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The Daily Reckoning | Friday, June 11, 2010 Investing in a world without wickedness or moral lessons, $12 trillion later...and what has it wrought? Plus, Bill Bonner reckons on Confucian scholars, Bob Marley and the worst job scene in four decades... Heavenly Recovery or Hellish Correction? The misguided notions of the economic movers and shakers Bill Bonner Reckoning from Charm City, Maryland... Time alone, yes time will tell You think you're in Heaven but you're really in hell - Bob Marley Yes, dear reader, time alone will tell. Are we really in the heaven of a recovery...or the hell of a Great Correction? Well, actually, we think we know the answer already. It's a Great Correction. That's what we thought when it began in '07. Everything that has happened since merely confirms it. Subprime mortgages blew up in April of '08. That set off the powder in the financial industry. In a matter of minutes the feds were on the scene too. Since then, they've put at risk as much as $12 trillion in the fight against the downturn. And what has it wrought? If this had been a normal recession, we would have seen a big up-tick in employment by now. Instead, 8.2 million jobs have been lost. NONE HAVE BEEN RECOVERED. Not since the troops were sent home after WWII have we seen anything like it. We should also be seeing some signs of inflation by now. When people get back to work they also go back to spending. This puts pressure on recession-diminished supplies, leading to price hikes. Instead, we're seeing the weakest pricing since Lyndon Johnson was in the White House and the Beatles were on TV. If they did the numbers properly, they'd show that prices were actually falling, for the first time since the Great Depression. If this had been a normal recession, we'd also see the money supply increasing. By this point in the cycle, people should be spending, borrowing and investing, increasing the velocity of money. Instead, the money supply and private sector credit continue to fall. We also should be seeing a relief in the housing sector. But noooo... If this is a 'recovery,' you can keep it. But if it's not a recovery, what is it? It's a Great Correction. It's hell, in other words, not heaven. But wait a minute. Hell is not so bad. And we're not sure we'd like heaven very much anyway. Not if it meant returning to the bubble years. Not if it meant pretending Bernanke, Obama, Summers et al really know what they're doing. And not if it meant going even further into debt. The feds are trying to engineer a 'recovery,' a return to an economy that was not only unsustainable, but downright diabolical. It made people poorer and poorer. And now the feds are making them even poorer - spending trillions of dollars at taxpayers (or bondholders) expense - to try to stop the correction. Why would they do such a thing? The short answer: because they're morons. But you probably want a better answer, don't you? Well, you're not going to get it from us. As far as we're concerned, the authorities are doing something so blockheaded you'd have to be retarded to do it. When we think of what they're up to we can still hardly believe it. They're so afraid of a correction that they're willing to bankrupt the nation to prevent it. It's like a teenager who burns down his school so he won't have to turn in his English homework. He might have been in trouble before; now he's in worse trouble. The Obama team has added $4 trillion to the nation's debt in the last 3 years, fighting the downturn. Martin Wolf in The Financial Times and Paul Krugman in The New York Times argue that we have to spend even more to stop this devilish correction. They're terrified of hell. What they're going to get is going to be worse. More thoughts, after today's column... The Daily Reckoning Presents Recovery Flops! Bill Bonner In the reign of Emperor Zhao, in 81 BC, 60 Confucian scholars were asked to consider the effect of government meddling in the economy. The Middle Kingdom was in a fix. Mongol raiders were pressing it from the East; the government was going broke. Taking the advice of Sang Hongyang, the feds of that era had put in place various state monopolies and price controls. The result? "People live in houses with badly-made beams and shoddy thatched roofs. They wear clothes of rough fabric and eat out of bowls made of dirt," the sages explained. "We waste our time on vain efforts...and lack the essentials, food and clothing." The scholars gave their advice in moral terms: "Above all, emphasize virtue and suppress get-rich-quick speculations." Too bad they didn't have The Financial Times or The New York Times to guide them! These journals offer a world without wickedness or moral lessons. Economy in a funk? Forget the real cause. Stimulate it! We can worry about the real problem "after the economy has recovered," writes Paul Krugman in The New York Times. "Only those who believe the economy is a morality play," would want to suffer the pain of a correction, adds Martin Wolf at the FT. Readers are urged to focus on the hilarity of the scene rather than on its gravity. It is as if a fat man were bending over. The further over he goes, the more his seams split. First to go was the subprime seam in the back...then the Greek seam on the side. But no one wants to say the obvious thing: that he should stand up straight and lose weight. Instead, the FT and the NYT want the government to buy him a larger pair of pants. You have read a number of unpopular views in our Daily Reckonings... That this was not a typical post-war recession; it is a Great Correction. Over-indebted American and British economies need to de- leverage. ..That no recovery is possible, because the preceding model of debt- fueled consumption was unsustainable. ..That 'stimulus' efforts were not only a waste of time and money, but also harmful; people who made bad bets should take their losses with dignity instead of trying to get others to pay. In the 10 million or so years since our ancestors have walked on two feet, many were the challenges that arose. We learned to hunt and gather...to build shelter...to clothe our bodies and to kill each other. We made tools and were able even to split atoms and remove body tattoos. We evolved into a practical, problem-solving race. But never could we solve the problem of an economic downturn. Why? Because the Confucian scholars were right. A properly functioning market economy gives people neither what they want nor what they expect, but what they deserve. In that sense it is 'moral' not mechanical. You can't pull levers nor turn screws to stop a correction. Like old age, the best you can do is to endure it with good grace; the alternative is worse. Central planners don't create wealth. They can only move it around, robbing Peter to pay Paul. This only 'stimulates' an economy if Paul uses the resources better than Peter. Don't make us laugh. In most cases, Paul is the same clown who made the bad bets in the first place. In the present instance, instead of robbing Peter to pay Paul, the feds judged it prudent to borrow from Peter. But Peter is no dope. First, he turned his eyes on Greece. Then, he noticed all the other peripheral players in the Eurozone... Then, he put his wallet back in his pocket. It became obvious that the jig was up. As Nouriel Roubini put it, we reached the point where "austerity is not optional." Stoicism went out of style in the economics profession 100 years ago. Activism paid. Stoicism did not. Since then, busybodies have advised presidents, headed central banks, run multi-national agencies, appeared on covers of TIME magazine, won the Legion d'Honneur and the Enron Prize...and run billion-dollar hedge funds. And now, after 18 months...and approximately $12 trillion worth of stimulus, bailouts and debt guarantees...we see the results of a live test. Have our modern economists done better than Sang Hongyang? The latest evidence came in last week, from the US. The biggest source of employment lately is the US government itself, which has hired hundreds of thousands of census takers. Obviously, if you could make people better off by having them count things, why not hire more of them and have them count the hairs on our heads? Employment in the private sector is still going down. One in ten Americans is officially unemployed...one is six is working at less than capacity. Twice as many people have been out of work for more than 27 weeks this year than the year before. Not surprisingly, real incomes are going down too. Meanwhile, one of every 8 houses is delinquent or in default on its mortgage. Statistically, 7.2 million of them will be foreclosed, most likely leading to another drop in housing prices...and a drop in household wealth. Prices are falling too. M3 fell at a 5% rate in May. Consumer prices, officially, are increasing at the slowest pace since 1966. Unofficially, adjusting for the real cost of housing, the actual cost of living is in outright deflation. In short, the 'recovery' is a flop. Bill Bonner, for The Daily Reckoning Joel's Note: As fellow reckoners will recall, a few of your editors recently made the trip to Beijing. We were there to try and get a better understanding of the investment landscape of the world's second largest economy. We spoke to industry insiders, money managers, private investors and various other movers and shakers around the city. It was very enlightening, to say the least. (Oh yeah, we also rode a horse up to The Great Wall and fired a few Chinese-made machine guns...but that's for another time.) We asked a ton of questions and took a bunch of notes. But there's still much to discuss... To that end, Addison and Chris have organized a conference call with a couple of our Beijing-based contacts. They'll discuss the opportunities and pitfalls of investing in China, including that property market bubble, the revaluation of the renminbi and everything else from US- listed companies worth keeping an eye on to behind-the-scenes insights you won't get anywhere else. If you'd like to be "in" on the call, let us know here. We'll get the details to you before we go live.  Bill Bonner Oil Spill Leadership Crisis Bill Bonner Reckoning from Baltimore, Maryland.. Everyone is looking for someone else to blame...and someone to follow. America's chief executive is acting tough. He's talking about kicking someone's derriere. He says BP chairman Tony Hayward "wouldn't work for me," as if he knew what he was talking about. Obama is a former community activist and law professor. What does he know about running a multinational oil company? Or about employing someone? The Obama team has taken to calling the company "British Petroleum." That hasn't been the company's name for 12 years...but it puts the blame on the other side of the Atlantic, where they want it. The news out yesterday was that the leak was allowing 1 million gallons of oil to escape into the Gulf every day. Some commentators say Hayward will lose his job. Others say BP will declare bankruptcy when the full costs of the damage become known. Analyst Matt Simmons says "there's not enough money in the world," to pay the clean up costs. Several commentators, including Simmons, suggest that the Gulf disaster be put entirely in the hands of the US military. We laughed when we first heard that suggestion. After all, the pentagon knows no more about deep water drilling than Obama. But they've already put a military man in charge - tough-talking Adm. Thad Allen. He probably has no idea what he's doing either, but people take him seriously. People want leadership - especially in a crisis. "The man on the white horse" always seems to come along, just when people need him. He sticks out his jaw. He takes charge. He leads. Only later do people realize that he was a jackass. And more thoughts... It's the "worst summer job scene in 41 years," reports The New York Times. Henry went out to find a summer job yesterday. He just finished his second year of pre-med training. He is tired of spending the summers working for his dad, so he decided to find a job on his own. He came back at the end of the day. "I found something... I'm going to sell knives, door to door." "Isn't that kind of dangerous...I mean, going door to door?" asked his mother. "No, I've got the knives." "Are you sure it isn't a scam," asked his father. "You know, where they try to get you to buy the knives?" "No, it's legitimate. They say they've been doing this since 1949." "How did you find this job? Why do you want to sell knives?" came the follow-on questions. "I'm going to be a surgeon," Henry explained. Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- 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 at joel@dailyreckoning.com Unwelcome Correction Mistaken for a Double-Dip Recession You want to see suspicious activity? Just follow Pennsylvania Avenue to the Capitol Building! A few years ago, urging people to rat out their fellow citizens would have been suspiciously un-American...more in keeping with life in East Germany or North Korea. But the world turns. And now, the snitchers are right here in the USA! A Gold Medal in Economic Incompetence Government Spending Won’t Stave Off a Correction Insufficient Silver to Supply China’s Growing Demand Most people have never heard of “the invisible hand” of the market, which is the surprising result of everyone working to get money with which to satisfy their own selfish interests, and it ends up benefiting everybody, a result that is so glorious that it seems that things are being guided by some “invisible hand.” Inflation Corroded Copper Coins Re-Animating a Debt Dog Markets Without Guardrails Two significant changes are pushing markets towards a shakeout. First, the bond markets are showing strains. For instance, both investment-grade and junk-rated companies are finding it more difficult to issue bonds. To put this in today’s context, the momentum money that has pushed asset prices up since the spring of 2009 assumes, or believes, that governments will do whatever is necessary to sustain the upward march. Now there are doubts. Soros: Collapse of Financial System “Real” and “Far From Over” The Underlying Problem was Never Illiquidity