The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery
The Daily Reckoning
Friday, January 15, 2010
Bill Bonner has today's reckoning from Baltimore, Maryland...
The public spectacle continues. Bankers appeared in Congress yesterday.
'Yes...we sold a lot of toxic, explosive stuff to our clients,' they said.
'Yes, we used our own money to bet against them...' admitted Goldman's top man.
'Yes, we blew up the whole world economy. We're sorry.'
Associated Press reports:
"The bankers - whose companies collectively received more than $100 billion in taxpayer assistance to weather the crisis - offered no regrets for executive pay that is now likely to increase as a result of their survival...
"Lloyd Blankfein, the chief executive of Goldman Sachs, took the brunt of the questions, especially on his firm's practice of selling mortgage-backed securities and then betting against them.
"'I'm just going to be blunt with you,' Angelides told him. 'It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.'
"Blankfein replied: 'I do think the behavior is improper. We regret the consequence that people have lost money in it.' Later, though, he defended the firm's actions as 'exercises in risk management.'"
This is not the first time we've seen this show. We're not old enough to remember the Pecora hearings of the 1930s. But they shared the same story line: captains of industry and finance make blunders; they cause Great Depression; politicians save the day.
Back in the '30s, the guys hauled before Congress generally refused blame. They were just doing their jobs. By and large, they were right.
This bunch today is more media savvy. They realize that their power and money come at a price. The feds have to pretend to punish them; they have to pretend contrition.
And the rest of us can only enjoy the show. After all, it's the greatest show on earth. We love every minute of it. But it's only entertaining when you understand the real plot.
What's the plot?
Well, you already know it. After the bubble blew up, the feds swung into action to repair it. But you can't really fix a bubble...at best you can only create a new bubble.
The real economy is still deflating. Just look at the jobs situation. Far from slowing or stabilizing, 2009 was the worst year yet for job losses - '07...'08 ...and '09...each year has produced greater losses. Even James Grant, who predicted a "barn burning recovery" now admits that his forecast has gone up in flames. He was "either early or wrong," he says.
And just look at the real estate market. "Home prices are softening again," says David Rosenberg. As for commercial real estate, here's Kenneth Laub, who's been in the business for 50 years, as reported by Bloomberg:
"He says the current downturn will overshadow all of the others...
"'It won't be a typical part of a cycle where we're down for two or three years and things recover,' says Laub, 70, whose New York firm, Kenneth D. Laub & Co., says it has handled more than $40 billion of real estate transactions since its inception in 1969. 'It will be longer than we've gone through before.'
"As in past slumps, the weak US economy is curbing demand for commercial space, increasing vacancies and causing rents and property values to fall. The key difference today is the explosion in debt financing and related derivatives that fueled a run-up in commercial real estate prices in the 2000s, Laub says. That's left property owners struggling to make mortgage payments. The overhang of debt will delay any recovery, he says.
"'It's not a supply-demand thing; it's an overleveraged condition,' Laub says.
"Laub expects a wave of restructurings by troubled commercial borrowers as hundreds of billions of dollars of loans come due annually during the next few years. Commercial real estate may still be recovering a decade from now, he says. 'What you're going to see is a tremendously long workout period unprecedented in commercial real estate in this country,' Laub says. 'That's where we're going, and it's just beginning.'"
Bad property market. Weak employment market. That's the background. And it will probably last for years - until the extraordinary debt in the private sector has been worked down to more comfortable levels.
Against this natural process of de-leveraging and depression struggle the feds - our heroes...making the situation worse! More below on that too...
Instead of blaming themselves for their silly theories...for causing the bubble with artificially low interest rates...and then failing completely to understand what they had done...they blame Wall Street.
Sure, the bankers, more knave than fool, took advantage of the situation. But they didn't cause it.
Still, they're very sorry they almost brought modern civilization to an end...but, hey, business is business...
Oh the roar of the greasepaint...the smell of the crowd! What a circus!
More thoughts below, after today's column...The Daily Reckoning PRESENTS: Few fields reward failure quite like the modern day study of economics does. If you're an individual who didn't predict the crisis, chances are you now enjoy a cushy job trying to solve it. Think Summers, Geithner and Bernanke, just for starters. In today's essay, Bill examines more closely the only job these goons know how to do: a bad one.
The Fallacy of the Fallacy of Composition
By Bill Bonner
Baltimore, Maryland
No unarmed profession has done as much harm as economists.
Recently, Yukio Hatoyama, the new Japanese Prime Minister, proved it again...revealing a budget deficit that must have made Paul Krugman drool. The Japanese government will spend 92.3 trillion yen next year, about 1 trillion dollars. Tax receipts will be enough to cover only half that amount, leaving the nation with the biggest shortfall since WWII.
It is obvious to everyone but an economist that spending twice as much as you earn is not a formula for real prosperity. And it is obvious to anyone but investors that buying Japanese debt is asking for a kick in the pants. But these are the same economists who mistook the bubble world of 2003-2007 for genuine prosperity and the same investors who bought dotcoms in '99 and mortgage finance companies in '07.
Mr. Hatoyama portrayed his spending spree in humanitarian terms. It was aimed at "saving people's lives," he offered. This is a big change, he explained; previous spending initiatives have been intended to channel rivers and create parking places. So bountiful were these public works projects that, in the '90s, Japan poured more concrete than any country on earth, prompting one commentator to refer to Japan's stimulus efforts as "state-sponsored vandalism."
Effacing the landscape did little to bestir the economy. The concrete hardened, but the markets gave way. More wealth was lost than in any other country at any time in history. Commercial real estate dropped 87%. Banks lost $1 trillion as they wrote off bad loans in the property sector. Golf club membership prices dropped 95%. Stocks ebbed down for 20 years and then hit a new low in March of 2009. After 20 years of bear market, they were back to 1982 levels. In the real estate and stock markets alone, $15 trillion was wiped out, an amount equal to three times the GDP of the entire country. By way of comparison, during America's Great Depression, between '29 and '33, only 1 times GDP was erased.
"Everyone was bankrupt," concludes Nomura Securities' chief economist, Richard Koo.
The trouble, according to most economists, was that what was good for individuals wasn't good for the whole economy. As businesses and consumers paid down debt the money went into banks and didn't come out again. How could it? No one wanted to borrow; they wanted to save. Sales fell. Then prices fell, prompting consumers to save even more. The more the private citizen repaired his finances; the more the finances of the nation fell apart. This is known in economics as the 'fallacy of composition,' which is to say, the whole is not the same as the parts. You may have all the parts of a cow in your freezer; but don't expect it to moo.
Richard Koo believes Japanese economists pulled off a great triumph. Monetary policy didn't work; consumers wouldn't borrow and banks wouldn't lend. But huge dollops of fiscal stimulus kept the wheels turning. The private sector cut spending; the public sector put it back. As a result, GDP never fell below its 1989 high...and unemployment never rose above 6%.
It's too bad the world is not a simpler place. If it were, the fallacy of composition might make sense...prosperity might be as easy as maintaining positive GDP growth...and economists such as Koo and Krugman might be worth a damn.
But the fallacy of composition is a fallacy...at least as applied by modern economists. There comes a time when a man should sober up, even though the hangover is unpleasant. But while Japanese households were drinking strong coffee, Japan's economists refused to allow GDP to fall; they put zombie companies on life support; and they kept the doors on the banks open. This not only prevented a new economy from arising, it cost money. As the citizens paid off debt, the government borrowed in their names. While households repaired their private balance sheets, government destroyed the balance sheet of the entire nation.
Now, after 20 years, the private sector has had time to pay down its debts. Corporate debt-to-GDP levels are back to 1956 levels. Japanese households have more net savings than any others in the world. But instead of tapering off its deficits, they grow larger and larger. Why? Because deficits no longer stimulate the economy; they ARE the economy. The Japanese tried to cure an alcoholic with heroin. Now, they're addicted to it. Take away the stimulus now, says Koo, and the economy gets the shakes, tax revenues fall and deficits actually grow larger.
Asked 'what is the most effective form of fiscal stimulus,' Mr. Koo replied: "military spending...because it increases demand without increasing supply."
Only an economist or a fool could believe such an obvious fraud. The Japanese fought the downturn by adding to the supply of bridge abutments. They might just as well have bought aircraft carriers. The taxpayer now has concrete up the kazoo, and a public debt that's headed to 300% of GDP...or to Hell...whichever comes first.
Joel's Note: If you haven't already read Bill and Addison's NYT bestsellers, Financial Reckoning Day and Empire of Debt, don't worry...because now they're both in their second print! You can grab them here, and here, respectively.
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And more thoughts...
Obama says the feds 'saved' 2 million jobs. But the cost of each job saved was as much as $65 million, according to our not-very-precise accounting.
Was it worth it?
Yesterday, we went on at some length as to why government jobs weren't the same as private sector jobs. Since they're never put to the test of the market, you never know whether they are worth having, let alone saving. Do they add to the sum of human wealth and happiness...or do they subtract from it? No one knows for sure.
But here's the strange and remarkable thing; modern economists actually would prefer jobs that are NOT worth doing.
In the twisted mind of a mainstream economist the problem in a depression is that people don't spend money. Since they don't spend, demand goes down. The secret to avoiding a depression, they believe, is to replace private demand with government demand.
Easy, peasy...right?
The government just spends more money. And since it doesn't have any more money to spend (practically every government on earth was already running a deficit), it borrows the necessary funds. Thus does demand go up. And thus do the feds create the next bubble - in public debt.
But what if government-funded stimulus projects actually produced goods and services that people wanted? Ah...that would be a problem. Because in a depression, there is too much supply and not enough demand. Prices fall, encouraging people to delay spending...further depressing demand...and causing an even worse depression. So, the last thing the feds want is more supply. They want more demand but LESS supply. That means that the ideal government project is one that doesn't produce anything worth having. Such as military spending. Or digging holes and filling them up again. Or, departments and agencies that employ people who don't do anything.
It sounds to us as though practically any government program would fill the bill!
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com The Daily Reckoning - Special Reports:
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