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The Daily Reckoning Friday, October 16, 2009 The Dow is back to where it was in 1999. Is this progress...or what? What should Obama do in the face of financial crisis? Nothing... The trouble with COLA is that there is no UN-COLA... Bill Bonner warns: there's no escaping debt...and more! A Retirement Society by Bill Bonner London, England Higher stock prices; fewer jobs... And don't forget the foreclosures. They're running 23% ahead of last year...even though they weren't as bad last month as last month. Associated Press: "The number of households caught up in the foreclosure crisis rose more than 5 percent from summer to fall as a federal effort to assist struggling borrowers was overwhelmed by a flood of defaults among people who lost their jobs. "The foreclosure crisis affected nearly 938,000 properties in the July- September quarter, compared with about 890,000 in the prior three months, according to a report released Thursday by RealtyTrac Inc. That puts foreclosure-related filings on a pace to hit about 3.5 million this year, up from more than 2.3 million last year." What an economy! The Dow is now back over the 10,000 mark...just where it was in March 1999 - 10 years ago. Is that progress...or what? During that time, the dollar has lost about a quarter of its purchasing power. That means stock market investors have lost only about 25% or their money over the decade. Not too bad, huh? And, oh yes...they've lost their jobs too... AP continues: "Unemployment is the main reason homeowners are falling into trouble. While the economy is likely out of recession, the unemployment rate - now at a 26-year high of 9.8 percent - isn't expected to peak until the middle of next year." But hey...we're not going to complain. We've got a job - trying to figure out what is going on. And that is a job that is recession-proof. Everyone wants to know what will happen next. When times turn tough they want to know even more. So, will someone please tell us what is going on...we want to know too! "What do you think?" asked a friend at dinner last night. "The way I see it, Obama's goose is cooked. He's stuck. He can't go forward and he can't back up. He can't back away from all those promises - including his promise to rescue the US economy. If he does, the voters and his own party will revolt. On the other hand, he doesn't have the money to go forward. He has to borrow it. And if tries to borrow much more, the Chinese will revolt. "His only hope is that the economy revives...so he doesn't have to do anything. And that's not going to happen." Why not? Wait a minute...you already know the answer to that question. Because it's a depression. It's the end of the road for the consumer credit economy. Consumers did their best. They borrowed as much as they could. They spent like there was no tomorrow. But now, it IS tomorrow. And now, they've got to settle up. So, boo hoo...no more wild parties. Daddy took the T-bird away. Get over it. What should Obama have done? Nothing. But the last chief of state to do that in a time of financial crisis was Warren G. Harding - one of America's best presidents. That's what he did in the panic of 1920. How come we don't hear much about the crisis of 1920? Because Harding didn't do anything; it went away. But that was a long time ago. Now, presidents are expected to do something. They have too many people around them who stand to make a buck out of it. Yesterday, Goldman announced its quarterly earnings. Goldman, you'll recall, is the firm that former Treasury Secretary Henry Paulson (a former Goldman chairman) called 13 times before breakfast during the financial crisis of last September. And Goldman is also the firm with its men in key posts in Washington, helping the feds figure out what to do with trillions of dollars in bailout funds (TARP, TALF, Fed's buying toxic assets, etc.) Well, what a coincidence...now the firm says its latest profit is four times what it was a year ago. The firm's "activities have become more profitable after the crisis reduced competition and governments injected funds in the banking system," says The Financial Times. Goldman can borrow the funds at almost no cost. Then, it can use the money in a variety of ways...such as lending it back to the government for guaranteed profits...or speculating on oil or gold, or whatever. Not for nothing is gold is up 17% in the last six months. If you can borrow at zero cost you can do a lot of speculating. Many speculators are using the government's money to bet against the US dollar - and making a lot of money. The US government has put $13 trillion of the nation's money and credit on the line. That's how much the feds have at risk on all their toxic asset purchases, loans and guarantees. Apparently, Goldman gets its share. [If you still aren't convinced that this recovery is a fraud, through and through - and that the feds are robbing you blind, read this free special report. In it, you'll find your financial defense strategy - something that might come in handy in the months ahead. Get your free copy here.] More news, from The 5 Min. Forecast: "It's Friday..." begins Ian Mathias in today's 5 Minute Forecast. "Let's have some fun at someone else's expense. Check out this exchange between Maria Bartiromo and Treasury Secretary Geithner: "Mrs. Bartiromo: 'So what have you done specifically to safeguard the dollar's decline?' "Sec. Geithner: 'Well, I think, Maria, if you look generally, you know, I don't - I don't talk about developments in the exchange markets, but - I generally don't do that, but I think if you look at what's happened over the last year, you've seen really a lot of confidence in the US finance, a lot of confidence in the US economy.' "Heh, we see you've been working with Sarah Palin's interview coach, Mr. Geithner. Good choice. But we get your point... If there's been a real, underlying theme of the past year, it's been unwavering global confidence in American finance. Surely there is no better gauge of that stalwart, badass, James Bond-meets-John Shaft confidence than the US dollar. Behold, the mighty dollar index! "Perhaps the dollar and US treasuries were the 'investments du jour' during the worst of the credit crisis in 2008. Was that thanks to confidence in the US, or simply the fact that there are lots of both and they are accepted anywhere? Either way, all this 'strong dollar' talk sure isn't speaking to the market." 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 one of our most profitable research services, Options Hotline. Right now, this service is offering 24 recommendations completely free of charge to new readers...but not for long. Act now... And back to Bill, with more thoughts: What can the feds do? Everyone is telling Mr. Obama that he must do something...now! So what does he do? Something stupid, of course. Yesterday, poor Mr. Obama did something stupid. He said he wanted to send 78 million American seniors a check for $250 each. What a nice Christmas present. But wait. Even Santa doesn't have that kind of money. The feds are already running a deficit somewhere close to $15 billion PER DAY. But heck, who keeps track of these things? And who quibbles about a few billion more or less? Not us. Not here at The Daily Reckoning. We've got other things to quibble about. In fact, we've got so many things to quibble about we hardly know where to start. So let's just pick a news item at random and we'll begin our quibbling there. Here's one: Social Security recipients are not going to get a COLA. A COLA is a "cost of living adjustment." It's what Social Security recipients get when prices go up. It adjusts their payments to inflation. COLA seemed like a fair idea when it was put in place. That was when prices were going up. The old folks were getting a raw deal and people felt bad about it. We remember those years. There was a report in the press in the late '70s that old people were "forced to eat dog food" to survive. We suggested that the government allow people to use food stamps to get pet food. But that was greeted like so many of our attempts to be helpful. The trouble with the COLA is that there is no UN-COLA. When prices fall, there's no way to get the money back. The adjustments only go in one direction. And prices ARE falling. US import prices roes only 0.1% last month...down 12% from a year ago. Take out energy and they're still down 4%. And that's with a dollar that is losing value at the same time. Imports should be going up in price. Instead, the downward tug of deflation is so strong that they are pulled down...even with the dollar buoying them up. So, imagine that the United States slips into a Japan-like slump...a long slump with off-and-on falling prices. The government's budget projections call for a rapid return to growth. Even then, they expect trillion-dollar deficits until the end of the next decade. But if the economy does not return to rapid growth, the situation gets much worse - fast. Tax revenues don't go up...and spending continues to mount. There's no way to reduce payments to Social Security recipients. And imagine the poor sap who proposes it. Or who suggests that maybe government salaries don't have to be twice as high as private salaries. He wouldn't last long. This leaves the feds in a tight spot. They won't have trillion-dollar deficits...they will have multi-trillion-dollar deficits. They won't have just a little trillion-dollar hole to fill; they will have a Grand Canyon. How to fill it? Ain't no way... Ain't no way... At a certain, but unknown, point the whole thing falls apart. The feds can't raise enough money. They go broke. Now, hold on...the US federal government can't go broke, can it? Those fellows have a printing press. They can print their way out, no? A very, very good question. Why would a government with the power to create money at will ever go bust? And yet, they do. Why? Because it is cheaper. But this is far too large and important a subject for a Friday. This is a subject for a Tuesday. Maybe even a Wednesday. But Friday? Nope. God didn't make Fridays for this kind of thing. We'll have to come back to it next week. Can anything stop the Chinese? "China consolidates its lead in world trade," was a headline in The New York Times earlier this week. China competes on price - and usually wins. America loses market share. "We're finished," said our dinner companion last night. "We're fossils. We're yesterday's news. We're a nation of old people. The growth and innovation is taking place elsewhere - such as in China. You can feel the difference when you go there. New buildings. New roads. New cities. New shoppers. Here, everything is old. The buildings. The people. Everything. "I tell my children to move to the Far East. We're history here." [Innovation and growth isn't only happening in China. There is another country in the East that is being increasingly seen as a 'wealth refuge'. Learn all about it by clicking here.] This morning comes news that the Chinese have bought another auto company - Britain's van maker, LDV. And over on page 11 of The Wall Street Journal is a photo of the head of China's big bank, CCB. Asked about whether the bank was looking at acquisitions in the West, Mr. Guo Shuquing said he wasn't interested. Western banks are on a "downhill path," he said. "Of course, there's something nice about living in a society which has peaked out," our friend continued. "You have all the grace and style of an advanced civilization without the annoying hustle and bustle. It's perfect for retired people...We live in a retirement society." Keep reading for today's essay, below... The Daily Reckoning PRESENTS: Debt. Our world is awash in it. You can run it up for as long as you want - but there's no escaping it. Bill Bonner explores, below... Bad Debt by Bill Bonner London, England Yesterday, George Osborne, Britain's Conservative Party finance minister-in-waiting, did something extraordinary. We can't remember anything like it. He told the truth. "We are sinking in a sea of debt," he admitted. And on the very day when France's president, Nicolas Sarkozy, said he would not raise taxes, Osborne said that he would not lower them. In order to lighten Britain's debt, he'd leave Labor's 50% maximum tax rate right where it is. Voters don't like hearing about debt. Politicians don't like talking about it. And economists don't want to think about it. And in a kind of collective suicide pact, they have all agreed not to worry about it. But debt is at the center of the world's financial troubles. Paying off debt is like dying. You try to put it off as long as you can. But nobody runs an open tab forever. This week brought news that Maine-based luxury yacht maker Hinckley, which has been building boats since 1928, is sinking. The problem is neither technical nor operational. It is philosophical. No one complains about the quality of the boats. Or even the prices (if you have to ask, you can't afford one). The company sailed along nicely until 1997. Then, the private equity hotshots from Boston took the helm. The old Hinckleys who ran the shop looked upon debt as though they were looking at a bottle of whiskey. A drink now and then did no harm. But watch out. Too much will sink you. In the 70 years they ran the place, they accumulated only $1 million of debt. But the new owners were dipsomaniacs; they multiplied Hinckley's debt 20 to 40 times. (Exact figures are not available.) For much of history, failing to repay debt was regarded as not merely a breach of contract, but a crime. People who failed to repay their debts in timely fashion were thought to have stolen from their lenders; they were put in prison. In the Middle Ages even a dead debtor's children could be sent to prison. Now, bankruptcy laws allow individuals and businesses to go to rehab. Then, they can stiff creditors again. Neither sin nor crime, debt is now just a cost of doing business. But few creditors are as forgiving - or perhaps as forgetful - as those who lend to governments. That is the conclusion of a new book by Carmen Reinhart and Kenneth Rogoff, This Time It's Different. The two professors document the history of eight centuries of "financial folly." What we learn from it is what we already knew - that borrowers are often perfidious, crises are usually insidious, and bankers are morons. Just five years ago, Ben Bernanke looked out on the calm seas of the Bubble Era. "The Great Moderation," he called it. Bernanke took the credit. It was due to "improved macro-economic policies," he said. In retrospect, he probably should have said it was just luck and left it at that. His macro-economic policies made things worse, encouraging all sectors of the economy to borrow. We know what this did to Hinckley. Riding low in the water, with too much debt heaped on its deck, the yacht maker struggles to stay afloat. "Paying off debt is like dying. You try to put it off as long as you can. But nobody runs an open tab forever." But what's new, ask Reinhart and Rogoff? Always and everywhere, debt leads to trouble. Too much debt caused France to default on its sovereign debt eight times. Spain defaulted six times before 1800 and then another seven times later. Latin America, as the authors point out, would have been safer for bankers if the printing press had never made its way across the Atlantic. Between hyperinflation, defaults and banking debacles - over two centuries - the banana republics scammed banks out of billions. In the '80s, Nicholas Brady tried to rescue New York bankers with his US- backed "Brady bonds." Readers of these back page columns can guess what happened next. Within a few years, seven of the 17 countries that had undertaken a Brady-type restructuring had as much or more debt than they had before. By 2003, four members of the Brady bunch had once again defaulted and by 2008 Ecuador had defaulted twice. Even non-existent countries go broke. In 1822, "General Sir" Gregor MacGregor issued bonds from a fictitious country he called Poyais, whose capital city, Saint Joseph, was described by the offering prospectus as having "broad boulevards, colonnaded buildings and a splendid domed cathedral." The bonds sold at lower yields than those of Chile. But it didn't matter whether the country was real or imagined, all of them defaulted. As for the present slump, the authors offer no predictions, but some guidelines. In the run-of-the-mill crisis, real housing prices generally go down 36% over a six-year period. GDP, in real terms, per capita typically goes down 9.3% while unemployment rates go up for five years, with a 'normal' increase of about 7 percentage points. But the closest parallel to the present circumstance, which they call 'the Great Contraction,' is the Great Depression of the 1930s - which was much worse. Unemployment in Germany and Denmark rose over 30%. Building activity fell 82% in the United States. Chile saw a 90% collapse in its exports. Tax revenues fall in an economic slump. Government expenses increase (especially when the authorities are ready to do 'whatever it takes' to stir a recovery). Typically, say Reinhart and Rogoff, public debt increases 86% over a three-year period following a financial calamity. Then come more catastrophes, caused by too much debt in the public sector. Both Britain and America are now running deficits of more than 10% of GDP. Neither has a creditable plan for reducing debt or deficits. So stay tuned. Much more trouble lies ahead. Enjoy your weekend, Bill Bonner 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. Bill's latest book, an update of Empire of Debt, can be found here. The Daily Reckoning - Special Reports: The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.