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The Daily Reckoning Tuesday, August 11, 2009 Expect a very long period of downsizing... Re-jigging the world's economies to the new economic realities... An unexpected visitor at the chateau...Donovan is coming! An excerpt from the newly updated Financial Reckoning Day... Land of the Lost Decades by Bill Bonner Ouzilly, France What's ahead? A "Lost Couple of Decades..." says Comstock partners. Yesterday, we estimated that it would take 19 years for the economy to complete its de-leveraging. It was not a very scientific estimate. But total debt has gone down about $2 trillion over the last 24 months. So, if it continued at that rate, it would take about 19 years to erase the extraordinary amount of debt built up in the bubble years. Now, along comes the Comstock crowd with roughly the same guess - two decades. They figure that the savings rate will go up to 10% and that the effect of taking that money out of the consumer economy will be to put the United States into a long, soft slump - just as we predicted in our first book. And there's another reason to expect a very long period of downsizing: that's just the way economies work. Market cycles are very long. Interest rates went up from the Great Depression all the way to the Reagan Administration. Then, they went down...and may still be going down. Stocks go up and down in cycles that last 30-40 years, peak to peak. The peak in '29 was followed by another peak in '66, which was followed by another peak in '99. Economic cycles are long too. Consumer debt, compared to disposable income, hit a low in 1945. It went up for the next 62 years. It only peaked out in 2007. If the chart were symmetrical, the process of deleveraging (getting rid of debt) would show a downtrend until 2069! And maybe it will. But there's no point in looking that far ahead. What we have in front of us is the opening stage of a depression...a market crash followed by a major economic re-adjustment. The new reality is that consumer demand is down...and will stay down for a very long time, at least until debt has reached more manageable proportions. Ken Rogoff says that will take 6-8 years. We say it could take 19 years. There's about $20 trillion in excess private sector debt to be eliminated. It will take time to get rid of it. And it will take time to re-jig the world's economies to the new economic realities. John Hussman explains... "If we knew that this was a standard economic downturn, we might conclude that the recent improvements are durable. However, nothing convinces us that this is a standard economic downturn. "Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP. That sort of tab will undoubtedly buy some amount of Kool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up. "When markets crashes are coupled with changes in the fundamentals that supported the preceding bubble - as we observed in the post-1929 market, the gold market of the 1980's, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble - they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years. " [It's clear that this isn't your garden-variety downturn...and it's time to settle in for the long haul. But you can still make sure you are sitting pretty...set up your own personal bailout by clicking here.] Now let's turn to The 5 Min. Forecast for more news: "How do you say bubble in Mandarin?" asks Ian Mathias in today's issue of The 5. Chinese property sales are up over 60% so far this year, their National Bureau of Statistics proclaimed yesterday. That puts the housing bubble here to shame. We've heard a bunch of nosebleed data points outta there in the last few weeks...check these out: New loan issuance has tripled in the first half of 2009, to $1.1 trillion. That's more than half of the entire Chinese GDP over the same period. 95% of those loans went to state-owned enterprises or provincial entities. The Shanghai Composite is up 79% year to date, the best major market performance in the world. Stocks on the Shanghai Comp. trade for 35.4 times earnings, double that of the MSCI emerging market's index. M2 money supply rose over 28.5% in the first half. The seven largest bond sales in the world this year were domestic transactions in China. Damn near everything is up dramatically in China in 2009...except exports. Strangely, we don't hear a lot of concern that the backbone of their economy has contracted 23% since this time last year. Ian writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. It's a free service available only to subscribers to Agora Financial's paid publications. One such newsletter, Wayne Burritt's Easy Money Options, offers a "bread and butter" technique for discovering the most lucrative gains around...like 150% plus in as little as two weeks. Click here to learn more. And back to Bill, with more thoughts: It's a real Ouzilly summer...bright sun...long evenings on the veranda...cool nights. Yesterday, while we were painting in the sunroom, we noticed a group of people wandering around the yard. They were taking photos...pointing at things. It was as if a group of tourists had walked in and decided to have a tour. But with them was an old man, bent over ...and wearing the blue outfit of a French workingman. This was no tourist. "Mr. Bonner?" a middle-aged woman began the conversation. She then introduced the group. It turned out that the old man - Mr. Brillaud - had been born on the property 90 years ago. Now, here he was...with his children and grandchildren. She asked if they could have a look around the place. "Of course," we replied. "I was born right up there," said the old man - pointing to the top floor of the house. "Oh, Mr. Bonner...you'd like to hear the stories this house could tell. I was born in 1919. My father came back from the war in 1920. He worked on the farm until he had a heart attack when he was 55 years old. My grandfather lived here too. He had gone over to the nearby village with a wagonload of gravel...the horse reared up and turned the wagon over. My grandfather was killed. "My mother was a cook here." He pointed to the kitchen. "But it was very different then. There was a whole community around the farm. There were the Cornettes, who lived in the house across the road. And the Desportes, who lived in the house down the lane. Oh...and a few other families too. It took so many people to make the place work. "And is the old bread oven still there? You know, in that building at the end of the courtyard?" "Yes...it's still there," we told him. "We used to love that place. It was where we made bread for the whole village. It was always warm. And it smelled so good. "We had to do everything ourselves. We grew the wheat. Then, we milled it. And then we made bread. And we had chickens for eggs. And cows for milk. And, of course, the vegetable garden. I don't think we had any money. But it wasn't a bad life. "Then, they changed the whole thing in the '60s. They put in place a law that said you had to pay the people on a farm...and contribute to their Social Security. Then, there were too many people on the farm for it to support. So, they all moved away. The only ones left when you got here were the Debonnet family, weren't they? Francois was still here. And now he's retired too. "Oh, and what have you done to the octagon?" he motioned to the building that we transformed into a library/office. We walked over to have a look. "It used to be for ironing," he continued. "There was a big brick fireplace in the center. We didn't have electric irons, you know. Instead, there were heavy irons on top the fireplace. It had an iron top, you see. You'd come in here and there would be irons on the fireplace, getting hot...and usually one of the maids ironing sheets. It kept them pretty busy. "Of course, it kept us all busy. We didn't have any 35-hour workweek back then. We worked all the time." Donovan is coming! Donovan...a handsome young Swiss man...a friend of a friend...did the cooking for us a few years ago. He is widely remembered. "Isn't he the one who got that girl in the village pregnant?" asked one of the boys at dinner last night. "No, he's the one who took the car and wrecked it. He didn't have a driving license," explained another. "And I remember when he went out in the evening...he went into town...and then, for some reason, he had to walk back. That's about a two-hour's walk. And he was so out-of-it he walked by the house and just kept going...until he finally realized he had gone too far...so he had to walk an hour back. He came into the driveway about 6AM...looked like he had been hit by a truck..." "He made quite an impression on all!" said another source. "I will never forget Donovan - not to mention the most memorable week of my life! What a thrill it was to sit under the spreading linden tree near the garden wall, reading and sipping on a peach royale whilst millions of bees happily kept to their work above my head. Later, I toured the garden below and helped the Dashing Mr. D. gather gooseberries. "One of my favorite pictures is Chef Donovan at the outdoor grille off the veranda, cooking up the evening's feast: wild boar steaks. Incredible! And incredibly delicious! My first experience of centuries old artwork and architecture in Europe was on our impromptu guided tour of churches in and near Montmorillon on a rainy Monday; Donovan, of course, in the lead with all manner of historical information. And I believe Donovan had a hand in the spectacular midnight fiery pyre display that thrilled and awed us all, and celebrated St. John's Day, if memory serves. Is it exaggerating to claim Donovan the sine qua non on our d'Ouzilly experience?" Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- You're Seconds Away From Your Shot at Life-Changing Ultra-Wealth Changing lives. Raking in huge fortunes. Just last week, in fact, saw a 235% gain...and there's more to come... Timing is critical here...parts of what you'll see in this special report are extremely time-sensitive. So critical, in fact, that your immediate reply is absolutely essential. Keep reading for all the details... --------------------------------------------------------------- The Daily Reckoning PRESENTS: In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a " hidden debt " far greater than official public debt. Bill Bonner and Addison Wiggin explore in this excerpt from the newly updated Financial Reckoning Day. Read on... Social Security? Not Exactly by Bill Bonner and Addison Wiggin Ouzilly, France The first public retirement pension scheme was created by Otto von Bismarck in 1880 Germany. Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States. As we've seen, the number of people expected to reach the retirement age of 65 was not considered to pose a threat to future funding. Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system. When Social Security was founded, the typical US worker at age 65 could expect to live another 11.9 years. But if today's official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today's worker would be waiting until age 73 to receive full benefits and tomorrow's workers even longer. In a report called "Demographics and Capital Markets Returns," Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. "When an entire society ages," suggest Arnott and Casscells, "...the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations." In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a " hidden debt " far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode. The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level. And to the retiring boomers' other doubts and insecurities, we might add that US health care costs are expected to rise by 7 percent of GDP over the next 40 years - a rate that is more than twice as fast as other developing nations. The "old old," - those aged 80 and over - are predicted to rise sharply through 2050 and will dramatically increase long - term care costs as well as disability, dependence, and health care expenses. In fact, by official projections, in 2030, the US government will be spending more on nursing homes than it spends on Social Security today. "Although people justifiably worry about Social Security," says Victor Fuchs, an economist who studies the health care industry, "paying for old folks' health care is the real 800-pound gorilla facing the US economy." Adding projections for Medicare and Medicaid 's expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes. "And to the retiring boomers’ other doubts and insecurities, we might add that US health care costs are expected to rise by 7 percent of GDP over the next 40 years – a rate that is more than twice as fast as other developing nations." The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic's Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You're encouraged to delve into the numbers we presented in the film and book. They're truly mindboggling. But in many ways the project was dated the moment we released it to the public. The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries' hospital care will be insolvent by 2017 - two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. Medicare would have to deposit $ 13.4 trillion - $ 1 trillion higher than last year's estimate - into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program's total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers' earnings or the economy as a whole. Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded. For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties - indeed, because of the difficulties - it is essential that action be taken soon, particularly to control health care costs. After the revised Social Security and Medicare announcement the world began to wonder: Can the US hold onto its AAA credit rating? "The US government has had a triple-A credit rating since 1917," David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, " but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating. "First, while comprehensive health care reform is needed, it must not further harm our nation ' s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country's future. "Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us." Of course, we must note that the whole credit rating biz is...well...corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch, and Moody's) are the same ones that left us all out to dry in 2007. (Of course, mortgage - backed securities get a AAA...housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too. But even Moody's is starting to hedge their bets. They've since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable...a corporate way of saying the good, the bad, and the ugly. While the United States isn't in the worst of the bunch, it's certainly not the best. Regards, Bill Bonner and Addison Wiggin for The Daily Reckoning 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. He is also the author of, along with Lila Rajiva, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics. Addison Wiggin is the editorial director of The Daily Reckoning, and executive publisher of Agora Financial, a multi-million dollar financial research firm and publishing group based in Baltimore, Maryland. He is also the executive producer and a writer of I.O.U.S.A. a feature length documentary film nominated for the Grand Jury prize at the 2008 Sundance Film Festival. This essay was taken from Bill and Addison's recently updated national bestseller, Financial Reckoning Day Fallout: Surviving Today's Global Depression, available now. Click here to secure your copy today. 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