The Paradox of Saving
London, England
Monday, November 17, 2008
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*** The Dow keeps losing ground – how much more of this can investors take?...everyone has their hands outstretched for a bailout...
*** Who needs college when you can take Mr. Market’s Advanced Seminar on Economic Corrections?...the propensity to save...
*** Thomas L. Friedman is back – let the games begin!...is Dubya starting to make sense to anyone else?...and more!
Today, we look at a couple of simpletons – one to offer praise...the other, just to laugh at him.
Before we do, let’s look at the headlines.
The Dow dropped another 338 points on Friday...and lost another 2 % early this morning. How much more of this can investors take? Berkshire Hathaway fell below $100,000. And GM appeared to be heading for the junkyard.
A GM bailout would cost $200 billion, say the papers. Uh oh...that’s more than the feds have on hand. And right behind GM are cities, states, colleges...all with their hands out...
Yes, they are all of “vital national importance.” We can’t let them fail, can we?
Of course, it’s all nonsense. Automakers...governments...they go broke from time to time; it’s no big deal. And colleges...who needs them? You can get a much better education just keeping your eyes open. Right now, Mr. Market’s Advanced Seminar on Economic Corrections is delivering one helluva lesson. Of course, the tuition is very expensive...
Stocks are down so much that dividend yields are beginning to look respectable again – averaging about 3.8%. For the first time in 50 years, you can get more yield from a stock than from a 10-year US Treasury bond. You remember, stocks were supposed to pay lower dividends because stockholders are supposed to earn capital gains as well as dividends. The combination of capital gains and dividends gives investors a total return greater than bonds; this is the “risk premium” that you get to compensate you for periods when stocks go down. What happened to the risk premium? Here it is!
When is the risk premium at its lowest? At the very moment when investors believe it is highest. That is, at the end of the ’90s, investors came to believe that they couldn’t go wrong with stocks. They were so sure that stocks were the way to go that they willingly bought stocks that paid little or nothing in dividends. They thought the price of the stock would go up; so they didn’t need dividends.
But stocks have gone nowhere since the mid-’90s. Now, investors want dividends.
Meanwhile, to those who have been given the most Mr. Market takes the most back. No country got as much out of the credit expansion as Britain. Its leading industry – finance – was in high cotton for the last decade. Gone were the conservatives old bankers with their derby hats and pin striped suits. The new breed of go-go moneymen in the City wore fancy Italian suits and came up with plenty of fancy investments too.
But just as the bankers were fashion victims, so were their clients.
Poor RAB Capital, for example. The hedge fund manager is traded in London. It’s seen its funds under management fall by 70%...and its share price is down 92%.
The pound is down 25% against the dollar over the last 90 days. Housing is down about as much as in the United States. “Help wanted,” signs are disappearing from shop windows. And suddenly you can get a table at a good restaurant without a reservation.
But that’s the trouble with a downturn. Just when other people can’t afford to eat at fancy restaurants – neither can you!
“Everybody’s got to cut back,” we told the family again on Saturday. “This is a global financial crisis. We don’t know how long it will last or how bad it will get. But we’re saving every possible penny – just in case.”
This is what economists call the “propensity to save.” It’s what happens in a serious downturn. But the propensity to save is not necessary shared by all the members of the family alike. Edward, 15, put his finger on what economists call the “paradox of saving:”
“Hey, Dad, but if we all stop spending...nobody will have any money, will they? Besides, you said you’d get me a new skateboard for my birthday.”
Edward is more civic minded than his father.
High rates of saving causes a recession to turn exceptionally nasty. People cut back...and all of a sudden...the cutbacks are magnified by millions of little decisions all up and down the economic ladder. The rich cancel their restaurant reservations...the poor buy a little less meat. But one man’s expense is another’s revenue. Pretty soon, money is getting tight throughout the whole system. That said, the man whose financial advisor tells him to keep spending in order to help the economy has a fool for a counselor. The smart thing to do is to cut back; let someone else go broke.
*** We are so happy to see Thomas L. Friedman back in the pages of the International Herald Tribune ...and back in form too!
The NY Times columnist is always entertaining...and helpful. Unwittingly, of course, the only way possible for Friedman. What makes him entertaining is that he is perpetually in a state of emergency...an irrepressible alarm...that causes him to run around wildly and crash into things.
Remember the terrorism scare of the early 2000s? Friedman was right at the front of it...howling at the mob to mobilize...urging them to panic. Otherwise, the terrorists were going to blow up every public building and underwear store in Christendom. More recently, there was his fright about rising oil prices. Once again, we had to “do something!” He called for a massive, nationwide campaign, “similar to the Manhattan project,” in order to save America from the oil exporters.
Now, it’s the financial crisis that has the man in a sweat. What a delight to have his views on the financial world! He is such a shallow thinker that his errors are always right on the surface. It is reassuring too; if Freidman agreed with our position, we’d have to rethink it.
“If you are going to fight a global financial panic like this, you have to go at it with overwhelming force,” writes Freidman. How does he know that? How many of these things has he seen? Well, none. No one ever has...which he admits a few lines earlier.
But ignorance never stops Freidman. He may not know where the enemy is...but he gives the order anyway: “Charge!”
“This is no time for half-measures,” he continues. How does he know what is a half-measure and what is a full measure? And what about no measure at all? Again, he doesn’t explain. But this is no time for thinking – it’s once again, into the breach! What we need now is “an overwhelming stimulus that gets people shopping again. And an over-whelming recapitalization of the banking system that gets it lending again.”
“Go shopping,” he summarizes.
Anyone with half a brain knows that it was too much shopping and too much lending that got the United States into this jamb. But that disqualifies Friedman right there. Not that he isn’t a smart fellow; but he’s determined not to let thinking get in his way. He’s smart enough to know that once you start thinking about things, they always turn out to be more complicated and nuanced than you had hoped.
But if you concern yourself only with appearances, you don’t have to worry about it. What do people in a healthy economy do? They go shopping. What do banks in a healthy economy do? They lend money. So, hey, this is easy. If banks would just lend and consumers would just buy things – we’d have a healthy economy, no?
Another charming feature of Friedman’s pensée is his willingness to chuck principles, rules and dignity whenever they get in the way. Dismissing the question of why the taxpayer should pay for Wall Street’s mistakes, he writes: “...fairness is not on the menu anymore...we need to throw everything we can at this problem...”
And now we turn our attention to the White House. George W. Bush is said to be not merely a lame duck president...but a dead duck too. He cost Republicans a victory, say pundits: he ruined the country...he destroyed the empire...he wrecked the economy. Today, you could accuse the man of sorcery or child molesting and half the nation would believe you.
Before we come to our revisionist look at the man, we repeat our advice. Just this weekend, Barack Obama pledged to put an end to Bush’s disgraceful torture policy. Dubya should watch his back and avoid foreign travel; otherwise he’s likely to arrested and slapped with a human rights violation. After all, most of the world would like to see him do the perp walk. Besides, he deserves it.
But here at The Daily Reckoning we always take the side of the underdog and the lost cause. Poor George is both. So, when we read the text of his speech last week in New York, we found it to our liking. Here is a man who has had some sort of brain operation or brain washing, we decided. They severed the connections, making it possible for him to think one thing and so something entirely different.
“History has shown that the great threat to economic prosperity is not too little government involvement in the market. It is too much government involvement in the market. ... And the surest path to...growth is free markets and free people.
“Capitalism is not perfect. But it is by far the most efficient and just way of structuring an economy. Capitalism offers people the freedom to choose where they work and what they do, the opportunity to buy or sell products they want and the dignity that comes form profiting from their talent and hard work...
“The record is unmistakable: if you seek economic growth, social justice and human dignity, the free market system is the way to go.”
These insights are, to our mind, correct. But the U.S. government with George W. Bush at the controls hardly favored free-market capitalism. Instead, the Bush administration presided over a “mixed economy” – both “innocent fraud,” as John K. Galbraith described the free-market’s excesses, and the government’s armed robbery.
... 36% of GDP was spent by government...and more than half of all eligible voters depended for their livelihoods – in whole or part – on government checks
...federally–chartered mortgage lenders – Fannie and Freddie – helped stimulate a huge bubble in the housing market
...the US government’s central bank – the Federal Reserve – led by Mr. Bush’s appointee, Alan Greenspan, practically single-handedly caused a huge bubble in finance, credit, speculation and consumer spending
...when the bubble inevitably burst, Mr. Bush’s own Treasury Secretary (recently one of the Wall Street bankers who had most benefited from the financial bubble) rushed in to use government money (aka taxpayers’ money) to buy up Wall Street’s mistakes...
...then, the feds partially nationalized the nations leading banks...
...and further lowered the cost of credit, in order to try to blow the bubble up again...
...and now, the United States, along with the world’s other leading governments, is pledging to give the world what it least needs – more regulation!
Until tomorrow,
Bill Bonner
The Daily Reckoning
The Daily Reckoning PRESENTS: In a dramatic example of the absurdity of government, we discover that “treasury issue requirements will be north of three trillion dollars in this fiscal year”. And to that, our Mighty Mogambo adds a much-deserved “gong”, as the U.S. gets booed off-stage in utter shame. And it only gets worse. Read on...
THE GOVERNMENTAL GONG SHOW
by The Mogambo Guru
My Puny Mogambo Mind (PMM) is actually retreating into a little Mogambo Inner Bunker (MIB) of its own, and I find that I avoid looking at what is happening at the hands of Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke, as all of this money is going to show up in an explosion of prices, including food and energy, and that is when societal hell breaks loose and it’s, “Game Over, Player One.”
So I was doing a pretty good job of evading things, and I had finally relaxed enough to pry open one corner of my mouth in which a straw could be inserted so that I might at least drink something. Then, in what can only be described as careless, Karl Denninger’s essay – posted at market-ticker.org – hit my eyes and my brain with, “to fund all this crap that Congress, Paulson and Bernanke have in the pipe (you know, the TARP, the newly-minted SIV that Ben announced this morning to buy commercial paper, etc.) the treasury issue requirements will be north of three trillion dollars in this fiscal year”!
While the tone of Mr. Denninger’s sentence is well-suited to the subject matter, I regret that the concluding exclamation point of the sentence was added by me, as Mighty Mogambo Editor (MME), and I have issued a stern rebuke to Mr. Denninger about proper punctuation, such as this Freaking Screaming Horror (SFH) of $3 trillion dollars in fresh governmental borrowing in one year!! Which you will notice merits two freaking exclamation points just by itself! Jeez!
Well, to be fair, the AP news service reports – without exclamation points – that the Federal Reserve announced that it will “provide up to $540 billion in financing to bolster the money market mutual fund industry, its latest effort to get credit flowing more freely again.” Gonggggg!
I include that “gonggggg” because that is the sound that I distinctly heard when I saw the figure “$540 billion”, so you can see why I was distracted with this “gonggggg” thing, as the first thing that crossed my mind was that it sounded like a funeral gong or something equally as spooky.
But it got weird when I read, “The Fed’s new program, called the Money Market Investor Funding Facility, will be used to support a private-sector initiative designed to provide liquidity, or cash, to money market investors.”
So what in the hell is a “private-sector initiative” whereby people would loan money at less than 1%? I don’t know, and the only thing that I know is that it will be the proverbial cold day in hell when I will loan money at squat interest rates!
But it is the sheer magnitude that is shocking! $540 billion! The last thing that I saw before I passed out on the floor from the shock is that while $540 billion seems like a lot, it IS a lot! In fact, it is 16% of the whole “$3.45 trillion held in money-market funds as of Friday”!
And speaking of money, from Reuters we read that the People’s Daily – “the official newspaper of China’s ruling Communist Party” – had “front-page commentary” that said, “The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place.”
I have two objections to this crap, one being that the People’s Daily is wrong; the United States did NOT “plunder” anybody; rather, the U.S. just took advantage of a bunch of ignorant rubes and hustled them out of their money! Hahaha! Ever heard of a guy name Ponzi? Well, look it up, morons! Hahahaha! Welcome to the big leagues!
The second objection is that if there is another currency that is NOT corrupted by over-creation – as is the U.S. dollar – I would love to hear about it, but the ugly fact is that all the world’s currencies are fiat currencies now, all composed of nothing but paper and electronic promises in some computers somewhere, and all being created in incredible excess even as we speak, which means that all of the world’s currencies are racing towards worthlessness.
Anyway, the article went on to say, “A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order”.
Of course, I sent them a telegram suggesting that they move their meeting to Disney World in Florida, near where I live, as I would love to tell them that they should swap their dollar reserves for the gold, and then I could send them a big whopping bill for my “consultation” services.
But they insist on holding their stupid meeting in China, and I am certainly not going to go all the way to China to give them my Priceless Mogambo Advice (PMA). So I change my tactics, and I send them my advice and bill them anyway! Hahaha!
I learned this technique from doctors who come by your hospital room and say, “Hi! I’m Doctor Blah Blah! I was walking by, so I looked at your chart, and now I can charge you $375 to tell you that and you should stop grinding your teeth in outrage at the unbelievable monetary excesses of the Federal Reserve and the corrupt compliance of Congress and the Supreme Court! Goodbye!”
I then discover, to my horror, that I may be waiting a long time for the Chinese to pay the bill for my terrific advice to get all the gold they can get their hands on, and I may be facing a protracted lawsuit because GATA.org already had the headline that “Economist Mundell says China should buy all IMF gold.”
So even though Mr. Mundell’s good advice to the Chinese to buy gold obviously preceded my own, that does not mean that my advice is valueless, just like Dr. Blah Blah who looked at my chart in the hospital, read the notes, came to the same conclusions, agreed with everything the attending physicians had done, had no new suggestions, and yet I still had to pay him $375.
But either way, gold is going higher in price, as it must, and now the tables are turned and it is me that is getting rich! Whee! This investing stuff is easy!
Until next time,
The Mogambo Guru
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