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The Daily Reckoning Monday, September 14, 2009 It's the one-year anniversary of the Lehman bankruptcy... Fear will come back...when people realize where they're headed... Protectionism is on the rise...living in a deflationary world... The Mogambo on the government's role in the economy...and more! The World After the Fall of Lehman by Bill Bonner London, England This week marks the one-year anniversary of the Lehman bankruptcy. The media struggles to say something meaningful about it. Here at The Daily Reckoning we will not even attempt meaningfulness. We'll be satisfied with a few snide remarks. What is most remarkable about the world a year after Lehman fell it is that so little seems to have changed. Even the papers have noticed. "A year after Lehman, little change on Wall Street," says the headline on today's International Herald Tribune. "Backed by huge US government guarantees, the biggest banks have re-structured only around the edges. Employment [on Wall Street] has fallen just 8% since last September." "Obama to push banking overhaul," says another headline at the Telegraph. Yes, the pols will try to convince the world that they have regulated risk out of the market. Perhaps they will limit salaries...or insist on more disclosure...or require that the capitalists hold onto more of their capital. Then, they will stand before voters and say they have made the world safe for democratic capitalism. Don't believe it; their bailouts have made it more dangerous. We don't know whether this was what Nobel prize-winning economist Joseph Stiglitz had in mind. But he has come to the same conclusion: "Stiglitz says banking problems are now bigger than pre-Lehman," says the Bloomberg report. Yes, Wall Street has a good gig going. The whole industry now benefits from the hedge fund formula - 'heads I win, tails somebody else loses.' When the hedge funds play the game, it's their clients who lose money. But the way Wall Street banks play it, the big loser is the US government directly, and US taxpayers and bondholders indirectly. When the going is good, the bankers make millions in profits - which they take home as salary and bonuses. An analyst at JPMorgan estimates that American and European banks will pay their 141,000 investment banking employees $77 billion in 2011...or about $543,000 per employee. Since they pay out so much of what they earn, they lack the capital to survive a crisis. But when they're threatened with extinction, the feds step in to bail them out. No wonder they have no fear of a meltdown... Wall Street was quiet on Friday. The Dow was down just 22 points. The most exciting news was that gold closed at $1,006. But if gold buyers were afraid of inflation they neglected to mention it to the folks over in the bond market. The US 10-year Treasury note yielded all of 3.34% on Friday. Which is to say, fear of inflation is probably NOT what is driving up gold. But we'll come back to that tomorrow. We've been doing a lot of thinking about gold...stay tuned. Meanwhile, The Financial Times says world equity markets have rallied 65% since their lows in March. There is no longer any sign of panic. Or fear. People seem to think the crisis of over. This has reinforced their illusions. They desperately want to believe that their financial authorities have the matter under control. So long as things seem to be stabilizing - or actually getting better - they figure they can relax. 'Nothing has really changed,' they tell themselves. 'It was just a hiccup...nothing serious,' they say. They look out their windows and see the same trees, same buildings, same automobiles; it certainly seems as if nothing had changed. Of course, when you set out on a drive from Manhattan, it takes a long time to get out of the city. For a long time, the buildings...the landscape...and the people still look the same. But you haven't even crossed the Hudson yet! It is only later, after a lot of driving, that you realize...you are a long way from home. We suspect that there's a long trip ahead of us too. We have begun the process of reversing a half-century of credit expansion. Since 1945, debt per person has increased. Now it is decreasing - with vast consequences. If we're right, the financial sector will shrink for many years. Profits will be hard to come by. A job will be difficult to get too. And the part of the world dominated by Anglo-Saxons will diminish. Fear will make a comeback...when people realize where they're headed... [But as long as you are properly prepared you have nothing to fear. And the massive government bailouts of the last year have given you a very unique opportunity - to take advantage of a "loophole" that could pay you $17,500...this year alone. Learn all about it here.] More news, from The 5 Min. Forecast: "As Bill mentioned, above, it was one year ago that Lehman Bros. went to the great investment bank in the sky," writes Addison Wiggin in today's issue of The 5 Min. Forecast. "But it was also when the feds arranged the shotgun marriage of a failing Merrill Lynch to a moribund Bank of America. And AIG's collapse into federal hands was taking shape, if not yet a done deal. "Years of debt and securitization finally caught up to the FIRE (finance-insurance-real estate) sector of the economy. The titans of finance refused to come clean about the real value of the 'assets' they sat on...and finally it came time to pay the piper. "Dan Amoss, whose recommendation of Lehman put options generated 462% gains earlier that summer, wrote in this space a year ago, 'Think about how much better off Lehman Brothers would be if its management hadn't put off the process of reporting losses, dumping impaired assets and raising new capital. Would its stock be 26 cents today? Probably not.' [Dan has two more bets on stumbling banks in Strategic Short Report right now.] "So the heavy-hitters of the finance sector have surely learned their lessons and proceeded to mark down their 'assets' to realistic levels over the last year, right? "You wish. Even mainstream economists like the Nobel laureate Joseph Stiglitz say we're in a worse pickle now. 'In the US and many other countries, the too-big-to-fail banks have become even bigger,' Stiglitz told Bloomberg over the weekend. 'The problems are worse than they were in 2007 before the crisis. It's an outrage.' "And how do ordinary people feel about the response their government leaders have made to the crisis? Americans are, as our friend Doug Casey would put it, 'a bunch of whipped dogs.' Rather, they're supremely sanguine, compared to much of the rest of the world. "For all the honeymoon-is-over talk surrounding Obama, we're struck by how much grumpier people seem to be elsewhere. Americans are as satisfied with the actions of Obama and Congress to the same extent Russians are satisfied with those of the Putinocracy. "We should note here that Russian GDP contracted at a breathtaking 10.9% last quarter, while consumer prices are rising at a better-than- 10% clip." You can get The 5 in your inbox 5 days a week, free of charge. It's one of the many perks that come along with being a subscriber to Agora Financial's paid publications, such as Options Hotline. This publication has been on an epic winning streak: no losing picks in 2009...2008...or 2007! Learn how you can multiply your options trading portfolio at least TEN times this year - guaranteed, or your money back. Get all the info here. And back to Bill, with more thoughts: As you'll recall from Friday, between the fall of the Berlin Wall and the fall of Lehman was perhaps the happiest, most worry-free period in American imperial history. The country had no military challengers. Finance was the world's highest margin business...and New York's hustlers were good at finance - rivaled only by those in London. And English was the world's dominant language. With these advantages behind them, Americans (and Brits) saw nothing before them but growth and prosperity. They had gotten used to living off the kindness of strange lenders. They thought they could get away with it forever. But when Lehman went down, so did hopes for the eternal reign of the Anglo- American financial empire. Now, savings rates are going up in America. Spending is down. So are salaries and prices. It's a deflationary world...practically everything is deflating... Consumer prices...inflation is negative in the United States and Europe... Wages...household income is down in the United States. Unemployment is up and the length of the average workweek is down. Result: lower wages. Housing..."house price decline [in England] will continue after false dawn fades," says a headline at today's Telegraph. A study by Ernst and Young predict a 1.6% drop in British house prices in the first half of next year, after an 11.4% fall this year. Net household wealth...down too, caused by falling house prices and falling incomes. Oh...but here's one thing that is up: government deficits. The United States posted a deficit of $111 billion in August. A few years ago, that would have been a frightening deficit for an entire year. Now, we have hundred-billion deficits every month...with no end in sight. [We can all agree that the end of this financial destruction is not neigh...but you can protect yourself and your assets - while building up your already-existing wealth - with seven 'super shields' from the next leg down in the financial crisis. Get all the info here.] As we forecast, protectionism in on the rise. The Obama administration put a tariff on tires imported from China. It was done do to protect American tire manufacturers from competition. Free trade? Sure, when it suits us. But China is getting huffy about it. In an "unusually strong riposte," Beijing, using diplomatic language of course, said to the United States roughly what Serena Williams said to her net judge: "If I could I would take this f***ing ball and shove it down your f***ing throat..." Why's China so upset? In an expanding world, everyone greedily grabs market share. Even if they're not as fast as the next guy, they still feel they're making progress. In a deflating world, on the other hand, if you give ground...you're not just losing market share...you're losing money! This weekend we traveled back to Paris to take part in a panel discussion on freedom. Liberty is not a hot topic in Paris. In a metropolitan area of some 4 million people, only about 50 turned out to hear our talk - and half of them were American or English. Still, we were surprised there were so many. Liberty is a popular word. But freedom has never been much in demand. Millions of books are sold that promise to reduce your weight. How many are sold that promise to increase your freedom? We don't know of any. Our guess is that the bookseller who makes freedom his market niche will soon have dust on his books and cobwebs in front of his door. Still, the little group was enthusiastic. Assembled in a stuffy miniature theatre off the Rue Mouffetard, the freedom enthusiasts had a number of ideas for promoting their cause. One wanted to infiltrate the government with closet libertarians. Another suggested a takeover of academia. Still another suggested engaging taxi drivers in Socratic dialogues. We looked for a fire alarm. Clearly, the heat was getting to them. They needed a good hosing down. We live in a world dominated by rules, laws, edicts, taxes and regulations. But it is not because the masses have never heard of liberty. They know what freedom is; they just don't want it. Instead, they want instead is an edge, an angle...a law that protects them from honest commerce...a special tariff that gives them an advantage...a monopoly...a privilege... They want food stamps and unemployment compensation. They want free medical care for their parents and free schools for their children. They want what we all want...growth and prosperity, without corrections. And they want to go to heaven without dying. Until tomorrow, Bill Bonner The Daily Reckoning The Daily Reckoning PRESENTS: This may come as a surprise, but the US economy's not doing great. And when the best paying jobs in the country now belong to government employees, it begs the question... How is going to get any better? The Mogambo Guru explores... The Government-Based Economy by The Mogambo Guru Tampa Bay, Florida I really got a laugh out of the report from Bloomberg that the Democratic Party of Japan (known in the parlance as DP) won an historic victory in the recent elections, coming to power for the first time in decades with "a pledge to support households battered by two decades of economic stagnation", whatever that is supposed to mean, but which is, upon even casual inspection, Standard Political Crapola (SPC). The interesting part is that the new prime minister, a guy named Hatoyama, said "he'll avoid more bond sales, so new spending will depend on his success in shrinking the bureaucracy and public works programs", which is so laughably, ludicrously impossible, especially in such a corrupt, lopsided economy that it makes me, a stupid American who really doesn't know what in the hell he is talking about, who lives thousands of miles away, in another country and hemisphere, turn up his nose at the sheer stink coming from that idea! Phew! Of course, this valuable piece of Righteous Mogambo Scorn (RMS) is because it is obviously, obviously too, too late for that. "A lot more people seeking the same number of jobs is pretty bad, especially when the number of people is still rising while the number of jobs is actually still falling!" It is too late, just like it is too late here in the USA, and just like it is too late almost everywhere else, too, where years and years of increasing government spending and control means that government IS the economy, and shrinking the size of government obviously shrinks the economy! Hahahaha! Oops! So, to the Japanese, I say, "Hahaha! Too late for that, you dumb Japanese chumps! Now you are going to pay a huge penalty for being such morons with your fiat money, and then especially involving the idiot Americans and their fiat money!" Anyway, crude and rude xenophobic insults and senseless bigotry aside, an example of this is that, here in America, the birthplace of sheer stupidity in central banking (by which I mean the disastrous Federal Reserve), our economic performance as a result of the same kind of constant stimulus is that non-farm payrolls have been falling and are now about back to where they were in 2000, meaning absolutely zero (non-farm payroll) growth for 9 years! A lot more people seeking the same number of jobs is pretty bad, especially when the number of people is still rising while the number of jobs is actually still falling! Yikes! Meanwhile, however, the government has spent its time growing bigger and bigger, like a huge, cancerous, oozing lump that is growing on your neck and already people are being repulsed by both the sight and the smell of it, and now there are 6% more people on "government payrolls" than there were in 2001, which is only the tip of the iceberg. And, as if to add insult to injury, they all make more money than you! Hahaha! For the first time in history, the average pay of a government employee is higher than the average wage of non-government employees! And when you add in their generous benefit packages, they make a lot more, and they are not going to take it kindly that you want them to suffer losses in pay and employment like us average morons out here. So that is One More Big Reason (OMBR) why the government will keep borrowing more and more and spending more and more, which is why the Federal Reserve must create more and more money and credit, which expands the money supply more and more, which makes prices go up more and more, sometimes in bubbles, which must, and always do, bust back to their intrinsic value. And such government and banking insanity as we are seeing today is the One Big Reason (OBR) - perhaps THE One Big Reason (TOBR) - why you must buy gold, silver and oil, apart from it being, you know, so easy that you squeal with girlish delight, "Whee! This investing stuff is easy!" Until next time The Mogambo Guru for The Daily Reckoning Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page. The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...

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