Bill Bonner

In the years 2007-2012, Nobel Prize winning economists Paul Krugman and Joseph Stiglitz — along with celebrity economist Jeffrey Sachs and practically all their colleagues — failed to notice the most-important thing to happen in their field. But not noticing things came naturally, easily to them. In fact, you might say they had built their careers on not noticing things, especially the most-important thing in economics.

It was part of their professional training. It was what allowed them to be economists and to win coveted prizes and key posts in a very competitive occupation. Had they been more reflective…and more observant…they would probably be teaching at community colleges.

But that is just a part of our story. By the late 20th century, economists — especially leading economists — had ceased being useful. They had become a nuisance. They closed their eyes to what an economy actually is…and to how it works…and focused on their own world — a make-believe world of numbers and theories, with little connection to the world that most people lived in. And now in the 21st century, they are up to mischief. And part of the mischief involves not noticing things that are right in front of their noses.

The most-important single feature of modern economies is growth. Without it, neither businesses, households nor governments can pay their bills. Without it, pension funds…private and public…go broke. Without it, the stock market is doomed….and bonds get crushed when debtors can’t pay.

In fact, without growth, every government in the economically developed world faces catastrophe. Its revenues stagnate while its costs — largely driven by open-ended health and pension obligations to aging populations — continue to expand.

By the year 2012, in fact, every major government in the developed world is already in trouble. Some more than others, depending on their ability to borrow money… or to print it. The US, Japan and Britain are still technically “solvent” because they control the currency in which their debts are calibrated. They can always print money to pay their debts; creditors do not have to worry about a simple default. Greece, Italy, Spain, Ireland, Illinois and California, on the other hand, are already keeping lenders up at night worrying that they will not and cannot pay their bills.

Even on these terms, Japan and Britain stand out, each with total debt of more than 500% of GDP. But even this Everest of debt was overlooked by most economists. Rather than look out the window, they hunched over their computers and studied their formulas and their numbers, apparently unaware of the avalanche that was headed their way.

Ultimately, an economy must pay its bills. And it can do so only by drawing on its own savings and output. Debt is money that has already been spent. It is like sin; it may be fun when you are doing it, but there’s always a price to be paid later on. Debt repayment is a painful part of the cycle. And sometimes it is so painful…so enormous…that the bill can never be settled.

Britain and Japan had had their spending sprees. They had their carefree days. How will they now pay their debts? You can forget paying them “off”; no one even imagines that such a thing is possible. But they must be serviced. A lender must get something for his trouble, even if it is a pittance.

Typically, lenders demand a pound of flesh for every 20 or so pounds they lend. The present period is unusual in that regard. Growth rates are so slow, savings rates so high and lenders so fearful, that they no longer require much in the way of yield. They are happy to take no real flesh at all. The U.K. 10-year bond yielded all of 1.68% in mid-August 2012, well below the rate of consumer price increases. As for the Japanese equivalent, investors were content with 0.8%. If there were any consumer price inflation at all, investors would lose money.

Inflation rates have been going down for more than 30 years. Ever since the CPI hit a high of 11% in 1980. Investors must think they will continue going down forever. If that is so, nations such as Japan and Britain will continue to carry their debt at vanishingly low interest cost. But it would be a strange world in which markets went only in one direction. And it will be an even stranger world in which foolish investors fail to get what’s coming to them.

The word normal is in the language for a reason. It was coined to describe what usually happens after something very extraordinary has happened. It is rare for lenders to lend below the rate of consumer price inflation. In effect, they are consenting, at the get-go, to a loss. What normally happens after investors do such a thing is that they do lose money — far more than they expected. Interest rates normally give lenders a 2-4% real return on their money. So if inflation rates were to hit the mark central bankers have set for them — about 2% — and if lenders were to want the interest payments that they normally expect, Japan and Britain would have to devote about a quarter of their entire annual output just to service debt. That’s another way of saying that one out of every four dollars of GDP must be used to pay for things that were consumed…used up…and probably already amortized…years ago.

There’s another word, in English, that describes the likelihood of that happening — zilch.

But deeper than the numbers or the words themselves or the particularities of the situation circa 2012 was a whole theory of government…a “social contract” now in jeopardy. The modern social welfare state was invented by Otto von Bismarck in the mid-19th century. The idea was simple. Governments required the consent and support of the masses. That was the lesson that Republican France had taught the world and that Bismarck had learned. You could get a lot more out of “citizens” than you could out of “subjects.” The subjects of Frederick the Great might reluctantly pay their taxes…and might join his armies. But they would always keep a distance — emotional and physical — between themselves and their masters. War and government were Frederick’s business, not theirs. Monarchs might retain the loyalty of their subjects. They could claim some of their money, too. But even the Sun King, Louis XIV, the man for whom the term “absolute monarch” was coined, was lucky if he collected 10% of the kingdom’s GDP in taxes. As for his soldiers, every one of them wanted payment. In real money.

In the course of the 19th century, monarchy was gradually replaced by some form of representative democracy or republicanism. Not that democracies were necessarily better in any moral or practical way. They did not necessarily improve the lot of the people who lived in them, neither materially nor judicially. Why were they such a hit? It may have been that defensive weapons — repeating rifles — had become cheap and effective. It was much more expensive to keep an armed, subject population in line. Or it may have been a result of the spread of ideas via cheap newspapers and books. Or it may have been merely that because of the Industrial Revolution, people were getting richer and could afford more government.

Readers will find more on the role of government, its growth and efficiency, later. For now, let’s just note that parliamentary, participatory democracy became fashionable in the 19th century. The main reason was probably because it is easier to squeeze and bamboozle a citizen than it is a subject. The real genius of modern democracy is that it makes the citizen feel that the government and its workings are somehow the product of his own aspirations. If he wants more money for his retirement, he presumes he can get is — provided only that enough fellow citizens share his desire. If he wants to go to war, that too is up to him and his fellow voters. If he wants to spend more money on space exploration or ban people from saying prayers in bars, the majority — of which he feels he should be part — can do that too.

There is hardly anything he and his fellow lumpenvoters cannot do — just so long as they are of one mind on the subject. That is why you so often hear people say, ‘If we could only get together on this…” They believe solidarity is the key to success. Whatever the majority wants, it gets.

Even kings had bits in their mouths and a hand on the reins. According to the “divine right of kings” doctrine, a king was a servant of God. A king was subject as well as monarch. God himself had given them the post; they could not refuse it. Nor could they refuse to carry out the job on the terms that they believed God had prescribed. God could pull on the reins whenever He wanted.

Often, monarchs were ridden by those who claimed to represent God. In the famous example from the 11th century, Pope Gregory VII got into a dispute with Henry IV, the Holy Roman Emperor. Henry was excommunicated. How much harm Gregory’s excommunication would do him, Henry might not have known. But he didn’t want to find out. He dressed as a penitent and waited three days outside the Pope’s refuge at Canossa. Then he was admitted and forgiven.

The democratic majority, on the other hand, recognizes no authority — temporal, constitutional nor religious — that can stand in its way. And thus it deludes itself to thinking that it is the master of itself, its own government and its own fate.

“The government is all of us,” said Hillary Clinton.

More to come…


Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • Longnine009

    “Democracy is the theory that the common man
    knows what he wants and deserves to get it
    good and hard.”
    Henry Mencken

  • Longnine009

    “Democracy is the art and science of running the
    circus from the monkey cage.”
    Henry Mencken

  • WaffenSS

    one interesting cravat about the financial situation of the world especially in Europe. This is just my personal observation. Europe and other countries are lining up at the door of Germany for bailouts, yes? Because Germany has the solvency to leverage debt, yes? Hum. The leaders of Germany, thoughout business and industry, the leaders are in their sixties, yes? Then it would be safe to say that these leaders are the children of the “Third Reich”, Yes?

  • John

    You finally defined the problem “open ended health and pension obligatins to aging populations”. This includes social security recipients and all government and teacher pensions. I hope others stop attacking just social security recipients while leaving government workers, who created the problem, off the hook.

  • Tom

    Democracy is two wolves and a sheep voting on what’s for lunch.

  • gman

    “In fact, without growth, every government in the economically developed world faces catastrophe. Its revenues stagnate while its costs — largely driven by open-ended health and pension obligations to aging populations — continue to expand.”

    demographic decline is a problem, but it is not THE problem. the reason that without growth we face economic catastrophe is because our fiat debt currency is a pyramid scheme. the currency must endlessly and ever more rapidly expand or the entire system implodes. the only way to accomodate this pyramid scheme is with endless and ever greater economic growth. the moment the economy stops expanding then the currency system begins to implode, sucking up every bit of wealth in reach and shutting down everything else that remains.

    of course any five year old will tell you that endless, let alone endlessly increasing, economic growth is impossible, so the system is doomed from the start. so why do some push this system? because it benefits them during their lifetimes. no matter how hard everyone works, no matter how much is produced, no matter how much wealth is created, all it means and all it ever can mean is that the currency owners, and those infestors who play it well, OWN more, and everyone else OWES more. that’s it. that’s the sole effect.

    “too much debt”? that’s the whole POINT of the system. “it will never be repaid”? that’s the whole POINT of the system. it’s not a bug, it’s a feature. it’s the SELLING POINT.

    it’s the goal of every banker and every infestor. to stand atop a huge pyramid of humanity struggling with exponential compounding debt, whose children are born in debt, whose every effort at repaying debt results only in greater debt, all while the banker/infestor intones,

    “YOU OWE ME.”

  • gman

    “Democracy is two wolves and a sheep voting on what’s for lunch.”

    libertarianism, corporatism, free-market-capitalism, and anarchism is one or more wolves voting on what’s for lunch.

  • Le Petomane

    Lovin’ it. Bill and gman at their best.

    “The government is all of us,” said Hillary Clinton

    But some of us are more equal than others.

  • Yoder

    Capitalism has to keep on growing. It is the only way the system can keep from collapsing under it’s own weight.

  • Art

    gman is spot on in his first comment above (then goes off the rails with the 2nd comment …. “libertarianism, corporatism” don’t go hand in hand gman).

    I differ from Bill with this article.
    The blame lies far more with the banksters and their debt money/fractional reserve lending than the “lumpens” (one of Bills favorite targets).

  • Samsonov

    “…every government in the economically developed world faces catastrophe.”

    So what exactly does government catastrophe entail for the people? Just in case no one has noticed the fact, there are numerous examples of governments that have already met the date with destiny. Note that, in every case, there was a tomorrow for the nation. Few died, few went hungry, few even noticed. Life went on. Rome fell a long time ago, but the Italians are still with us. I submit, let the governments meet their date with catastrophe, sit back, and enjoy the show.

  • Rob

    I read this on CSMonitor…you should run for president…seriously. I’m simply amazed there is someone out there in the media (or politics for that matter) that actually understands much of anything. You clearly do.

  • Le Petomane

    Could there be a simpler task than to provide welfare to the needy limited to the available excess?
    I mean, we can either afford it or we can’t. We either want to help or we don’t.
    Don’t tell me there isn’t excess wealth in America. It stinks all the way around the world.
    If you can afford to have agents and military bases all over the world blowing up suspicious goat herdsmen with remote control airplanes while sitting on your Mcbutt, you can afford to look after your less able, can’t you?
    What’s the matter with those crazy goat herders anyway? All we want to do is lend them some money!!!

  • gman

    “‘libertarianism, corporatism’ don’t go hand in hand gman”

    they do as far as the sheep are concerned. it’s all the same to them. (the point was to show that in those other approaches there’s no vote for the sheep at all.)

    “there are numerous examples of governments that have already met the date with destiny. Note that, in every case, there was a tomorrow for the nation.”

    yeah. but back then people owned their own money, their own water source, and their own land. you could kill the entire government and half the population and everyone else would just carry on. today the government owns all the money, people do not live at well sites, and virtually no-one grows their own food. a significant glitch in finance would cause major full-stops nationwide.

    “Don’t tell me there isn’t excess wealth in America.”

    “excess wealth” almost always means someone else’s wealth, however much it is, and never your own, however much it is.

    “What’s the matter with those crazy goat herders anyway? All we want to do is lend them some money!!!”

    can’t. most of them are under islam, which has rules regarding debt and usury which are contrary to the goals of modern western banks.

    “I mean, we can either afford it or we can’t.”

    sure, we can afford to help. the problem is when people realize help is available it starts the process of them ceasing to work. you go from helping people who just need a hand to get back on track, to outright supporting multiple generations of healthy ineducable layabouts who riot and rob and kill just for fun. drawing a line between the two is difficult.

  • Don Levit

    I am not trying to compete with gman, but this quote came to mind:
    In Communism, man uses man.
    In Capitalism, it is just the reverse.
    Don Levit

  • gman

    “In Communism, man uses man.
    In Capitalism, it is just the reverse.”


    those who tell you they are independently wealthy – there’s nothing independent about it.

  • ducdorleans

    well, we had to wait one week for it, but this DR was more than worth it …

    all DR’s compete in quality, but this one stands out for the bird’s look pov …

    thanks, and looking forward to the next part(s) …

  • CT

    It all comes down to business and the business community has everyone convinced that it is the most important concept ever conceived just listen to wall street shows masters of the universe, and they are always gripping about the problem of uncertainty. Well so what? Everybody has a problem with that. And guess what that’s the idea. Keep everyone guessing. Power.

  • Bob

    I think Bill has been cheating on us with another website:

  • Oliver L.

    Cynical but has a point.

    W-SS—what’s safest to say is that your post has real apparent point; every single one of those leaders renounces the policies of National Socialism (some of them, like Fischer, were Marxists in their youth while others like Brandt like Germany during the war).

  • Oliver L.

    Brandt *fled* Germany…

Recent Articles

A Tale of Two Power Sources

Dave Gonigam

Dave Gonigam reports on the beginning of the coal “cave-in.” Plus: An industry set to profit no matter what happens to Obama’s climate-change rules...