01/17/11 Paris, France – Products of the past…doomed…
Chinese President Hu Jintao: the US dollar-based monetary system is a “product of the past.”
He is right about that. And last week two major US credit agencies – Moody’s and Standard and Poor’s – underlined the point. They said America’s triple A credit rating would be lost if the nation continues to borrow so much money.
Amen to that, brother…
But how can the US borrow less?
Ben Bernanke says the US economy will probably grow between 3% and 4% this year.
Pretty good, huh? We can stop worrying, huh?
Wait a minute. We don’t know if the US economy will grow this year…and neither does Ben Bernanke. But even if it were to grow at 3% to 4%…would that mean we were enjoying a genuine recovery? Could the US dollar-based monetary system hold up after all? Could it surprise the Chinese and be a product of the future as well as of the past?
Let’s see how the present economic model works. You spend $10 trillion on bailouts and stimulus. This puts the whole country on course for bankruptcy…where the Chinese are telling you that your money is history…and the rating agencies are threatening to take you down a notch or two. But for your trouble you get, say, 4% growth.
Hmmmm…4% growth is equal to about $560 billion more GDP. But don’t look too closely. Much of this extra GDP is debt-fueled government boondoggling which adds nothing real to the nation’s wealth.
But in order to keep this “growth” going, you have to continue to run deficits – of about a trillion dollars a year. Hold on…what kind of business is Ben Bernanke running?
It costs more in deficit spending than you get in positive GDP growth.
Well, maybe you lose money every year…but you can make it up in the long run!
Hold on… The deficits are expected to run 5% to 10% of GDP for years. Maybe forever. If the growth rate is only in the 3%-4% range, it will mean that debt always outgrows growth. In fact, that is exactly what almost every economist projects.
Then, what’s the point? Well, maybe deficits can be cut…and the growth rate will pick up? Hey, anything is possible. And since we’re starting out in 2011 with a positive attitude…we’re ready to believe anything.
And maybe that’s what gold speculators were thinking on Friday. They sold gold – taking the price down $26 an ounce. Gold rises as confidence in the financial system falls. If gold is falling, it must mean the confidence in the Bernanke, Geithner team is increasing.
Based on the evidence so far, we’d have to take the other side of that bet. If Bernanke & Co. have any idea what they are doing it is not apparent from the public record. Even now, in the 5th year of the Great Correction, they still seem unable to see what is going on.
Bernanke:
“We got in trouble in the first place by making too many bad loans, right. So you’ve got to make good loans. We’ve got to have credit worthy borrowers.”
It may be that, in private, Bernanke has a clearer view of things. But we cannot tap his phone or channel his dreams. All we have to go on is what he says…and does. So far, he has said or done nothing that gives us confidence in the man.
He’s right: we got into trouble by making too many bad loans. But why did “we” do that? Because the Fed lent money too cheaply! It encouraged speculation and risk taking – especially by the banks, who must have known that they would be bailed out if they got into trouble.
And how could the Fed remedy the situation? Easy. It could raise rates – just as Paul Volcker did. It could put the squeeze on speculators. It could raise reserve requirements. It could allow the banks to go bust…send them a message they wouldn’t forget.
But what has Bernanke done? Just the opposite. He has rewarded the reckless speculators by buying up their bad bets (adding $1.7 trillion in trashy mortgage backed securities to the Fed’s core holdings). He has cut rates even more…bringing the effective rate down to zero for privileged borrowers. And he has created the illusion of “recovery” – by goosing up prices of stocks and commodities.
Bad policies. Bad in the short run. Worse in the long run.
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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Bill, I know you are standing by there in Paris waiting for my comment to see if I can give my blessing to today’s editorial or not.
Well I can give it at least a mixed blessing… A couple of things to polish up however.
You compared Bernake’s 3 to 4% GDP growth to planned deficit spending of 5 to 10% in the years to come. You make the excellent point that this would cause the deficit and debt as a percentage of GDP to constantly rise.
But Wait!. Benakes GDP figures (like all GDP references) are in real dollars before inflation (well, as real as paper fiat dollars can be!). So growth after inflation in dollars has some chance of being as large as the deficit in dollars.
Further you state:
“Gold rises as confidence in the financial system falls.”
That is debatable. But anyhow, a MUCH better measure of confience in the U.S. dollar is the yield on 10 and 30-year treasuries. Until investors other than the FED refuse to buy those or send the yield up A LOT in spite of any FED buying then the market continues to vote with its wallet that it still has confidence in the dollar.
That is all for now Bill. Good job. Thank you.
too bad that chinese guy doesn’t feel confident any more
of course, we are trying to show them how banking and finance REALly work!
they’re so inscrutable, it’s hard to tell if they’re impressed
OK—it’s the playoffs:
our psychopathic criminal banksters
against the chinese.
whoya got?
Whoya got? Well, if I were a betting man, and I admit to having placed a wager or two, I’d bet on the Chinese…
If I were Chinese, I’d be buying commodities, Euro paper, or anything else with those FRN’s I’m holding. Inscrutable and smiling all the while dumping a loser currency.
At Investors Friend (or should I say Shawn Allen?):
“a MUCH better measure of confience in the U.S. dollar is the yield on 10 and 30-year treasuries. Until investors other than the FED refuse to buy those or send the yield up A LOT in spite of any FED buying then the market continues to vote with its wallet that it still has confidence in the dollar”
No, it just signals that for now, they dont have anywhere to run…they are running to gold, commodities and Euro, but they still keep the pace low…they dont want to frighten the dollar…they dont want to look like a bunch of terrified sailors abandoning ship…it’s like the beggining of the Titanic sinking…everybody is still boarding the lifeboats in a orderly manner…but ther ARE boarding the lifeboats, thats what gold, commodities and QE II are telling you…in fact, screaming in your face.
Gold will be the investment of a lifetime. Hope you dont miss that lifeboat just in spite of Bill.
i’ll take jamie & lloyd!
The Chinese are buying US Debt because that’s the only thing they can do for now. They buy with one hand (to keep the illusion of normality in the markets) and they dump it with the other hand, under the table. They exchange it for any asset they can get. Gold and commodities are just the main ones. Real state and equities in developing markets are others. And they buy less and less by the hour (hence the need for QE II).
The signs are everywhere. The worst kind of blind man is he who doesn’t want to see. The blood is all over the wall. Don’t say you haven’t been warned.
The sun is rising for the east and is setting on the west. Our time in the sun has come and will go soon. To quote Axel Rose…”Capt. America is being torn apart now he’s a court jester with a broken heart…”
i’ll take the court jester, too!
free tibet!
Sadly, this whole thing is like a slow motion train wreck…fascinating to watch right up until the point you realize the train is headed right at you!
Alls I know is that I am buying silver(gold when possible)and planting a nice vegtable garden next spring. Boy am I going to need it.
I find this whole thing a little confusing. Robbing peter to pay paul, the only problem is their is no peter and paul is printing his own money and claiming its peters.