oil or other real good, with actual real economic value, is exchanged for freshly printed papers with no real value.The volume of this exchange has colapsed.

    The magnitude that measures the real foreing financing, the magnitude to watch, is the trade deficit. American trade déficit has sunk. To blow bubbles is no more possible.

  • sierra

    Thx Bill B. for another good column.
    LaGirl is right; everything the “common person” touches is terribly inflated regardless of the “official” inflation reports of the financial media. I find myself spending $20 bills like $5 bills five years ago….
    As far as “savings” rate increasing; it is also a chimera….if it’s “….up 5%” then it only means that the public is spending 5% less in consumption…and in an economy that lives on 70%+ consumption to motivate it, don’t hold your breath!!

    The “…center of financial power” is also correct…that’s why we have two wars of choice to control the spigot (or attempt to) of the most precious commodity of the ages (present times of course), oil. Our dollar is vulnerable as the “currency of last resort” so we must protect our currency….many countries want to (some are already doing so) get off the, “….dollar oil commodity pricing.

    To go forward from here and think we can reproduce what happened in the early 21st century in finance is to build another bubble and suffer its collapse which will be much worse than this one as all the past ones have been….an escalation of loss.
    Something else must be visualized.

  • Lost & Found

    JRod-

    well, I did read his Empire of Debt only last week but there were only about 10 pages worth reading out of about 380 or so (thank God, I didn’t have to pay for it). I prefer reading his Daily Reckonings, though, as they are not as dry as a fart on a cracker, as his books obviously are, it seems.
    And, by the way, I would not have a hard time imagining anything when it comes to financial relationships between two-legged animals. I have already seen lots and lots of horses puking (though they have four legs, I know), if you know what I mean, and I have seen them puking in front of lots and lots of pharmacies, even, too. If you know what I mean, too. Cheers.

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