A Worldwide Bubble in Everything
by Bill Bonner
Vancouver, Canada


The depression deepens.

"These are not layoffs...they're permanent job losses," said Barry Ritholtz yesterday morning in his presentation at the Agora Financial Investment Symposium in Vancouver. "These people are not going back to work anytime soon."

That is the difference between a recession and a depression. In a recession people get laid off...and then they are called back to work when things go back to normal. But in a depression, they are let go permanently. They exhaust their unemployment benefits and become desperate. They must find new employment in new industries. Because things cannot go back to normal; normal is played out.

"In the period, 2001 -2007," our old friend Mark Faber reminded us in his speech on Tuesday, "the Fed managed to do something that had never before been done - create a worldwide bubble in just about everything. Stocks, bonds, art, oil, and housing - you name it; it went up. The only thing that didn't go up was the dollar."

How did the Fed pull off such a remarkable achievement?

Stimulus!

After a half a century of stimulus - with credit, inflation and the money supply growing faster and faster - the Fed put the pedal to the metal following the nano-recession of 2001. It dropped interest rates to just 1% - well below the rate of consumer price inflation - and kept them there until an expansion had been going on for three years.

Stimulus stimulates. By 2007, the world economy was taking curves far too fast. As we guessed, the stimulus didn't stimulate nearly as well as the meddlers had hoped. Instead of increasing real output in the US, it lured Americans to spend and speculate...and drove Chinese entrepreneurs to put up new factories in order to give them something to buy. In America, debt grew 5 times faster than GDP; for each dollar of extra income, Americans added $5.50 to their debt. In China, manufacturing capacity grew faster than ever.

Whole industrial cities, the size of New York or Chicago, were added to the map - in a matter of just a few months.

Now the world has too many factories...and too many consumers with no money to consume with.

[Unfortunately, the economy has been depending on consumers as the number one driver...and now that consumers aren't consuming - what's going to push the economy forward?

You've heard us tell this tale many times. You'd probably like us to get on with it...and tell you how it turns out. Instead, we keep looking back.

"Bubbles had been localized in the past," Marc explained. "A bubble in one area drew investment from another area. In one market, prices soared. In another they slumped. Overall, things didn't change much."

But a worldwide bubble in everything is something new. And it caused something else that is new - a worldwide crash. We have been ducking explosions and stepping over the debris for the last two years.

"'Loss of purchasing power AND a devaluing dollar is going to invite inflation into our economy. So the dollar won't buy as much as it used to, and the dollars you have will be eaten away by inflation,' so said our currency counselor, Chuck Butler in his presentation at the Symposium yesterday.

"Everyone seems to agree that inflation will plague the United States eventually - when exactly that will happen is still up in the air. So what do you do to protect yourself from this impending threat? According to Chuck, 'You need to diversify out of the dollar.'

"Chuck advises us to think of diversification as an insurance policy. He recommends the allocation of different amounts in your portfolio. '20% allocations in currencies, 20% in metals - maybe foreign real estate. Anything to get you out of the dollar.'

"Also presenting yesterday was frequent DR contributor James Kunstler.

"'The most striking thing about the current situation,' said Kunstler, 'is our inability to construct a coherent consensus on what is happening to us and what we are going to do about it.'

"'One of the consequences [of the credit and consumption bubble] is that we are now no longer able to generate that "something for nothing" wealth that came out of the frauds. And now we can't use our revolving debt economy. Now we have to pay for what we do out of the "accounts receivable".'

"Kunstler warned that the way Americans think about oil and energy has to change.

"'China is going around the world making special arrangements with oil producers,' he said.’So a lot of oil is going to come of the oil futures market and be earmarked for China. That is going to change the way the oil markets work.'

"Kunstler appeared again at the 'Whiskey Bar', a rough and tumble discussion sponsored by our sister publication, Whiskey & Gunpowder.

On the panel were James Kunstler, Whiskey & Gunpowder's Gary Gibson, Breakthrough Technology Alert's Patrick Cox, Barry Ritholtz, Capital & Crisis' Chris Mayer, Doug Casey, Outstanding Investment's Byron King and The Rude Awakening's Eric Fry, who moderated the panel.
"Sparks were flying - partly due to the free booze, and partly due to the wide variety of opinions and views on what is happening in today's economy.

Case in point: Doug Casey and Barry Ritholtz on government regulation vs. the free market. Says Casey: 'The whole system is rotten from top to bottom. The whole system has gone rotten - and don't look to the Republican Party for help or answers. We wouldn't have any of these problems if the market ruled.'

"'We've never had a textbook free market, and we never will,' Barry responded.’This government has been corrupt, and always will be that way. But the thing is, people keep voting these guys into office. The first step is total transparency - but will we ever get that?'

One of the biggest and most obvious consequences of this worldwide bubble is unemployment. Even Ben Bernanke says that joblessness could be a problem for years. What to do about it? More stimuli!

"The (Fed) believes that a highly accommodative stance of monetary policy will be appropriate for an extended period," he said on Tuesday.

Will this new stimulus succeed? Will the depression end soon?

'No' is the right answer. Instead, it must run its course. It must eliminate plus capacity and reduce excess debt. Until that is done, the job picture will get worse, not better.

Just look at what is happening in state and local governments. The LA Times:

"If the budget deal crafted by Governor Schwarzenegger and top legislative leaders is passed by the legislature and survives the inevitable court challenges, California will undergo perhaps the biggest down scaling of government in its history."

Downscaling government means fewer state-level jobs.

Fewer people drawing salaries from the government means more people looking for work elsewhere. But they will not find it in the blown-up industries and zombie companies of 2009. They will have to wait...and wait...and wait...

In the race to downscale, California faces swift competition. All over America...and in much of the English-speaking world...governments are forced to cut back.

Just look at what is happening in Ireland. Here, we turn to The Telegraph in London:

"Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

"A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

"No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base."

Just getting to Vancouver was a revealing trek. Despite the ongoing Great Recession, it never ceases to amaze me how busy are the major airports. My trip took me through Atlanta and Seattle, and both airports were wall-to-wall travelers. The waiting areas were full, the planes were packed and the baggage areas were filled. Even the rental car counters had lines out the door.

Busy airports may or may not be a sign of life in the larger economy. Even unemployed people can buy a ticket and fly somewhere. All you need is a credit card, if you can still get credit. Meanwhile, airline profit margins are tight. Fuel prices are creeping upwards. The airlines are still nicking you for things like $15 baggage fees. And as I flew over the heartland of the nation, I looked down and pondered our collective fate.

Last week, for example, the Federal Reserve predicted that the U.S. unemployment rate would surpass 10% in the coming months.

That's no big surprise. The true U.S. unemployment rate as at least 15% already when you factor in the long-term unemployed who are not carried on the "official" books.

Then the Fed made a shocking prediction. It forecasted that the U.S. economy would add NO NET NEW JOBS over the next five years! Whoa!

No net new jobs? That ought to scare you. The Census Bureau predicts that the U.S population will grow over five years. But the numbers of new jobs will remain static. That is, for every job gain there will be a loss.

This job-stagnation is a recipe for all sorts of bad things at the local, state and national levels. Government budgets won't balance, so I guess we can plan on more "cost saving" measures such as releasing prisoners early and closing schools. Yep, that's how to build a great nation... More criminals and fewer well-educated citizens.

The Fed announcement is basically an admission of monetary and policy malpractice at the highest levels of the U.S. political class. I witnessed it first-hand a couple weeks ago when I was in Washington, DC. I met with some Congressional staffers who were just clueless. But they sure were full of themselves. They had all the answers, too.

As my Delta flight flew over eastern Washington the other day, I looked down and saw a familiar sight. It was a long, narrow body of water, with a stark, linear feature at the end of it. It was Lake Roosevelt, impounded by the Grand Coulee Dam, of which I wrote last year.

From 36,000 feet, Grand Coulee Dam sure looked small. But it's the largest manmade structure in North America. It's three times the height of Niagara Falls. It's larger than the Great Pyramid of Cheops, times a factor of three. It has enough steel in it (9 million tons) to build about 225 World War II-era battleships, at 40,000 tons each. Today it's rated at about 6.8 gigawatts of electrical power, or the equivalent of about seven large nuclear power plants.

Grand Coulee was built in the 1930s as a government "stimulus" project. This was back in the good old days when the government knew how to "do stimulus." Y'know, build big dams. Kick-start the steel and cement industry. Employ tens of thousands of skilled workers. Do some heroic engineering and create an energy project that will benefit the nation for decades into the future.

No, Grand Coulee by itself didn't solve the issues of the Great Depression. But it sure did come in handy when it started spinning power in 1942, just as the U.S. entered into fighting World War II. One lesson is that if you dream big dreams, you never know what will come out on the other side.

And today? Congress's idea of "stimulus" is to pass a $787 billion pork-bill. But most of the money won't get spent until 2010 and 2011. Oh well, we're going to have to borrow it all anyhow.

I drove across part of southeast Washington and northwest Oregon during my journey to Vancouver. I haven't been up in these parts in many years, so this was my chance.

As I motored around the two and three lane back roads, I sure saw a lot of stuff for sale. It seemed that many households wanted to sell one item or another, often parked prominently along the highway.

I saw cars for sale - old, not-so-old, and nearly new. There were vans, SUVs, trucks, campers and trailers. There was farm and construction equipment. There were boats and ATVs. Then there were dozens of homes and lots with "for sale" signs. Plus many yard sales, with all sorts of household, workplace and institutional goods waiting for buyers.

It was entirely clear that many people are trying to raise cash. So everything's for sale.

Remember that old expression, "Shop 'Till You Drop?" Well, people are dropping. Where's that Grand Coulee Dam project when you need it, right?

I drove along the Columbia River for quite a ways, following the trail of Lewis & Clark, from their expedition in 1805-1806. Today the Columbia is a well-regulated, controlled body of water crossed with dams and dredged as necessary. Large ocean-going ships float serenely in the water next to downtown Portland.

In their journals, Lewis & Clark described a wild Columbia River of raging rapids, filled with gigantic log snags. Some of the logs floating down the Columbia of old were up to 7-feet in diameter and 200-feet long. Big trees, huh? It was a different world back then. Speaking of a different world, I was impressed by the old U.S. Customs House in Portland. Now THAT building also represents a different world, one where the federal government raised its revenues from duties and imposts.

In the olden days a ship captain would dock at Portland or another locale on the Columbia. Then he'd walk over to the U.S. Customs office to declare the cargo and pay the taxes due. This was how the federal government funded its operations. And when the funds were spent, the government had to observe its own fiscal limits.

In other words, the original U.S. government had to take an interest in growing and maintaining the economy. Today, with the fiat dollar, the feds think that they can do anything. Until, of course, the nation spends itself into national penury.