Apocalypse Now

It’s fairly clear that the sky is falling…even though some still refuse to acknowledge it. Bill Bonner explains that we can ignore what is happening in the world – or we can look back at previous times the heavens caved in and see what we can do to prepare.

“Utter piffle,” is how Terence Blacker of The Independent describes it. He is the voice of Fair Reason. To him, the idea that the sky is falling now is an “insult to past generations who have faced more grievous threats with courage and calm.” But that’s the trouble with Fair Reason; she never looks up. Like the wife who thinks her husband ‘would never do something that,’ she’s appalled when she finally sees what he’s been up to.

Nassim Taleb has made a career out of warning people. His “Taleb distribution” describes the occasional apocalypse: usually, things happen in a respectable, bell curve kind of way…the way Fair Reason thinks they should…and then, all Hell breaks loose.

The last time the sky fell was 96 years ago. Few saw it coming; no one panicked. But panic wouldn’t exist if it weren’t a useful instinct from time to time. The celestial bricks came unglued in August 1914. By 1918, 40 million people had died. But that was just the beginning. WWI bankrupted or destroyed almost every major government of Europe. The plumy families that had dominated the continent for centuries – the Hohenzollerns, the Romanoffs, the Hapsburgs – were all clobbered. The Ottoman Turks fared no better. Then, scarcely 20 years later, France’s Third Republic was another victim…and so was Germany’s Third Reich.

But that was only the half of it. Between the two wars, came hyperinflation and destitution in Germany, America’s Great Depression and something far more deadly – the world’s worst plague, the Great Flu Epidemic of 1918-1920. The illness is known to us by its WWI alias, the “Spanish Flu.” Propagandists didn’t want the world to know how many French, American and English soldiers were dying of the disease. So they referred to it as though it only wiped out Iberians.

First spotted in young soldiers at Fort Riley, Kansas, the virus was soon found almost all over the world. Japan was the only major population center spared. Curiously, the disease killed off young adults more often than old people or children – somehow turning a strong immune system against its owner in what scientists call a “cytokine storm.” How many people gave up the ghost? Estimates range from 20 million on the low side to 80 million top end – that is, at least twice as many people who had died in the war.

Before the 1914-1945 catastrophe was the 1789-1812 calamity – roughly the period from the French Revolution to the Battle of Waterloo. It not only included the collapse of five different forms of government in France – Monarchy, First Republic, Directory, Consulate, and First Empire – but also inflation, 3 currency collapses, major political debacles throughout Europe, the Napoleonic Wars, as well as the last major famine in France in 1795.

War, bankruptcy, chaos, plague and famine – when trouble comes, it comes with a mob at its back. As usual, the Greeks provided an early example. Athens must have been the Goldman Sachs of the classical world. But when these masters of the ancient universe tried a hostile takeover of Sparta, it failed miserably…leaving them as exposed Bear Stearns. Sparta counterattacked and laid siege. Then, the bugs joined the attack in 430 BC. Thousands were killed by plague – including Pericles himself. Weakened by disease, hunger and war, Athens surrendered, was enslaved, and the Golden Age was over.

Later, it was the Romans’ turn. Bankruptcy, wars, stupidity – all took their toll. Then, in the 6th century, came another major onslaught: disease. Of the 80 monasteries around Constantinople in 540AD, none survived. Ghost ships, in which everyone on board had died of plague, drifted in the Mediterranean. European civilization seemed to fall apart.

Again, in the 14th century, came 100 years of war in France…along with starvation and plague. A couple of cold, wet summers caused famine in Western Europe. Young children were abandoned. Old people starved themselves to free up food for their families. Meanwhile, the Mongols attacked in the East, hoping to conquer all of Europe. And when they retreated, they left a going-away present – the plague. The Black Death of 1347-1351 killed off more people than the war or the Great Famine of 1315. Towns and fields were abandoned as a third of the population died. “So many died that all believed it was the end of the world,” said Agnolo di Tura of Siena, who buried his five children with his own hands.

New Scientist magazine comments: “Many people dismiss any talk of collapse as akin to the street corner prophet warning that the end is nigh.” But, more and more scientists are taking the end of civilization threat seriously, the magazine continues. Complexity – such as derivative financial instruments and “just in time” inventory systems – is making “our society…ever more vulnerable.”

In his 1988 book, The Collapse of Complex Societies, Joseph Tainter argued that all societies – like all organisms – are doomed. Each challenge requires a solution. Each solution takes resources. Eventually, the solutions – and readers may substitute the word “bailout” for solution – brings more challenges and takes more resources. Eventually, the system collapses under the weight of if all.

When the stars fall, even the angels get out of town.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

November 7, 2008

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

Nobama rally…Nobama bounce…Nobama bull market…Nobama nuthin’…

Instead, the Dow fell another 443 points yesterday. The index has fallen almost 1,000 points since the election results were announced.

Oil fell too, and seems to be ready to drop below $60. As for gold, it lost more than $8 yesterday. That’s the way it’s been going. Gold loses value…but stocks lose more. ‘Sell stocks on rallies, buy gold on dips’ has been good advice. But it doesn’t feel very good. In a bear market, he who loses least wins. But even he doesn’t feel like much of a winner – not when cash is outperforming him.

Why no ‘bama rally? Maybe investors are afraid that Obama is going to do what he said he would do – raise taxes?

We don’t doubt it. But an increase in the top marginal rate from 35% to 39% is not going to make that much difference. Neither is an increase in the tax on dividends.

No, we suspect investors are just looking ahead and realizing that the whole U.S. economy is going into rehab. And they figure they might need their cash for a little rehab of their own.

And so they pull back…out of risky investments…out of expensive hobbies…out of the shops and restaurants…

“Shoppers cut back,” says a Reuters headline. Hey, newshounds…tell us something we didn’t already know!

Retail sales are the worst in 10 years, the report continues.

Disney admits that its profits are falling – down 13% in the latest quarter. Morton’s Steakhouses say the customers aren’t coming in the door the way the used to.

And the Wall Street Journal tells us that “frugality” is making a comeback. Hey, we knew that too!

But that’s just what rehab is all about…sobering up…straightening out…drying out. It’s humiliating too. You have to stand up and admit that you were an idiot and a jerk…promise to do better…and ask for forgiveness. Well, at least that’s what we had to do that last time we were in rehab.

Then, they finally let you out and you can go get a drink.

But right now, the U.S. economy…and much of the world economy…is just going in, just beginning the process. So far we’ve just seen the shakes and the night sweats. But there’s more coming…

Because as each man pulls back, he takes something away from the other fellows around him. He pulls his money out of a stock; the price falls; and other shareholders are poorer. He walks to work rather than taking a taxi, and then the taxi driver has less revenue. He tells his son: ‘If you want a pizza, you have to get on your bicycle and go pick it up yourself…and get the cheapest one.’ And then, the pizza-delivery service has less money.

And so then the taxi company has to go into rehab too…and the pizza business…and the other shareholders. And pretty soon, everybody’s taking money away from each other as fast as they can. That’s what frugality is: not giving other people your money. But then, obviously, others are forced into frugality too.

It’s back to rehab for everybody.

*** The first priority, says a piece in the New York Times is to “stabilize the patient.”

Who could argue with that? Seeing no one raise his hand, we will.

All over the world, the ambulances are rushing to the scene of the accident. Yesterday, the British rescue team arrived and immediately pumped an unexpectedly large dose of adrenaline into the market. The Bank of England cut its key rate by 150 basis points – its boldest move in 27 years.

Meanwhile, over on the continent, the European Central Bank had its needle in the other arm, with a 50 basis point stimulus transfusion.

Not to be left out, the Swiss cut rates by 50 points too. Australia cut rates by 75 basis points a few days ago. And Korea announced a rate cut too. (We don’t know how much juice the Koreans have in their plastic pouch…we can’t read Korean).

Meanwhile, Nancy Pelosi, the Speaker of the House, is about to put her back into another heroic rescue attempt. The House is where spending bills are supposed to originate (notwithstanding the fact that the biggest spending bill in recent memory – the $700 billion Wall Street bonus protection plan – actually got its sordid beginning in the Senate). And Ms. Pelosi, formerly of Baltimore, Maryland, where she was known as the “mayor’s daughter,” now has a democratic majority in the House…and the Senate too. She can probably get just about any fool piece of legislation passed that she wants.

And what everyone wants now is to “stabilize” the financial markets so investors won’t have to go into rehab and drag the rest of the economy with them. The idea is to keep the booze flowing…and hope the party comes back to life.

Stability produces instability, Hyman Minsky used to point out. Why? Because when investors have no fear that someone will call the cops, they tend to party harder. With no threat of crash or correction, they take more risks in order to squeeze out more gain.

We read a first-hand account by a member of a local government investment committee, explaining how the committee had lost its money in sub-prime mortgages. Most of the people on the committee had little idea what was in the package of sub-prime debt, he explained. But one of the committee members had connections on Wall Street who convinced them that they might as well get the extra yield that these instruments promised. After all, they were rated Triple A by the agencies and the likelihood of a problem was so slight it didn’t deserve considering. So, they went for it and put millions of dollars of municipal pension money into these monstrous investments (Wall Street collected a fat commission on the transaction.)

They made a mistake, in other words. Of course, as Marcus Aurelius explained, Nature has no quarrel with mistakes. In fact, she welcomes the crack-ups they produce. Losses are just a way of bringing change. The mistakes are washed away by corrections, making way for new life…and new mistakes. That’s how capitalism works.

But now, the stabilizing quacks want to stop the process of nature. They hope to stop change; to give these miserable monsters so much juice that they will be kept alive – forever. Of course, they can’t really succeed. They can’t beat Nature…not in the long run.

But it’s not the long-run that anyone is worried about. In the long run, we’re all dead, said Keynes. What people are worried about is the next few months. They don’t want to go broke in the next few months…or have to stand up and admit that they’ve been idiots…or give up the beach house…

Let Nature take her course, is our advice. Get it over with.

*** And Addison and Short Fuse send this note:

“To all of our dear readers in the Baltimore area…I.O.U.S.A. is opening at The Charles Theater today…and tonight, at 7 PM, we will host a screening of the film, with a Q&A afterwards.

“So if you haven’t caught the movie yet, we would love to see some friendly faces there. And we’ll be giving away copies of the book and DVD. We hope to see you there!”

If you can’t make it to the Charles Theater tonight, there is a way you can get the book (which was number one on Amazon this past Wednesday) and DVD – along with a year subscription to Chris Mayer’s Capital & Crisis.

The Daily Reckoning