Mereja

Author: Bill Bonner

  • Greenspan and His Fed Were Wrong 90% of the Time

    Poor ol’ Alan…

    We almost felt sorry for him…

    “Maestro mauled…” said the headline in The Financial Times. We wanted to maul him many times. But now that others were doing it…it made us feel sympathetic to the old scalawag.

    Didn’t the Alan Greenspan Fed’s failure to curb subprime lending deserve to go into the ‘oops’ category, demanded chief tormentor Phil Angelides.

    Mr. Greenspan defended his legacy. He was right 70% of the time, he said. The other 30% of the time he was wrong.

    Hey, that’s not bad. Pity it’s not true. Greenspan was wrong 90% of the time – at least.

    He thought those fancy derivatives actually spread the risk of failure…and made the system more stable.

    He thought those subprime loans helped people of modest incomes realize the goal of home ownership.

    He saw no risk in keeping the key rate at an ’emergency’ low level…years after the emergency had passed.

    But he hit one of those magic moments last week…when he was finally right about something. He declared that the yield on the 10-year note was “the canary in the coal mine.” This week, the canary wobbled…but stayed on his feet. He’s still standing…but looking a little peaked. More below…

    While the former Fed chief was in the spotlight at The Financial Times yesterday, the present Fed chief was front-page news over at The Washington Post. Alan Greenspan is a scoundrel, no doubt about that. But he was, in some ways, a better Fed chief than Bernanke.

    The trouble with Bernanke is that he doesn’t know his limitations. He actually believes the Fed can look at the possible outcomes going forward and improve them before they come out.

    “Fed chief sounds a deficit warning,” is the headline. He said Americans faced a “difficult choice.” It’s between higher taxes and fewer entitlement services, he said.

    This doesn’t seem like a difficult choice to us. We’d gladly accept fewer “services” from the feds if they’d lay off on the taxes. But that’s because we’re in the half of the US households that actually pays taxes.

    No kidding; the report was in yesterday’s news:

    “Almost one half of US households pay no federal income tax.”

    So, welcome to the beginning of the end. If half the citizens get bread and circuses without paying for them, you can bet that the whole shebang is headed for destruction. The math doesn’t work. Half the people have no interest in curbing taxes or spending. Obviously, those people would prefer to raise taxes – on us – rather than give up their free pills and retirement benefits. Even among the half that does pay taxes, most pay very little – less than they get back in ‘services.’

    Meanwhile, the ‘rich’ get socked hard. According to the reports we’re seeing on scurrilous blogs and from our usually unreliable sources, the tax burden on the rich is set to rise over 60% of income – thanks to the health care charges they will have to bear.

    By the way…the whole thing is a fraud. The services, that is…

    Here’s how it works. In 2007, the private sector finally blew itself up – thanks largely to all that debt offered by Wall Street and encouraged by the Alan Greenspan/Ben Bernanke Fed.

    So then…in comes the Fed again…and the US government…wearing white hats and pretending to save the situation. How? By bringing more of the economy under their control!

    As far as we can tell, the last successful government program was WWII. And that was only successful because the competitors’ programs were also run by government. But that doesn’t stop them…

    Does anyone seriously think the feds can do a better job? These are the people who run the Post Office…and Amtrak, for Pete’s sake. Even with monopolies, they can’t make money. Now they’re the majority owners of auto companies, insurance giants and mortgage firms. Hardly anyone buys a house in America anymore without the help of a government-owned mortgage business. And soon, you won’t be able to get a doctor to take your temperature – assuming they still do that – without getting a bureaucrat’s approval.

    In theory, the feds take charge of more of the economy, and spend more money, so they are able to keep the GDP from going down. The feds have been pumping about $4 billion per day of deficit spending (money they didn’t collect in taxes) into the economy. The bankers say ‘thank you very much’ for the business and pay themselves big bonuses. But this money doesn’t stimulate the private economy…it replaces it.

    But it replaces it with zombie ‘growth.’ The government-driven part of the economy is largely brain-dead. It is a waste. What real, positive boost to prosperity comes from someone filling out health care forms for the feds? What benefit do we get from tax accountants? How about from the ambulance-chasing lawyers?

    (Yesterday, driving to work, we saw an ad in Baltimore’s inner city: “Birth injury? Malpractice? Workplace injuries? You need a lawyer!”)

    How about from any of these multitudes of mid-level bureaucrats…lobbyists…handlers…interveners…meddlers…?

    The feds spend money. But the money is like warm water to a boat hull. It just stimulates the barnacles. Gradually, the boat slows…and sinks.

    What can you do? Haul it out and scrape the barnacles off! That’s what Ben Bernanke is proposing. But wait…the barnacles vote!

    And they make campaign contributions…

    But here is Ben Bernanke talking tough. ‘If you don’t straighten up,’ he seemed to say, ‘you’re going to end up like Greece.’

    Wait…this has a familiar ring to it. This is the same Ben Bernanke who is holding rates near zero to make it easier for the feds NOT to straighten up. Like those of his predecessor, Bernanke’s centrally- controlled lending rates are sending out just the wrong signal at just the wrong time.

    And like Greenspan, he can get away with it…for now.

    But maybe not for long. On Monday, US T-note yields ran over 4%. “The fun’s over,” said old-timer Richard Russell. It looked like the end had come for the long bull market in bonds. Bond yields have been going down since ’81. But they seemed to hit bottom near the end of 2008. What we’re seeing now – possibly – is the beginning of the long march in the other direction.

    This seemed even more likely because at the end of March the Bernanke Fed lost one of its pumps. It can no longer buy up the toxic mortgage- backed bonds of Wall Street, thereby giving the banks money to buy US Treasury debt.

    Still, on Wednesday, threats of more trouble from Greece sent investors towards US bonds for safety.

    “Greece Rescue Not Going According to Plan,” was the headline at Bloomberg.

    “Demand strong in US 10-year Treasury debt sale,” reported The Financial Times.

    But by yesterday, it looked like the plan for US debt was not going well either.

    “Treasuries decline after $13 billion auction of 30-year bonds,” said another Bloomberg report.

    Jobless claims unexpectedly rose last week. What do you expect? This is a Great Correction. Learn to love it.

    “China offers high-speed rail to California,” says The New York Times. Get used to that too. Who’s got the money? Who’s got the new technology? Who’s got the engineers…the people who actually know how to do something.

    Hey China…let’s make a trade. We’ll give you 1 million lawyers for 100,000 engineers. Or, how about 20,000 lobbyists for one good metallurgist? Heck…we’ll throw in 535 members of Congress.

    Hold the Congressmen? Okay…guess we’re stuck with them.

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Goldman Stole the Money Fair and Square

    Cut expenses. Go broke. Be happy.

    Everybody is convinced the market is going up. So what does the market do? It goes down – 72 points yesterday.

    What do you call it when the market goes down 72 points? A beginning!

    Well, we don’t know if it’s really the beginning of the end or not. We’ve seen more beginnings than we can count. Still, no sign of the end. But there must be an end out there somewhere. Always is.

    And look at what is happening in the gold market. While everyone has been watching health care…and stocks…and bonds, gold has been moving up. It rose another $17 yesterday to bring the price up to $1,151.

    Why is gold moving up? Because it anticipates higher inflation? Because it is afraid of government defaults?

    Most likely, it has no more idea than we do. It doesn’t know what’s going to happen…but with the feds borrowing more than 10% of GDP each year, it ain’t going to be pretty.

    The S&P is now trading at a P/E over 23, according to the most recent Barron’s report. Dave Rosenberg:

    “No matter how we slice it, whether on a Shiller P/E, Tobin Q or historical profit basis, the US market is anywhere between 20% and 30% overvalued.”

    Emerging markets are soaring. Oil is over $85. And the temperature here in Baltimore is 83 degrees.

    The heat is on. Something’s gonna blow.

    But Goldman Sachs is as cool as a cucumber. Goldman released its annual report earlier this week. The firm said it hadn’t done anything wrong. It hadn’t bet against its own clients. Nor had it expected any help from the government.

    Here at The Daily Reckoning, we’ve always taken Goldman’s side. We’ve always had a weak spot for cripples, lamebrains and predatory lenders. Besides, Goldman stole the money fair and square.

    Critics charge that Goldman ‘perverted’ capitalism. But they just don’t understand how kinky capitalism can be on its own.

    You see, dear reader, when it comes to putting meat on the table, nothing beats capitalism. But it only succeeds so well because it is allows foolish hunters to blow their own heads off. In his book FIASCO, Frank Partnoy recalled his days on Wall Street:

    “The way you made money from derivatives was by trying to blow up your clients,” he writes.

    He described how Wall Street regularly sold extravagantly complicated derivative instruments to institutional buyers who were either too dim or too lazy to figure out what they were buying. If they had known what was in them, they wouldn’t have bought them.

    Then, of course, the instruments blew up…along with the pension funds, endowments and insurers who bought them.

    But that’s just the way it should work. Capitalism doesn’t like it when idiots have too much money. So it uses people like Goldman to help take it away from them. That’s what Lloyd Blankfein meant when he said Goldman was doing “God’s work.”

    We don’t know if God wanted Goldman to blow up the world economy…but capitalism seemed to be calling for it. And it looked like capitalism was going to blow up the bomb tosser, too. Unfortunately, the feds stepped in. They bailed out AIG…and the whole financial industry – including Goldman. Now, they lend the big banks money for practically nothing…which the banks lend back to the feds at 4%. The banks make money. They restock their reserves with US Treasury debt. And the feds get to finance their gigantic deficits. It’s great for everyone – until it blows up too.

    It’s true, of course, that capitalism had already been twisted long before the feds bailed out the banks. Individual investors believed they could make money just by buying mutual funds or a house. Institutional buyers thought they could make money by buying collections of mortgages, any one of which they knew was likely to be garbage. But these crackpot ideas are just part of what makes capitalism so much fun to watch. And don’t worry, just leave it alone…it will correct those mistakes in a jiffy.

    Here we are barely 24 months after the correction began. Who thinks he can make money by buying a house now? Only people standing on the courthouse steps and hoping for an extreme bargain. Who thinks he can finance his retirement by buying stocks? Only the young and the dreamers.

    And who thinks you can make an economy richer by consuming more? Or cure a problem of too much private sector debt by adding more debt in the public sector?

    Only economists! And that’s a whole ‘nuther subject.

    And more thoughts…

    While the markets are hot, the economy is cool.

    Nearly 7,000 people go bankrupt every day – a record number. And in March, M3, the broadest measure of the money supply, recorded its biggest drop ever.

    And get this. Peak to trough, December ’07 to February ’10, 8.3 million jobs were lost. As we reported yesterday, take away the statistical tricks and the number of people with real jobs actually fell last month – despite reports of an additional 163,000 new jobs in March.

    Consumer credit fell again in February – down $11 billion. To put this number in perspective, the US government has run about $2.5 trillion in deficits since the correction began. So, in spite of pumping monthly deficits on the order of $120 billion…consumer credit still sank by $11 billion.

    What can we say? It’s a Great Correction, after all.

    Greece is going broke after all. Yields on Greek debt rose over 7% yesterday. So let’s look at how this works. Investors worry about a default. They push up yields (they need higher interest payments to justify the risk). This causes Greece to go further into debt (the cost of paying the extra interest), which causes even more worry among lenders.

    Why doesn’t Greece just cut expenses?

    Ah…glad you asked. This just goes to show what a dead-end debt can be. The government has already proposed substantial cuts. But it has to answer to the voters – who are on the verge of rioting in the street. And its own cabinet ministers are calling the Germans ‘racist’ because they refuse to give the Greeks money.

    It’s hard for a popular democracy to cut spending. And then when it does, it discovers that it is in another trap. So much of the private sector depends on government spending that, take it away, and the whole economy shrinks. This causes tax revenues to fall by more than the budget cuts. In other words, a multiplier works in the other direction – causing the budget deficit to widen when cuts are made!

    And guess what? Greece is not the only government that is falling into this hole. Latvia. Iceland. Maybe Ireland, England, California…and even the US…

    Where, exactly, the point of no return lies, we don’t know. But it’s out there somewhere…

    What’s the solution? Well, just to bite the bullet. Make the cuts. Default. Be happy.

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Another Pile of Bills to Pay

    “Bill, you should come down here…this Saturday, they’re auctioning off Tulip Hill. It’s probably the nicest house in the county. And it’s gorgeous… I don’t know if I’ve ever seen such a pretty place…”

    Our cousin was calling to tell us about a house owned by another remote cousin. It’s a beautiful place. Built in the early 18th century by a rich planter…it is an authentic Georgian brick colonial, with a park that reaches down to the river. They didn’t build many houses of that quality in America. Of those, few have survived. This is one of them.

    One friend bought the place for $1.2 million (if we recall correctly) back in the mid-’90s. Then, another friend bought it for over $4 million in the bubble years. When he went to sell it, however, he found that he couldn’t get anywhere near his money back. So, it’s up for auction, with a $1.6 million minimum.

    “Don’t even think about it,” said Elizabeth. “We’ve got more than enough problems already.”

    So, we called our cousin back…

    “I’m not even going to look at it. Because if I look at it, I might start thinking about ways to get it. The next thing you know, I’d have another roof to fix and another pile of bills to pay. A man has to know his limitations…”

    And finally, this from Bloomberg:

    Los Angeles will run out of cash on May 5, city Controller Wendy Greuel said today in a release in which she requested a $90 million transfer of reserve funds to pay bills.

    The controller said she received a letter from the Los Angeles Department of Water and Power today indicating the utility wouldn’t send an anticipated $73 million payment to the city’s general fund. That money is part of an annual contribution of 8 percent of power revenue that the utility makes in lieu of paying taxes to the city, according to Ben Golombek, a spokesman for the controller.

    “The question I have been asked most often during the budget crisis is, ‘When will the city run out of money?’ Greuel said in the e-mailed release. “Unfortunately, we finally have the answer.”

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Expect the Great Correction to Wipe Out this Bounce

    It’s springtime. The temperature is 85 degrees here in Washington. New York is approaching record-breaking temperatures. Global warming is back in business.

    The flowers are out. Cherry blossoms are thick on the ground. The grass is yearning for the mower.

    Heck, everything is back in business. To hear the media tell it, you’d think jobs were picking up…consumer spending too…manufacturing – everything.

    Everyone thinks the recovery is as pullulating as April. Obama says we’ve ‘turned the corner.’ Larry Summers thinks we’re headed to the moon.

    Is our old ‘Crash Alert’ flag still flying over the building with the gold balls? We hope so. Because, when everyone is thinking the same thing, no one is really thinking at all.

    And when you start thinking about it, you begin to wonder…

    ..what happened to de-leveraging? What happened to all those bubble era mistakes?

    ..what happened to all that debt consumers were carrying?

    ..what happened to the Great Correction; isn’t there anything left to correct?

    You’ll recall that the Great Correction seemed to be aiming to put a number of things right. Foremost were the economies of the USA and China. The US needed to correct its over-reliance on consumer spending/debt. China needed to correct its over-reliance on exporting things to America.

    Of course, there were a number of other things in need of correction too:

    ..like the huge credit expansion of 1946-2007…in which debt went from 150% of GDP to more like 370%.

    ..and the phony baloney post-1971 money system in which the reserves of one central bank are the IOUs of other central banks. In the case of Europe, nobody is exactly sure who’s supposed to pay the IOUs. In the case of the US, everybody knows who’s supposed to pay…and everybody knows he can’t pay. He doesn’t have that much money. Even if you liquidated all his assets and all his citizens’ assets, Uncle Sam would still be about $50 trillion short.

    ..and there’s the stock market too. We’re still in bounce mode, following the big drop from 2007 to March of 2009.

    In the short run, our chief researcher – Charles Delvalle, who keeps an eye on our investments at our family office – is bullish:

    “The intermediate trend in the Dow Jones is still up. This trend was confirmed after the Dow Jones surpassed its Jan 19 peak. We could see a test in the trend, with a drop back down to the Jan 19 highs. As long as the Dow manages to stay above this, we could see a charge to 11,000 as soon as [this] week.”

    But if this Great Correction is as great as we think it ought to be, it will wipe out this bounce…and sink another 50% before finally hitting bottom.

    ..and don’t forget the bull market in bonds. No one knows for sure, but the 10-year T-note hit its all-time low below 3% in November 2008, after a 27-year bull run. This week it went back over 4% – its highest point for this cycle. “The fun’s over,” says old-timer, Richard Russell. Are 10-year yields headed back to 15%?

    ..finally, there’s the very big picture…the Anglo-saxon empire…begun by the British in the 16th century…and carried on by Britain’s former colony, America. Is it time to take the English- speakers down a notch? Maybe…

    Well, what do you think? Has the Great Correction fizzled out? Is it time to party like it was 2006 again? Is China going to make even more money by selling even more stuff to the US? Are Americans going to go further into debt to buy it? Are their houses going to recover 25% to 30% losses and keep on going? Is the Dow going back up to 14,000 – and beyond? Are bonds going up – even though the supply of them is soaring? And what about the empire? Has it got greater glories still in store?

    We don’t know. We just watch…wait…and wonder…

    ..along with everyone else.

    And more thoughts…

    Our old friend, Graham Summers points out that the latest employment numbers are close to fraud:

    Let’s have a look at these 162,000 jobs.

    Right off the bat, we know that 48,000 of them came from hiring census workers. I won’t completely put this down because these ARE new jobs. But they’re hardly sustainable (the census is a temporary employer) or productive: paying someone to count other people adds literally NOTHING to the US’s manufacturing or productivity base. If it did, we could simply start hiring people to count clouds or trees and have an incredible economy in no time.

    So without census workers, we added 114,000 jobs in March.

    Then there are the +81,000 via birth/death adjustments. This metric is so complicated that it’s not even worth trying to explain. In simple terms, the BLS tries to adjust the jobs numbers to account for the birth/death cycle of businesses. But the reality is that it is an ‘X’ factor used to downplay job losses and boost job gains.

    Without these adjustments, we added 33,000 jobs in March.

    Then, of course, there are the weather adjustments. The winter of 2009- 2010, was by all counts, a rough one. So the BLS made various adjustments to atone for the fact that for several chunks of 1Q10, people couldn’t even get to work, let alone hire. Now that the winter is over, the BLS is adjusting numbers upwards to make up for former downward revisions. The total number of jobs “created” by adjusting for the nasty winter? 100,000.

    Without these adjustments, we LOST 67,000 jobs in March.

    Bill Bonner
    for The Daily Reckoning Australia

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  • Summers Believes You Can Manipulate the Economy All You Want

    “Here’s your new iPad,” said one our tech wizards. “It looks great. Of course, you’ve got to use your iTunes account to use it…”

    “Your what?”

    “Uh…don’t you have an iTunes account?”

    “I don’t think so…”

    Your editor is checking out the new technology…more below…

    Meanwhile, no matter how absurd things get, they can always become more absurd.

    “Summers: US nears ‘escape velocity’

    That’s the headline on the weekend Financial Times.

    Summers is jubilant. He got the latest employment figures on Friday. They tell the story of an economy that he thinks is headed into outer space, with 162,000 new jobs created in March. Hallelujah…all this intervention by the feds is paying off! Thank God Summers was on the job. If he hadn’t been…well, the economy would have had to get along on its own…right here on planet earth…just like it did for all those centuries up until the feds got control of it during the Great Depression (or shortly after).

    Heck, you know how terrible it was back then. People would go broke… Speculators. Bankers. Promoters. They would be wiped out. Jobs would be lost. Businesses would go bankrupt. And then, a few months later, they’d have to get back on their feet…begging, borrowing, or stealing enough capital to make a fresh start.

    But now things are different. Now, we have a better world, designed in part, by Mr. Summers himself. Now, people don’t go broke. Well, at least, major campaign contributors don’t go broke. They get bailed out. They stay in business. The feds give them money so they can keep doing what they did before. And then, the feds put a booster rocket under the whole economy…

    Yes, dear reader…this is a happy day for Summers. But it also marks a giant stoop for mankind. Finally, man is free from the discipline of the market system. Now, Werner von Summers et al are on the case. So you can forget about anything really bad happening. Now, it’s to the moon and beyond…growth and prosperity from here to kingdom come.

    Summers is not crazy. He is merely lost in space. He thinks you can manipulate the economy all you want…like solving an engineering problem…well…like sending a man to the moon. But you could say that about almost all modern economists. At about all those that don’t agree with us.

    The other 2 or 3 are muttering to themselves while rummaging through trashcans hoping that someone left a little liquor in the bottle before throwing it away.

    At least our president has his feet on the ground. Obama believes the US has “turned the corner” on the jobs issue.

    But wait. The private sector added 123,000 jobs last month. According to our sources it needs to create 100,000 just to stay even with population growth.

    So, we’re not at all sure that 23,000 jobs is really that great after two years, 8 million job losses and $10 trillion of stimulus.

    Let’s see, at that rate, it will take approximately 320 years to get back to full employment…doesn’t sound like ‘escape velocity’ to us. We’ve seen Amtrak trains going faster. Maybe we’re missing something.

    And more thoughts…

    This kind of marginal job performance is not likely to have a major impact on consumer spending. Speaking of which, we wondered how consumers could increase spending when their incomes weren’t going up. Comstock Partners explains it:

    The answer is surprisingly simple once you look at the savings rate. As we mentioned, consumer spending has climbed 3.7% since May; that amounts to $373 billion of increased spending in the period. During the same span consumer savings declined by almost the same amount – $374 billion-while disposable income – was basically flat, dropping by 0.1%. It is therefore easy to see that the entire increase in consumer spending for the nine months was due to reduced savings.

    For some context let’s look briefly at the household savings rate as a percentage of disposable income in the past. From 1955 through 1992 the savings rate stayed mostly within a range of 7%-to-11%, and then began a steady decline. The decline was slow at first, dropping to about 5% in 1998. After that the rate of decline accelerated, first with the bursting of the dot-com boom, and then with the boom in housing later in the decade. By 2007 the rate had dropped all the way to an average of 1.8%. The period of decline coincided with below average growth in wages and employment compared to prior decades. To maintain their standard of living, consumers went heavily into debt, aided and abetted by extremely easy monetary policy, soaring home prices, rising net worth and lax borrowing terms that enabled millions to borrow more than they could afford.

    As we know, during the recession consumers were hit by high unemployment, lower incomes, tight credit and rapidly declining net worth. By May of last year they had raised their savings rate back to 6.4%. Since then, however, the savings rate has dropped back to 3.1% in February, thereby accounting for all of the increase in consumer spending in that period.

    In our view, therefore, the prospect for further substantial rises in consumer spending rests on an extremely shaky foundation.

    – Here’s more of Summers’ razor sharp mind at work.

    Is China a currency manipulator, he was asked?

    “We think countries with large surpluses need to be focused on shifting the pattern of demand towards reliance on domestic demand.”

    Hey wait a minute. If China needs to focus on domestic demand, shouldn’t the US change its focus too? Shouldn’t the US switch its focus to domestic supply? Let’s get this straight. China has been manipulating its population – actually holding down wages so that it could gain market share. The US, of course, is free from all sin…washed in the blood of Keynes, as it is. But there’s no question that its citizens and denizens got a little carried away too, during the bubble époque. While the Chinese made things to excess…Americans bought them to excess. So if the Chinese are supposed to put the kibosh on their exports – by encouraging domestic consumption – it stands to reason that the US should put the kibosh on its imports, by encouraging domestic production, right?

    Yes, makes sense. But that would mean lowering the value of the dollar (the opposite of the remedy advised for China) which would have the effect of lowering wages and consumption in the USA. If you’re going to be a manipulator, in other words, you’ve got to manipulate in a way that is consistent with some theory. Otherwise, you’re just a random manipulator…which is to say, you’re crazy.

    – Charles DelValle does research for us at our family office. He reports that households are going broke faster than ever:

    The 149,268 consumer bankruptcies filed in March represented the highest monthly consumer filing total since Congress overhauled the Bankruptcy Code in 2005, according to the American Bankruptcy Institute (ABI) relying on data from the National Bankruptcy Research Center (NBKRC). The March filing total represented a 34 percent increase from the February filing total of 111,693 and a 23 percent increase from March 2009 total of 121,413. Chapter 13 filings constituted 25 percent of all consumer cases in March, representing a 2 percent decrease from February.

    Well this makes sense. More stimulus. More jobs. More spending. More bankruptcies…!

    What the heck? Wait…it makes some sense… Here’s Charles’ comment:

    Bankruptcies are good for people (bad for banks) in a deflation. There are more people who aren’t burdened by debt payments. These people are now free to spend in the economy as they wish. This also helps reduce outstanding consumer credit, and any other debt related figure relating to consumers.

    – And what’s this? The Wall Street Journal reports that “multi-generational households” have returned, forced together by joblessness.

    Another report in the WSJ tells us that the “bank of Mom and Dad” has had to close its doors. Apparently Mom and Dad don’t have the reserves they used to have…and they’re not supported by the Fed the way other banks are.

    And here’s another item: “Office vacancies at 16-year high.”

    What to make of it all? For the present, we’re just going to assume that our Great Correction theory is basically right. The numbers are confusing. And the facts are contradictory. But that’s just what you’d expect in a Great Correction…a lot of adjustments to a new financial world.

    – Most new technology is a waste of time. Even successful technologies are often huge net negatives for human society. TV, for example. Yes, television has given much pleasure to many people over the years. But it has also dulled the senses, imaginations and intellects of two generations. We can’t prove it, but can’t believe there’s not a connection between TV watching and modern politics. We’re not saying there is a direct connection. People who watch a lot of TV may not be dumber, but they are much better indoctrinated.

    Nevertheless, experts tell us that the media is headed in the direction of Amazon’s Kindle and Apple’s new iPad. We decided to get one of each so we could check them out.

    We’ll let you know if we figure anything out. But so far, we don’t have the time for these time-savers.

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Loving the Shutters

    “With all this good news coming out, Mr. Bonner, don’t you think you should admit that the Great Correction is already over?” asks a dear reader.

    No.

    Any other questions?

    “Too bad about their house,” said a neighbor in Maryland. “They built a house out of straw bales. Very pretty. Very energy efficient. But then it caught fire and burned to the ground.

    “They should have used bricks…”

    Back on the family farm, we’re able to see what 15 years did our handiwork. Fortunately, we were never tempted to build a house out of straw bales (we figured they were too vulnerable to leaks)…but we tried a number of other things.

    For example, we were pioneers of passive solar heating. And ferro-cement. We built a ferro-cement workshop with insulated glass at a 45 degree angle, facing the sun. There were problems immediately. It was so hot in the summer that we had to roll out a blue awning…that made us feel like were underwater when we were inside.

    Then, we got the bright idea of planting trees on either side. In the summer, their leaves would shield the shop from the sun. In the winter, the leaves would fall.

    This worked very well. The trees are much bigger now. They do the job. The trouble is that something went wrong with the glass. It has clouded over and now needs to be replaced.

    On one of the barn roofs, we used something called “Onduline” – or something like that – rather than tin. It came in sheets, but had the form of barrel tile. It was also cheap and easy to put on. Didn’t look bad. We can’t remember how long it was supposed to last, but less than 20 years later it is full of holes.

    The tin roofs, on the other hand, are still in good shape. The oldest ones are covered with rust. But they can be repainted easily.

    In the main house, we used poplar for the floors, from trees that we had cut on the farm. It was very pretty – still is. But it is soft. It has been scratched and dented in many places. Now, we have to refinish the floors.

    But the biggest disappointment was the wood shutters. The main house has real, functional wood shutters. We love the shutters. You can use them to control the sunlight, so the heat of the summer sun doesn’t enter the house. And in the winter, when we’re not at home, we close the shutters to keep the carpets and drapes from fading.

    In the old days, almost all houses had working shutters made of oak. The ones on our grandmother’s house are still there…and still in good shape after more than 100 years. But when we went to get wood shutters for our house in 1993, they no longer made them in oak. The new ones were made of pine or fir. Nevertheless, since they were protected from the weather by several layers of paint, and set back at least two feet inside the overhang and gutter, we didn’t expect any trouble with them. But here we are 17 years later and half of them are rotten and will need to be replaced.

    Unfortunately, they are unusually large…and very expensive to make.

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Bubble Era Economic Model Worked Until Consumers Ran Out of Money

    Front page headline on Friday’s Wall Street Journal proclaimed a big up-tick worldwide in the manufacturing sector.

    According to the paper, everybody is making more and more stuff. This helps assure that the recovery “has legs.”

    Auto sales, too, came in stronger than expected in March. So it sounds like the recovery has wheels too.

    What we want to know: does it have a brain? Who’s buying this stuff and where are they getting the money?

    At least the economic model of the bubble era made sense. The producers produced. The consumers consumed. That worked great until the consumers ran out of money. Then, they had to borrow from the producers. And eventually, the whole thing blew up when it became clear that the spenders had borrowed and spent too much, while the producers had expanded and produced too much.

    So far, so good. But now, the world economy needs a new model, right?

    The consumers can’t really go back to borrowing, can they? Nope. Not without digging themselves deeper in the hole…or actually earning more money. So, the producers can’t exactly go back to producing either, can they? Nope. Not without customers.

    Well, who the heck are all these manufacturers making stuff for?

    Darned if we know. In theory, there are billions of ready consumers in Asia and Africa. Except they don’t have much money. And don’t have much credit. And don’t have shopping malls. And don’t have any way to get to the malls if they existed.

    In India, for example, half the population lives on less than $3 per day. You can do the math yourself…even if they spent every cent on “stuff,” it would mean total spending of $500 billion, more or less – which is less than the US trade deficit in 2007. Of course, they can’t spend their money on ‘stuff’ – they need it just to eat.

    On the other hand, India’s middle class is already as big as the middle class in America – and it’s growing fast. But how does it make its money? By producing, we assume. So as it gets wealthier, doesn’t it add to the world’s supply of stuff…as well as consuming it? And since Asia is more of a producer, in general, than a consumer…isn’t it adding to the world’s supply of stuff faster than it consumes stuff? And since labor costs are so low, doesn’t it add more cheap stuff?

    The point we are making is that it takes time for one group of consumers to get out of the way and for another group to take its place. Even if you believe that Asian consumers will replace buying from the US and the UK, you still have to admit that this ain’t gonna happen overnight.

    First, because Asian would-be consumers need to earn more money. Second, because they need to change their habits – from saving to consumption. Third, because the factories need to switch from making things US consumers want to making things that Asian consumers want. Fourth, because they also need to set up new channels of distribution and sales.

    In the meantime, who’s consuming more than he is producing? We don’t know. But someone must be doing so…otherwise all this extra manufacturing just adds to the world’s inventory of unsold merchandise.

    This is just a reminder about the way an economy actually works. The meddlers in China think they can stimulate production. The meddlers in America think they can stimulate consumption. Then they accuse each of “manipulation.”

    We’ve seen at least four or five different arguments about what the value of the yuan ‘should’ be. One hundred and thirty Congressmen think they know. Paul Krugman thinks he knows. Everyone seems to think he knows. But the truth is – none of them knows. Nobody can know. Only the market knows. And it isn’t talking. It can’t talk. Its lips have been sealed by government order.

    The yuan is supposed to be too low because it is linked to the dollar. There is no logical reason to say that the yuan is too low at all. You might just as well say the dollar is too high. But once you allow yourself the fantasy of silencing the markets and reorganizing the world’s commerce, the sky’s the limit.

    The next thing you know, you are taking over the auto industry…and health care…

    …and fixing prices for breast implants…

    Bill Bonner
    for The Daily Reckoning Australia

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  • Americans Believe Economy Has Worsened During Past Year

    “Wow…it’s amazing how many Spanish-speaking people there are in this area…”

    The one that we find most striking – after being away from the US for 15 years – is how the Hispanic population has taken over.

    The woman who cleans our office speaks Spanish and little English. So does the woman who cleans our house. And the gardener. And the fellow who shovels out the driveway when it snows. And the busboy in the restaurant where we have lunch.

    And the maintenance man. Our landlord explained:

    “Eusebio came here from Peru. He lived at Macho Pichu. He walked here. But he’s been here 10 years. And he’s great. Always ready to work. Smart. Figures things out. And always nice to work with. He charges $150 a day. Not bad really.”

    On our drive to work, we put on Spanish-language radio: CNN en Espagnol. We can only understand about half of what is said. But we’re learning…

    Jules, 22, rode along with us in the car…

    “It’s amazing. Those people are everywhere. And you know something, they give me hope for the future. They come here. They work hard. And as long as they stay outside of the official status…that is, as long as they’re illegal immigrants, everything works well. Because they can’t go on welfare, I guess. And they can’t vote themselves special programs and benefits. They have to work for a living. And they work hard.

    “There’s some movement in Congress, I think, to change the immigration laws so that these illegal immigrants would be treated a full citizens. What a mistake that would be. Pretty soon, they’d be as big a burden on the system as native-born citizens are. That’s the reason we can’t compete in the world… We have to carry too many retired people…and too many people on welfare…and too many chiselers getting a check from the government for not really doing anything…

    “The country feels old and worn out…at least compared to India. But these Hispanics are something else. They’re young. And they’re not yet ruined by the system. I mean, they’re not yet leeches…”

    Jules explains how to save the US from decline…below…

    But first, let’s turn to a related matter.

    (Bloomberg) – “Americans are down on the economy and the markets even as stocks and growth indicators are up.

    “By an almost 2-to-1 margin Americans believe the economy has worsened rather than improved during the past year, according to a Bloomberg National Poll conducted March 19-22. Among those who own stocks, bonds or mutual funds, only three of 10 people say the value of their portfolio has risen since a year ago.

    “During that period, a bull market has driven up the benchmark Standard & Poor’s 500 Index more than 73 percent since its low on March 9, 2009. The economy grew at a 5.9 percent annual pace during last year’s fourth quarter.”
    What’s going on? The economy is doing well (the last quarter showed a 5% + growth…). Investors are making money. Why all the long faces?

    That’s the problem with a zombie economy. It walks. It talks. But it still sucks the blood out of the living.

    People at the top are protected. They’ve got their sweetheart deals with the feds. They’ve got their bailouts…and their bonuses. Heck, we’re not complaining. Here at the Daily Reckoning, they pay us enough to keep the table set and the liquor cabinet full. What more could we ask for?

    But the poor man on the street is the one who feels the pain. The Great Correction is not just an economist’s abstraction. It’s everyday life. The Bloomberg report continues:

    “Barely one-in-three Americans say the country is on the right track. Fewer than one in 10 say they believe the economy will be strong again within a year. Just 4 percent of Americans who cut back on spending during the recession now say they are confident enough to open their wallets, according to the poll, which has a margin of error of plus or minus 3.1 percentage points.

    “Unemployment in February was 9.7 percent. Payrolls in the U.S. have dropped every month except one since December 2007. Economists expect job growth to turn around in March, with a median forecast that payrolls will rise by 192,000.

    “Poll respondents rate persistently high unemployment the greatest threat to the economy over the next two years, with 75 percent calling it a high threat. Chronically high budget deficits are cited as a high threat by 70 percent, followed by homeowners who can’t pay their mortgages, which is cited by 58 percent. Higher taxes are deemed a high threat by 57 percent.

    “Nine of 10 Americans believe that cutting the deficit, which is projected to reach a record $1.5 trillion this year, will require sacrifices from middle-class Americans. Still, when asked about a range of potential tax increases and spending cuts to address the problem, the large majorities of Americans favor tax increases that only affect the wealthy.”

    And more thoughts….

    Yes, it does appear that a fault-line is widening in America. The upper classes are educated…smart…and they have money. They can compete with the elites of any country on earth.

    But the middle/lower classes have a problem. They’re used to getting paid the wages of a rich, developed country. But they don’t really have any more skills than people in India or Mexico or Russia. For thirty years the average hourly wage for an American working man has remained stagnant as more and more unskilled labor came on line. Much of it came as legal and illegal immigration from Latin America. And the rest came from labor outside the US.

    China mastered the business of making things to export into the US. India took the lead in service industries, where their English-language skills could be put to work.

    But there are still hundreds of millions of people who earn practically nothing; there are 500 million people in India who live on less than $3 a day, for example. As long as these people are still entering the global workforce, it’s hard to see how unskilled Americans can expect to earn more money.

    This is just part of the Great Correction that Americans must live through. They have to pay down (or default on) debt – as much as $20 trillion worth – while their incomes are under pressure from competition at home and abroad…and the US economy suffers a prolonged, Japan-like slump.

    Stephen Roach elaborates..and picks up our point (from Friday) about global trade:

    “The political pressures are grounded in the angst of American workers. After more than a decade of stagnant real compensation and, more recently, a sharp upsurge in unemployment, US labour is being squeezed as never before. Understandably, voters want answers. It is all because of the trade deficit, they are told – a visible manifestation of a major loss of production to foreign competition. With China and its so-called manipulated currency having accounted for fully 39 per cent of the US trade deficit in 2008-09, Washington maintains that American workers can only benefit if it gets tough with Beijing.

    “However appealing this argument may seem, it is premised on bad economics. In 2008-09, the US had trade deficits with more than 90 countries. That means it has a multilateral trade deficit. Yet aided and abetted by some of America’s most renowned economists, Washington now advocates a bilateral fix – either a sharp revaluation of the renminbi or broad-based tariffs on Chinese imports.

    “A bilateral remedy for a multilateral problem is like rearranging the deckchairs on the Titanic. Unless the problems that have given rise to the multilateral trade deficit are addressed, bilateral intervention would simply shift the Chinese portion of America’s international imbalance to someone else. That “someone” would most likely be a higher-cost producer – in effect, squeezing the purchasing power of hard-pressed US consumers.

    “The US would be far better served if it faced up to why it is confronted with a massive multilateral trade deficit. America’s core economic problem is saving, not China. In 2009, the broadest measure of domestic US saving – the net national saving rate – fell to a record low of -2.5 per cent of national income. That means America must import surplus saving from abroad to fund its future growth – and run current account and trade deficits to attract the foreign capital. Thus, for a savings-short economy, there is no escaping large multilateral trade imbalances.

    “Yes, China is the biggest piece of America’s multilateral trade deficit. But that is because high-cost US companies are turning to China as a low-cost offshore efficiency solution. It also reflects the preferences of US consumers for low-cost and increasingly high-quality goods made in China. In other words, savings-short America is actually quite fortunate to have China as a large trading partner.

    “Washington’s scapegoating of China could take the world to the brink of a very slippery slope. It would not be the first time that political denial was premised on bad economics. But the consequences of such a blunder – trade frictions and protectionism – would make the crisis of 2008-09 look like child’s play.”

    America is in decline. Or so it appears. Its population is aging (though not nearly as fast as China’s…or even Europe’s). Its industries are old. Its institutions are old. Its infrastructure…its government…and its economic theory (stimulate consumer spending at all cost!) are all old. It is now putting in place a health care system, a costly program based on a very old model for a social-welfare state.

    The anglo-saxon empire is long in the tooth too. It began in the 16th century, which makes it already longer-lived than most empires. The costs of running an empire are high. Typically, empires collect tribute to help pay for it. The US runs its empire at a huge loss…and depends on borrowing from the vassal states to stay in business.

    The arithmetic is bad. Domestically as well as internationally. Each year, more and more people vote for more and more benefits that they expect someone else to pay for. It doesn’t seem likely that this could go on much longer.

    But Jules had a solution:

    “The place needs new blood. These Hispanic immigrants have a lot of energy. In fact, there are probably millions of people who would like to come to the US and work. They should set up a special guest-worker program, like they have in Switzerland or Dubai.

    “They open the borders to these guest workers. They just have to register to get in. Then, they’re free to work…but they don’t get any Social Security…they aren’t covered by any welfare or minimum wage laws. They can’t vote. They’re just like illegal immigrants, but they can’t be deported. Oh, yes, they’d just have to pay a flat tax…10% of their wages. No complications. No deductions.

    “This would really fire up the economy. There wouldn’t be any need to outsource projects overseas because you could get cheap labor here. We could compete with China and India. And then, as these people earned money, they’d buy houses and cars and so forth, which would really help the US economy too.

    “The US would be a growth economy again… Of course, all our marginal native-born workers would lose their jobs…and the unions would got out of business…and we’d all have to learn Spanish… Pretty soon, I guess the country will be bilingual anyway…”

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Why Else Would Anyone Lend the Feds Money or Back their Health Care Bill?

    Strange creatures…strange events…strange thoughts… Zombieland is getting weird.

    We are expected to believe six impossible things before breakfast, and another half dozen before lunch.

    “…the current rebound in the economy is a statistical mirage,” writes David Rosenberg. It is “orchestrated by record amounts of monetary and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years.”

    But investors and voters seem willing to believe anything. Why else would anyone lend the feds money…or back their 2,400-page health care ‘reform’ bill?

    We’re expected to believe that the same feds who couldn’t see the subprime fastball coming…

    ..and who struck out completely when they started to get overleveraged curve balls coming their way (they thought derivatives made the system more stable!)…

    ..have now hit a home run, with the bases loaded.

    Yes, we’re expected to believe that the bad news bears – Bernanke, Summers, Geithner et al – have now won the World Series…by not only preventing a depression…but putting the economy back on track for growth and prosperity.

    And now the feds are going to improve the whole system of health care, too. And we’re expected to believe that the $1 trillion program will not cost us a cent…and that the deficit will actually go down…that insurance companies will charge less…that doctors and nurses will work harder…that cripples will walk…that the blind will see…and that even teenagers with acne will suddenly have peachy-perfect skin.

    We’re also expected to believe the Greek’s debt problems have gone away (thanks to a deal cut with the Germans)…and that America’s debt problems never even existed.

    Why else would so many people lend the US so much money at such low interest rates?

    Yes, dear reader, the crisis of ’07-’09 gave us a fright. But it’s all behind us now. How do we know? We just read the paper!

    “Record volume of junk bonds sold,” says a news headline.

    That’s pretty curious in itself. It means that investors think nothing can go wrong. If they thought something might go wrong, they wouldn’t want to buy junk bonds. ‘Cause they’re the first to go south when trouble comes.

    What are they thinking? What can go wrong? Everything… Everyone should be battening down the hatches and locking up the firearms.

    Instead, they’re opening up the liquor cabinet and putting on the music. Consumer spending is up for the 5th month in a row.

    Hey wait a minute. Why are consumers spending? Unemployment is still up around 10% officially. Unofficially, it’s much higher.

    So how is it possible for people without jobs to increase spending? Strange, don’t you think?

    And what’s this?

    “Personal income drops across the country,” reports The Wall Street Journal.

    This is becoming curiouser and curiouser….

    Unemployed people whose incomes are falling are nevertheless spending more money. What are they spending?

    Tax refunds!

    Yes, it’s refund season. And a lot of people are asking for refunds. People who lost their jobs, for example.

    Yes, it’s the feds to the rescue again. They’re sending back money to the taxpayers who earned it. We have no quarrel with that. And it certainly gives some air to the folks who are trapped underwater in their sinking ships. But that oxygen was earmarked for other spending. And so now the feds have to borrow more.

    We’re expected to believe that they can borrow as much as they want for as long as they want without ever getting into trouble? And we’re expected to believe that an economy that sank under the weight of private sector borrowing can now be refloated with more debt in the public sector…

    ..but that’s not all.

    And more strange goings-on:

    Probably the strangest things of all are the conclusions and advice given by some of the smartest economists in the business. We mentioned it on Friday. But our mouth is still open and our eyes are still glazed. In the run-up to the crisis of ’07-’09, almost everybody made mistakes. The spenders spent too much. The savers over-did it too. They built too much capacity.

    Both need to make corrections. That’s what a Great Correction is for.

    But the advice given Martin Wolf, Paul Krugman and others is the kind of thing that is hard not to laugh at. When the bubble blew up, everyone lost. But some lost a lot more than others. The spenders were in debt and broke, while the producers had money and factories (they didn’t know what to do with). So what do Wolf and Krugman suggest? They advise the winners to act more like the losers. Germany and China (the countries with savings…) should spend more money and stop working so hard.

    Readers will note that Krugman is an American economist. Martin Wolf, the lead economist at The Financial Times, is English. They represent the losers, of course.

    Wouldn’t it make sense to follow the winning strategies, not the losing ones? Wouldn’t it make sense to listen to the winning economists – those in Germany and China, not those in the spendthrift economies?

    Nah, those economists may not understand the secret to a healthy economy – spend, spend, spend. That’s the secret…stimulate spending. Consumers spend. Government spends. Business spends. Everyone spends until they run out of savings…then, they spend till they run out of credit. And then they’re busted.

    Hey, what kind of secret is this? Well…that’s what’s so strange about it.

    Now, there’s a new federal program.

    “Expanded mortgage aid should cut foreclosures,” says another headline. The new aid program requires lenders to reduce mortgage payments when a borrower loses his job.

    Now the feds are using their brains. Let’s see, if you lose your job your mortgage payments go down… But what happens to the money you were supposed to pay? Wasn’t it owed to someone? What are they going to do?

    Well, one thing they’re going to do is to be a little more careful before making any more mortgage loans.

    But the number of foreclosures is still going up anyway. There are now 4.5 million houses in the process of foreclosure or 90 days delinquent.

    A Great Correction takes time. Stocks go down. Revenues go down. A business gets in trouble. It sends out dismissal notices. Then, the ex- employees get unemployment comp. They run down their savings. And then they fall behind on their mortgage payments. And then, with their house worth less than the mortgage, they give up and move out.

    And then the house price falls.

    Patience…dear reader…patience.

    Maybe Porter is right. Maybe we’re wrong. Maybe there’s no voluntary de-leveraging going on, after all. The most recent numbers show the savings rate in a decline.

    Maybe that’s the way it works. Maybe nobody ever really tightens his belt unless he absolutely has to. Maybe it takes a crisis…a catastrophe…a disaster. Maybe that’s the way of the world. Maybe thinking doesn’t matter at all. Maybe markets make opinions after all.

    In the businesses where we’re directly involved, in 2009 we paid down debt, stopped making capital investments, reduced the payroll and saved every penny. Now, we’re starting to lighten up again. We’re considering new investments. And the payroll has climbed back almost to where it was before the crisis.

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Even Central Banks Buy Gold

    Gold investors had a better idea what to do. They bid up the price of the yellow metal $11. Even central banks are buyers:

    Central Banks Buy Gold, from MoneyNews:

    Central banks around the world added 425.4 metric tons of gold to their reserves last year, the biggest increase since 1964, according to the World Gold Council. That represents a 1.4 percent gain to put their holdings at 30,116.9 tons in total. The increase was the first since 1988. Central banks in India, Russia and China were among those boosting their gold reserves last year, as the precious metal jumped 24 percent, hitting a record of $1,226 an ounce in December. Central banks now possess 18 percent of all gold ever mined.

    “There’s clearly been a renaissance of gold in central bankers’ minds,” Nick Moore, an analyst at Royal Bank of Scotland, told Bloomberg. “It’s not just been central banks taking on gold, but a general shift for physical gold in the investment sector.” Many are now singing gold’s praises, with the precious metal up about 3 percent so far this year.

    “Gold is quietly, at the edge, becoming the world’s second reservable currency, supplanting the euro and rivaling the dollar,” money manager Dennis Gartman wrote in his Gartman Letter, obtained by Bloomberg. “The trend shall continue months, if not years, into the future.”

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Almost Every Mortgage Written Last Year Underwritten by US Government

    Not much time to write this morning…gotta rush…

    The Dow was up 9 points on Friday…following a week of big news.

    Congress passed a bill permitting the US government to take over the health sector…about 17% of US GDP. Let’s see. The feds don’t have any money, right? They’ve got the biggest deficits ever, and will have to borrow $2.4 trillion this year just to keep the lights on.

    And now comes news that Social Security has gone into deficit for the first time ever…and 7 years ahead of schedule.

    The feds took over the mortgage finance industry last year. Practically every single mortgage written last year was underwritten by the US government.

    And they took over the auto business too. They should be able to do for autos what they did for passenger trains. That is, they should turn Detroit into an Amtrak…which is to say, a Zombie City, if it isn’t one already.

    Then, there was the bailout of Greece. And not only that…there was a weak auction of federal debt. A few years ago, any one of these bits of news could have walloped the stock market.

    But investors didn’t seem to know what to do with the news. The Feds had taken over another big chunk of the economy. But what to make of it? Was that good news or bad news? The stock market seems unable to make up its mind. Finally, it ended the day with less than 10 points of movement.

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Chermany vs. Gremerica

    Bummer! You work hard. You save your money. You make a product and sell it at a profit. Everybody’s happy. And then, your customers, the silly spendthrifts, go broke. And what do you know? Everybody points his finger and blames you!

    “World leaders are choosing recession,” charges The Financial Times. The “world leaders” the FT is talking about are Premier Wen Jiabao of China and Germany’s Finance Minister, Wolfgang Schauble.

    The FT says they should loosen up; have some fun. China should raise the value of the yuan, adds Nobel Prize winner Paul Krugman, backed by 130 members of Congress. Germany should raise wages, says France’s finance minister Christine Lagarde. That is, they should be more like grasshoppers than ants.

    But neither the Germans nor the Chinese prospered by being grasshoppers. They got rich by being ants. And they’re still at it. China is still exporting…and making a $291 billion current account surplus this year. Germany will clear $187 billion. And now everyone is on their backs. La Tribune, in Paris, even dusts off a prophecy from a defunct 19th century critic, Friedrich Engels: “They will ruin not only other nations’ industries but those of their own country too.”

    Economists are normally reserved. This is not because they are well mannered. It is because they have nothing to say. But occasionally, timid bewilderment gives way to dangerous bursts of confident opinion. An opinion that has the support of The Financial Times, Paul Krugman, Christine Lagarde, Friedrich Engels and 130 congressmen is almost by definition a threat to the public weal and thereby a suitable subject for today’s back page.

    To bring us all up-to-date, the world appeared to prosper in the boom years ’97 to ’07 years (the micro-recession of ’01 excepted). The big exporters – China and Germany, who Martin Wolf calls “Chermany” – ran big trade surpluses. The big spenders – notably Greece and the US, who we will call Gremerica – ran large trade deficits. From these facts, Mr. Wolf infers that if the Cherman ants prosper by making, someone must impoverish himself by taking. In this case, the Gremericans…along with other grasshopper nations such a Great Britain.

    The gist of the Krugman, Wolf, and Lagarde et al position is that in the world economy is ruled neither by good nor by evil, but by mathematics. An exporter, such as China or Germany, can only run a trade surplus equal and opposite to the deficits of other nations. What’s more, a grasshopper nation – such as the US – can only run a deficit insofar as the ants are willing to finance it. A deficit is no sin. Nor is hard work and savings anything to be proud of.

    We have heard this value-free line of talk before. Ben Bernanke claimed that the US was not making a mistake by spending too much; instead, it was doing the world a favor by consuming its “surplus savings.” Lately, between them, Britain and America consumed as much as 70% of the world’s total savings. While this couldn’t go on forever, it went on long enough to give China a $2 trillion pile of the grasshoppers’ money…and long enough to make Germany the moneybags of Europe. But by 2007, the consumer nations of Gremerica were completely spent. The cost of continuing to live beyond their means was too great. They couldn’t afford to go on. And now, the world appears to suffer. The grasshoppers are laid up. Who will buy? The proposed remedy, in a nutshell… where it belongs, is to stimulate consumer demand in Chermany.

    It is hard enough for a sensible man to turn the knobs and adjust the levers of his own family budget. He wouldn’t dare fiddle with a whole economy, let alone the economy of a foreign nation. The meddlers, though, are ready to throw the switch on the whole worldwide shebang. And as usual, those who presume to tell others what to do are those whose presumptions are idiotic. The math says it works. But common sense tells us it is absurd to pressure the world’s most thrifty and productive people into not working so hard.

    Trade balances must sum out to zero, but that doesn’t mean that consuming goods is just as good as producing them. Alas, the world economy is not organized in a way that makes it easy for an economist with a calculator. Instead, it’s infinitely complex. Turn any knob you want; you’ll get results you didn’t expect. Turn the ants into grasshoppers? Maybe. But the bugs have ideas too – shaped by experience, culture and calculations of their own.

    Wolf’s math tells him that raising German wages will make Greece more competitive. But don’t expect the Greeks to build a Maybach any time soon. Instead of turning Germans into grasshoppers it will more likely turn them into unemployed ants. Likewise, you can raise the yuan. But China’s export economy already looks like a bubble. And making it harder for Chinese manufacturers to sell their wares looks like a pin. Even the threat of sanctions has a sharp edge to it. It was just this sort of high-minded central planning – led by Misters Smoot & Hawley in the ’30s, with their sharp pencils and dull wits – that tipped the world into a deeper, darker depression.

    Chermany isn’t responsible for Gremerica’s problems. Chermany can’t solve them. Gremerica made mistakes. It must now correct them.

    Bill Bonner
    for The Daily Reckoning Australia

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  • Geithner Says it Would Take a “Long Time” to Repair the Housing Market

    Not much action in the markets yesterday. The Dow lost 5. Gold gained 4.

    So far the markets have not seemed to notice, but there are not one…but two bulls in this china shop.

    First, the US government is going broke.

    Second, we’re at the beginning of a Great Correction.

    As to the second item, here’s this update from Bloomberg:

    Sales of new homes in the US unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market.

    Purchases decreased 2.2% to an annual pace of 308,000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.

    The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6% this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a “long time” to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation.

    “It’s going to be a long, slow slog and the lagging sector will be new home sales because they have to compete with existing sales and foreclosures,” Bill Hampel, chief economist at the Credit Union National Association in Washington, said before the report. “New home sales probably have until the fourth quarter until they start recovering.”

    What happens in the 4th quarter that makes the housing market recover? A sudden influx of immigrants? A sudden increase in employment?

    We don’t think there will be a recovery…not in the 4th quarter…not this year…not next year…not for 10 years.

    Instead, housing prices are probably going to sink. Why? Because they’re a consumer item, not an investment. For 100 years, a house was a place to live in…and housing prices more or less kept pace with inflation. Then, beginning in the mid-’90s people came to see a house as “the best investment you can make.” They began buying houses as a way to make money…and as a way to save for retirement. It made sense. What would you rather have, a mutual fund growing at 10% per year…or a house that goes up by 10% per year? The house! Because you can live in it…and show it off. So you leverage up…you buy twice the house you can afford. You live better. And you make more money.

    Those days are over. But, not everyone realizes it. Some wait for the housing market to ‘recover.’ Some may imagine that they will once again see profits from their houses. Others just hold on…waiting for an up- tick so they can get out.

    There are still millions of people living in houses they can’t really afford…and millions of others who are “underwater” and running out of air. That’s why the number of houses facing foreclosure rose in the last quarter of last year. And it’s why the inventory of unsold houses continues to rise.

    Gradually, people are coming to see houses in a new light. Soon, they’ll see them as money-pits…as expensive follies…and as a pain in the neck. Instead of being proud to have a McMansion…they’ll be embarrassed…like having a car with tail fins in 1985…or wearing a mullet in 2010.

    Not only that, it will also be seen as a big waste of money. As the Great Correction continues, unemployment will remain at high levels…savings will increase…and people will want to cut expenses. Among other things, they’ll want smaller, cheaper houses. They’ll want to dump their suburban castles and walk away from their country palaces.

    Houses will be losers.

    Bill Bonner
    for The Daily Reckoning Australia

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  • What Good is Mandatory Healthcare if You Can’t Find a Doctor

    Dear readers get a break today.

    We’re on our way back to the USA. No time to check the markets…

    Here’s something for the “miscellaneous” file, something we found in the paper this morning:

    A team of Canadian researchers wanted to know if people who bought “green” products were nicer than other people. They did a study of it and came to the conclusion, as reported in The Financial Times, that “those who bought supposedly ethical products were more likely to lie, cheat and steal and less likely to take the chance to be kind.”

    Hmmm…

    From this, they drew the wrong conclusions. They came to believe that there was a finite amount of niceness in the world and that those who take the trouble to buy ethical products use up much of their allotted stock.

    Of course, even horrible people can be nice. And nice people can be horrible. After all, Hitler was nice to his secretaries and his dogs. But that doesn’t mean that those who are nice to their secretaries and their dogs have to incinerate Jews and gypsies. Or even yell at waiters.

    Where the researchers and commentators go wrong is in the beginning. They think that buying an ‘ethical’ mutual fund…or a ‘green’ car…is a form of being nice. It is nothing of the sort. It is a substitute for being nice. Being nice is not always easy. Many people have a hard time with it. Others judge it not worth the effort…or even counterproductive. Niceness was probably as useless to Attila the Hun as virtue is to a prostitute or integrity is to a politician.

    Still, most people manage to be nice most of the time…and a few – including our own mother – manage to do it practically all the time. We have never heard our mother say a word that wasn’t nice. She has never had an unkind thought, as near as we can tell.

    Nice people don’t have to pretend to be nice by buying supposedly ethical products. They are nice; that’s what counts to them. The person who buys ethical products, on the other hand, is a scalawag and a hypocrite. He is not really nice at all, which is what the researchers really discovered.

    “Love afar is spite at home,” wrote Emerson. He was talking about people who are nice to mother earth…but nasty to their own mothers. Or people who are nice to ‘humanity’…but mean to their next-door neighbor. Or people who whine about starving children they have never seen and ‘underprivileged’ people they hope they’d never have to meet. He was talking about people who buy a cup of “fair trade” coffee and don’t leave a tip…

    Emerson knew there was no limit on niceness. He was talking about dreadful people who weren’t nice. The do-gooders. The meddlers. The improvers. The health care Democrats. And the “no child left behind’ Republicans. He was talking about all the bleeding hearts whose own hearts are as black and hard as a lump of coal.

    Speaking of health care…this, from Ron Paul:

    Following months of heated public debate and aggressive closed-door negotiations, Congress finally cast a historic vote on healthcare late Sunday evening. It was truly a sad weekend on the House floor as we witnessed further dismantling of the Constitution, disregard of the will of the people, explosive expansion of the reach of government, unprecedented corporate favoritism, and the impending end of quality healthcare as we know it.

    Those in favor of this bill touted their good intentions of ensuring quality healthcare for all Americans, as if those of us against the bill are against good medical care. They cite fanciful statistics of deficit reduction, while simultaneously planning to expand the already struggling medical welfare programs we currently have. They somehow think that healthcare in this country will be improved by swelling our welfare rolls and cutting reimbursement payments to doctors who are already losing money. It is estimated that thousands of doctors will be economically forced out of the profession should this government fuzzy math actually try to become healthcare reality. No one has thought to ask what good mandatory health insurance will be if people can’t find a doctor…

    Finally, a dear reader from India writes:

    India is a very exciting place. Although I am Indian by origin, I made a choice to relocate here because of the opportunities I see.

    India will give you the feeling of a true, bottom-up free market. Free markets are chaotic, messy and “unplanned” because they are organic. They are driven by the needs of people, seeking their own aspirations and self interest and are not driven by the needs of some megalomaniac government.

    The infrastructure will come, it will come as people will pay for it because someone needs to profit from it. I don’t think you will see too much of “build it and they will come” in India. So no maglev trains in India for now.

    Having said that, I think that India will go through its cycles as any free market does. To that end, I think that the risk-reward in the equity markets in India is turning unfavorable for the next couple of quarters. The global demand-supply balance in REAL goods and services was altered in a big way by the financial crisis. The full impact of the shift has not been felt by companies.

    I foresee, tremendous pain for companies throughout the world as they come to terms with a world driven by demand weakness in the US, Europe and Japan (and now a potential bubble burst in China).

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • America Completes Collection of Welfare State Essentials With Health Care System

    What is this health care bill? Is it a new way of making the future better? Or is it an old solution to an old problem? The feds first considered a takeover of the health care industry during the Roosevelt administration. They’ve been working, planning, plotting their way towards the same objective ever since – for 80 years.

    And what they’ve finally gotten is yesterday’s bad solution to yesterday’s problem.

    The nation state was invented by the French at the beginning of the 19th century. By the middle of the 19th century, Otto von Bismarck added the refinements that we know today as the modern welfare state.

    And now…as every welfare state in the world faces decline and bankruptcy…America has completed its collection of welfare state essentials – with a national health care system.

    Why are the old welfare states going broke? Because the payoffs to the past have become too great. There are too many old people who expect pensions and health care. There are too many old industries that, like patients in a mental hospital, need to be cared for. There are too many bailouts…too many subsidies…too many protections…too many safety nets.

    Every society is a pact between the future and the past. A new society looks to the future. An old one looks back at the past. As a successful economy matures it owes more and more for things that have already happened. China builds new high-speed railways, for example, while in the US we’re still paying Amtrak’s losses of the last 40 years.

    Over time, more and more special interests, anglers, parasites, leeches and lobbyists get a grip on a financial system. They find ways to take advantage of it…to exploit the system for their own ends. Trade unions, business groups, the rich, the poor, the middle classes – everybody wants a benefit.

    The health care act is not a bold new initiative that will lead the country forward into a new era. It is 2,400 pages of payoffs to old interests – payoffs to senators and congressmen for supporting the bill, payoffs to the pharmaceutical industry, payoffs to organized labor and insurance companies…payoffs to groups that were set up many years ago.

    The benefits go to the past; the costs go to the future. Even if the economy were running at normal speeds, the deficits of the world’s leading welfare states would still be increasing. Only 10% of current deficits are related to “stimulus” efforts. The rest is payoffs… To organized interests representing the past.

    In the US, Federal debt is expected to reach 140% of GDP by 2014. In the G7 countries as a whole, debt-to-GDP will go over 100% just two years from now.

    The welfare state model is no longer the model for the future. It’s a model for the past…that will soon be defunct.

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • The Depression Now Known as “The Great Correction”

    “When you visit India…and I suppose it is true when you visit China or Brazil too…you don’t even notice at first…it’s not so much a thought…but more like a feeling…”

    We were explaining to colleagues why it’s the end of the world as we have known it.

    Back to that in a minute…

    The Dow rose 102 points yesterday. If this keeps up we’re going to have to amend our view.

    In our way of looking at things…we are still in a prolonged bounce following the big drop of ’08-’09. Stocks have yet to realize that the economy is in a depression. Yes, we know it doesn’t seem much like a depression. Even we have stopped using the term…

    Now we’re calling it “The Great Correction”…in which we’re expecting a number of things to get sorted out – including the stock market boom from ’82-’07…the post-’71 dollar-backed monetary system…and the huge credit expansion that goes all the way back to 1946.

    But that’s not all. It could be that this period will correct the whole, extraordinary surge in Anglo-Saxon power that began in the 17th century. English speakers have been on a roll since Sir Francis Drake defeated the combined armada of Spain and France in 1588. Soon after England began putting together her empire…and then, the industrial revolution turned Britain and America into economic powerhouses.

    In addition to reducing asset prices and de-leveraging the economy, The Great Correction could be reducing the relative power and influence of the English speaking peoples. We don’t know…but that’s the way it looks now…

    Returning to our conversation…

    “Of course, things are a mess in Mumbai…I mean, the traffic is terrible…the heat is appalling…there are people who look like they haven’t eaten in a month…

    “But you can’t help but notice that India is moving forward. It’s chaotic; it’s uncomfortable; it’s unpredictable…but it is going ahead. People are young. Buildings are new. There are new cars on the road…and new shops opening up.

    We saw a couple of Tata Motors’ new Nano cars – cute little cars that sell for only $2,500. But there were dozens of car varieties we never see on American or European roads.

    “You can’t help yourself…you begin looking into the future…and imagining what it will be like when they finish a bridge or complete a road…or demolish a slum…or find new ways to do things…new ways to get along with one another…and new ways to run the country…

    “Then, when you come back to France or America, you’re suddenly back in the past. It’s a relief, because everything seems familiar and orderly. Like a museum. But it’s a let-down too…because you’re back to dealing with old problems…old people…and old institutions. While the emerging economies look ahead…the developed ones look back.”

    Bill Bonner
    for The Daily Reckoning Australia

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  • Obama Lets Zombies Loose on US Health Care Industry

    Zombies Take Over US Health Care!

    “Obama assures his place in history,” says the editorial in today’s Financial Times.

    Poor fellow. He’ll be remembered as the guy who let the zombies loose on the US health care industry. It wasn’t a very good industry even before passage of the reform bill. Not because of the doctors and nurses; they’re as competent as other professions. But they’re forced to work under appalling conditions – with lawyers, lobbyists and regulators on their backs!

    This new reform measure just increases the weight. Now, there’ll be more parasites than ever. Health care is about to turn into a zombie industry…run by brain-dead bureaucrats and kept alive by infusions of blood from the taxpayer.

    “Obama should veto the bill,” says an American friend. “He should go on TV and tell people that he wants real reform of the health care business…not a 1,000 page document full of bribes and boondoggles. That would really assure him a place in history.”

    But that’s not going to happen. Instead, the president will sign the bill, smile in triumph, and the health care sector will come under US government control. One by one, step by step, deficit by deficit…the feds take over the economy.

    Banks…mortgage finance…insurance…automobiles…passenger trains…and now health care.

    Stock market investors seem to like zombies. The Dow rose 43 points. Gold fell to under $1,100.

    What’s wrong with investors? What do they think? Maybe each investor looks around and judges his fellow investors fools. He figures the fools will think health care ‘reform’ is a good thing. So he figures they’ll buy stocks. Anticipating a rise, he buys too.

    Or, maybe he figures that the health care act will be such a disaster it will turn voters against the democrats… And maybe the republicans will come back into office… Who knows what he is thinking… Or if he is thinking at all…

    “US starts to fall in line with other nations,” is a headline in today’s Financial Times.

    That is certainly true. The zombies are taking over everywhere. The US held out against them longer then most nations. But now it too is letting government employees run the health care business.

    George Wallace once compared the Democrats to the Republicans: “There’s not a dime’s worth of difference between them,” he said. Now, there’s not a dime’s worth of difference between the world’s feds. Whether they speak French or Polish or English they’re all taking more and more control of their respective economies. And almost all are going broke.

    The latest figures from the IMF tell us that debt in the G7 nations will exceed 100% of GDP by 2014. Yes, they’re all shuffling along together…towards bankruptcy.

    Taking over vital industries helps move them down the road. It turns the industries from sources of tax revenue into expense items. The US has spent $177 billion since it decided to take over Fannie Mae’s mortgage finance business, for example.

    And how many billions has the US spent since it took over the nation’s passenger rail system in ’71? We couldn’t find a figure…but it must be around $50 billion.

    Amtrak was sold to the public in ’71 as an investment opportunity. With a monopoly on rail traffic between America’s most populous cities…throughout the biggest economic boom in history…you’d think Amtrak couldn’t help but make money. It was supposed to turn a profit in 1974. It didn’t. Nor did it make a profit in 1975…or 1976…or 1977…1978…1979…1980…etc… All the way up to today. It never made a profit. It just lowered service levels and kept chugging along. And now the feds are still pumping more than $2 billion per year into the zombie railroad.

    All Aboard!

    And more thoughts…

    An Indian man, who had been living in California, went back to Bombay to attend the wedding of an old friend’s son… He noticed that the bride’s family was not of the same caste…but of a lower caste. He wasn’t sure if he should say anything; perhaps customs had changed in the many years he had been away.

    Finally, he had a minute with his old friend, alone.

    “Is it now normal to marry a lower caste girl?”

    “What?”

    “I mean, I couldn’t help noticing that your son is marrying a girl from a lower caste.”

    “No…no… My son works for J.P. Morgan. She works for Goldman Sachs. Same caste.”

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Bombay’s Gold Trade Leading Authority

    Yesterday, we went to Bombay’s street of dreams…

    It looked to us as though it was more of a street of nightmares. The street was torn up. It smelled of sewage and industrial waste. We looked up and down for the office of a fellow who is one of Bombay’s leading authorities on the gold trade.

    When we finally found him, we had to go through a dirty doorway, past a shop where people were sitting on the concrete floor stuffing mattresses with wool, up an elevator last inspected by the British in 1946…and finally to a tiny little office at the back of the building.

    “You have to understand,” said the slim man with a bandaged foot, “the gold trade here in India is very different than anywhere else. People use gold for household finance. When they need cash, they sell their gold. When they want to save money, they buy gold. And they are required to buy gold for various special occasions too. Weddings, festivals…there are plenty of holidays in India…and each one is an occasion for buying gold. One holiday calls for buying arm bracelets. Another for buying bangles. Rings…necklaces… every bit of jewelry is also a sign of status…and family savings.”

    We went back onto the street…and made our way past porters, shoppers, loiterers, sleepers…over to the jewelry shops themselves. They say the population of India is 1.2 billion people. It seemed like more than that in a three-block area…

    There is a guard at the entrance to the shop. He waves a wand around our bodies, trying to detect metal or karma, then gestures for us to proceed. In the shop, there are dozens of sari-wrapped women studying the glass display cabinets. Behind them are other sari-wrapped saleswomen, answering questions…

    “How much is this?” We saw something that might make a nice birthday present or wall display. It was a large, splendidly gaudy necklace of finely-worked gold.

    “That’s 4 lakh.”

    “Four what?”

    “Well, a lakh means times 100.”

    “So, it’s 400 rupees?”

    “No, it’s 400,000 rupees.”

    “So a lakh means 100,000?”

    “No…wait…I read the price wrong. It’s only a fifth of a crore, so it’s more like 2 lakhs.”

    “What’s a crore?”

    “It means you multiply by another 100.”

    “Oh…”

    “So, this is 0.2 crore, or 2 lakhs, or 200,000 rupees…?”

    “Yes, that’s it.”

    “And how much is that in dollars?”

    “I don’t know…we only accept Indian currency.”

    Regards,

    Bill Bonner
    for The Daily Reckoning Australia

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  • Inflation and Deflation at the Same Time

    Want to get married? Just look in the Bombay newspaper:

    “Alliance invited for a Punjabi girl, 40/5.5…stammering a bit, physically healthy…totally homely…”

    Not very good advertising. Probably because they use the world “homely” in a different way…

    How about this?

    “Highly affluent cultured Kolkata-based Hindu Agarwal Family (originally from Rajasthan) invites proposals for their ‘USA based’ daughter. She is fair, slim, smart…”

    Or…

    “A Reputed Agarwal family having Established Business of Garment Exports/Builders seek alliance for their Daughter. Fair, Slim, Very beautiful, Convent educated… Boy should be handsome, well Educated/Settled from similar status cultured business family…”

    The paper is full of possibilities. But it helps to be ‘fair’…often described as “wheatish,” well-educated… And from a good family.

    No mention of money. But “cultured” and professional and education figure prominently.

    So why spend so much effort trying to get rich? All you need is an engineering degree, a masters, from MIT, and you can get a beautiful, wheatish girl from the Punjab.

    Wait…here’s the money…

    “Maharashtrian Deshastha Brahmin well-established business family invites alliance for their daughter, fair, beautiful, 28, 4′ 11″, B.A. Journalism…” wants a qualified, good personality boy…with a minimum income of Rs. 1 Lakh per month.”

    How much is a lakh? More below…

    Meanwhile, the Dow fell on Friday. It was down 37 points. Another day older. Another day not wiser. We don’t know any more than we did the day before.

    Oil fell $1. Gold dropped $19.

    Hmmm… Inflation? Deflation? Analysts and pundits are trying to look into the future. What’s coming? Higher prices…or lower ones?

    Forget looking into the future. It’s hard enough to tell what is going on right now.

    Our prediction, years ago, was that we would see BOTH inflation and deflation. But even we didn’t foresee such a mix of inflation and deflation AT THE SAME TIME.

    In India, which we left this morning, food prices are soaring.

    “Consumer boom drives rapid rise in inflation,” says The Financial Times.

    In parts of India, the price of tomatoes rose 200% in just a few days.

    The “inflation genie is getting out of the bottle,” is the FT’s comment.

    Worldwide, at the wholesale level, there’s plenty of inflation. Oil has gone up 115% since January ’09. West Texas Intermediate is now selling for $85 a barrel. Iron ore is up 95% during the same period.

    There’s also something called the Rind Index that measures the commodities that people don’t usually pay any attention to – things like burlap and animal hides. These things are used by industries to make things. There’s not much speculative buying. But there’s plenty of inflation. The Rind Index is up 50% since January ’09.

    Prices are rising in China too. Guangdong, a large state in South China, next to Hong Kong, has just raised its minimum wage by 20%. Believe it or not, the papers tell of a labor shortage in China. There are said to be some 2 million unfilled jobs in the Pearl River Delta area, says the FT.

    (Dear Readers looking for employment might want to think twice before packing their bags and going to China. After the wage increase, the minimum monthly salary in Guangzhou, the provincial capital, is still only 1,030 renminbi…or about $145.)

    Inflation…inflation…inflation everywhere…

    But wait. The Fed says there’s no inflation:

    “With substantial resource slack to restrain cost pressures…inflation is likely to be subdued for some time.”

    The Fed is right…as far as it goes. CPI readings in the US are coming in at their lowest levels in six years. Most businesses have plenty of excess capacity. The labor market has 11 million surplus workers. The dollar is strong. China is desperate for customers. Why should prices rise?

    But that’s what they’re doing. Rising. And falling. At the same time. Hot money from the feds – and “growth” in China and elsewhere – drive up prices for raw materials… while the Great Correction drives down consumer prices in the US and Europe.

    How will this work out? Which one will dominate – inflation or deflation?

    It depends. So far, the feds are winning their battle – at least on the surface. Stocks are up. Commodities are up. Junk bonds are up.

    But we’re still betting that the major trend…the deeper and more important trend…is down. You wouldn’t know it from reading the paper or watching the TV. On the surface, the crisis is over. And maybe it really is. But it’s a bad bet. Because the risk is still on the downside.

    If the feds succeed, maybe they can keep the credit bubble – now focused public sector credit – pumped up a bit longer. But so what? What can you win by betting on even higher stock, bond and commodity prices? Probably not very much.

    The downside, on the other hand, is like the Grand Canyon…deep…and treacherous…

    Bill Bonner
    for The Daily Reckoning Australia

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  • Feds of India Have Been Choking the Economy for Years

    We have come to Bombay to get a good look at India – at least the part of it you can see from a 10th floor room at the Taj Mahal Hotel. Which isn’t much. The air is too dense. Still, we can make out the figures of whole families eating and sleeping on the pavement near the dock.

    We have never seen families sleeping on the pavement on Regent Street…nor on 5th Avenue. New York and London are great success stories. Turning the pages here, on the other hand, we read a failure story. It is the story of a people who haven’t got much. The world turned against them, relatively, at the beginning of the Industrial Revolution. But if the world turns long enough, it comes back to where it began. To make a long story short, we’re betting on rotation.

    The secret of material success is simple enough. In the beginning there is nothing. In the end, there is much. In between is all the dust and noise of a real economy. Everything and everyone moves – the dirt and raw materials…the bussers and schleppers who carry them, heat them up and hammer them into finished products…the merchants who sell them…and the consumers who use them. The money moves too.

    But over time…and space…it must all balance out. For every item produced there must be a consumer. For every surplus, there must be a deficit somewhere else. And for every boom there must be a bust.

    Taking a train from Washington DC to New York City, you can look out your window and see the equation fastened to a rusty bridge, over a rusty river in a city of rust. It says “Trenton Makes, the World Takes.” It is a sign that might have been hung on any one of hundreds of bridges in hundreds of different factory towns throughout America and Britain. As a bit of civic promotion, the sign is not completely fraudulent; it is only incomplete. It should have been turned around…probably in the 1970s. That was when Trenton became a taker.

    For more than half a century, Trenton pumped out exports…then, it spent almost another half a century getting swamped by them. First, it enjoyed a capital investment boom…and then a capital investment bust, followed by a consumer spending boom…and then a consumer spending bust. Now the rest of the world awaits neither its output nor its orders. It is neither maker nor taker, but a dead-end slum.

    Where will Trenton’s next boom come from…or when? No one knows. In the meantime, it must pay for what it already got. America’s post-WWII consumer boom came to an end in 2007. For the first time since 1946, consumer credit is falling. Americans are paying down debt.

    Which leaves us looking out our hotel window, wondering…

    The best form of government, said Voltaire, is democracy tempered by an occasional assassination. India’s government must be as hard as steel by now. In 1984, the Prime Minister, Indira Gandhi, was assassinated by her Sikh bodyguards. Then, in 1991, her son Rajiv Gandhi was also killed, this time by Tamil Tigers. If we were named Gandhi, we’d go into a less dangerous line of work, like being a test pilot. But Sonia Gandhi, widow of Rajiv and the daughter of an unreconstructed Italian fascist, must like excitement. She was elected president in 1998. Her son is also a politician.

    Western investors needed courage to put their money in India. Six out of nine governments since 1980 have been coalitions, several including communists. In 1999, Pakistan invaded the country. In 2007 Maoist rebels attacked police and killed 50 of them. Last year, terrorists set fire to our hotel.

    When activists, foreign and domestic, failed to destroy India, nature took a whack at it. A cyclone in 1999 killed 10,000 people. An earthquake in 2001 carried off 30,000. A Tsunami struck in 2004. The next year, monsoons flooded much of the country.

    Indian stocks paid off anyway. US stock prices went nowhere over the last 10 years; Bombay stock prices more than tripled. Over the 30 years, from the opening of the stock market to the end of 2009, the investor had a return of 17,000%.

    All over the developed world, governments are getting a death grip on their economies, taking control of vital industries and increasing the state’s share of GDP. One of India’s advantages is that its feds have been choking the economy for years; now it is becoming a model of negligence. As a percentage of GDP, India offered only perfunctory stimulus to fight the downturn of 2007-2009.

    Now, China overheats. America cools down. And India grows at 7% per year without breaking a sweat.

    Wage growth is flat or negative in Trenton; in India hourly earnings double every 10 years. India depends less on exports than any other major developing nation except Brazil. And only the Philippines and Indonesia have less credit as a percentage of GDP.

    While much of the rest of the world did it…and then over-did it…India hasn’t done it yet. There are more autos in the US than there are licensed drivers, and two chickens in every pot; India barely has one vehicle per 100 people and barely any pot at all. This is a country where the getting has just begun.

    Bill Bonner
    for The Daily Reckoning Australia

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