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Message: READINGS from The daily Reckoning ..
| Goldman gets a hidden bailout...Wall Street uses bailout money for bonuses...Cash for Clunkers...nationalizing GM...quantitative easing...Geithner lies to the Chinese... Crackpot ideas! Corruption! What next? But the most breathtaking scene is the one no one seems to notice... Perhaps it is because we have our head in the clouds...so far above the surface of everyday life that we can look down and see what is happening... ..or perhaps because you have to be a connoisseur of absurdity to appreciate it... ..strange...bizarre...almost surreal...even when you see it, you don't quite believe it... First, the voters ruined themselves...now it's the government's turn! The US federal government is digging its own grave...bankrupting itself with its eyes wide shut. And it's not alone... Look back a little more than 100 years ago, and you'll see that something similar happened. Europe went to war. No one knew why. No one knew what he stood to gain. But whether he was a kraut, a frog or a Tommy...he kept at it for four years - until every major government of Europe was broke. Most of them collapsed completely. All of them were broke. Germany and Russia, with the added burdens of war reparations on the one hand, and Bolshevism and civil war on the other, forgot their manners. Both were soon butchering their own people. In the Great War the generals led the way to calamity. Now it is economists... Some observers think the economy is recovering already. Others think it is not. If it is not recovering, it is because it didn't get enough stimulus, they say. If it is recovering, it's because the stimulus has worked. "Fewer layoffs expected as recession winds down," says a headline this morning from one of the wire services. The Dow fell 25 points yesterday...but it's still in bear market rally mode. With a little luck, it could go to 10,500. (Of course, it can do whatever it wants...we're just guessing, based on the experience of other major crash/depression episodes in history.) Oil trades at just under $72 this morning. Gold is at $960. It is "business as usual at Goldman," says a news report. Which is to say, big bonuses for the bankers. The top eight US banks got more than $170 in bailout money last year. They paid about 20% out in bonuses. But now the press and the politicians are on their case. It looks like they might have to ease up on the bonuses...at least until the heat is off. The news is mixed. German factory orders are up...but the Bank of England says the recession is worse than expected; it says it will continue buying bonds. Americans are raising chickens in their backyards again...even in places like Brooklyn. But the latest headlines tell us that requests for unemployment benefits are running below expectations. The housing market is supposed to be stabilizing...but new waves of defaults, resets and foreclosures are coming. Half America's mortgages will be underwater by 2011, says a Reuters report. And Deutschebank warned that construction loans were starting to go bad too. But the big story? Stimulus! [This next wave of the housing tsunami is nothing to scoff at. In fact, these loan contracts also carry a "reset" risk in the fine print, when already high monthly mortgage payments could as much as double - right at the height of the second biggest market meltdown since the Great Depression. ] More below, but first, let's see what The 5 Min. Forecast has in store for us: "In this economy, this is as close as it gets to 'good news,' reports Ian Mathias in today's issue of |
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At least something good has come out of the economic crisis; it blew off the purple robes that clothed economists and exposed their naked flanks. Still, they don't deserve the beating they're getting in the press - with snide remarks and sarcastic comments; they deserve better. A beating with sticks! Even Alan Greenspan admitted he had "found a flaw" in his own thinking. We will have to imagine the giggles from the back of the room - if anyone had been awake. If was as if Stalin had confessed to being rude to his mother or Bernie Madoff copped a plea for shoplifting. The mea was fine, but the culpa didn't seem to measure up to the facts. He, more than any living human being, was responsible for the biggest financial debacle in history; you'd hope he'd be a gentleman about it and hang himself. Meanwhile, the queen of England visited the London School of Economics and had a question: why weren't economists on top of this thing? They replied to this question last month. In a three-page letter, they avoided the simple truth - that their trade was no more reliable than fortune telling and marriage counseling. The letter claimed that a "psychology of denial" prevented government and financial eyes from seeing the catastrophe in front of them. It was "a failure of the collective imagination of many bright people", they said. In fact, it was the exact opposite - imagination run wild. Economists imagined a world without yesterday or tomorrow...a world in which you could run up debts forever and never have to pay them back. Last week, Timothy Geithner promised the Chinese that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America's biggest creditor that the public sector wouldn't continue to run huge deficits - practically an outright lie. But it's one thing to stiff the Chinese; it's another to stiff time. Adjusted for inflation, the US consumer's earnings barely rose from the '70s. By some measures, he had actually less disposable spending power in 2007 than he had in 1973. And now his income is going down. The June number reflected the biggest drop in income in 4 years. Salaries and wages fell 0.4% in June...the 9th drop in the last 10 months. How is it possible for him to spend more?
We pose the familiar question only to set up an unfamiliar answer. In the past, the consumer reached into the future. In many cases, he reached beyond the future, and into Never Never Land. Consumers spent money they hadn't earned yet...thus bringing forward purchases that should have been made years later. The accumulated effect of this was to add $35 trillion in extra spending to the world economy - from America alone - over the course of the great credit expansion, 1945- 2007. That's why we have a depression now - because consumers already spent what they would normally be spending now. Time always gets even. Now, it is the past that is doing the reaching. The automobile bought in 2006...the house bought in 2005...the vacation taken in 1999 - the ghosts of yesteryear spending reach for Americans' paychecks. Of course, in some cases, consumers spent more than they could reasonably expect to pay back - ever. They reached so far the poor ghosts are disappointed. Lenders realized that they'd never get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five - Bear, Lehman, Goldman, JPMorgan and Merrill - only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion. From one scam to another...from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus. What are they thinking? Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future. (Setting aside 'quantitative easing'...or Zimbabwe-style stimulus...an even bigger fraud.) The purest illustration of how this works is in the popular 'cash for clunkers' programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn't expect 2010 to ever arrive...as if they thought they could stop the sun and the seasons...and the Chinese...forever. Like moths in amber, their wings will never tatter...nor will their faith flag. The dollar will always be strong. US bonds will always be in demand. And the future will never arrive. But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011...and then 2012...all the way to the end of time. Enjoy your weekend, Bill Bonner The Daily Reckoning |
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