Capitalism is Doing its Work

We’re playing it straight today. And, as usual, optimistic…

The world is NOT going to Hell in a handcart. After a long time spent in the handcart, it is finally getting out and standing on its two feet. Americans are beginning to save again. The Chinese are beginning to look for other places to sell their gadgets and paraphernalia.

Capitalism is doing its work. It’s destroying the mistakes of the Bubble Epoch. It is burning up the errors of the past so it can rebuild for the future.

Yesterday, the Dow rose 152 points. This morning, stocks are soaring in Asia – as the world anticipates further good news. Reports from the economy are terrible; but not as bad as expected, they say.

Layoffs in the United States are running at 3 times last year’s rate. And the index of manufacturing activity slipped for the 14th month in a row in March.

Oil is holding around $49. Gold traded around $927 yesterday. And the dollar didn’t move much either – it’s about $1.32 per euro.

But hey…here come the firefighters. What is they’ve got with them? Well, darned…they’ve got another handcart and a ticket to Hell!

Yes, the G20 group is meeting today in London. Mr. and Mrs. Obama have already met the queen. And the protestors have already met the police.

There are the anarchists, the environmentalists, the Tibetan liberationists, the vegetarians…just about everyone with a gripe is out on the street. ‘Make Love, Not Leverage,’ says one poster. Word from our headquarters in London – in the building with the gold balls, across the river from the City – is that protestors are getting out of hand. They’ve attacked police…and smashed up a Royal Bank of Scotland branch office.

“Built on Blood,” they’ve scrawled on the Bank of England. They’ve burned a banker in effigy…and had fistfights with others. One demonstrator hops around dressed as the Easter Bunny. Others wear masks…intent upon doing mischief.

But what’s the point? These dumbbells are just as confused and hopeless as the G20 big shots they are trying to impress. Both believe the world would be a better place – if people would just listen to them!

Meanwhile, the cost of their mischief is adding up. The protestors don’t really cost very much. What’s a few broken windows? But the G20 costs the world trillions.

Already, in the United States alone, the bill for fighting the correction is about $14 trillion, by our reckoning. That includes not only the amounts actually spent…but the Fed guarantees, toxic asset purchases and so forth. If you will recall, Mr. Paulson argued that buying the banks’ stinky assets would actually make the taxpayers’ money. When the world came to its senses, he said, it would realize that these assets were worth MORE than the going price.


That was about $6 trillion ago. Every day the losses continue to mount up. Instead of being shrewd buys, the bank’s disgusting assets have proved to be even worse than imagined.

But the fact that they’ve been wrong about everything doesn’t seem to discourage the rescuers. No…they didn’t see the blaze coming. No…their back burns didn’t work. No…they don’t know what caused the conflagration nor where it is headed nor how to put it out. Still – give them more money so they can do something about it!

The U.S. official national debt has jumped over $11 trillion. Wait a minute…wasn’t it just a few months ago that we announced it had gone over $10 trillion? Yes, dear reader, it was…the national debt is exploding. The feds say they will borrow an additional $2 trillion this year. If the bailouts and stimuli continue as planned, the national debt will grow by almost $10 trillion in the next 10 years. In other words, the nation will add more debt each year for the next 10 years than it did in the entire first two centuries of its life.

Hey…now we’re rolling!

This is why we have faith in our public officials. Yes, they may stumble and bumble…but they’ll get it right eventually. They’ll cause inflation like we ain’t never seen yet! Give them time…

Welcome the United States into Ponzi Nation, dear reader. It must bring in new money to pay the interest on the old money it borrowed. And every day that passes, the amount that can’t be paid back grows…

More news from Addison and Ian in dreary Baltimore:

“So…this is how we get the economy ‘back on track’,” writes Addison in today’s issue of The 5 Min. Forecast.

“GMAC, an auto financer 49% owned by GM, announced today it would start loaning to subprime borrowers again. The group said it will roll out a $5 billion line of credit to new car buyers over the next 60 days, now including those with credit scores below 620.

“Why? To meet President Obama’s deadline and prop up next quarter’s earnings report; a last ditch effort to avoid bankruptcy.”


“GM sales crashed 45% in March, compared to 2008. No word on what happens when this group of fictitious subprime buyers can’t pay for their cars either.”

Each weekday, Addison and Ian bring readers the The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And more thoughts from our office next to the Communist Party headquarters in Paris:

Poor David Leonhardt. The man is lost. But he’s got plenty of company. And our guess is he’ll have even less elbow room as the crisis intensifies.

Writing in the New York Times:

“Does stimulus work? Fortunately, this is one economic question that’s been answered pretty clearly in the last century.

“Yes, stimulus works.

“When governments have taken aggressive steps to soften an economic decline, they have succeeded. The Germans did it in the 1930s. Franklin D. Roosevelt did so more haltingly, and had more halting results. Even the limp Japanese recovery plan of the 1990s makes the case. Although dithering over a bank rescue kept Japan in a slump, government spending on roads and bridges made things better than they otherwise would have been.

“When Roosevelt stuck to a stimulus program, unemployment fell markedly, and the biggest stimulus of all – World War II – did the rest. It’s true that economic models say the economy shouldn’t work this way. When resources are sitting idle, businesses should find a way to use them profitably. But they often don’t.

“People become irrationally pessimistic during a downturn. They are driven by what Keynes called animal spirits. Only government can typically change the dynamic.”

Oh, what a dreary world it would be if it could be manipulated so easily! Got an economic slowdown? Let the government fix it by putting people to work! Missing those essential animal spirits? Don’t worry about it; government employees are always beasts. But wait a minute…what good does it do to put people to work doing things that people don’t really don’t want done? Or, to put it another way: if people are not willing to buy something with their own money…or invest in it…what makes it a good idea when the government does it? Sure, you can put people to work digging holes and filling them back in again. Or making a cannon to blow up buildings. Or, why not burn down Washington…so people can be put back to work rebuilding it?

C’mon…we know it’s not that simple. It’s not that easy…

The two countries that emerged most quickly from the Great Depression were Japan and Germany. Both did it by massive rearmament – preparing for war. People got jobs in tank factories (though not in Germany until it threw off the constraints of the Versailles Treaty) and steel mills. They put together bombs and machine guns. The factories filled with workers. The shops filled with customers. The bars filled with soldiers. Problem solved, right? But was the world a better place as a result? After having created its expensive military monsters, Japan and Germany had to do something with them. It was either go to war or go broke.

That’s the difference between a command economy…and a free economy. In a command economy, you can get results. Sometimes the results even look and feel good – for a while. But you can’t get genuine improvement; for that, you need an economy in which people decide for themselves how capital is allocated. Only then to people get what they really want…what they themselves have freely chosen.

Our Daily Reckoning depression motto: capitalism doesn’t always take you where you want to go…or where you expected to go. But it always takes you where you ought to be.

*** The closer you look, the more you realize that government meddling in the economy is a fraud. Just look at Geithner’s new hedge fund, for example. It’s such a scam that a Nobel prize winning economist – Joseph Stiglitz – refers to it as “robbery of the American people.” The fund is a public/private partnership’ that buys toxic assets from the banks. Its goal is to help the banks…and give investors (and the government) a chance to make some money. But it doesn’t help the banks if the fund buys assets for what they war worth; the banks merely exchange one asset for another of equal value.

The banks only benefit if the fund buys them for MORE than they are worth. On the other hand, the fund only benefits if it buys them for LESS than they are worth. In practice, the fund will pay more than it should…otherwise the banks won’t participate. But the fund is structured so that the losses will not fall on investors and the government equally. Instead, the public will get the losses…while the investors get a profit.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning