The Daily Reckoning typically takes the part of the underdog, the despised and the downtrodden. Sometimes we do so because the calumnies are misplaced…and sometimes we just pick up the poor schmuck for the fun of knocking him down and treading on him some more. Gideon Gono is no exception.
The Financial Times tells us that sales of government debt will reach $2 trillion next year – led by the United States and Britain, each borrowing about 10% of GDP. For France, the borrowing will reach 8.6% of GDP. Yet, this week, the brightest star in the investment firmament burned brighter still: U.S. Treasury bond prices rose to levels never before seen. The 10-year T-Note, for example, yielded all of 2.67% (yields fall as prices rise).
It was as if the laws of nature had been suspended. The cost of the world’s bailout efforts are said to be beyond $10 trillion already. Yet, the more bonds governments sell to finance the rescue, the more the demand for them grows. Remarkably, the further in debt government goes, the more people want to lend it money. Maybe, if the feds get away with this, gravity will be the next to go.
Central bankers, as everyone now knows, are rascals and scalawags. Gideon Gono is no exception. But there is something heroically imbecilic about the man. While most economists hedge and weasel, Mr. Gono goes boldly, recklessly forward – where no central banker has dared to go, at least not since the worst days of the Weimar Republic. Mr. Gono stands tall…a colossus of error…an Olympus of bunglement.
It is easy to criticize the chief of Zimbabwe’s national bank. In fact, it is hard not to criticize him. Keynes warned that "there is a lot of ruin" in a nation. Mr. Gono’s contribution to economics is to show how much ruin there is. That…and proving that the laws of supply and demand still apply to money.
The latest news tells us what he hath wrought and it sounds like Hell: the trash piles up in Harare and the water system no longer works. Vendors are selling bottles of water for $25 US. Cholera has broken out…and Anthrax too. Shops are empty. People are hungry. Nothing works. This week, even the forces of law and order are on the rampage, breaking windows…looting what little remains in the shops. The soldiers and police haven’t been paid, at least, not with real money.
Between August 2007 and June 2008, the Zimbabwean money supply increased 20 million times. Naturally, this led to the kind of spectacular increases in consumer prices that modern economists had only seen on newsreels. Consumer price inflation was clocked at 2 million percent six months ago. Now, it is said to have sped up to 230 million percent.
Of course, Mr. Gono rolled out all the usual inflation fighting measures – all that is, except for the one that works. Prices have been controlled. Mr. Gono personally went around, found shop owners who have illegally raised prices, and had them arrested. Bank withdrawals have been limited to 500,000 Zimbabwe dollars per day. If you wanted to buy 2 kg of sugar, for example, you’d have to stand in line for four days at an automated teller. But at present rates, you could stand in line at the automatic tellers every day for eternity and never get enough money to buy a drink of water.
Last weekend was Gideon Gono’s 49th birthday. We salute him. He may be a moron; but at least he’s a useful one. Better than another bad theory, he has provided a bad example. In an age when central bankers all over the world are trying to avoid a decline in the cost of living, Mr. Gono has proven that there are worse things.
But despite Gono himself, Gonoism seems to be gaining admirers in the rest of the world; because the alternatives don’t seem to work. Keynesianism, for example. The Keynesians say that when people stop squandering their money, the feds have to step in and squander it for them. Right now, practically every government in the world is promising huge new spending programs. Deficits be damned! In the heat of the emergency, Europe waives aside the Maastricht limits and America prepares its first trillion-dollar deficit in 2009. By 2010, America’s deficit could easily reach $2 trillion.
But will "Keynes on steroids," as one journalist put it, work? There’s no evidence of it in the record. America tried it in the ’30s. Japan tried it in the ’90s. In neither case were the results favorable.
Milton Friedman saw the problem with Keynesianism – it led to rising prices…and then stagflation. He pointed to the lever marked "monetary policy." Give that a pull, he said; just make sure the economy has enough money, everything else will take care of itself. Maggie Thatcher and Ronald Reagan both pulled on the monetary policy lever. And in the recession of 2001-2002, Alan Greenspan yanked it so hard the handle practically broke off. Milton Friedman was still alive at the time and actually approved of Greenspan’s handiwork, saying that he had ‘spared the economy a worse recession,’ or words to that effect.
But now we face an even worse recession. And central bankers are running out of ammunition to fight it. The U.S. Fed’s key rate is only 100 basis points from zero. His resources are "obviously limited," said Bernanke, in a speech in Austin, Texas. But then, while the Fed can’t push interest rates below zero, "the second arrow in the Federal Reserve’s quiver – the provision of liquidity – remains effective," he said. One option is for the Fed to buy "longer-term Treasury or agency securities on the open market in substantial quantities," Bernanke said.
Gonoism, in other words.
Enjoy your weekend,
The Daily Reckoning
December 05, 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.
"I’m never going to buy another American car," said an American colleague yesterday. "The quality just isn’t there…"
On the other hand, we have a French friend who swears his Corvette is the most trouble-free car he’s ever owned.
Who makes the best cars? We don’t know. But we don’t have to know…we’re happy to let Mr. Market decide.
But Nancy Pelosi wants to trump Mr. Market. She wants to decide which automakers survive and which don’t. Letting the automakers go bankrupt is "obviously, out of the question," says Nancy Pelosi.
Out of the question? Maybe. Obviously? Not at all.
Here at The Daily Reckoning, we know that Mr. Market is a hanging judge. When he thinks someone has done wrong, he strings them up. Right now, he’s got GM and Chrysler on the gallows. But Nancy Pelosi is right; Congress is bound to come to the rescue.
We’ll get back to that in a minute. First, a look at yesterday’s news:
Is the market set for the long-awaited Obama Bounce? Yesterday, it wasn’t clear. The Dow lost 215 points. Gold finished down almost $4. Oil was down too – to $43.
We’ll just have to wait.
Meanwhile, auto execs were back in Washington. They seem to have lost their case with Mr. Market on the bench. Now, they’re appealing to Congress.
But the U.S. Congress is more like a lynch mob than a judge. It doesn’t think or carefully weigh the evidence. And it is certainly not blind. Instead, it reacts…like a mob…instinctively, and foolishly.
The unions don’t want to see GM or Chrysler go under. They’ve been feeding at that trough for a long time; they don’t want to stop now. The shareholders don’t want to see them go down either. They’ve got money at stake. Nor does management…nor do any of the subcontractors, dealers, or service industries related to automobiles…or the hundreds of thousands of people they employ.
They’re all "stakeholders," they say. And they’re prepared to reward members of Congress who help them protect their ‘stakes’ and punish those who don’t.
Of course, all say they believe in free enterprise…and in market economies. But all will tell you that there are special circumstances in this case. Everyone always has plenty of reasons why the rules of a free society shouldn’t apply to them…at least not just now.
So, the fix will probably be in, dear reader. The Detroit Dinosaurs will be kept alive. At least for now.
But how? These hogs have big appetites. Who’s going to feed them? With what?
Ah, there, dear reader…there’s always a catch…a fly in the ointment…crack in the bell…. Hit the bell hard enough…and it falls apart.
There are only so many resources in the world – only so many workers…only so many tons of steel and only so many barrels of oil. In a real, free-market economy, ordinary people decide how these will be used. They vote with their money. They buy a beer, for example…and send a signal to the whole world. "Beer is what we want!" So, the hop growers get hopping…the beer truckers get trucking… and the brewers get brewing. The ‘hidden hand’ directs resources to where they are needed. People get what they want.
And then, along comes the U.S. Congress…in its all its majesty. We don’t care what Mr. Market says, it declares, ‘It is cars from Detroit that the people shall have.’ And then, the money that would have gone into making beer is diverted to the auto industry. Resources follow the money. The steel delivery trucks head for the auto plants, not to the brewers. The oil that might have been used by a distillery is instead siphoned off to fire up an auto plant. The capital that might have been used to build more breweries in Anaheim is instead used to prop up old assembly plants in Detroit. And then, the consumer pays more for his beer – because the brewers didn’t increase production – and more for his cars too…Detroit knows the game is rigged in its favor; why bother to cut costs?
Of course, subsidizing the domestic auto industry is just what economists have been cautioning other countries NOT to do for decades. Typically, a woebegone country in Africa or Latin America wants its own airline and its own auto industry. Its citizens could perfectly well buy their sedans on the open market…and count on the commercial airline industry to move them through the sky. But where’s the prestige in that? Where are the sweetheart contracts…the bribes…the payola…the baksheesh?
A report out earlier this week criticized the Treasury Department for not having adequate controls on its $700 billion giveaway program. The money may be wasted…but at least it should be wasted according to proper procedure, said the critics.
And so the great fight against nature continues. The Bubble Epoque is over. Bailouts…bribes…boondoggles – welcome to free enterprise a la USA, circa 2008.
*** As we mentioned yesterday, today is a special day…it’s what our buddy and trusted currency counselor, Chuck Butler refers to as Jobs Jamboree Friday! Yee-haw!
Early this morning, Chuck wrote this to his Daily Pfennig readers:
"The ‘experts’ have forecast a -335K drop in jobs for November… But, your old Pfennig writer believes that this forecast is low. I think it will be closer to -375K. The reason I say that is the employment piece of the ISM report that printed the other day and the employment index of that report showed some real serious rot on the labor vine. I read a report last night, where an economist was attempting to show how the report should read -750K. As bad as -375K is, I don’t think the Bureau of Labor Statistics (BLS) would have anything to do with printing a -750K report!"
Turns out, the Labor Department’s monthly jobs report was much worse than feared. In November, the United States shed 533,000 jobs…the biggest monthly job loss since December 1974.
"These are horrendous numbers… This is an economy that is in absolute free-fall right now. Confidence has collapsed," said Nigel Gault, chief U.S. economist at Global Insight.
Also in the jobs report was data that showed that the unemployment rate went up from 6.5% to 6.7% in October. MarketWatch points out that although this rate is (marginally) lower than the forecasted 6.8%, it is the highest unemployment rate since 1993.
*** The holiday season is going to be rough on many Americans…and in turn, retailers. In fact, Americans are turning away from what usually powers the economy out of a recession: credit cards. The Washington Post reports:
"According to an analysis by Citi Investment Research, the constriction in lending that began earlier this year points to at least a 5 percent decline in consumer spending on goods during the heart of the holiday season. A Consumer Reports survey showed more than half of shoppers intend to rely less on credit this Christmas. One retailer, Circuit City, has already blamed the meltdown in credit for sending it into bankruptcy protection last month.
"’If you’re a retailer right now, you see the contraction in consumer debt as a problem,’ said Jerry Welch, former chief executive of FAO Schwarz and now head of prepaid card service nFinanse. ‘There’s no way you can be a retailer and look out and see people being maxed out on their credit cards and think it’s good for you."
Over here at The DR headquarters, we have an interesting way to provide your family with the comfortable holiday season they have become accustomed to…with a $1500 "One-Time Divided" check.
*** The South Africans we meet – black, white, or somewhere in between – are always nice, smart and hardworking. And the society they have created is dynamic, complex, and flourishing.
On the other hand, it is a society that is troubled…and, possibly, doomed.
At least, that is our impression. Crime is an ever-present problem…and a constant subject of discussion. When we arrived, a radio talk show was discussing a recent case in which robbers interrupted church services – at gunpoint – and relieved parishioners of their valuables.
No one thanked these desperadoes for what they had done – even though they made it easier for the churchgoers to get into heaven. Instead, they were roundly condemned…in recurring laments about how crime-infested South Africa has become.
The evidence of crime is everywhere. High walls and razor wire protect suburban houses. Security guards stand vigil at office parks. And along the roadsides, there are people – walking, sitting, sleeping, bicycling…all vaguely menacing, at least to someone from North America or Europe.
Is it anymore dangerous than Baltimore or Las Vegas? We don’t know. But to a foreigner, it seems more dangerous.
And it seems like a culture evolving – quickly. From the domination of the Boer’s and the English, South Africa has become multi-racial…and multi-cultural. All the races and cultures seem to get along fairly well. But how long can it last, we wonder? How long before the plague of democracy catches up to them, and the numerically superior black Africans realize they can vote themselves money and privileges?