Author: Bill Bonner

Still on the road to moksha…

Prices are rising in India – pushed up by the high cost of food. Thanks partly to a disastrous government policy of encouraging the over-use of chemical fertilizer, food prices are shooting up. In a poor country, food is a bigger part of the family budget than in a rich country. India’s CPI is rising at about 11%.

Flash from the TIMES of India:

A man brought his wife to Mumbai from Augangabad. He then took her to the house of someone she didn’t know and told her to wait there for him to come back. But he didn’t return. The wife asked the owner of the house what was going on. She was informed that she had been sold to the man for 40,000 rupees (a bit less than $1,000). Her family back in Augangabad came to her rescue. They bought her back.

A thousand dollars seems like a lot of money to pay for a wife. Especially when you consider all the expenses that come later. Food, shelter, transportation, Gucci, BMW, and so forth…

But it’s just another proof that the feds are winning! They’re reflating the bubble…at least to some extent.

Stocks rose again yesterday – largely on the good feelings inspired by Ben Bernanke. The US Fed chief let it be known that if the economy slips back into a slump it won’t be his fault.

The Dow rose again – 45 points. Gold went up $3. Oil gushed up over $82.

That’s the 22nd time in the last 27 sessions that the Dow has gone up. And it’s now above its high for this rally…at its highest point in 17 months. This brings US stocks back to their levels of…

..1999! Is that progress, or what?

Emerging markets, meanwhile – at least the BRICs – are back too. They’re back at 1995 levels.

Emerging economies are using this new appetite for risk to sell a record amount of debt. When the crisis came in ’07, the spread in rates – between emerging market debts and US debts – widened. People knew they could count on Uncle Sam to pay up. They weren’t so sure about India, Argentina and Zanzibar. So, the yields on emerging market debt rose.

But now that the feds’ program of reflation seems to be working, they’re going to take a flyer on emerging market bonds. They’re still a little riskier than US bonds (or so buyers believe) but they have higher yields.

Here in India, for example, a portfolio of municipal and corporate bonds is paying more than 9% interest.

Hey, wait a minute…isn’t the inflation rate 11%?

“Well, that’s an aberration,” explains an analyst. “It’s caused by rising prices for food. The long-term inflation rate is only about 5% or 6%. But the real play on Indian debt is in the currency. The rupee is a relatively strong currency. India just doesn’t have the debt problems that you have in America. Our bet is that you can earn 9% on the bonds and maybe another 50% as the rupee strengthens…”

The investor in Indian bonds has Ben Bernanke on his side. So does the investor in gold.

Bernanke told the world that he’ll keep rates at zero for as long as it takes…

..but that’s not all…

The Fed also announced that it was changing its policy. It said so in such a subtle way that most people probably missed it – including us. We only realized what it had done when we read an analysis this morning in The Financial Times.

In the past, the Fed has been “evaluating” the impact of buying up mortgages in order to support the housing (and presumably even the commercial property) market. Now, it says it “will employ its policy tools as necessary to promote economic recovery and price stability.”

Monetizing private sector debt certainly promotes the hell out of something…but we doubt it really promotes either economic recovery or price stability. What it promotes is the eventual destruction of the dollar…and the US bond market. Behind the bonds stands the dollar. And behind the dollar stands the Fed. The Fed is telling us that it is ready to stab the dollar in the back in order to keep up the illusion of ‘recovery.’

The Fed’s $1.7 trillion bond buying program – quantitative easing – is supposed to come to an end at the end of this month. We were looking forward to seeing what happened when the biggest player in the market – a buyer – dropped out. Now it looks as though the Fed might not drop out after all.

Yes, dear reader, the US is still on the road to financial moksha (the final liberation from the cares of this world…achieved by a Hindu sect – the Jains – by starvation.)

Bill Bonner
for The Daily Reckoning Australia

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In the US, producer prices fell in February, more than expected. Core inflation was barely positive. That is not just a US trend. In Europe, price increases have fallen to the lowest level in 11 years. Japan is experiencing the biggest price drops in many years.

This sounds like a D-word to us…disinflation, almost deflation.

One report tells us that greater than 5% of Fannie Mae mortgages are 90 days in arrears – or more. Another report says it’s 10%.

This too sounds like a D-word. Default.

But wait…

“Fed signals optimism over US economy,” is the lead headline in today’s Financial Times.

The markets responded, pushing the Dow up 47 points to a new high for this bounce…though still midway between its all-time high and its low of March 2009.

Oil rose a dollar too. So did gold. The euro edged up too…

Reading more closely, we don’t see much reason for the Fed’s optimism. And apparently, neither does the Fed. It is leaving its monetary stimulus program in place for an “extended period.” It says inflation is likely to remain subdued “for some time.”

The Great Correction (our term) destroyed nearly 8.4 million jobs (the FT’s count) and wiped out $14 trillion in household wealth. And now Americans are struggling to find firm footing in an economy with fewer job openings, less credit available, and an uncertain growth outlook.

What’s going on? There’s a word for it. Another D-word…several of them. There’s Depression. Deflation. And De-leveraging, for example.

Our old friend Porter Stansberry writes to tell us that we’re wrong about household de-leveraging. The drop in credit we reported yesterday was caused by defaults…not by voluntary reductions in debt, he says.

He’s right. Most of the decline in household credit, so far, comes from defaults. And maybe it is just wishful thinking on our part… hoping that Americans would willingly and eagerly improve their balance sheets. The savings rate is up…but it’s not yet clear whether this marks the beginning of a major trend or not.

But whatever the cause – be it voluntary de-leveraging or involuntary de-leveraging – we think there’s more of it ahead.

Here’s a statistic: 21% of Iraq and Afghanistan veterans are jobless. They’re mostly men. And mostly unprepared for the modern job market. After all, who wants to hire someone who knows how to drive a tank or patrol a gas station?

Ultimately, an economy gets rich by making and acquiring things people want.

Ah…we look back nostalgically at the Bubble Epoch. It was so easy to make fun of people back then. They thought they could get rich by buying things they couldn’t afford with money they didn’t have. Now, we’re in a new era… of sorts. Now, it’s the public sector that has lost its head. The feds think they can make the economy work better by buying things nobody really wants with money nobody really has.

Who really wants to guard a gas station in Baghdad? Nobody we know. Who’s got the money to fund the fed’s $1.8 trillion deficit? Nobody.

And think of the poor fellow who draws that sorry duty in Iraq. When he comes back to the US, what does he have on his résumé? He’s good at guarding a gas station against terrorists? Not many job offers for that skill set.

So, one in five of these fellows is unemployed. And the feds try to do something about it by spending more money they don’t have on more things nobody really wants.

Meanwhile…money may be getting harder to come by…. See below…

This, from Bloomberg:

China, Japan Reduced Holdings of US Treasury Debt in January

March 16 (Bloomberg) – China and Japan, the two biggest foreign holders of Treasuries, reduced their positions of US government debt in January as a measure of demand for American financial assets fell to a six- month low.

China remained the biggest owner abroad of Treasuries, even as its holdings dropped by a net $5.8 billion to $889 billion, according to Treasury Department data released yesterday in Washington. Japan cut its holdings in January by $300 million to $765.4 billion, the report showed.

China has been a net seller of Treasuries for three straight months, the longest such stretch since the end of 2007. Chinese officials have questioned the dollar’s role as a reserve currency and recently sought assurances about the safety of US government debt as the budget deficit widens to a projected record $1.6 trillion this year.

“Foreign central banks stopped buying Treasuries in January,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “If this were to continue, if China were to stop recycling its dollars into US Treasuries, it could have dire implications for Main Street America in that mortgage rates could move higher.”

“More Jains taking up santhara,” reports the TIMES of India.

Santhara (also called sallekhana) is the Jain practice of voluntary and systematic fasting to death. Jain texts say it is the ultimate route to attaining Moksha and breaking free from the whirlpool of life and death…

Nearly 500 people took the road to Moksha in 2008, the paper reports. The article goes on to tell us that more women than men starve themselves to death, because they are “more strong-willed” than men.

In the past, when people took the holy vow of santhara they used to advertise it in the local papers. This would allow friends and relatives time to come over and say goodbye. Now, the government is said to be cracking down on the practice; apparently, you are no longer permitted to advertise. Now you have to die alone.

“Eunuchs want rape laws to be gender-neutral,” is another headline from the Indian press. We couldn’t make out the cause of the eunuchs’ complaint. Rape laws are already being rewritten in a more politically correct way; the word ‘rape’ is to be replaced with ‘sexual assault.’ But the eunuchs feel they are still not getting the attention they crave. They are often “the targets of some of the worst sex crimes in India,” said a spokesperson.

“Economy expected to grow four-fold by 2020.” Think the headline refers to the US? Britain? France? Think again. It’s the subcontinent the article talks about.

Edelweiss Capital predicts a nominal growth rate of 13% per year for India…leading to a GDP over $4 trillion in 10 years. Per capital income is expected to rise too – from $1,017 per year now to $3,213.

Imagine what these mean to business and investors. Even if you have a mediocre business you can expect your sales to triple…or quadruple…over the next 10 years.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Financial Times: US Household Debt Falls for First Time Since WWII

Yes, dear reader, we have been a voice howling in the wilderness. First the wilderness around the Café des Dames in Paris’s 19th arrondissement…recently the wilderness of Bethesda, Maryland…and lately the wilderness near the Taj Mahal Hotel in old Bombay.

Reading the TIMES of India is a delight. We see that a politician has been given a colorful, over-the-table bribe…a garland made up of 50,000 thousand-rupee notes (about $1 million)…

..a headless body has been found in Kandivli…26 people were killed when their bus fell off a bridge…

..and that more than half the population defecates in public.

In fact, India is Number One in outdoor Number Two, if our dear, delicate readers know what we mean. It has 10 times as many people defecating in public as the runner up, Indonesia. The US didn’t even make the top ten.

The poor Indians. They can’t handle alcohol. Research shows that Indians suffer higher rates of heart disease if they drink. Even light drinkers face a 40% higher risk of heart trouble, according to the study. Heavy drinkers’ risk of heart problems is twice that of non- drinkers…still, well worth it, in our humble opinion…

“110,000 killed on India’s roads and railways,” says another news item.

“Is that all,” we asked a colleague. Every time we cross a road we narrowly escape death. And we’re being careful. Other pedestrians seem to ambulate in the middle of highways…beg between lanes of busy rush- hour traffic…and make daredevil dashes across chaotic intersections. It’s amazing more aren’t killed.

There’s also an item that shows how India’s civil justice system works. A landlord has finally won an eviction – thirty-three years after he went to court! The unauthorized tenant lived in the apartment for an entire generation before finally being booted out.

But wait…our beat is money. So back to the big money story…

Mainstream economists and mainstream financial media tell us that the worst is over…that the ‘recession’ has passed…and that things are getting back to normal.

Nope, we reply. Not a chance. The old economy that existed since the end of WWII is dead. No way could it recover; you can’t revive a corpse.

It was beginning to look as though we would have to eat our words: the cadaver was sitting up in bed and watching TV.

Everything was beginning to look eerily normal, after all. A year after the stock market hit bottom, it still has not resumed its downward slope. Businesses that should have gone bust are still in business. Politicians who should have been run out of town on a rail are still putting their earmarks on everything. Bankers who should now be parking cars are still making loans.

The government is still misleading… Economists are still mis- interpreting… Investors are still mis-understanding…

..it sure seems like things are back to normal!

But something important has changed. And here comes the proof from the good ol’ FT.

The FT, by the way, has the same dim economists as everyone else. While we wouldn’t trust a government employee to manage a coffee shop, the FT’s leading economist, Martin Wolf, thinks they can manage the whole world’s economy. It’s just a matter of getting the balance right, he thinks.

But beneath the surface of the flow of silly opinions and distracting noise, there is a powerful tide…an undertow that is sweeping everything out to sea. For the first time since 1946, household debt in the US is actually going down.

This is what de-leveraging is all about. The credit expansion is over. The tide has turned. Credit flowed for 61 years. Now it ebbs. No more increases in household credit. No more increases in consumer spending, over and above wage gains. No more extra sales. No more ‘growth’ at the expense of private sector debt.

It’s over.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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We’re going to rename our theory. This is more than a depression; it’s more than a financial and economic phenomenon. It includes a shift of power…a return to normal after 4 centuries of aberration…and the failure of a whole line of Nobel Prizing-winning economic claptrap, including the Efficient Market Hypothesis and Modern Portfolio Theory. Let’s call this phase “The Great Correction”…and wait for events to prove we’re right.

In the meantime…we await clarification…

When will this bounce end? What will happen when it does?

Yesterday was another inconclusive, information-free day. The Dow rose 17 points. Gold went up $5. Oil fell to $79 a barrel.

But the deep trends continue. The government grows…and heads towards bankruptcy. Most developed nations are running huge deficits in their public accounts. The one that has been most in the news is Greece. The Hellenes promised to cut their spending, rioted in the streets, and now hope for some back-up plan from Europe. The rest of the PIGS (peripheral European states, with good food and wine, but bad finances) watch carefully. What Greece gets now they’re likely to get later.

But the problem is hardly limited to the small states of Europe.

Barron’s reports that the states face “massive shortfalls” in their pension programs. This is in addition to the other massive shortfalls faced by governments all over the planet.

“US ratings threat,” is the headline on today’s Financial Times:

“Moody’s Investor Service will warn the US today that unless it gets its public finances into better shape than the Obama administration projects there would be ‘downward pressure’ on its triple A credit rating.”

Moody’s learned a lesson last year. You take money from the ratee. You give a good rating to junk. Then, people point their fingers at you and sue when the junk goes bad. The raters don’t want every Treasury bond holder in the world at their throats.

The US is going broke; no doubt about it. Of course, it may take years…

What the hell? We can wait…

Some Treasury buyers aren’t waiting until the last minute. “China continues selling US Debt in January,” comes a report from The Wall Street Journal.

Japan too, adds Bloomberg.

Japan, of course, faces a financial crisis of its own. It already has government debt greater than 200% of GDP…and its aging citizens are saving less money each year. Pretty soon, it will be unable to finance its deficits. Then what?

Then, yields will rise and Japan will face a crisis similar to that of Greece.

And what about China? Even countries with sound budgets can take huge financial hits.

“China may face massive bank bailouts,” Bloomberg reports.

Yes, dear reader…China has a solid budget…and industries that make money. The trouble is, it has too many of them. And now it’s made the mistake of stimulating them to increase production – as well as increasing infrastructure – at the worst possible moment, just as their major customer goes into a funk.

So, while China’s state finances are in good shape – at least on the surface – its private sector finances are a mess. They are such a huge potential mess that one analyst refers to China as the ‘mother of black swans.’

Who’s going to bail out China’s banking sector? Who’s going to bail out Greece? Who’s going to bail out Japan? Who’s going to bail out the US?

Day by day, the lumbering, clumbering wheels roll on…towards bigger governments with greater debts… One government looks to another one to help it out. The other looks to yet another. One nation depends on its central bank…and its central bank depends on the US Federal Reserve, the capo di tutti capi of all the world’s central banks.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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This must be some kind of golden age for government. In the US, the feds have seized major stakes in banking, autos, insurance and mortgage finance industries.

The Chinese are paying for their enterprises. They already own footholds in some of the most important companies in the US. Yesterday, they announced another big move. CNOOC, China’s state-owned energy company, is buying half of Argentina’s second largest oil producer, Bridas. The Chinese have described the deal as giving them a “beachhead” for entry into Latin America.

The world’s richest people (two of the top five are Indians)…its biggest markets…it largest financial reserves…its most profitable companies – all are moving away from the US.

And now the Chinese are proposing to help the US upgrade its transportation system. Word from Beijing is that Chinese contractors are pitching high-speed rail lines to California, Florida and Illinois.

What next?

Empires you can trust…

At least there is one area in which the US maintains a clear and decisive lead – the military. Nobody comes close. No navy. No air force. No army. We’re number one.

The trouble with being number one in military power is that you need to find a way to pay for it. Which brings to mind a recent book by Thomas F. Madden, Empires of Trust. We spent the weekend sitting in a wicker chair by the pool reading it, drinking lime sodas and red wine.

The book is a delightful history book, recounting Hannibal’s war against the Romans and the Romans’ many wars against the Greeks. It is a marvelous book of history. It’s too bad the author draws conclusions that are comically out of sync with his own tale.

The storyline is that the US, like ancient Rome, is a very different empire from most. It is a good empire…based on strong family and religious values…which wants only the best for the rest of the world and only peace and security for itself. The Roman Empire succeeded, he says, because you could trust it. America will endure, he believes, for the same reason.

If this were true of Rome, it makes the Romans the most hopelessly incompetent race of humans that ever existed. They sought peace? The record shows a thousand years of wars; the history of Rome is a history of war. They fought the…

Sabines & various other tribes
Fidenates
Veientes
Albans
Latins
Samnites
Greeks
Carthaginians
Illyrians
Macedonians
Syracusians
Spartans
Doric Cretans
Argosians
Seleucids
The Aetolian League
The Ebro
Lusones
Various Celt-Iberian Tribes
Lusitani

This leaves out the small fry and only brings us up to 139 BC… They had another 500 years of hard fighting ahead of them. If there was anyone in the ancient world with whom the Romans didn’t kick up some dust, we have never heard of them.

And security? Mr. Madden seems to think Roman armies went all the way from the banks of the Tiber to the banks of the Tyne, the Rhine and the Euphrates just so as to make the walls of Rome itself more secure. Having beaten one neighbor, they then faced another, who was naturally nervous about Rome’s next move.

As its circle moved outward, Rome found itself with more and more neighbors to defeat. Where once it had only a few potential enemies, it soon found itself ranged, albeit with allies of more-or-less questionable loyalty, against half the world, including against the world’s best military powers of time. In the name of security, in other words, it put the ancient world’s leading military geniuses to work trying to destroy it.

Mr. Madden really ought to get out more. He seems to know a lot about Roman history. The problem is that he knows not much about other people…their history…their motivations…and their empires. While there are vast differences in the character and the style between various empires, they all are alike in that they are all run by humans who are all after the same heady mix of power, money and status. All use both carrot and stick – insofar as they can. Some were better with the carrot. Others were better with the stick. Using the carrot was often the cheapest way for an empire to get where it wanted to go. But all empires were also capable of making and winning wars, often ruthlessly and cruelly, when the occasion called for it.

Ultimately, an empire is a protection racket. The imperial power provides protection and demands tribute in return. If he gets no tribute…or cannot provide protection…he is out of business. Trust is useful to empires, as it is to the Mafia; it is a tool, not the core business.

This is clear from Mr. Madden’s own recounting of the Punic Wars. After the Romans had conquered all of Italy, they looked across the straits of Messina at Sicily. There, the Carthaginians were trying to take control. Naturally, the Sicilians of the time looked for support wherever they might get it, and signaled to Rome that it could use help.

Trouble was, the Romans had an understanding with the Carthaginians. Like Hitler and Stalin before the invasion of Poland, the two had agreed to respect each other’s spheres of interest. The Romans, who desired no conquest, according to Madden, had agreed to leave the rest of the world to the Carthaginians; the Romans got free run of Italy in return.

But the empire of trust betrayed Carthage; it went to war in Sicily and won the island for itself. This was the first Punic War. The second came about as had the first; this time the Romans breached their agreement by meddling in Carthaginian affairs in Spain.

The Second Punic War saw Hannibal cross the Alps. Then, we got to see how strong those bonds of trust in Italy really were. Given the choice between weak Rome and the strong Carthaginians, dozens of Italian cities switched alliances – including the second largest city on the peninsula, Capua.

The Romans could be trusted, as long as trust worked for them. When it didn’t, they turned to violence – just like everybody else. In the case of the Punic Wars, and all of Rome’s wars, it was violence that settled the issue, not trust.

Madden spends considerable ink telling us how nice the Romans were in their wars against the Greeks. But when push came to shove, that is, when trust no longer paid, Roman forces looted the treasures of Corinth, and leveled the city.

Mr. Madden misses the point about Rome. He misses the point about the US too. Like Rome, America uses carrot and stick. Carrots are usually cheaper. But, in the end, it’s the stick that counts. Americans were able to calm indigenous peoples with treaties and reservations; but if they had not been ready and willing to go to war against them, they would never have been able to colonize the continent. Then, they used big sticks against their own people too. In their war against the Confederacy, Sherman did to Atlanta almost exactly what Mummius had done to Corinth. He destroyed the city…and laid waste to the countryside around it.

Brief dummies guide to empire: A coalition of the willing is all very well; but when they’re not willing to go along, get out the stick and whack them hard.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Beware the Ides of March…and the rest of the year too!

This is the day Caesar was assassinated. What’s it to us?

Well, it just reminds us that things go wrong. Even when you’re on top of the world. There are always countercurrents…undercurrents, beneath the surface, where you don’t see them…plots…conspiracies…and just bad luck.

On the surface, the US economy is recovering. Well, not even. It is stabilizing.

The Dow has been creeping up. It rose 12 points on Friday. Gold fell $6. Oil held at $81.

The most recent figures show the consumer becoming a little freer with his money. But look beneath the surface and you find government statisticians juking and jiving with the numbers. They seasonally adjusted downward the figures for January…which boosted the figures for February. Had they not done so, the figures for February would have been negative!

Still, consumers are not as lifeless as they have been…and on the surface, this is good news.

And who can blame consumers for being a little more ready to spend money? The newspapers tell us that the Great Recession is over…and that we’re in a recovery. The lumpen consumer probably thinks he’s going to find a job soon…and that his house is going up in price.

But beneath the surface, there are powerful downtrends still underway. These trends began in 2007. They were misinterpreted, naturally, by leading economists and policymakers as a “liquidity crisis.” In fact, they were signs of a debt crisis. The private sector had far too much debt.

Economists who never expected trouble, reacted to it in a predictably moronic way – they rushed to the rescue with more debt. Now, they think they’ve triumphed… They’ve prevented another Great Depression. They’ve saved the world!

We’re written so much about that; you surely don’t want to read any more on that subject.

But here’s the interesting point: by failing to address the real causes of the crisis, the feds only allowed those undercurrents to grow more powerful and more dangerous.

Instead of reducing the world economy’s reliance on debt, they increased it!

On the surface, the rescue efforts look vaguely like a success. The private sector stopped spending. Government increased its spending to make up for it. Okay so far.

Alas…net, the world’s debt is still increasing – by a huge margin. Over the next 3 years, the biggest 20 economies in the world – the G20 – are expected to slip over the 100% mark, with more debt than GDP.

Now, let’s do a little math. The US has total tax receipts equal to about 15% of GDP. If the interest on the debt is only, say, 3%…that means you’re spending 20% of tax receipts on debt service. But suppose inflation rises…and interest rates go back up to where they were in the late ’70s. Back then, the feds had to pay 15% interest to borrow
money for 10 years. At that rate, financing the whole federal debt would take 100% of tax revenues – just for the interest.

Obviously, that’s not gone to happen. Something else is going to happen. What? Hard to say. Some combination of default and inflation, most likely…

Of course, this doesn’t bother the feds. That story is still beneath the surface… It’s a crisis that hasn’t happened yet. They couldn’t see the crisis in the public sector coming in ’07. They can’t see the next one coming either.

Economists can’t tell a government job from a private sector job…and can’t tell $1 of government spending from a dollar spent by the private sector…and can’t tell a dollar’s worth of GDP from a dollar’s worth of real prosperity…which means, they can’t tell the difference between what’s happening on the surface to what’s happening underneath.

In a sense, this is just another manifestation of the same “battle” we wrote about years ago. On one side are the feds. On the other is Mr. Market.

The feds want to inflate. Mr. Market wants to deflate. The feds want a boom. Mr. Market wants a bust. The feds want to inflate another credit bubble. Mr. Market has a knife in his hand.

On the surface, the feds are winning. At least, that’s the way it looks if you get your information from reading the newspapers or listening to CNBC. And in a sense, these reports are correct. Superficially, the battle is going the feds’ way.

But deeper down…the debt is still there…and it is growing bigger. And Mr. Market sharpens his dagger.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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“Masked youths…attacked the head of Greece’s largest trade union, who was addressing the crowd, and hurled stones at the police. GSEE union boss Yiannis Panagopoulos traded blows with the rioters before being whisked away, bloodied and with torn clothes.”

The Daily Mail account put the blame for these disturbances on Germany’s finance minister, who warned the Greeks that “the German government does not intend to give a cent.” At least Bild, a popular German newspaper, was trying to be helpful. It suggested that Greece sell Corfu…and that Greeks get up earlier and work harder.

Meanwhile, from Iceland comes news that every voter with an IQ above air temperature has cast his ballot against a bailout plan. The Icelanders were slated to make good $5.3 billion in bank losses. But why shackle common voters to the banks’ losses? The plan was so outrageous and so unpopular that Iceland’s normally compliant Prime Minister called for a referendum. Given a chance to vote on it, 93% said no. The other 7% probably read it wrong.

Insurrection is in the air. In England, government employees are preparing the biggest strike since the ’80s. In America, dissatisfaction with Congress is at record highs; four out of five of those polled say, “Nothing can be accomplished in Washington.”

Herewith, an attempt to deconstruct the rebel yell. By way of preview, it’s not the principle of the thing, we conclude; it’s the money.

There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years – particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work – not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said.

Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since.

Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn’t belong to them. Consumers could enjoy a standard of living they couldn’t afford. And the financial industry could earn huge fees by selling debt to people who couldn’t pay it back.

Never before had so many people been so happily engaged in acts of reckless larceny and legerdemain. But as the system aged, its promises increased. Beginning in the ’30s, the government took it upon itself to guarantee the essentials in life – retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save.

As time wore on, more and more people lived at someone else’s expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident was an opportunity for wealth redistribution. And every trend was fully leveraged.

If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitizations to profit from segments of the market that had theretofore been spared. By 2005 even jobless people could get themselves into debt. Then, the bankers found ways to hide debt…and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector – it helped them to go broke.

As long as people thought they were getting something for nothing, this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks’ losses…and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn’t worry about yesterday. So, the patsies are in revolt.

Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports.

The rioters can go home, in other words. The system will collapse on its own.

Bill Bonner
for The Daily Reckoning Australia

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The air is so hot and humid, here in Mumbai, you can boil an egg in it.

Last night, we ventured out of the hotel for an authentic Mumbai experience. We went out the front door, around the corner, and a half block down the street to a restaurant called Indigo.

We would have taken a taxi but the only thing worse than walking in Mumbai is taking a cab. Taxis are everywhere…small black and yellow cars. They are banged up veterans of many years on Mumbai’s chaotic roadways.

If the car doesn’t break down or get in an accident, you merely suffocate.

This morning, our driver sounded his horn, then started the engine. Cars are never taken in for repair in India unless the horn doesn’t work. You can drive without brakes, but not without a horn. Maybe that’s why 110,000 people die on India’s roads and railways every year.

We were on our way to CNBC, where we were being interviewed. For some reason, your editor has achieved minor celebrity on the subcontinent. The announcer told his audience that we were a “venerated western economist.” Other interviewers ask for autographs. Many have read our books. All want to know what we really think.

This is probably because our views flatter them. Unlike the US, India is not at the end of a 50-year credit expansion. It’s only at the beginning. Investors might look forward to many years of growth.

“In the West, the situation is very different,” we explained. “The Western economies – especially the Anglo-Saxon economies, and particularly Britain and America – have been on a spending binge for many years. That reached its zenith in 2005-2006; now, it will be very hard for these economies to grow. They can’t do it by expanding consumer spending and consumer credit. In the first place, consumers already have too much stuff. In the second place, the consumer has neither the income nor collateral to justify more debt. So, the economy needs to find a new model to move forward.

“In India, on the other hand, people don’t have so much stuff. There are people sleeping on the sidewalk outside my hotel room. They have nothing except the clothes they are wearing. And they certainly don’t have credit cards and home equity lines. So India can grow for many, many years simply by providing basic goods and services to its own people. And the nice thing about it is that India doesn’t seem to be capable of central planning…or any planning at all. The country can expect a long spell of prosperity, until the central planners get in position to lead. Then, you’re in trouble.”

CNBC didn’t like what we had to say. Even if we were generally optimistic about India, we were definitely not cheerleading for world economic growth. And CNBC…along with most of the other mainstream financial media…like to keep viewers smiling.

“Sorry that you are so gloomy,” said the interviewer, adding to the audience that “those are just his views.”

Of course, dear readers know we’re not gloomy at all. Around the office they call us Mr. Sunshine. Why? Because we welcome a depression in the economy like we welcome a hard freeze in the winter; it kills off the parasites.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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There was a time…not so very long ago…when Americans held all the top spots. We had the most…the best…the biggest companies. And the richest people.

Those days are gone…

MEXICO CITY (AP) – Mexican telecom tycoon Carlos Slim is the first man from a developing nation to become the world’s richest person – a shift that underlines the loosening of America and Europe’s stranglehold on the top spots in the billionaires’ club.

Slim’s arrival at the top aroused both pride and anger in Mexico, where many see his fantastic wealth in a poverty-afflicted nation as a sign of what ails it.

With a recovery in the value of his cell phone holdings pushing his estimated fortune to $53.5 billion, Slim jumped past Microsoft founder Bill Gates and investor Warren Buffett when Forbes magazine released its 2010 list of the world’s wealthiest Wednesday.

The rise of Slim, the 70-year-old son of an immigrant shopkeeper, is just a part of the emergence of billionaires in developing countries, Forbes reporter Keren Blankfeld said. She noted this year’s top 10 richest also include two billionaires from India and one from Brazil.

Here’s another item in today’s news:

“China becomes world’s biggest internet market,” says a Reuters headline. There are more Internet users in China than in any other country, says the article. And more cars sold. And more concrete poured.

Travel broadens your horizons, they say. More importantly, it humbles you. You realize that there are a lot more people doing a lot more things than you thought.

All over the world, people bus, hump, schlep, toil and strain. Some work hard. Some work not so hard. Some work smart; others don’t.

But over time, fashions and circumstances change. What goes around, comes around. Those that did once ride so high now lie low…

Yes, dear reader, the world turns. And traveling around…you get to see different parts of it…with different stories to tell…

This morning’s news tells us that 60,000 people are rioting in Greece…torching German cars and generally behaving badly.

What’s their beef? They’re running out of money, running out of credit…and running out of time. Modern macro-economic policies have turned against them.

But they’re not alone. The news from the plains tells us that Kansas might have to close half of its public schools…if it doesn’t find a way to close its budget gap.

The news from other states is not very different. Many foreign governments are in the same fix. Ireland has already begun its “austerity” programs. Italy and Spain can’t be far behind.

But what about the US federal government? No austerity at all. Just the opposite. The feds announced the biggest budget deficit ever – $221 billion for the month of February. In other words, per family, the American government spent approximately $2,000 more than it received in tax revenues. Hmmm….if it continues at this rate, it will spend $24,000 more than it receives per family this year. In round numbers, the typical family will pay about $25,000 in taxes…and receive about $50,000 worth of ‘services.’

Is that a great deal…or what?

It’s an absurdity…it’s preposterous…it’s weird and unnatural. And it can’t last.

It is only possible now because of the peculiar circumstances of today’s financial world. Lenders, investors…Chinese creditors…give their dollars to the US government, believing it to be the most credit- worthy borrower in the world. But as the supply of US debt goes up the quality of it declines.

Already, the US is – from a GAAP accounting point of view – bankrupt. (See below…) Lenders cannot reasonably expect to get their money back. But that doesn’t seem to bother them. US debt still looks like a better bet than, say, Greek debt.

But the world is full of surprises. What a shock it will be when the US finds itself in Greece’s shoes!

Bill Bonner
for The Daily Reckoning Australia

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Yesterday was another dull day on Wall Street. The Dow rose 2 points. Oil held at $81. Gold didn’t move enough for us to remember, one way or another.

The recovery continues…or so says the mainstream financial press. But the economy is still losing jobs…and people are still getting poorer.

NEW YORK (CNNMoney.com) – The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday.

The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute’s annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.

The American economy has apparently peaked out. Its labor is too expensive. Its consumers are tapped out. Its government is going deeper and deeper into debt, with no way out. In other words, the US economy is yesterday’s news. We’re here in Mumbai learning more about tomorrow’s news. We sat down with a group of 12 analysts trying to understand what is going on in India, generally. Of particular interest was Tata Motors… Our investment team at the family office recommended it last year. It went up 468% over the last 12 months…

“Sell it now,” said an analyst here who follows the automobile sector.

You see the Tata name everywhere here in India. Autos (the family owns Jaguar), coffee shops, hotels, insurance, airlines, chemicals – you name it. Tata seems to own the whole country. Just about everything seems to have a Tata company behind it.

But who is behind Tata? The company is run by Ratan Tata, graduate of Cornell and Harvard, who is unmarried. With no children.

“The family is part of a tiny minority in India,” a colleague explained. “They are Zoroastrians…which we call Parsees. They are a disappearing group because they don’t believe in getting married and having children. And if a Parsee marries a non-Parsee neither of them can continue to be a Parsee.”

They sound like the Japanese. On the road to extermination. But this dead-end is peculiar to the Indian Zoroastrians. Other groups of Zoroastrians accept converts…some even recruit them.

The word ‘parsee’ or ‘parsis’ was the term applied in the state of Gurajat, in Western India, to anyone coming from Persia. The Zoroastrians were originally from Persia, where they were pushed out by the Muslims. Now, they are a small religious minority, with a few recruiting centers…including one in Los Angeles.

“Parsees believe in playing an active role in the world. They fight for good against evil and try to establish order against chaos,” says our informant.

We don’t like to criticize anyone else’s religion, but it sounds a little flat to us. Where are the body thetans? Where’s the crucifixion? Where’s the bread transformed into the body of the savior? That’s probably why the Zoroastrians have lost market share. Not enough magic and mystery.

But we’re not here to improve the world’s religions. In fact, we’re not here to improve anything. We’re just watching…wondering…and waiting for the next absurd thing to happen.

Hey…here’s something. Page one of the Times of India. It says that the president of France and his new wife, Carla Bruni, are both having affairs. The president is said to be doing a little hootchi kootchi with his minister of ecology. And if you believe the report, the first lady of France is now living with another guy.

Oh well…those French!

Back to our beat…money. Money doesn’t cheat. It doesn’t lie. It doesn’t run around. It is interdenominational and ecumenical.

Well…real money doesn’t cheat. You can trust gold. On the other hand, those paper dollars, euros and rupees are completely faithless. They say they’re worth a certain amount one day. The next, it’s a whole ‘nuther story.

Lately, the dollar has been doing well. The bond market has held up…despite the extraordinary demands placed on it by the world’s governments.

In February alone, the US government ran a record deficit of $221 billion. And February is a short month. Annualize that and you’ve got about $2.5 trillion in excess spending.

That money has to come from somewhere. And even if you took 100% of America’s savings…it still wouldn’t be enough.

If you’re married to the dollar…it’s time to see a divorce lawyer.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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The private sector ruined itself in the bubble of ’03-’07. Now, it’s the public sector’s turn. All over the developed world – with a few exceptions – the feds are adding debt at an alarming rate.

The US has already passed “the point of no return,” says a report from Casey Research. Ken Rogoff and Carmen Reinhart put that point where external debt passes 73% of GDP or 239% of exports. IMF data, says the Casey team, shows the US has already gone too far on both scores, with external debt at 96% of GDP and 748% of exports.

We’re in Mumbai, India, checking in with one of our ‘strategic partners.’

In our family office, where we keep the family money, we take big bets over long periods of time…working with strategic partners who are knowledgeable about key sectors. Last year, we missed the rally in US stocks. But we’re lucky in our choice of friends and business partners. Two of our strategic partners – one in the resource area…the other in India – more than doubled our money.

Over the last 12 months, Mumbai’s Sensex index has gone up more than 108%.

But our bet on India is for the very long term. In the recent financial crisis, that bet seemed to go bad. Foreign investors pulled their money out of India along with other emerging markets – even though India had very little exposure to the banking crisis itself.

What’s ahead? Seven percent GDP growth this year…nine percent next year. The first figure is news. The second is a forecast. But there are good reasons to be bullish on India for the long pull. Stay tuned…

Bill Bonner
for The Daily Reckoning Australia

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China says it is continuing to buy US bonds “every day.” It doesn’t have much choice. It earns money by selling things abroad. In fact, exports in February were up more than 40% over February ’09. This leaves it with a lot of foreign money – most of it in dollars. What can it do with so much money?

China has quietly bought stakes in America’s leading companies…and in various businesses all over the world. But the only way large amounts of US dollar cash can be readily and safely deployed is in US bonds.

That said, China could also cause one helluva problem for the US if it ever chose to do anything else.

No worries on that score, said the Chinese official in charge of its $2.4 trillion worth of foreign reserves. He says China’s holdings of US debt are normal and that there is no intention of reducing them or playing politics with them.

He surely means it. And when the dollar goes down…and when the market turns, and China feels compelled to get rid of its US bonds, he’ll be totally sincere when he explains that to the international financial press too.

Markets make opinions, as they say on Wall Street. The market in bonds and the dollar has been very good for a very long time – since 1983, to be exact. As a result nearly everyone – including the Chinese – are of the opinion that US bonds are a safe place to be. When the market changes, so will opinions.

So far, no problem. But there’s no telling how long the foreigners will continue to support the dollar. Then what? Well…it leaves quantitative easing…in which the US central bank lends the money itself. Where does it get the money? It just invents it.

Which is why you can’t trust paper money. You have a dollar. You have it. You hold it. And you expect to keep it ’til death do you part. But then, along comes another dollar that looks just like it…fresh…young…full of vim and vigor. So why not? Everybody does it.

Pretty soon, there are a lot more dollars running around. And they change hands fast. In economists’ lingo, the velocity of money goes up…and the value of the dollar – like a faithless lover – goes down.

Bill Bonner
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Yesterday marked the one-year anniversary of the rally. The Dow rose a piddly 11 points. Gold sold off $1.

This rally has gone on for so long most people think it is not a rally at all, but a new bull market. Worldwide, it has taken equities up some 73%…making it one of the greatest rallies ever.

What are we to think? Are we alone in thinking it’s still a trap? What happened to the problems that led to the crisis of ’07-’09?

If you don’t think about it too much you might think everything is fine. Stocks are up. Business profits are up. GDP is up. Housing and unemployment seem to be stabilized. What’s not to like?

The recovery is a done deal as far as most people see it. The rescue efforts, initiated by the feds, were a big success…or so they believe. It has been 12 months since the bottom…and the world still has not ended. Everything is back to normal…isn’t it?

The problem in ’07-’09 was that too many people owed too much money.

And what has happened to change that? The net level of indebtedness in the US has actually gone up since ’07!

Huh? How’s that? We’re in a de-leveraging phase, aren’t we?

Well…yes…but only in the private sector. The feds are still adding debt.

Let’s look at the private sector first. There, we find unemployment still around 10%. Adult males in their prime working years, however, have fewer jobs than ever before. One figure we saw shows that only 4 out of 5 of them are working.

That is just the beginning of the problem for these fellows. They’re getting fewer college degrees, compared to women, than ever before. They’re earning less money too – again, compared to women. Fewer are the chief breadwinners in their households. And fewer are even in a household at all – more are alone.

Let’s not get distracted by the suffering of the masculine part of the population…

..we’re looking at what is going on in the broader economy. Is it healthy and growing? Or is the stock market just a honey trap…a bear market trap for the unwary investor?

The private sector is de-leveraging. Not only is the unemployment rate high, the typical family also lost a lot of money when its house went down in price. And since the typical householder is also in his 40s or 50s, he has to consider his retirement and how he’s going to fund it.

Stocks? While they’ve bounced back nicely, the stock market is still well below its highs…and still in a losing position over the last ten years. A 73% gain sounds nice, but it would take a 100% gain to recover the losses of the ’07-’09 bear market.

Houses? One out of four mortgaged houses is still underwater. In some new developments, the figure is as high as one out of two. And there is little likelihood that the owners will be high and dry anytime soon. People no longer expect to retire on the gains from their houses.

This leaves the middle-aged householder without much choice. He has to save money. Remember, the boom of the 2003-2007 period was caused by dis-saving. Now, a higher savings rate will mean less spending for many, many years. This is a fundamental and important change of direction for the economy. It will restrict business growth and restrain profit growth too.

So, is it possible to slough off the crisis and return to business as usual? Nope. Not possible. You can pretend that things are back to normal. You can act as if they are back to normal. You can invest as though they are back to normal. But you can also lose your money.

But they’re not normal at all. They’re different. The 1982 to 2007 period was…mostly…a boom time, caused by rapid increases in debt, asset prices, and consumer spending. The next period is…mostly…a bust time – when asset prices, private debt, and consumer spending go down.

Sooner or later, but probably sooner, the stock market will realize it. Our Crash Alert flag – tattered and faded – is still flying.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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As we’ve pointed out before, there are two parts to a political system. One part is shrewd, calculating and corrupt. The other is stupid, senseless, and earnest. The first is surprisingly predictable. The second is predictably surprising.

Like the two sides of the brain, people use politics both ways. On the right side, they use it to do something that is completely preposterous…and often completely at odds with their own interests.

Start a war, for example. National pride. Sentiment. Anger. Humiliation. There’s no telling exactly what emotion will stir up the mob. And there’s no telling what mischief it will get up to when it’s been properly stirred and shaken. India was the site of the biggest political demonstration of all time. What was it about? Killing cattle. The Hindu population was against it…

Meanwhile, from Nigeria comes news that the Christians and Muslims are killing each other. And in Europe, just a century ago, people tried to kill each other for 4 long years…

But the right side of politics is beyond our scope for today. We’re concerned with the left side…the rational…goal seeking…angle playing side…where people use politics like a burglar uses a crowbar – to get something that isn’t theirs.

For example, a report in USA Today tells us that government employees have used politics to get more money. The paper said that 8 out of 10 professions are better paid by the government than by the private sector.

Lobbyists use the government to get money for their employers. If we read the item in The Wall Street Journal correctly, there were 10,000 “earmarks” in the latest budget bill.

What’s an ‘earmark?’ It’s a special little provision that gives a contract – or other favor – to a specific company, industry, or locality. A congressman might insert a little provision awarding a $100,000 contract, for example, to one of his constituent companies. Directly or indirectly, the company may have contributed $50,000 to the congressman’s re-election campaign…or may be ready to hire him if he is booted out of office…or may have hired his son or daughter. The amount is so small that the rest of the Congress is not going to pay much attention to it. Besides, other members of Congress are doing the same thing. Ten thousand earmarks…that’s more than 20 apiece.

Giving out money to friends and supporters is not exactly what Congress was set up to do. A Congressional Ethics panel was organized to investigate. Its report just came in this week. What did it find? That there was no impropriety; it was just business as usual!

Even the Ethics Committee has been corrupted by the left side of politics – the rational side. Everybody is looking out for Number One. Even the Ethics Committee.

Very predictable. And no harm in that. Everyone does it.

But as the political system matures, it supports more and more people who are looking out for Numero Uno and don’t much care what happens to Numero Duo. And as the host weakens, the parasites become bolder.

Even the right side of politics is corrupted. Instead of going to war for purely absurd reasons, lobbyists for pentagon contractors urge the nation to war for practical ones…specifically, to add to their own profits…and generally to boost employment.

Eventually, between the left side and the right side, the nation runs out of juice. Or worse. When the politicians have squeezed all they can out of existing taxpayers they go to work on those who aren’t even born yet. The debt rises and rises…until it is too heavy to carry. Then, all Hell breaks loose.

A few days ago, the Congressional Budget Office reported that the Obama administration’s deficit forecasts were a little on the low side – $1.2 trillion short over the next 10 years.

How reliable are those CBO forecasts? Not very… The deficits are likely to be a lot higher than either the administration or the CBO now imagine.

Stay tuned…

Bill Bonner
for The Daily Reckoning Australia

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If you don’t read the newspapers you run the risk of missing something. Of course, if you do read them, you run the risk of catching something.

Not much in the financial news worthy of comment this morning…

The Dow gained $13. Gold lost $13. Nothing much to say about it…

So we will comment on something beneath comment…something so low we have to dig down to find it…something so unworthy we hardly imagine we are mentioning it…something in the newspapers…

We’re talking, of course, about politics…

The love-fest with politics is heating up. The drugs have been passed around. Now, the clothes are coming off…

“France keeps steady course in economic upheaval,” says a headline at the International Herald Tribune. Steady course? You bet. It kept subsidizing, bailing out, protecting, coddling and otherwise meddling in its economy – just like it did before the crisis began. Had it not done so, the story continues, France might not have been the first major economy out of the worldwide recession.

On the other hand, the French never went deeply into debt… So maybe they just didn’t have so much exposure to the worldwide debt crisis in the first place.

Never mind. The papers don’t know what the problem is, but they’re convinced that government interference is the solution.

Over at The Financial Times, Clive Crook is breathing hard, too. He reckons that the “downturn called for a big stimulus,” and that the US stimulus effort headed off a worse recession. He then explains that the feds’ stimulus really didn’t stimulate at all, it merely offset a decline in spending at the state level. State tax revenues fell; states spent less. State tax revenues declined $87 billion in the last 12 months, the biggest drop on record. The feds made up for it by spending big.

Meanwhile, The New York Times tells us that the whole downturn is now behind us. The economy is “surprisingly normal,” it says.

The US economy is some 11 million jobs short of full employment. Nothing very normal about that. But February saw an unexpected upturn in consumer credit, reports the Times. And unemployment seems to have bottomed out, adds The Wall Street Journal.

Surprisingly normal?

Well, there’s a big difference from something that looks surprisingly, reassuringly normal…and something that is actually working normally.

Which is it?

The New York Times is right; it is an economy that looks surprisingly normal…

Zombies can look surprisingly normal too. If you clean them up.

Bill Bonner
for The Daily Reckoning Australia

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As I was floating down impassible rivers
I no longer felt myself steered by the haulers…

– Arthur Rimbaud, “The Drunken Boat”

The news yesterday pushed against us like a gentle wind. Pending house sales were bad. Consumer spending was good. Unemployment was bad. Manufacturing was good.

The Dow rose 47 points. It has moved without much conviction for several weeks. It can’t seem to make up its mind. We thought it had headed down decisively a few weeks ago…and then, it stabilized…and wandered about…

Gold has more sense of destiny about it. It’s been in a bull market for the last 10 years…and shows no sign of wanting to do anything else. It lost $11 yesterday, but still trades at $1,132…not that far from its all-time high.

Gold is in a real bull market. As near as we can tell it is still in the developing stages. There are a few old gold bugs around. But the public is not yet talking about gold. Investors are not yet adding major positions in gold to their portfolios. Ordinary people are not yet expecting gold to go to $5,000 or $10,000 an ounce.

But the news keeps coming…the opinions…the rants…the data…and the theories…

This way and that…we begin to feel like a “drunken boat.” That was the title to a poem written by a 17-year-old Frenchman named Arthur Rimbaud. It describes how we meander. We are driven by the winds…and pushed by the back-eddies… Turning our bow this way …and then that way…

Never quite sure what direction we’re going…or what to think… No one is in control…

And still, the current continues…and we keep heading downstream…carried by the great river…always moving along.

One day we’re fascinated by what is going on in Japan. The next day it’s China. Some days we think we might somehow muddle through…on others, we’re sure something is going to blow up any minute.

But that river just keeps rolling along…and we’re on it.

Where does it lead? Well, that’s the point. We’re not sure…

All we’re sure about is that it doesn’t lead where most people think. They think they see a ‘recovery.’ Forget it. Won’t happen. We could have another speculative period…but it won’t be like the Bubble Epoch of 2005-2007. Houses would have to go up 20% just to get homeowners’ heads above the water. Then, maybe they could borrow and spend like it was 2005 again…but that’s not going to happen. People don’t have the incomes…or the credit…to bid up house prices again.

Here’s a headline from The Wall Street Journal: “Employment of Adult Males at Record Low.”

Where does that lead? We’re not sure…but we don’t think it leads to ‘growth’ in the US economy. Instead, it leads to bankruptcy, deflation…and maybe insurrection.

And what about the Chinese economy? Isn’t that growing at breakneck speed – over 10% per year?

The trouble with breakneck speeds is that you do break your neck. China should slow down…or it’s going have an accident. And if it slows down, the whole world slows down with it…

And as to that ‘growth’ – it’s counterfeit anyway. It’s not real growth…it’s ersatz growth, caused by greater and greater government involvement and spending. The feds (the haulers) pretend to be in control. They want us to believe they are in control. But they are out of control themselves!

Can increasing government spending really make people more prosperous?

Show us an example!

Bill Bonner
for The Daily Reckoning Australia

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Miserable cities…ghost towns…angry voters…

Market flash:

The Dow was flat yesterday. Gold rose $2. And Greece said it was making progress towards cutting its deficit.

Yesterday we looked at America’s most miserable cities. Today, let’s take a gander at its new “ghost towns.”

There are many towns and cities that are losing population…losing key industries…and probably on the verge of extinction. USA Today mentioned some of them in a cover story this Tuesday.

Ravenswood, W. Va., for example. It has 4,000 people and one major business. It’s a one-horse town, in other words, and the nag is leaving. The aluminum works are partly shuttered already, says USA Today; the rest is for sale.

What’s going to happen to Ravenswood? It could become a ghost town.

There are already dozens of towns in West Virginia that are inhabited mostly by ghosts. They’re relics of the booms and busts of the past. Mining, logging, railroads – each one created it own towns. Then, the profitable industries of the 19th and 20th century became unprofitable somewhere along the line. People left. Those who remain live among the shades.

The booms and busts of our time are simply claiming more victims. Cleveland is losing population. So is Baltimore. So are dozens of US cities.

“In the America where things are made the recession has a depression,” continues the report. “According to a new Northeastern University study, one in every six blue-collar industrial jobs have disappeared since 2007.”

And one in five adult males of prime working age is out of work. There are fewer and fewer factory towns in the US…and fewer and fewer jobs for people who work in them. And now comes word that auto sales in February fell nearly 4%. And early estimates suggest that the job report coming tomorrow will be depressing.

“Industrial workers are dinosaurs,” says one laid-off worker, now retraining to be a traveling nurse.

Hmmm… Let’s see. How does this work? No one makes anything anymore. We all become service industry workers…looking out for one another. I give you $5 for cutting my lawn. You give me $5 for cutting your hair. Neither of us has a penny more. How then do we afford to buy anything?

“An industrial town makes products that bring wealth into a community; a post-industrial ghost town as a zero-sum economy – people in marginal jobs ‘serving and paying each other,’” says USA Today.

Services don’t make people wealthier. They may make them more comfortable. But real prosperity requires real stuff – food, cars, tables, light bulbs, iPads.

Of course, you could offer services to people who make these things. A small nation, such as Singapore, for example, could earn a living by offering financial services. A Caribbean island could offer vacations. But what can a great nation like the US offer? It can’t get by on services. And it can’t support half its population on welfare, unemployment and food stamps. It needs manufacturing…it needs to make things…and sell them.

Why doesn’t it do that already? How come so many people are out of work? How come men can find jobs?

Ooh la la…too many questions. But when was the last time you heard a mother proudly announce that her son was going into manufacturing? Or that he was learning to be a machinist? When was the last time you saw a major factory under construction? When was the last time you picked up something in a shop, turned it over and found “Made in America” stamped on the underside?

Bill Bonner
for The Daily Reckoning Australia

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There’s good news and bad news…and a lot of news in between.

Consumers spent a little more than was expected of them. And manufacturing did a little better than expected too.

On the other hand, the federal government’s tax receipts plunged in the month of February…and bank lending is still contracting. Last week it shrank $33 billion – the 7th week in a row it has contracted.

How does an economy expand when the banks are lending less money? Beats us.

We believe the “expansion” reported in the GDP figures is mostly counterfeit. It’s government spending and hot money filtering into the economy. Still, it’s amazing that the GDP figures are positive.

The Dow was flat yesterday. The euro rose a little – on expectations of a settlement of the Greek affair. Greece only had a month to sort out its problems. That was two weeks ago. The “clock is ticking,” say news reports. Most likely, the Hellenes can’t really sort their problems out on their own. Greece will need some sort of bailout – even if it is limited and tentative – from Germany. Stay tuned.

It will be interesting to see what happens when Britain runs into trouble financing its deficits. It won’t have the Germans to help. Britain never took up the euro. It will be on its own.

But the big news from yesterday was the $19 boost in gold. Why did gold suddenly shoot up?

We don’t know. But our guess is that gold will suddenly shoot up a lot more. We’re in a deflationary period. That means everything is going down in price. But against what? Well, against money. Against real money that is – gold.

So gold should continue to go up until this deflationary period is over. That doesn’t mean there won’t be more hiccups and reverses in the gold bull market. But one of the surest trends of our time is the crack-up of the paper money system. And that is bound be good for gold.

Chris Wood of CSLA says he gives the dollar standard 5 more years. Maybe it will be a bit more…maybe a bit less. But one thing is sure. Governments cannot continue to run such huge deficits forever. There will come a day of reckoning…

The feds are hoping it comes at a time and place of their own choosing. They all want to ease their way out of their troubles…with the help of consumer price inflation. You heard central bankers talking last week about increasing the inflation target from 2% to 4%. If they can actually control inflation so precisely, it will be a miracle. But that is what they hope to do.

A few years of 4% inflation would do wonders. In ten years, they would have cut a third of the national debt – in real terms, of course (supposing that they don’t add to it even faster). Not only that, the debts of the private sector would be eased too. At 6%…debts would be cut in half in a decade. With half the debt burden – the private sector might be ready to begin a new period of growth. That is the feds’ real strategy…to de-leverage the private sector enough that it can grow…and increase tax receipts.

By the way, that was what happened in the Reagan administration. The inflation of the ’70s forced up interest rates and caused the worst recession since the Great Depression. But it also lightened debt loads – so much that the economy was ready for another big growth spurt.

This growth really paid off in the ’90s…and the very early years of the Bush junior administration. Thanks to growing tax revenues, both Clinton and Bush were able to pay down the huge debts of the Reagan years…and still increase spending. The economy was able to “grow its way” out of debt.

Then, with the war on terror and the micro-recession of 2001, the budget magic of the ’90s was lost. Bush apparently never met a spending bill that he didn’t like. Spending exploded…especially time bomb spending for health care, which increases automatically year after year.

Then came the depression…known popularly as the Great Recession of 2007-2009. Tax revenues fell. Spending increased even more. And now the deficits come hard and fast. And there seems to be no way to “grow our way out” of them. All of the conditions that made for a boom in the early ’80s are making for a bust in the early 2010s. Interest rates are at record lows, not record highs. Stocks are high, not low. Bonds are high, not low. The government is the solution, not the problem.

Bill Bonner
for The Daily Reckoning Australia

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“I can’t stand it anymore. I have to say something. You act like you actually want a depression. What’s wrong with you?”

The above letter came from a dear reader who has missed the point. We are as generous and warm…as caring and sharing…as anyone outside a mental institution. We only want the best for our fellow countrymen…really.

But what is best? What’s best for the fellow who bought a house he can’t afford? Isn’t it to get out the house as soon as possible? What’s best for the fellow who didn’t save enough for his retirement? Shouldn’t he start saving as much as possible as soon as possible? And how about the banker who lent money to people who couldn’t pay it back…or the investor who put his money into projects that weren’t really very good investments? Shouldn’t they take their losses as soon as possible…and move on?

The period of time in which mistakes are recognized and corrected is called a depression. Best to get it over with.

You see, dear reader, we do not believe in the perfectibility of man and his institutions. Instead, we see material progress. Man’s machines and inventions get better. But man himself? He is what he always has been…prey to sin and folly…prone to error…and ready for a good time.

If he makes mistakes, he must correct them. If he spends more than he earns in the present, he must spend less than he earns in the future.

The Dow rose 78 points yesterday, but is still more than 200 points below its high for this rally. The euro is at $1.35 – down substantially, from its high…but still 50% above where it started. Immediately after the euro was introduced, it fell. It dropped to 88 cents. People thought it was weak and irresolute. They called it the “Esperanto currency” – referring to the artificial language invented in the 19th century and designed to unite the world. Esperanto never really caught on. People feared that the euro would never really catch on either.

But it seems to work as well as any other paper currency…at least for now. So, you see, some innovations work. Some don’t. But behind them is the old rag and bone shop of the heart… As far as we can tell, either progress of the human race is glacially slow…or there is none at all.

Even real material progress is slow. Over the last two centuries, real increases in human wealth – in the west – average out to only about 2% per year. That doesn’t leave a lot of room for error. Make a few big mistakes…such as those caused by miscues from the central banks…and you’re actually going backwards.

Are bankers really smarter, better, shrewder than they were 100 or 1,000 years ago? How about investors? Don’t they make exactly the same mistakes they always made…?

Not many humans have the luxury that we have. Here at The Daily Reckoning headquarters, we’re paid to keep our eyes open…and to try to figure out what is going on.

Of course, we’re not paid very well. Still, what a luxury it is to be able to watch… Economists on Wall Street have to answer to the big banks that employ them. Naturally, they want to show that the world is always getting better. They want their customers to buy more stocks and bonds…which will become more and more valuable, forever and ever.

And then, there are the economists working for the government. They want to prove that they can control the economy…and improve it! Otherwise, why bother to hire them?

There are other economists working for universities and colleges. What do they want to do? They want to show that they are part of the elite classes…capable of leading the country…capable of making decisions. Capable of running things. You don’t get important posts in academia by being “negative.” You don’t win the Nobel Prize in economics by saying “hey…this is all very entertaining…this economics…but there’s not really very much you can do about it.”

Here at The Daily Reckoning, on the other hand, we have no hope of getting tenure…a Nobel…or even a raise. We have no boss and no one to flatter or mislead. We answer to no one but our Dear Readers. And we don’t even pay any attention to them!

Do we want a depression? Well…yes…bring it on! But not because we enjoy seeing people lose their houses and stand in bread lines. It’s only because we know that a lot of mistakes were made during the bubble years – thanks largely to the government’s mishandling of the economy. While real, underlying wealth only grew at maybe 2% per year, people spent an extra 5% to 10%. This spending gap grew during the bubble years, effectively consuming wealth that had not been earned yet…and leading to so many capital investment mistakes that there is no way to avoid a bit of backtracking – which we recognize as a depression.

Here at The Daily Reckoning, we love depression like we love mid-winter. It clears the air…and prepares the earth for spring.

Bill Bonner
for The Daily Reckoning Australia

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The zombies are taking over!

Stocks went up 4 points on the Dow on Friday… Gold went up $10.

Noise. Distraction. Headlines. Opinions.

The important trend is the big one – the shift of resources from the private sector to the public sector.

During the bubble years, the private sector made a big, big mistake – taking on far too much debt.

Now, it is correcting its mistake…reluctantly, painfully, and with plenty of foot-dragging and interference from the government. Instead of letting the dead die in peace…the feds are pumping financial adrenaline into their veins…turning them into zombies.

It’s expensive work…so government is now making the same mistake the private sector made a few years ago. It’s pretending that debt-fueled spending is the same as growth. Ain’t no such thing.

The feds’ “growth” is even more pernicious and counterfeit than the bubble era growth in the private sector. At least people actually wanted houses…they just couldn’t afford to pay for them.

The feds, on the other hand, produce things that people wouldn’t buy even if they had the money – zombie products. Who would buy a billion-dollar software program to spy on other people? Who would pay other people to do nothing? Who would take on the debts of a failing financial institution?

Consider this, from Bloomberg: “Fannie Mae will seek $15.3 billion in US aid, bringing the total owed under a government lifeline to $76.2 billion, after its 10th consecutive quarterly loss.

“The mortgage-finance company posted a fourth-quarter net loss of $16.3 billion, or $2.87 a share, Washington-based Fannie Mae said in a filing yesterday with the Securities and Exchange Commission.

“Fannie Mae, which owns or guarantees about 28 percent of the $11.8 trillion US home-loan market, has been hobbled by a three-year housing slump that wiped 28 percent from home values nationwide and led to record foreclosures. The company, which posted $120.5 billion in losses over the previous nine quarters, and rival Freddie Mac were seized by regulators in September 2008.”

Did you read that carefully? Fannie Mae guarantees almost a third of the $12 trillion home mortgage market – or about $4 trillion. And guess who guarantees Fannie Mae? You do!

Fannie made bad loans. It ought to be put down, like a horse with a broken leg. But Fannie’s bondholders don’t take a loss. The losses have been moved to the public sector and Fannie itself has been turned into a zombie company.

Assets, liabilities, spending – it’s all shuffling over to the government…and sucking the life out of the private sector. In the area of durable goods, only about 4.4% of them, on average, were purchased by the pentagon over the last 17 years. But since the beginning of the financial crisis, durable spending by private industry decreased…while pentagon spending went up. The most recent figures show that 8% of durable orders are now bought by the military.

Recovery? Don’t bet on it. This government spending only makes it look like a recovery. The numbers may show an increase in durable goods sold, but tanks and armored personnel carriers don’t lead to genuine growth. They lead to Soviet-style zombie growth…by the government, of the government, and for the government. The rest of the economy shrinks.

Bill Bonner
for The Daily Reckoning Australia

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