No More Giveaways; No More Recovery

Hey…how ’bout this rally!

The Dow was up 120 points yesterday. Now, we’re beating the bounce of 1930. The post-crash bounce in 1930 lasted fifth months. Ours began on March 9th…so it is now in its sixth month.

And like 1930, people are coming to believe that recession is almost over…and happy times are here again.

Heck, we’re sure the trouble is behind us now; 53 economists said so!

According to Bloomberg:

“The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the monthly Bloomberg News survey. Analysts lifted their estimate for the third quarter by 1.2 percentage points compared with July, the biggest such boost in surveys dating from May 2003.

“‘We’ve averted the worst, and there are clear signs the stimulus is working,’ said Kenneth Goldstein, an economist at the Conference Board in New York.

“‘Cash-for-clunkers was the icing on the cake,’ said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. ‘It’s well-timed stimulus syncing with cyclical forces leading to a ramping up of production.’”

Yes, now the economy is firing on all cylinders…or just about. Yep. No doubt about it. Still, there are some nagging doubts. The latest figures show foreclosures still increasing – up 7% in July from a year before. And house prices are still going down. And unemployment is still going up. And consumer prices are falling…indicating a Japan-like deflation. And business profits are falling. And consumers are cutting back. But except for that – housing, jobs, sales, profits and deflation – everything is working out beautifully.

Now that we mention it, all the indicators of real economic activity are down.

So, the feds aren’t taking any chances. Yesterday came news that the Fed would continue buying bonds at least through October. And they are not likely to raise rates either. The banks can borrow at practically zero interest…and use the money to buy Treasury bonds. The 10-year yields about 3.7%. In effect, they’re lending the money back to the people they got it from…and earning 3.7% for their trouble.

But, take away the stimulus spending…and the stimulating low interest rates…and what have you got? You’ve got is an economy entering a depression.

Oh, there’s the rub, isn’t it? If the feds hand out money so people can buy automobiles, people buy automobiles. If they don’t give out the money, people don’t buy automobiles. If they buy automobiles, of course, it looks like the economy is recovering. But take away the giveaways, and the recovery disappears.

Solution: keep giving away money!

Hold on…something wrong here. If you could generate economic prosperity by giving people money so they could buy things…why not give them money to buy everything? Why just autos? Why not give them money to buy financial advisory services? Ah…now we’re talking!

But let’s keep this serious…well, as serious as we can be when we talk about programs designed by knuckleheads.

So, the feds are encouraging people to buy autos. Set aside the fact that buying too many autos and other things is what got them into trouble…

…if giving people money so they could buy things actually made people prosperous, welfare recipients would be the richest people on the planet. Obviously, it doesn’t work that way. What makes people rich is the ability to earn money…not their ability to get handouts. And remember, too, the feds don’t really have any money to hand out. They can only get money by taking it from its rightful owners – either in taxation or loans. Or, they can print it up themselves. In any case, the money adds nothing real or extra to the economy. It merely distorts the economy…twists it…misleads it…and makes it a bigger mess than it was already.

We are enjoying our month in the country. Not exactly a vacation…but close. We work in the office from 8AM until lunchtime at about 2PM. Then, we turn our attention to other things. In the summer, that means painting. We’re repainting the billiard room, because Elizabeth decided that the curtains needed to be changed. And then, we’re repainting a farmhouse, top to bottom, before renting it out.

Painting is a fairly relaxing occupation. You can do it while thinking about other things. Rolling the walls or cutting in the corners, some men might think of going hunting…or playing golf. We try to figure out what is going on in the world economy. For these are remarkable times we live in. We see what is happening…pretty much what we expected. But we’re not sure where it leads.

Readers may have noticed a shift in our thinking recently. Well, you can blame latex. As we were painting in the billiard room we began to see that governments are more incompetent than even we had realized. They can’t create inflation on demand. A few months ago, we were preparing for inflation…even hyperinflation. Now…we’re not so sure. The depression and the Chinese vigilantes may hold off inflation…even for years.

Does this mean you should sell your gold? Well…we wouldn’t go that far. Even in the Great Depression gold and gold mining stocks rose in price. And the one and only sure thing is that the world monetary system is dangerously unstable. We’d hold gold until it settles down. Just don’t count on getting rich from it in the short-term.

Here’s another reason housing prices are going down: housing priorities are changing. Baby Boomers are entering a phase in their lives when people typically escape from urban/suburban centers in favor of small towns and rural areas. If this pattern continues, it will mean a big shift of population, say the experts.

Remember, it’s what you do, who you do it with, and where you do it that counts. By the time a person reaches middle age, the first question is usually settled…the second is often in doubt…and the third is actively being considered. That is, few people begin a new career after the age of 50…but it seems like more and more decide they might want to try life with a new partner.

“I can’t imagine it,” said Elizabeth. “It just seems like too big an adjustment. It took me a quarter century to get used to you. I don’t know if I could get used to someone else…

“On the other hand, it might be fun to try…”

Well, for whatever reason, it seems like people are changing partners – even at a rather advanced stage in life. And as for the where to live – it’s a question on practically every Baby Boomer’s mind.

“I just got tired of living in the city,” said a man who spent his entire career in Paris. “Just too much hassle. I’d rather visit occasionally than live there.”

Our friend has moved to the country not far from here. He has set up a small woodworking shop in a garage and happily spends his time making chairs and tables. When his house is full of them, he’ll probably have to give them to friends and relatives.

“It’s much nicer living out here than in the city,” says another friend. “And much cheaper. You can buy a whole house for half the cost of an apartment in town…and then you don’t have to pay for parking…you can raise chickens and vegetables…and you can even heat with wood, if you want. You don’t really have to spend much money at all.

“And the quality of life is higher. Small towns are more friendly. They’re prettier…usually. They’re easier. So they’re perfect for people who are retired.

“And here in France, there’s another phenomenon. When people retire, they want to go back to where they came from. Usually, they have a house they inherited from parents or grandparents. So, they leave the apartment in Paris to their children, who are just building their careers. And they retire to the country. It’s not a bad way to live.”

Until tomorrow,

Bill Bonner
The Daily Reckoning