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Today's Daily Reckoning: A Doozy of a Depression Los Perros de San Jose, Nicaragua Monday, February 16, 2009 --------------------- *** The full weight of the depression has yet to fall on the U.S. economy...the most severe downturn in generations... *** Trade is collapsing, and now it’s every man for himself... the force of a correction is equal and opposite to the deception that preceded it... *** The 200th anniversary of Darwin’s birth...and more! --- Special Offer --- Time for Plan B Before you kiss your dreams of an early retirement goodbye, you’ll want to take a look the best ‘little-talked-about’ retirement secret out there. “Plan B Pensions” give you many, many times more options for rebalancing your portfolio in a shifting market than you'll see in either the classic plans or more modern versions, like the 401(k) approach. You can get into some of these “Plan B Pension” programs with as little as $10 . --------------------- Remember our dictum: the force of a correction is equal and opposite to the deception that preceded it. As we looked out over the absurd hallucinations, delusions and lies of the Bubble Years – oh, those happy days! – we warned that the coming correction “would be a doozy.” And a doozy it is. ‘Doozy’ is a technical term we feral economists use. “Depression” is what most people call it. “Slump worst for 50 years,” is the big headline in the Financial Times over the weekend. “Data reveal recession worst than feared.” And the full weight of it has yet to fall upon the economy. A correction takes times...especially when it is not merely a cyclical recession, but a structural depression. The whole structure of the world’s economy is being reshaped. The banking system is insolvent. Thousands of businesses are broke. Millions of households are upside down financially. Joblessness is rising into the tens of millions and may reach 100 million worldwide. “One of the severest downturns in generations,” said U.K. Chancellor Alistair Darling. The downturn is going to be tough for almost everyone, almost everywhere. The French have to learn to live with fewer tourists at home and fewer bottles of champagne exported abroad. The English have to learn to with less revenue from financial services. The Chinese – and Asians generally – have to figure out what to do with all those TV sets that junk Americans aren’t buying anymore. Arabs wonder what to do with their oil. Americans, meanwhile, have to figure out how to get by in a world where strangers aren’t so kind. You’ll remember what made the world go round this last quarter century. Those nice strangers made things and shipped them to Americans. The Americans paid for them with I.O.Us. The foreigners were so accommodating, they never asked for payment. Instead, the I.O.U.s just piled up in their vaults. All that has come to an end. Trade is collapsing. And now it’s every man for himself. Sauve qui peut. Americans aren’t buying. Chinese aren’t selling. So far, the strangers are still being nice about America’s I.O.U.s. They’re politely holding onto their Treasury bonds and not insisting on payment. But they’ve made it clear that they’re not exactly looking for a lot more of them...not when the value of America’s collateral is falling so sharply. And they’ve made it clear that if the United States lets these I.O.U.s go down anymore, they won’t be very happy about it. But what we’re wondering is whether we should add a corollary to our dictum: Yes, the force of a correction is equal and opposite to the deception that preceded it. And the measures taken to stop the correction will be just as absurd as the crackpot ideas that got the economy into trouble in the first place. We don’t know what particular good this insight does for us. But it just shows that the show isn’t over. One hallucination may have run its course, but there are plenty more. And they have consequences too. What the world waits to see is how long it takes these consequences to reveal themselves. No one doubts, broadly, what the consequences will be. Governments are doing their level best to create inflation. Sooner or later, they’ll get the hang of it. But when? How? That’s the thing...no one knows. The depression is taking the stuffing out of prices. Trillions in nominal purchasing power have disappeared. Workers have been laid off by the millions. There are too many Starbucks...too many malls...too many factories. All these things are dragging down prices...even while the feds inflate the money supply. Where will the turnaround come? When will prices stop going down and begin going up? No one knows... *** We have come back to Nicaragua – for the first time in three years. It’s the kids’ winter vacation. But now, we only have one kid with us – Edward, 15 years old. All the others aren’t kids anymore. They’re away at college...or working. Even Elizabeth is away at college. She is studying at the Sorbonne and can’t join us until next week. Until next week, it is just us...the sea...the sun...the tropics...and all that goes with it. Right now, we are sitting on the veranda of the Rancho Santana clubhouse. The sun is bright and hot over the ocean...a sea breeze cools the air...the palm trees sway...the waves crash onto the shore, spinning the surfer’s head over heels. Eat your hearts out, dear readers... “What’s this?” Edward was pointing at a strange animal that looked like a giant cockroach. “It’s a bug,” his father, the naturalist, answered. Darwin seemed to have no natural enemies last week. It was the 200th anniversary of Darwin’s birth. His theory was blessed in every account we saw. Everyone was on his side. As a result his ideas reproduced and multiplied until they were in practically every newspaper. Commentators saw Darwinism at work everywhere. In the current worldwide financial meltdown, for example, they thought they saw not the beneficent ‘invisible hand’ of Adam Smith, but the bloody claw of natural selection. “It’s the survival of the fittest at work,” said one opinionist. Ideas, like rats, need predators. Otherwise, they get out of hand. Seeing none to cull the weak parts of Darwin’s pensee, we will do it ourselves. There are two parts to Darwinism as it is popularly understood. One part is based on observation – at which Darwin was a master. The other is extrapolation – not so much on Darwin’s part, but his followers. The problem is that the part that is probably correct is child-like and obvious. And the part that is more grown up is nothing more than empty guesswork. He notes that some animals are better suited to their environments than others. If a polar bear were suddenly born to a hog here in Nicaragua, it probably wouldn’t last long. On the other hand, if a mutation produced a naked polar bear at the North Pole, it wouldn’t stand much of a chance either. Both would probably perish, leaving no heirs or assigns...and thus removing from the gene pool whatever crazy aberration that created them. Some things survive and reproduce; some don’t. The essence of Darwinism is nothing more than that simple-minded observation, as near as we can tell. But the application of this notion far and wide is a threat to the intellectual eco-system. Because of it, people think they know a lot more than they actually know. To the question, why is the polar bear white, rather than black, they have a ready answer: because evolution made him white. But this is no answer at all...it just postpones thinking until the next question: why did evolution make him that way? Then, the guesses begin: because he can blend into the snowy background and sneak up on seals. Oh. They tell us, for example, that he covers his nose – which is black – with his paw, so he can get closer without being spotted. Smart bear. But you’d think if evolution could turn his whole body black it could whitewash his nose too. And what about the seals? Are they morons? You’d think those that couldn’t tell the difference between a bear with his paw over his nose and an iceberg would have been weeded out by now. Besides, why aren’t seals white? Of course, the biologists and know-it-alls have their answers, but they are just putting 2 and 2 together in the clumsiest way. They really don’t know why polar bears are white. All they know is that nature hasn’t exterminated the white polar bears – yet. Many of these deep thinkers also believe that Darwin proved that God didn’t create man. Instead, man arose by the process of evolution, they say, one accidental step at a time. Man is the product of pure chance, they claim. As if God couldn’t make it look like an accident, if He wanted! Enjoy your President’s Day, Bill Bonner The Daily Reckoning --- Special Offer --- How you can turn just $200 into $1.2 million! These scientifically selected Penny Stocks beat the pants off the Dow, the NASDAQ and the S&P 500. We do all the hard work, and instruct you on exactly what to buy... Discover the easiest way to earn the most money in the market in this free report... Guest Essay: The Daily Reckoning PRESENTS: You’ve gotta be pretty confident to create as much money and credit as the Federal Government has in the last few years. But according to The Mogambo Guru, it’s all a product of the Keyensian theory of economics. And he says it doesn’t take confidence...it takes ignorance and stupidty. Read on... AN EDIFICE OF PURE ECONOMIC CRAPOLA by The Mogambo Guru Benn Steil, who is on the Council of Foreign Relations and an editor of an economics journal, is writing in the Financial Times , see, and his essay has the catchy headline “Keynes and the Triumph of Hope over Economics”, which is so terrifically profound and funny at the same time that I laughed out loud, which was unfortunate, as I had just taken a big bite of a yummy chilidog and it sprayed all over the place as a result of my mighty guffaw. This messy kind of accident has happened to me before, and which is why I now cleverly use somebody else’s desk and computer whenever I eat something while “working” or downloading porn on the computer. Anyway, I instantly liked the guy! He seems to be, like I always am, bewailing the fact that we economists are getting a really bad rap because of all the idiots in the world who also call themselves “economists”, with the important distinction between us and them that that they have taken over the schools, the governments and the media to spread their stinking, lunatic, neo-Keynesian econometric bastard offspring “theory of economics”, full of one ridiculous assumption after another, upon which they built an enormous, glittering edifice of Pure Economic Crapola (PEC). Like what? Well, like “the consumption function” which is at the root of the whole theory, which is that when you get a dollar of income, you spend some and you save some. I know what you are thinking; you are thinking, “These guys get paid for knowing THAT? Hahaha!” Well, there is more, as the mysterious, necromantic arts of economics comes in to determine, as a constant – with an astonishing precision out to three decimal places! – exactly HOW much you spend and how much you save of each dollar! Hahaha! And then they say, “That’s not complicated enough! Let’s adjust it for, ummm, the ‘wealth effect’, which is the phenomenon that when you make a lot of money or you have a lot of money, you spend a little more and save a little less!” If it stopped there, it would be mildly interesting and make for good fodder for a barroom argument with other drunken sots, but these moronic Modern Economist Establishment weenies thought that they had finally found a computer program, full of equations and countless variables, that could reliably guide monetary policy to maintain the value of the dollar and prevent the business cycle while creating excess money and credit to maintain a boom of governmental deficit-spending and rampant indebtedness! Hahahaha! Morons! And yet, trust me when I tell you that it will get you nowhere to stand outside the Federal Reserve Building in Washington, D.C. and helpfully yell out, “Hey! In case you ain’t heard, you Fed guys and all your stupid incestuous friends are morons if you think that your stupid econometric equations can possibly, possibly, possibly work, which can be easily proved if you just get up off of your fat, worthless butts and look at the ruinous, Depression-like conditions you produced! The purchasing power of the dollar is now crapola, while the top two industries in America are government spending and trading financial securities back forth between ourselves!” If you have any time left before the security guards arrive and make you go away, try telling them, “Now the sheer suffocating size and expense of the federal, state and local governments in America are truly gargantuan, thanks to your stupid incompetence and sheer stupidity in actually believing such a ridiculous theory of benign consequences from such enormous expansion of money and credit!!!” The three exclamation points are an indication that your voice should be at maximum volume at this point for optimal impact, as I can hear police sirens approaching. Mr. Steil is not amused at our antics, and continues, “on the other hand, we call for trillion dollar stimulus plan on the basis of little more than citing John Maynard Keynes” which “gives us special license to talk economics without knowing any.” Hahaha! Exactly right! Well put! And like the guy who wears a T-shirt that proudly proclaims “I am not a gynecologist, but I’ll take a look” the results of having economic poseurs and idiots at the Federal Reserve inflict their idiotic econometric theories upon us have been Disastrously, Ruinously Bad (DARB). Which brings up, as you knew it would, a Powerful Mogambo Suggestion (PMS) to buy gold, silver and oil to protect yourself from insane monetary policies of the Federal Reserve and the insane fiscal policies of Congress, and maybe make a pile of devalued dollars in the process, too! Whee! This investing stuff is easy! Until next time, The Mogambo Guru for The Daily Reckoning