Bill Bonner

Irene was not so bad. She knocked down a few trees, flooded a few basements. But, in the end, she was a good girl who left quietly when her time came.

Traders, players, speculators and mid-night ramblers drifted back into Manhattan as soon as they could clear the fallen trees. They must have felt they had been spared for some great purpose. They must have looked to the heavens as clouds parted and rays of golden sunlight struck their uplifted faced. Whatever got into them, they rushed to the stock exchange and bought US stocks! The Dow rose 254 points.

If you believe the stock market, the storm is over…all is well…

But US GDP grew at only a 1% rate last quarter. That is a small number. Don’t look too carefully or it will disappear altogether. If you deflate the latest ‘growth’ number by the inflation rate published by the Bureau of Labor Statistics (actual year-to-year CPI-U is 3.6%) you get negative real growth. Recession, in other words.

And then, you have to wonder. Suppose you were to adjust that number for population? US population is growing at something just under a 1% rate. What you would see is that the average American is getting poorer (his share of GDP) at about 3% or 4% per year.

And then you are able to make sense of a lot of the other economic information that comes your way.

For example, a report out yesterday tells us that the personal savings rate in America keeps edging up — just as you’d expect. From next to zero, it has moved up over 5%. Households continue to cut back on spending…and increase savings. In the last quarter, they paid down $50 billion of debt. A drop in the bucket…but at least it was the right bucket. The Wall Street Journal:

In a marked shift from their borrow-and-spend behavior during the boom, US households are now by and large prioritizing saving and debt reduction. On Monday, the Commerce Department is to release July figures likely to show the personal saving rate, or proportion of after-tax monthly income unspent, in the 5% to 5.5% range…

We also learned that gasoline use is at a 9-year low. Labor Day weekend is less than a week away. But this year, forecasters believe more Americans are going to stay home. They can’t afford the cost of filling up the tank for a long road trip.

We hope this is true. We’re driving up to New York from Baltimore to attend a wedding. We don’t want to get stuck in a lot of traffic.

But it is sad to think that people can’t afford to visit friends and relatives because they don’t have the cash to pay for gasoline. Oh, for the good old days! We remember buying gasoline for 25 cents a gallon back in the early ’70s.

Sigh…but that was before Richard Nixon came up with the funny dollar we have today. Let’s see…suppose Nixon had done the right thing? Suppose he had honored America’s commitment to settle her debts in gold?

There would have been Hell to pay in the mid-’70s…but isn’t it better to pay Hell sooner rather than later? After all, the entire amount of foreign claims against the dollar at the time was something on the order of $50 billion. Now, it is around $4 trillion. Maybe more.

So, just for fun…let’s imagine what would have happened. Of course, there would have been this aforementioned period of wailing and gnashing of teeth. And then? And then, US producers would have had to get busy making and exporting products…while consumers would have been forced to curtail their reckless spending. America’s trade deficit would have remained under control…and the US would still have jobs in manufacturing. And it wouldn’t have debt equal to 370% of GDP.

But how much would people pay for a gallon of gasoline? Well, let’s see…let’s assume that gold has done a fair job as real money, of holding its purchasing power steady. Back in the early ’70s you could have bought 160 gallons of gas with a single ounce of gold. And today? At $1,800 an ounce, and gasoline at $4, you can buy 450 gallons. It’s as if the price of gasoline had fallen to about 10 cents a gallon!

Hmmm….go figure.

Either gasoline is too cheap. Or gold is too expensive. If we were a trader we’d short the latter and go long on the former.

And since we’re always just guessing, we’ll take a guess as to what this means…

Gasoline is weak because the economy is fundamentally weak. Gold is high because Richard Nixon destroyed the integrity of the dollar, the US economy, and the world’s monetary system. Each of these trends will have to play itself out. In the meantime, gasoline…and/or gold…may need a little adjustment. And the storm continues…

At least the feds aren’t cutting back. The private sector spent itself silly in the ’00s. Now it’s the feds’ turn.

With all the talk of ‘cuts’ and ‘budget reduction’ you might have the idea that the feds are putting the same screws to their budgets as everyone else. You might have thought, too, that much of recent government spending was temporary ‘stimulus’ spending, intended to kick the US economy in the derriere, in order to get it moving faster. That spending might have been expected to taper off as the emergency passed. If you thought that you would be as dumb as a voter. The 2011 budget is on target to hit an all-time high of $3.6 trillion, more than $100 billion up from last year. Total outlays are increasing at a breathtaking pace — up by a third in just four years.

And now that the debt ceiling has been cracked…the sky’s the limit.

Whee!

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 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. 

  • Bernankenstein’s Monster

    Sadly, the single biggest consumer here in the states is still the Pentagon.

    Funny, they were the largest single consumer in the late 60′s as well.

    Good luck reigning in that feckless spendthrift.

  • http://Sicsemperliberalis.wordpress.com Alec Misra

    If we simply compare the $crb commodities index and the gold price we notice the following thing. Gold has more than doubled in price per dollar since its prior all time high in 1981. But, and here is the interesting point, the $crb has remained at about the same price (in dollars) that it was back then. This suggests that the dollar has not lost much real value since that time (although commodity prices have fluctuated dramatically since that prior high). Far rather it suggests that gold may have entered an unsustainable bull market. Before anyone shouts at me Its purely the divergence from the $crb which worries me in this regard.
     Nevertheless both charts also suggest that inflation is back again since the dawn of the new millenium. See my prior article for more on this:
    http://sicsemperliberalis.wordpress.com/2011/06/25/inflation-a-better-measure-4/

  • gman

    “It’s as if the price of gasoline had fallen to about 10 cents a gallon!

    Hmmm….go figure.

    Either gasoline is too cheap. Or gold is too expensive.”

    or gold at that time was undervalued. or gold now has more potential buyers than ever before. or workers back then were paid more per unit of work than they are now.

  • tdm

    “And now that the debt ceiling has been cracked…the sky’s the limit.

    Whee!”

    Have you been talking to MG?

Recent Articles

5 Min. Forecast
How to Profit On the Back of an “Activist Investor”

Dave Gonigam

Since the invention of the "shareholder rights plan" (i.e. the "poison pill"), most companies are relatively immune to hostile takeovers. But according to Dave Gonigam that could all change thanks to one activist investor. And if you're savvy enough, you may just be able to follow his lead for big gains. Read on...


Extra!
Why Americans Shouldn’t Worry About Income Inequality

Jim Mosquera

As the markets have continued to rally over the last several years, more and more people have touted the problem of "income inequality" in the US. But as Jim Mosquera explains, this perceived problem will likely sort itself out with the arrival of one specific market event. Read on...


One ETF to Play Asymmetric Warfare

Addison Wiggin

Almost one year ago, substation telephone cables were maliciously cut in San Jose, CA. In 20 minutes, 17 transformers were knocked out. A year on, similar threats have cropped up. Today, Addison Wiggin explains why these threats are so serious for the safety of the global economy... and shows you one way to play it...


What Small-Caps are Saying About the Current “Bubble”

Greg Guenthner

The big problem with declaring bubbles is that it really does you no good. Unless you're attempting to measure and time market moves, you're also blowing hot air. But if you keep watch for negative divergences, you have a much better shot at figuring out big market moves than the latest bubble-busters. Greg Guenthner explains...


A Simple Strategy for Investing in the US Energy Boom

Byron King

Too often investments are made in a vacuum. But as Byron King demonstrates, the global economic crash... easy money... and technological advancements are all interdependent. In particular, that connection has changed the investment calculus in the resource market. Read on to learn how...


How Gold Will Respond to Declining Discovery

Henry Bonner

Oil isn't the only resource to experience "peaks." Due to a major contraction in gold exploration over the past few years, the mining sector is no longer mining gold at its replacement rate. In other words, the amount of gold above ground is running out. And according to Henry Bonner, it will get worse before it gets better...