01/31/11 Baltimore, Maryland – Friday may have been a key turnaround day. Stocks fell 166 points on the Dow. Gold leaped $22.
What’s up? Hard to say… We’ll have to see what happens this week.
A falling gold price means people think things are under control…that they believe the present system works…and that it will deliver growth without excessive inflation.
When people lose confidence in the system, on the other hand, the gold price goes up.
By the end of last week, people must have been losing confidence.
Egypt seemed on the brink of a major blow-up, possibly destabilizing the entire mid-east.
And from Japan came more disturbing news:
“S&P Downgrades Japanese Debt,” said the headline. Standard and Poor’s said Japan had no plausible plan for keeping itself from bankruptcy.
The country has the highest debt to GDP ratio in the world. And it just keeps adding debt.
Is that a problem? Lenders – mostly the Japanese themselves – don’t seem to think so. They lend money to the Japanese for 10 years and ask only 1.24% interest. Can you imagine? If the yen lost only 2% per year – which is the TARGET in most advanced economies – the real interest rate would be negative. Meaning, the lender would lose money every year.
And how will the Japanese repay the money? Lenders are putting up money to a borrower who, as the S&P puts it, has ‘no plausible plan’ for paying it back. And asking only 1.24% interest. What are they thinking? Are they thinking at all?
Saving rates in Japan are falling. People are getting older. More people are retiring than entering the workforce. How can this movie possibly have a happy ending?
Meanwhile, here’s another headline. This one probably didn’t rattle investors. But it should have shown them where we’re headed:
Spain to Raise Retirement Age to 67
MADRID – Spain’s government and main labor unions agreed on Thursday to raise the retirement age as part of an overhaul of the country’s pensions system, averting threatened organized protests and responding to investors who have been demanding that Spain clean up its public finances.
After a year of negotiations, the draft deal ensures that Spain’s normal retirement age will rise to 67 from 65. As part of a compromise, however, the government agreed that workers could retire at 65 if they had contributed to the state pensions system for at least 38.5 years. The agreement is also intended to cut the cost of future pension payments by basing the calculation for such payments on a worker’s last 25 years of earnings, rather than the 15 years under current law.
Pension reform has been a political hot potato in several European countries, including France, which was hit last autumn by a nationwide strike and protest movement before the government won support in Parliament for its plan to raise the minimum retirement age to 62 from 60. Similarly, Greece was the scene of serious unrest after its government also agreed last June to radical changes to its retirement program – including cuts in benefits and curbs on early retirement – as part of changes promised by Athens in return for a €110 billion, or $150 billion, bailout.
Like many other Western countries, Spain is facing mounting difficulties in supporting the cost of an aging population, at a time when its economy is showing little signs of recovering from the worldwide financial crisis. Last year was the first in which Spain’s pension system did not manage to run a surplus.
What is this? It’s a default. Spain is defaulting on promises made to its working classes.
We’ll see a similar default in all the advanced, social welfare economies. America included. They all made promises they can’t keep. Now, they have to default…in many different ways.
Some will cut back fast on promises in order to protect their credit. Others will let themselves be pushed to the wall – like Argentina in ’01. They will not willingly cut back…they will be forced to do so. Then, when they run out of money, they will be unable to keep their promises. In desperation, they will seize assets and cause all sorts of mischief – just like the Argentines did.
Still others…like a ruined man reaching for a loaded pistol…will turn to the printing press.
It doesn’t matter how many bailouts you give them. It doesn’t matter how far down the road you “kick the can.” All will default. The only questions are how and when…
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 said:
Is that a problem? Lenders – mostly the Japanese themselves – don’t seem to think so. They lend money to the Japanese for 10 years and ask only 1.24% interest. What are they thinking? Are they thinking at all?
This is truly a great mystery of our times. Who is buying 10-year and 30-year bonds from over indebted governments and accepting interest rates that may not even compensate for inflation (let alone possible default risk)?
Who are they and why do they buy?
When will they wise up and stop buying at those low rates?
I know that governments buy some of their own bonds, but aside from that there are plenty of institutional buyers. Why, Why Why?
Is there an ETF for Japanese Government Bonds so that we can short them?
Obviously you’ve never lived in a true equities bear market. The reason the Japanese themselves are happy to park money in JGBs at 1% interest is because they can remember what it’s like to see the Stock index fall from 40000 in 1990 and still be almost 70% lower twenty one years later. (I’m guessing that under performed almost every single other asset class in that time). Trust me, when you experienced this you’ll never put your money in stocks again.
That’s THE real mystery indeed. It makes no sense. The TARGET inflation, the inflation that even government crooks admit with a straight face, is 2%!! 2 freaking %! Tell me how in God’s name can this ponzi scheme work out for the best…? How can the outcome be anything but disaster. Timing is the only caveat here.
In light of the above, any man with 2 working neurons should have a sizable portion of his net worth in gold and other hard assets.
I don’t know about you people, but this whole ponzi scheme called “government debt” never fooled me for a second. Like the great Mogambo put so adequately and succinctly: “we’re freaking doomed!” Think Cairo in the streets of New york, in 15 to 20 years, tops. Maybe less.
i came across this last evening.
it is a bit long, but quite good, imo, and i wanted to share it, if i can get it up:
Capitalism is setting the world on fire because capital is subject to the law of supply and demand, but supply has political leverage over demand/borrowers. So after sucking out whatever value they can, those supplying the capital have to keep finding new borrowers. After thirty years of explicit supply side capitalism, the world is overrun by liquidity and out of solvency.
Money that is publicly guaranteed is a form of public utility, or contract and has to be treated as such. As economic medium, it is conceptually similar to a public road system. We own our houses, car, businesses, etc, but not the roads connecting them and no one cries socialism over that. If people understood money as a form of public commons, they would be much more careful what value they take from personal resources and relations to convert into money. This would reduce the influence the banks and governments have over every aspect of our lives. We all like having roads, but their is little inclination to pave more than is necessary. If we applied the same principle to money, we might have a healthier society and more stable economy.
The fact is that is doesn’t work to treat money as a private store of wealth, because that promote far more money being created than there are goods to trade for it and the system is bound to collapse. Money is a tool, not a god. You can curse a god and nothing happens, but you screw up the tools and you can get your hand cut off.
If you really think that piece of paper in your wallet is yours, just try running it through a copy machine and see who holds the copyright.
Free markets and capitalism are not synonymous, because a market needs a medium of exchange in order to function and when a private party provides that medium, the rest of the economy is domestic to that party. The money and management of it, has to be a public function, just like the courts and cops.
You will know western economies have turned the corner and are headed to recovery when they outlaw abortion along with all other methods of birth control. Not on moral grounds, but rather because exterminating future tax payers eventually wrecks havoc on government finances. The aging of the population and negative population growth in all of the advanced western economies can primarily be attributed to birth control. Of course immigration would be an alternative, but ethnocentric consideratons will prevent that from helping much.