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Friday, June 19, 2009 The classic post-bubble trends are in place... Investors take comfort from the employment figures... Why inflation, or hyperinflation, lies in wait for the US... Bill Bonner experiences déjà vu all over again...and more! --------------------- Special Offer --------------------------- Only 63 People Know Why These Six Tiny Companies Will Change the World... You're #64 - and about to become ultra-wealthy. This will go down in history as the "story of our era..." Most importantly, you'll be rich because you took decisive action in 2009. See the full report here. --------------------------------------------------------------- Trends in the Post-Bubble Era by Bill Bonner Paris, France Let us begin with a chart, which was sent to us by Dr. Eberhardt Unger: Savings are going up. Spending is going down. That is the fundamental economic trend of the post-Bubble Epoque era. "Without a genuine return of the tendency of households to consume," says Dr. Unger, taking the words out of our mouth, "there can't be, in the United States, a durable economic recovery. Manufacturing is still in sharp decline. It's only the presence of a large volume of liquidity that permits Wall Street to fantasize about a new phase of economic growth." Forget the rally; it's fake. And forget the 'green shoots.' They'll soon shrivel up in the hot summer sun. There ain't going to be any real recovery in the immediate future until the mistakes of the recent past are corrected. And that, as we keep saying, takes time. Yesterday, the Dow rose 58 points. Oil and bonds both stayed put. Gold lost a dollar. And the dollar itself is back to $1.38 per euro. Nothing very exciting. But what's this? It's the end of the housing decline! For the first time in two years, property prices in Southern California went up last month. Is that good news, or what? But wait...they only went up because more expensive houses were sold. Apparently, the mortgage market has loosened up enough to permit larger houses to find buyers. Good news for people who want to buy or sell a house for more than $500,000. But we're not sure it is any indication of a strengthening housing sector. Half the houses sold had been foreclosed. It's hard to imagine people bidding up house prices when their savings rates are going up and their spending rates are doing down. The three just don't go together. Like a top hat, morning coat, and a pair of sneakers. Like Moe, Larry, and Omar...or the father, the sun and the holy tomato. Nah...not likely. Prices should stabilize...but they're not likely to rise. And here's a new forecast from Deutsche Bank that says house prices in the New York area will drop by 40%. All real estate is local, of course. There are bound to be some areas where property prices fall more. And some areas where price declines have already overshot the equilibrium points. These latter areas may experience gains in the bounce-back...but don't expect any broad recovery in the housing market any time soon. In fact, says Rob Parenteau, over at the newly revamped Richebächer Letter, the housing market has yet to find its bottom...and will continue to wreak havoc on the global economy. Read his full report to find out how to protect your wealth (and turn a tidy profit) while everyone else are losing their shirts. See here. Meanwhile, investors take comfort from the employment figures too. "Fall in jobless claims raises hopes," says an item in the Financial Times. Continuing claims dropped off in the first week in June, the report explained. But each week still brings more claims. What, exactly, is happening, we don't know. But we doubt that there is any significant increase in employment in the works. The US economy is still in a downward trend...and this summer, we predict, it will get worse. Take another look at the chart. If this is really the deflationary/depressionary trend we think it is - lower consumer spending with higher consumer saving - there is no way that businesses are going to increase their production or their payrolls. Producer prices are falling faster than they have for five decades - at a 5% rate. Capacity utilization is at an all-time low. Factory output is falling faster than at any time since the shut-down following WWII. The price of labor, the major cost for most businesses, is falling. Ergo, businesses have no pricing power...and no way to increase margins. So, don't expect consumer price inflation...or a business cycle upswing...any time soon. More news from Ian Mathias at The 5 Min. Forecast: "The U.S. government announced yesterday it will auction a record $104 billion in debt next week," writes Ian in today's issue of The 5. "Despite obvious warning signs that the world has had its fill of American paper, the Treasury will forge ahead: $40 billion in 2-year's Tuesday, $37 billion in 5-year notes Wednesday and $27 billion in 7 year garbage on Thursday. "They must 'get it.' Last week's sharp rise in 10-year yields was a sure a sign as any that investors everywhere are getting cold feet. A prudent government would take a break...let things cool off. But there's no rest for Uncle Sam, or his Treasury. They've got the mother of all Ponzi schemes to run: "The government chalked up a $189 billion budget deficit last month alone, another record and the eight straight monthly deficit. We suspect they'd love to take a break from force feeding the market notes and bonds, but they can't...the Treasury will have to auction $2 trillion in debt this year just to keep the lights on. "An interesting aside...funny how government savings started circling the bowl at the precise moment the gold standard was abandoned." With all these government shenanigans afoot, it's no secret where investors will begin to flock - to the ultimate store of value: gold. Luckily, you'll be there first, poised to profit as the price gets higher and higher...and our intrepid correspondent, Byron King, believes that the price of the precious metal will get to $2000. Read his full report here. And back to Bill's remarks and reflections: Of special interest to us is whether or not Mr. Market will be given the time to correct his errors and mend his ways. Except for our heroine, Angela Merkel, practically every major world leader is against him. They're spending trillions to try to make sure that what should happen doesn't. And they have extravagant hypotheses and bumptious pretensions. What they don't have is any experience or proven theory that justifies their trillion-dollar interventions. Above, we said that you shouldn't expect inflation. Well, we take that back. 'Normally,' we should add, you shouldn't expect inflation under these circumstances. But there's not much normal about these times... Shadow Statistics' John Williams explains why inflation, even hyperinflation, lies ahead: "The Fed's efforts at U.S. dollar debasement have been instrumental in recent dollar weakness, which in turn has contributed to the upside pressure on dollar-denominated oil prices. Irrespective of near-term currency market gyrations and central bank intervention, the dollar ultimately is headed much lower against the major currencies. Such helps to generate inflationary pressures in the United States that are not reflective of strong economic activity. "While the excessive growth in the monetary base (100%-plus year-to- year) only has begun to trickle slowly into the broader money measures, the flow can accelerate sharply and quickly. The weakening dollar and Fed activity aimed at dollar debasement have contributed to declining demand for U.S. Treasuries. With low fundamental investor demand for Treasury securities, the Fed increasingly will have to monetize U.S. Treasury borrowings, whether directly or by stealth (such as Federal Reserve largesse flowing to the Treasury through banks now obligated to and/or controlled by the government), despite official protestations to the contrary. "As non-demand-driven inflation and money growth begin to pick-up, so too should the velocity of money (see Money Supply Special Report at www.shadowstats.com) and inflation. Risks never have been higher for the onset of a U.S. hyperinflation within a one-year period. While my timing forecast for such an event remains in the range of 2009 to 2014, given where we sit on the calendar, early 2010 looks increasingly dangerous." We search the history books looking for case studies. How many times before have economies walked in front of a bus? What happened to them afterwards? We have already looked at Japan in the '90s...and the United States in the '30s. Today, our weary eyes turn to the pampas, where they seem to step in front of buses every day. At the beginning of the last century, Argentina was roughly comparable to Europe and America in terms of its industrial growth and wealth. Britain was still considered the richest nation; but an Argentine worker earned almost as much as his British confrere. Argentina had a growing middle class, a democratic government, the world's grandest opera house and its widest boulevard. "As rich as an Argentine," was a popular expression in England at the time. Argentine planters did the shopping in London and Paris...and took their vacations on the Cote d'Azur. New York was a bustling metropolis, just like Buenos Aires. But New York was grimy. Buenos Aires was beautiful...with grand buildings in the Belle Epoque style and mild weather. But something went very wrong on the pampas. A Wikipedia search brings up this: "Argentina went through steady inflation from 1975 to 1991. At the beginning of 1975, the highest denomination was 1,000 pesos. In late 1976, the highest denomination was 5,000 pesos. In early 1979, the highest denomination was 10,000 pesos. By the end of 1981, the highest denomination was 1,000,000 pesos. In the 1983 currency reform, 1 Peso argentino was exchanged for 10,000 pesos. In the 1985 currency reform, 1 austral was exchanged for 1,000 pesos argentinos. In the 1992 currency reform, 1 new peso was exchanged for 10,000 australes. The overall impact of hyperinflation: 1 (1992) peso = 100,000,000,000 pre- 1983 pesos." What happened? We'll have to look at that on Monday...we're out of time for today. Keep reading for today's essay... -------------------- Special Offer ---------------------------- The $2.5 Trillion Gorilla in the Room This is vital. Because, you see, a lot of Americans - and a lot of people in the rest of the world - are counting on credit card-carrying American shoppers to jumpstart the global economic engine all over again. But it isn't going to happen. And you don't want to bank your investments on the idea that it will. Or you'll risk even bigger losses than many Americans have suffered already. Here's how you can save yourself and boost your profits during the coming time bomb... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Today, the biggest borrower in all the land is, you guessed it, the United States of America. And, points out Bill Bonner in the essay below, the Obama Administration is adding to the accumulated U.S. debt at a suicidal pace - four times faster than the record set just last year. Is hyperinflation in our future? Read on... Déjà vu All Over Again. Once More. by Bill Bonner Paris, France Rarely has The Daily Reckoning been criticized for understating trouble. But trouble keeps getting ahead of us. We can barely keep up with it. So often have we anticipated 'disaster' or 'catastrophe' that the words now fall like empty shells. We light the fuses; they don't go off. Alas, we have become alarmists with no bell or siren. We break the glass and pull the lever every week, but no sound is heard...except the familiar words whispered with in a hoarse, weary voice...watch out! So today we turn to the dead for eyewitness accounts: Otto Freidrich described the period of German hyperinflation and its effects: "... People carried wages home in huge crates; by the time they could spend even their trillion-mark notes they were practically worthless... There was not a single girl in the entire middle class who could get married without her father paying a dowry... They saved and saved so that they could get married, and so it destroyed the whole idea of remaining chaste until marriage...the girls learned that virginity didn't matter anymore." "Against my will," wrote author Stefan Zweig "I have witnessed the most terrible defeat of reason and wildest triumph of brutality in the chronicles of history." Zweig lived through the hyperinflation in Germany during the '20s and sold stories to survive. Later, he moved to Brazil and blew his brains out. Brutality triumphed because civilized life was smothered by inflation. The Treaty of Versailles condemned the Huns to pay more than 47,000 tonnes of gold in reparations. Taking that amount of real money out of the economy left the Germans with no choice. They had no money left. They had to create it. Result: hyperinflation. The size of the banknotes rose with the crisis. In 1922, the highest denomination was 50,000 Mark. By 1923, the highest denomination was 100,000,000,000,000 Mark. By December 1923 the exchange rate was 4,200,000,000,000 Marks to 1 US dollar." The German middle class was wiped out. More importantly, the handrails and guideposts wobbled, so there was nothing to hold onto and no way to know where you were going. Businesses, banks, military, police, even the government itself - everything tottered and fell down. In the tumult, war-hardened rabble rolled towards Herr Hitler like loose nuts. "In economics," begins the Wikipedia description, " hyperinflation is inflation that is very high or out of control... Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses." "If the Federal Reserve were a heart patient, the defibrillators would be on already. If it were a normal bank, it would be closed down immediately." Who's the biggest borrower today? The United States of America. At 12% of GDP, its deficit is more than twice as large as that of France. It already owes Japan and China as much as Germany owed its former enemies in reparations - adjusted to today's money. But America's debts are far grander than those of Germany in 1923 - even relative to the size of the US economy. Where Germany owed a little over $1 trillion; America - if you include private debt, official government debt, off-budget obligations and internal commitments - owes 100 times as much. And the United States keeps borrowing more. In a single year - 2009 - it will borrow $1.3 trillion, again, just shy of the debt that sank the Weimar Republic. While the private sector during the bubble years brought U.S. debts to a record 3.7 times the entire nation's output, now it's the public sector that does the borrowing. The Obama Administration is adding to the accumulated U.S. debt at a suicidal pace - four times faster than the record set just last year. And America's central bank hands the borrower a loaded pistol; it is adding bank reserves - which allow the money supply to expand geometrically - at a 4,500% rate. That last number is not a typo. It's an alarm. If the Federal Reserve were a heart patient, the defibrillators would be on already. If it were a normal bank, it would be closed down immediately. But neither Karl Helferich nor Ben Bernanke set out to ruin their economies. Central bankers don't do it intentionally; they do it inevitably. Not because they want to, but because they have to. Like the Germans in the '20s, America has no politically acceptable way to pay her growing debts - except by printing more money. And now, her leading intellectuals urge her on. Cometh the hour when the feds begin to think about cutting back on their program of inflation, cometh the experts who will tell them to keep at it. "The crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts," writes Nobel winning economist Paul Krugman in the New York Times this week. "Those demands should be ignored. It's much too soon to give up on policies that have...pulled us a few inches back from the abyss." "It's déjà vu all over again," he concludes, referring to the Japanese in the '90s and the Americans in the '30s. In both cases, he thinks their economies died because they turned off the juice too soon. But people come to think what they must think when they must think it: "To follow the good counsel of stopping [the inflation machine] would mean... that in a very short time the entire public, factories, mines, railways and post office, national and local government, in short, all national and economic life would be stopped." Karl Helferich, Chairman, Central Bank of Germany, 1923. Déjà vu, all over again. Once more. Enjoy your weekend, Bill Bonner The Daily Reckoning P.S. Our annual Agora Financial Investment Symposium in Vancouver, British Columbia is rapidly approaching...and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a "Decade of Reckoning"...four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade. This event is already 70% sold out...secure your spot now. Click here for all the info: The Agora Financial Investment Symposium: July 21-24 Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis. Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here: Mobs, Messiahs and Markets --------------------- Special Offer --------------------------- With Gold, Who's Laughing Now? With all the flak you've taken for singing gold's praises, wouldn't it be nice to laugh back? Well, today's your lucky day... an opportunity to make up to 20X your money. We have a VERY limited number of spots - so get in now!   The Daily Reckoning - Special Reports: History of Financial Disasters: Will you be Wiped Out? 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