Tough Love On St. Valentine's Day

Sometimes the hard slap of reality is better for people than a sweet cushion of accommodating affection. That may be as true for an economy seduced by credit as for a wayward husband.

What people most want at any given moment is not necessarily what is best for them in the long run. Drug addicts, for example, may want another fix. Obese people may want another eclair. Alcoholics may want another drink. And politicians may want another term in office. But in no case is the object of their desire best for them…or for the people around them.

Pardon me for bringing up the subject of “tough love” on St. Valentine’s day, dear reader. It is not the kind of love either of us want. But it may be the kind of love the U.S. economy needs.

“Recession,” said one young person interviewed by USA Today, “will be good for my generation. Our expectations are so elevated…”

The expectations of most people in America – young or old – seem to have reached Olympian heights. Only the gods should have it so good. Full employment, rising stock prices…I will not dwell on those illusions. I have dwelled on them for so long in these messages that I might be accused of taking up permanent residence.

But, to judge from the press as well as the opinion polls, doubts are beginning to surface. Yesterday, for example, the Wall Street Journal let the cat out of the bag with a remarkable admission: “Savings Generate Wealth,” said a column of personal financial advice.

People have begun to notice that they are deeply in debt. They are hearing more and more of layoffs and bankruptcies. Their stocks lost money last year and are flat so far for this millennium. For the present they are willing to “look across the valley” of the current downturn to the rising slope of prosperity on the other side. But…at the margin…they are beginning to wonder if it might be easier to make the hike with a lighter debt load. Like a drunken man about to take up rock climbing, they’re beginning to think it might be safer if they sobered up first.

And yet, if Americans begin to ‘copy the Japanese’ by saving money instead of spending it, the whole thing is over. Forget the soft landing. The economy would plunge so deep into the earth it would take years to dig out.

Let us not forget, though, that Alan Greenspan is still at the controls. And he promises to fight the downdraft of financial rectitude with everything at his command. But since he cannot expand time, nor perform the miracle of the loaves and fishes, he can only do what he has always done…the very thing that fueled the enormous boom in the first place. That is, he proposes to give American consumers what they may need least in the entire world – more credit.

The fate of the entire world economy is at stake. Yet, so sure are most people that this joy juice will do the trick, that the world doesn’t even hold its breath.

People are sure it will work because, in recent memory, it has never failed. Each time the bum was about to sober up, Greenspan’s Easy-Credit Corner Liquor Store offered more booze…and the party was on again.

But, [dare I say it?], this time might be different.

“Don’t count on Mr. Greenspan this time,” writes Dr. Kurt Richebacher. “His monetary easing in late 1998 and his following extremely hesitant rate hikes have precipitated the worst credit excesses ever in history. …and have made the U.S. economy and its financial system extremely vulnerable to any economic slowdown.”

It is not like the 1997-98 crisis period, Dr. Richebacher elaborates. It is worse. “Total outstanding debt of the non-financial sector during the two-year period after June 30 [1998] has risen $4,400 billion (20%). Corporate debt soared 30% to $4,600 billion, while private household debt increased 19% to $6,700 billion. This included a surge in outstanding mortgage debt by $1,600 billion or 32%. And more specific to financial system leverage, the financial sector raised its borrowing by a shocking $2,000 billion, or 43%, to almost $8,000 billion.”

“We see very important differences between the financial crisis of ’98 and that of today,” he continues.

“Then…it was panic and turmoil at the periphery of the global financial system that threatened the center…. This time…the developing financial crisis has its epicenter in the U.S. financial system itself.”

Despite the upturn in January spending, says Dr. Richebacher, the consumer “is exposed to a savage financial squeeze, impacting him from three sides: first, abysmal growth of real disposable income; second, plunging financial wealth; and third, tightening credit conditions.” Spending rose steadily and steeply during the late 90s. Finally, it outstripped earnings, so that during the 6- month period to November 2000, for example, consumers spent nearly $80 billion more than their incomes.

Caught now with capital losses rather than capital gains, high energy bills, and the threat of being laid-off from his job, the consumer has little choice. He has to go on the wagon.

This may not happen immediately. It may be difficult to see amid the white darkness of information age data. Dr. Richebacher notes that “it took more than a year after the crash in October-November 1929 for the public, at long last, to become frightened…”

But woe unto to you who are complacent…for ye are destined to know fear.

Bill Bonner, howling in the wilderness of Poitou… Ouzilly, France February 14, 2001… Valentine’s Day

*** Well, the great man spoke. But none of the news sources on which I rely seem to have been able to figure out what he said.

*** Whatever it was, Mr. Market was not impressed. The Dow fell 43 points. The Nasdaq fell 61.

*** The Big Techs backed off. Lucent dropped 9% after its debt was downgraded…to close below $12. The biotechs, big winners on Monday, were big losers yesterday, falling 5%. The Internets were losers too – with index down 4%. Tobacco companies, on the other hand, rose 3%.

*** Amazon fell to $13.75. Is Bezos still smiling? I hope so. After all, you shouldn’t take stock prices too seriously. Besides, Mr. Bezos was TIME’s “Man of the Year” last year. You can’t do much better than that.

*** Mr. Greenspan did his part, now consumers are doing theirs. Retail sales rose 0.7% in January – their fastest pace since September.

*** So…the battle to protect America from saving seems to be going well. Of course, Napoleon’s attack against Russia went well too, in the early stages. So did Japan’s attack on the U.S. fleet at Pearl Harbor.

*** “Debt Smothers America’s Youth” proclaims USA Today. After what was billed as the biggest wealth explosion in history, America’s young people are poorer, not richer, than previous generations.

*** “Like no other generation,” says the USA Today report, “today’s 18- to 35-year-olds have grown up with a culture of debt – a product of easy credit, a booming economy and expensive lifestyles. They often live paycheck-to-paycheck, using credit cards and loans to finance restaurant meals, high-tech toys and new cars they couldn’t otherwise afford… At a time when they could be setting aside money for a down payment on a home, many young people are mortgaging their financial future. Instead of getting a head start on saving for retirement, they are spending years digging themselves out of debt.”

*** According to a Reuters report, a New Jersey man racked up almost half a million dollars in charges on more than 20 cards over a one-year period. Ibrahim Elwahsh, 36, was a temporary worker with a $25,000 annual income… but he didn’t let that limit his lifestyle. During a 1995-96, he went on a spending spree that totaled about $450,000 and declared bankruptcy in 1996.

*** Among people under 35 years old, reports USA Today, home ownership has fallen from 41.2% in 1981 to 39.7% today. And the equity in their homes has fallen more sharply – from $57,000 in ’89 to $49,200 in ’99. Net worth has dropped too – from $12,700 in ’95 to only $9,000 in ’99.

*** Another sign of a phony boom – bankruptcies are soaring. SMR research says the number of people filing for bankruptcy could reach 1.5 million this year. And Salomon Smith Barney estimates that as much as $33 billion in U.S. corporate loans could go bad – up 40% from last year.

*** Consumers are devoting 14.1% of after-tax income trying to keep up with their debt burdens according to Charles Peabody at Mitchell Securities. Diane Swonk at Bank One Corp. says the number could be as high as 34.1% – when you include home equity loans and auto leases.

*** “Aren’t Americans richer than they used to be…and able to carry more debt?” asks US News & World Report. The problem, says USN&WR, is that “income and assets are highly concentrated while debt is distributed more democratically.” Rich investors might have benefited from the run-up in asset valuations over the last 10 years. But those at the bottom half of the wealth spectrum have few financial assets. The wealthiest 1% of the population has a net worth 167 times greater than that of the middle 20%. But the rich have only 6 times the debt of those in the middle.

*** While people were supposed to be getting rich, many were cutting deeply into the few assets they had. Among all homeowners, equity declined from 70% a generation ago, according to USN&WR, to only 54% today. What’s more, borrowing from pensions doubled between ’92 and ’98.

*** “The finances of the entire country are on the line,” continues USN&WR. Corporations are deeply in hock along with consumers. Xerox owes $7 billion. JC Penny carries $6 billion. And the nation itself runs a current account deficit equal to 4.5% of GDP. The only thing that keeps the country afloat is the willingness of foreign savers to buy U.S. debt and financial assets. Overseas investors own a third of the U.S. Treasury market…20% of all U.S. corporate debt…and 9% of all U.S. stocks.

*** “The real story of the 90s,” says the Economic Policy Institute, “was not the stock market but the debt explosion.”

*** The euro fell a bit yesterday. For better or for worse, I’m betting that a lot of this debt will go bad…and the dollar will go bad with it. So, I put some money into a euro-denominated account at I see in a press release today that the bank has been awarded Forbes Magazine’s “Best Of The Web” designation for 2001.

*** First, electricity… now this? “In the US, there are more than 54,000 municipal water systems serving an average of 4,000 customers each,” writes John Myers of Outsanding Investments, “yet the water and wastewater treatment infrastructure is failing – a victim of antiquated systems. Many water utilities are using pre-WWI technology. The nation’s wastewater treatment market alone is already worth $82 billion…” Myers believes there is some money to be made as the water ‘crisis’ gains momentum in the popular media.

*** While Henry squirmed and jived in church on Sunday, Pere Marchand recalled Luke’s version of what is known as “the beatitudes.” “Blessed are they that…” and so forth. Luke remembered Jesus to offer maledictions as well as blessings, with a symmetry that might apply to Jeff Bezos or the entire New Era boom: “Woe unto you that are rich! For ye have received your consolation…Woe unto you that laugh now, for ye shall mourn and weep…Woe unto you, when all men shall speak well of you!”

*** According to my usually unreliable sources, on this day in 269 A.D. a young Roman named Valentine, who had converted to Christianity while in prison, was clubbed to death for his beliefs. The 14th of February – the day before the Roman feast of Lupercalia, a pagan love festival – was then set apart as the special day to remember Saint Valentine. In 496 A.D. Pope Gelasius changed Lupercalia from the 15th to the 14th to try and stop the pagan ritual. The church, however, finding little fault with a love celebration, did away with only the pagan elements. St. Valentine is now remembered as the patron saint of love.

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