09/20/11 Buenos Aires, Argentina – We think we’re onto a big story. A BIG story.
This correction is aiming high…it’s going to take down the entire capital structure of the world’s developed economies.
Stocks…bonds…real estate — watch out…they’re all going down.
The dollar…the pound…the euro — look out below!
But that’s not all. No, if we’re right, this is bigger, much bigger than just a market correction.
It’s an economic correction…a monetary correction…and a political correction.
But we’ll come back to that in a moment. First, let’s look at what happened yesterday. The Dow lost 108 points. Not much information content there…
…but look at what happened to gold. It was down $35. Could gold be finally testing its admirers? Though still in a major bull market, could it be correcting…possibly falling back to the $1,000-$1,500 range?
Yes it could. Gold’s time will come. But we don’t think it is here yet. Gold has risen in anticipation of trouble. But the trouble gold buyers foresaw hasn’t come…not yet. There’s been massive money-printing. Still, in terms of the goods and services it will buy, gold has held up pretty well.
Gold will take off — when the anticipated trouble becomes real here-and-now trouble. And that probably won’t happen for a while. And part of the reason it won’t happen is this Big Story we’re following.
You see, our whole economy…and our society…and our government…and much of what we think…all were built on truths that are no longer true.
In a word or two, our modern economy — and our government — depends on growth. And growth may be a thing of the past.
You want to make money, you invest in profit-making businesses, right? Not necessarily. On the whole, investments in stocks only go up if the economy grows. Otherwise, companies are just fighting for market share. One goes up, but another goes down. Taken all together, investors go nowhere.
Well, at least you can always put your money in bonds. You won’t earn a lot of money, but over time you’ll receive safe, sure gains. Right?
Wrong again. Practically all the world’s major debts — private, corporate and government — depend on growth. Without growth, the debtors can’t pay. And if they can’t pay the debt is worthless.
Do you hold Japanese Government Bonds, dear reader? Good luck with that!
But those points are obvious, aren’t they? How about this: if you want healthier people, you just grow your health-care institutions, right?
Wrong again. In terms of a percentage of GDP, Chile spends only a third as much on health care as the US — much less in absolute dollars. Life expectancy in the US is 77.6 years. How long do you think they live in Chile? Well, we’ll tell you — 78.6 years.
Maybe there’s something in the water in Chile. But suppose you could take a group of Americans and give them all the free health care they want. Would they live longer?
Well, guess what, the Rand Corporation tried it. And guess what it found? Except for people who were extremely poor and had no access to health care previously, giving normal people more health care did not make them healthier. The group with free health care consumed a lot more resources from the health industry — about 25-30% more. But it was no healthier.
And guess what else? When it comes to surgery, who do you think comes out ahead — people on Medicaid…or people with no health insurance? The people with no health insurance, of course.
These facts and figures come from a delightfully moronic book called The Great Stagnation, by Tyler Cowen.
He points out that the results from educational spending are similar. In 1971, the US spent a little more than $5,000 per student per year. Now, it spends more than $12,000. So guess how much reading scores have increased? Have they more than doubled too? Nope. They haven’t budged.
This is especially interesting because of something known as the “Flynn Effect.” Flynn noticed that kids were getting smarter every year. So, if IQs are going up, you’d naturally expect test scores to go up to. But they’re not. Which suggests that the quality of educational inputs is going down…so that the results end up in the same place.
In other words, the great Truth of the Modern Age — that further inputs produced further outputs — is no longer true.
What’s the connection between education and government debt? Why are we trying to compare stock market gains with gains in health care?
Here’s where The Great Stagnation falls apart. Its author completely misses the point. He thinks the “low hanging fruit” has already been picked. In a way, he’s right. The big gains in output — in education, health care, heavy industry, farming, banking, debt and many other areas — have already been made. Now, it’s hard to make any successful investment in any area…
…if you invest in more health care…it will probably be a waste of money.
…if you spend more on education (not individually, but collectively), that too will probably be money down a rathole…
…if you increase the level of credit (as the government is trying to do)…you might as well save your money.
…no point in investing in the stock market either. The glory days are over…
…and stay away from the bond market. The debtors won’t be able to pay…
Yes, we’ve entered an era of ‘Great Stagnation.’ And yes, it looks as though the low hanging fruit has been picked.
Tyler Cowen thinks this is a problem that we can fix. He thinks we just have to put our thinking caps on.
The silly goose. He doesn’t realize that the era of low-hanging fruit changed the way we look at things too. It made our arms shorter and our brains smaller. We are all dumb optimists now. That’s what 300 years of finding low-hanging fruit does to a people. We think that every downturn — even a Great Stagnation — can be reversed by, among other things, raising “the social status of scientists.”
No kidding. That’s what he recommends. As if the social status of people was determined by an act of intellectual will.
What a disappointment. We began reading The Great Stagnation thinking its author was a closet Dear Reader. Instead, he turns out to be a disciple of Thomas Friedman.
More on the real causes of the Great Stagnation…tomorrow…
Regards,
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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GROWTH SMOWTH…
No, it is not true that only growing companies are good investments. Companies that are not growing can send out bigger dividends.
To the extent that growth matters, it is growth per capita that matters.
Individual Americans don’t need the whole country to grow. Your job is just to maximise your own wealth and “utility”.
If there is a killer bear loose and the economy will shrink, I might still be quite okay as long as I can run faster than average.
One man’s debt is another man’s savings. Therefore if we are awash in debt we are also, perforce, awash in savings.
I’ll continue to correct Bill’s errors tomorrow…
“One man’s debt is another man’s savings.” That is the problem…much of the current debt will never be repayed.
“Companies that are not growing can send out bigger dividends.” This sums up all you need to know about TIF.
Buy Greek bonds. They’re an excellent place to “awash” away your savings.
“If there is a killer bear loose and the economy will shrink, I might still be quite okay as long as I can run faster than average.”
Are you SURE that you can run faster than the average? 80% of people believe they are better than average drivers.
Do you really want to test it in a fair race? Or would you rather have a head start?
Seems to me your best chance of out running the average is to see the bear long before they do and taking some precautions. “If there is a killer bear loose and the economy will shrink, I might still be quite okay as long as I can run faster than average.”
Are you SURE that you can run faster than the average? Did you know 80% of people believe they are better than average drivers. Do you really want to test youself in a fair race? Or would you rather have a head start?
Seems to me my best chance of out running the average is to see the bear long before they do and taking some precautions. Isn’t Bill simply posting a “Possible Killer Bear Warning”? If you completely ignore Bill’s warning and do not build some protections into your portfolio, why would you expect to be any better at dealing with such a crisis than all the other people who did not heed such warnings.
Isn’t Bill simply posting a “Possible Killer Bear Warning”?
If you reject Bill’s warning and do not build some protections into your portfolio, why would you expect to be any better at dealing with such a crisis than all the other people who did not heed such warnings.
Mr. Can you spare a (million) dollar(s)?
How about I borrow a $million from Bill? I promise not to pay it back, that way Bill’s theory can come true.
I will not charge for this service.
I will borrow from any of you as well and I faithfully promise not to pay it back. Hurry, limited spots available. I will take the first 10 respondents only (one million $ minimum, please).
Shawn’s got it!
When companies stop growing, they need to just send out bigger dividend checks.
Amazing in its simplicity.
Shawn still owes me for advertising.
He already doesn’t pay me, the welsher.
T.I.F…
Form T4A sent to you in the amount of $1,000,000.
I will not charge you for this service.
I WON’T PAY!
Bill, I can’t pay you for advertising unless you send me a more educated class of customer.
People who understand the basic math that if a company is not growing, it does not need to invest money in new plants and locations and such and therefore has more money available for dividends. Surely some of the dear readers get this?
Shawn, I think you’re missing Bill’s point. It’s not about growing the number of employees or growing in stock market valuation. If the company does produce real value (dividends) that can be exchanged for other goods, then, by Bill’s measures the company IS growing.
And another thing: one man’s debt is not necessarily another man’s wealth. Just as the economy can be a positive sum game, it can turn in to a negative sum game, making even the wealth of the creditors less worthy. I think this is Bill’s point – he can correct me if I’m wrong.
Bill seems determined to attribute Golds recent decline to deflation. And yet I come across this from an interview with “London Trader” at King World News
——-
“After lease rates had dropped and the gold market was attacked, we find out after the fact that the central banks decided to raise dollars by leasing gold. The central banks had not done that for two years. Central banks have been preserving central bank gold and overall the central banks have been net buyers, and then all of the sudden they lease it, thus selling it into the market”.
——
Bills thesis about the end of growth rings true to me, only I think Gold might side-step any significant decline.
It’s the Western Central Banks currently hitting it now by leasing again. Doing so to hide fiats weakness as the EU cracks. This driving down the price of PMs only plays into Asian hands. Makes China’s case for a Gold backed Yuan stronger.
We have reached Peak Everything. Look around and observe. You’ll see it everywhere.
We used to have a planet that could support more people consuming more stuff, plentiful fossil fuels to make us more productive, and a level of debt that could grow without becoming a drag.
We have none of those things now.
“One man’s debt is another man’s savings. Therefore if we are awash in debt we are also, perforce, awash in savings.”
Psst–wanna buy some Greek bonds?
$5,000 in 1971 == $26,000 2010.
Education spending dropped by one half…
“correction”? “build some protections in your portfolio”? come on guys, what is coming is going to look a lot like this.
http://www.angelfire.com/ak2/intelligencerreport/tsunami_japan_1.html
see all that smoke in the distance? that’s greece. see all that water? that’s the defaulting dollar. see all those crushed houses? those are your portfolios. see all those people running away? that’s you.
to ken:
I noticed that too. I’m sure most of the people here did.
Bill, your analysis is correct only if your assumptions are correct. However, the IMF forecasts that the world will grow by 4% next year, so the collapse isn’t here yet.
http://online.wsj.com/article/SB10001424053111903374004576582542935774636.html
Also, regarding health expenses. The health of the Americans is not good in part because America lacks in preventive medicine. For example – getting rid of junk food will reduce obesity and improve health. That may hurt some corporations, but will be good for the average person.
What about scientists growing more fruit trees and breeding taller people. I think this guy is on to something. W
to ken:
Did Tyler Cowen explain somewhere that those 1971 education dollars were Real, or Nominal?
Mr. Cowen is an academic idiot who would starve to death waiting for a man who knew how to grow fruit to come along.
You see, we could grow more fruit trees – easy enough solution. No! You need an Environmental Impact Statement before digging. These can cost anywhere from $35K – $100K, depending upon the surroundings. The fruit trees will be in a rural area with lots of critters so the $100K is what your looking at just to get started, which is more than you paid for the land to plant upon.
You could get taller ladders or some other technology to help with the high fruit. But due to higher labor costs, ins. costs, regulatory fees, etc. we just simply sell the fruit trees, or move our fruit growing operation to Asia.
Bill, I’m in total agreement. The government in conjunction with banks, multinationals and utilities have managed to clog up the economy to the point where there is NO GROWTH. Amazing what greed and selfishness can do.
Let’s do a roll call.
For Health: Let’s thank the government regulatory agencies and medical organisations for suppressing all manner of invention as well as natural health product that would have drastically reduced the cost of health case for all as well as saved millions of lives.
For Education: Let’s thank again, the government for creating such an asinine program for education that 99% of the population are clueless about economics, finance and just about everything. An honourable mention must be given to most teacher’s unions. More interested in protecting their members than providing quality education at an affordable price.
For Utilities: Once again, the government but always in conjunction with the utility and energy companies for suppressing all manner of device capable of generating energy in new and novel ways all suppressed to facilitate us continuing to use a technology that is more than 120 years old!?!
Finance: Once again the government and banks working together to their mutual benefit. The politicians using paper money as a means of buying votes in order to be re-elected and cement their power, the banks for accumulating massive wealth not by being a middlemen between savers and investors but by printing money managing to provide absolutely no benefit to the economy, the public but only for themselves!
How can anybody expect any real growth in such an environment!
“If there is a killer bear loose and the economy will shrink, I might still be quite okay as long as I can run faster than average.” You certainly aren’t even as smart as the average bear.