A Retirement Society

Higher stock prices; fewer jobs…

And don’t forget the foreclosures. They’re running 23% ahead of last year…even though they weren’t as bad last month as last month.

Associated Press:

“The number of households caught up in the foreclosure crisis rose more than 5 percent from summer to fall as a federal effort to assist struggling borrowers was overwhelmed by a flood of defaults among people who lost their jobs.

“The foreclosure crisis affected nearly 938,000 properties in the July-September quarter, compared with about 890,000 in the prior three months, according to a report released Thursday by RealtyTrac Inc. That puts foreclosure-related filings on a pace to hit about 3.5 million this year, up from more than 2.3 million last year.”

What an economy!

The Dow is now back over the 10,000 mark…just where it was in March 1999 – 10 years ago. Is that progress…or what?

During that time, the dollar has lost about a quarter of its purchasing power. That means stock market investors have lost only about 25% or their money over the decade. Not too bad, huh?

And, oh yes…they’ve lost their jobs too…

AP continues:

“Unemployment is the main reason homeowners are falling into trouble. While the economy is likely out of recession, the unemployment rate – now at a 26-year high of 9.8 percent – isn’t expected to peak until the middle of next year.”

But hey…we’re not going to complain. We’ve got a job – trying to figure out what is going on. And that is a job that is recession-proof. Everyone wants to know what will happen next. When times turn tough they want to know even more.

So, will someone please tell us what is going on…we want to know too!

“What do you think?” asked a friend at dinner last night. “The way I see it, Obama’s goose is cooked. He’s stuck. He can’t go forward and he can’t back up. He can’t back away from all those promises – including his promise to rescue the US economy. If he does, the voters and his own party will revolt. On the other hand, he doesn’t have the money to go forward. He has to borrow it. And if tries to borrow much more, the Chinese will revolt.

“His only hope is that the economy revives…so he doesn’t have to do anything. And that’s not going to happen.”

Why not? Wait a minute…you already know the answer to that question. Because it’s a depression. It’s the end of the road for the consumer credit economy. Consumers did their best. They borrowed as much as they could. They spent like there was no tomorrow.

But now, it IS tomorrow. And now, they’ve got to settle up. So, boo hoo…no more wild parties. Daddy took the T-bird away. Get over it.

What should Obama have done? Nothing. But the last chief of state to do that in a time of financial crisis was Warren G. Harding – one of America’s best presidents. That’s what he did in the panic of 1920. How come we don’t hear much about the crisis of 1920?

Because Harding didn’t do anything; it went away.

But that was a long time ago. Now, presidents are expected to do something. They have too many people around them who stand to make a buck out of it.

Yesterday, Goldman announced its quarterly earnings. Goldman, you’ll recall, is the firm that former Treasury Secretary Henry Paulson (a former Goldman chairman) called 13 times before breakfast during the financial crisis of last September. And Goldman is also the firm with its men in key posts in Washington, helping the feds figure out what to do with trillions of dollars in bailout funds (TARP, TALF, Fed’s buying toxic assets, etc.)

Well, what a coincidence…now the firm says its latest profit is four times what it was a year ago.

The firm’s “activities have become more profitable after the crisis reduced competition and governments injected funds in the banking system,” says The Financial Times.

Goldman can borrow the funds at almost no cost. Then, it can use the money in a variety of ways…such as lending it back to the government for guaranteed profits…or speculating on oil or gold, or whatever. Not for nothing is gold is up 17% in the last six months. If you can borrow at zero cost you can do a lot of speculating. Many speculators are using the government’s money to bet against the US dollar – and making a lot of money.

The US government has put $13 trillion of the nation’s money and credit on the line. That’s how much the feds have at risk on all their toxic asset purchases, loans and guarantees. Apparently, Goldman gets its share.

What can the feds do? Everyone is telling Mr. Obama that he must do something…now! So what does he do? Something stupid, of course.

Yesterday, poor Mr. Obama did something stupid. He said he wanted to send 78 million American seniors a check for $250 each.

What a nice Christmas present. But wait. Even Santa doesn’t have that kind of money. The feds are already running a deficit somewhere close to $15 billion PER DAY.

But heck, who keeps track of these things? And who quibbles about a few billion more or less?

Not us. Not here at The Daily Reckoning. We’ve got other things to quibble about. In fact, we’ve got so many things to quibble about we hardly know where to start.

So let’s just pick a news item at random and we’ll begin our quibbling there. Here’s one:

Social Security recipients are not going to get a COLA. A COLA is a “cost of living adjustment.” It’s what Social Security recipients get when prices go up. It adjusts their payments to inflation.

COLA seemed like a fair idea when it was put in place. That was when prices were going up. The old folks were getting a raw deal and people felt bad about it. We remember those years. There was a report in the press in the late ’70s that old people were “forced to eat dog food” to survive. We suggested that the government allow people to use food stamps to get pet food. But that was greeted like so many of our attempts to be helpful.

The trouble with the COLA is that there is no UN-COLA. When prices fall, there’s no way to get the money back. The adjustments only go in one direction.

And prices ARE falling. US import prices roes only 0.1% last month…down 12% from a year ago. Take out energy and they’re still down 4%. And that’s with a dollar that is losing value at the same time. Imports should be going up in price. Instead, the downward tug of deflation is so strong that they are pulled down…even with the dollar buoying them up.

So, imagine that the United States slips into a Japan-like slump…a long slump with off-and-on falling prices. The government’s budget projections call for a rapid return to growth. Even then, they expect trillion-dollar deficits until the end of the next decade. But if the economy does not return to rapid growth, the situation gets much worse – fast. Tax revenues don’t go up…and spending continues to mount. There’s no way to reduce payments to Social Security recipients. And imagine the poor sap who proposes it. Or who suggests that maybe government salaries don’t have to be twice as high as private salaries. He wouldn’t last long.

This leaves the feds in a tight spot. They won’t have trillion-dollar deficits…they will have multi-trillion-dollar deficits. They won’t have just a little trillion-dollar hole to fill; they will have a Grand Canyon.

How to fill it?

Ain’t no way… Ain’t no way… At a certain, but unknown, point the whole thing falls apart. The feds can’t raise enough money. They go broke.

Now, hold on…the US federal government can’t go broke, can it? Those fellows have a printing press. They can print their way out, no?

A very, very good question. Why would a government with the power to create money at will ever go bust? And yet, they do. Why? Because it is cheaper.

But this is far too large and important a subject for a Friday. This is a subject for a Tuesday. Maybe even a Wednesday. But Friday? Nope. God didn’t make Fridays for this kind of thing. We’ll have to come back to it next week.

Can anything stop the Chinese?

“China consolidates its lead in world trade,” was a headline in The New York Times earlier this week.

China competes on price – and usually wins. America loses market share.

“We’re finished,” said our dinner companion last night. “We’re fossils. We’re yesterday’s news. We’re a nation of old people. The growth and innovation is taking place elsewhere – such as in China. You can feel the difference when you go there. New buildings. New roads. New cities. New shoppers. Here, everything is old. The buildings. The people. Everything.

“I tell my children to move to the Far East. We’re history here.”

This morning comes news that the Chinese have bought another auto company – Britain’s van maker, LDV. And over on page 11 of The Wall Street Journal is a photo of the head of China’s big bank, CCB. Asked about whether the bank was looking at acquisitions in the West, Mr. Guo Shuquing said he wasn’t interested. Western banks are on a “downhill path,” he said.

“Of course, there’s something nice about living in a society which has peaked out,” our friend continued. “You have all the grace and style of an advanced civilization without the annoying hustle and bustle. It’s perfect for retired people…We live in a retirement society.”

The Daily Reckoning