 | | The Daily Reckoning | Tuesday, August 7, 2012 |
- Just how far down the road can the feds blast that can?
- The U.S. as the U.S.S.R....there but for the grace of technology,
- Plus, Bill Bonner with a hypothesis of “déjà vu all over again”...
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|  | | | | Quote of the Day... | | | Sometimes it is said that a man cannot be trusted with the government of himself. Can he, therefore, be trusted with the government of others?
— Thomas Jefferson
| | | | Big Bazooka Theory and Practice | | |  | | Bill Bonner |
Reckoning today from Paris, France...
This message is one of a series. It began when Mario Draghi, former Goldman man and now head of the European Central Bank, promised to do “whatever it takes” to save Euroland.
The issue on the table: whatever does it take to bring a real recovery?
First, whatever it takes, Mario Draghi didn’t seem to have it. Or maybe he did. The situation in Europe is so complicated it’s hard to tell. So, investors have been fearful one day and cheerful the next. At the beginning of last week they thought all was lost. Then, by the end of the week, stocks were rallying again. The Dow rose more than 200 points on Friday. Yesterday, it still had some forward momentum...going up another 21 points.
What does Mr. Draghi have? This report from the Telegraph, which has been hard on the story from the beginning, suggests that at least Mr. Draghi has something:
Mr. Draghi has secured a mandate for “unlimited open-market operations”, a far cry from the half-hearted and self-defeating bond purchases of the last two years. The ECB at last has a license to act with overwhelming force, like the US Federal Reserve. |
‘Overwelming force’ is what Ben Bernanke has, which is thought to be the same as ‘whatever it takes.’ But is that enough? What force do central bankers really have? All they can do is provide the markets with more cash and credit. And even if they give it all they’ve got that still won’t be enough to cause a real recovery. Because you can’t cure a debt crisis with more debt. If you could, no one would ever bother with austerity.
Households, governments, businesses — faced with too many debts and not enough money — sooner or later have to straighten up, reduce spending and reckon with their bad debt.
On the other hand, we’ve never heard of a counterfeiter who failed to pay his debts. And since the bank of Ben Bernanke has the power to print money, investors are inclined to give him and the US some slack. That’s because he has ‘whatever it takes.’ At least, they give him more slack than they give to, say, Greece. When Greece is in a pinch, it defaults. That’s what it has done many times. Half its history since independence in 1828 has been spent in default. But when the US is in a pinch, it prints!
That’s the Big Bazooka Theory in a nutshell, where it belongs. And here’s a forecast, too. Readers take note: this is not a formula for a healthy economy. Nor does it bring a recovery. It’s only a formula for blasting the can so far down the road that most investors and savers can’t see it, and therefore don’t worry about it.
As for Mario Draghi, we don’t know. He may have the power to use unlimited force. Or he may not.
According to the theory, you’re bazooka can’t be just big, it has to be infinitely big. Because, the only way you can hold off a default is by promising to print an infinite quantity of cash. And you have to mean it. If you just print up a few hundred billion, speculators take out their calculators. If they see you’re a little short, they sell your bonds, fearing that you will default. Then, other speculators buy them at low prices, betting that you will print more of whatever it takes. Then, when you do print more, prices soar and the speculator sells the bonds back into the market...
...and the whole process repeats itself...until you finally default.
As long as the amount you print is limited, speculators can look ahead and see when it runs out. The only way to end this speculation against your bonds is to say: ‘don’t bother selling my bonds, I’ll print an infinite amount to protect them.’
Then, the whole drama goes away. Savers and investors just want to know they’ll get their money back. Your willingness to print, completely unrestrained by law or common sense, reassures them.
In fact, in today’s world, they’ll buy so many of your bonds that your interest rates will fall below the level of consumer price inflation (which is usually falling too)...making the real yield actually negative! In other words, if you agree to act like a damned fool, they’ll lend you money and ask for no real yield.
That’s because you will have ‘whatever it takes.’
All of which is passing strange. But very amusing.
But it still leaves us with the question: whatever does it take to bring a real recovery? More thoughts, below...
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| | The Daily Reckoning Presents | | Government-Sponsored Poverty | | |  | | Jeffrey Tucker |
Growing up in the Cold War, we tended to look at Russia as a nightmare slave society that was utterly and completely foreign to anything Americans knew or could possibly know, absent some kind of invasion.
If I were to summarize the American propaganda message of the time it would be this: We are free, they are not, and that’s why we are rich and they are poor. And, man, did they look poor to our eyes. I could never understand it: How the heck does a once-great people put up with a government that is so obviously and apparently driving the whole population down, year after year?
Well, welcome to 2012 America. Have a look at the extremely scary Federal Reserve report, the Survey of Consumer Finance. If you have the stomach for it, read it yourself. The bean counters have put together the most broad and deep look at the finances of the median family. It turns out that the median American family is financially falling off a cliff, despite (or because of!) the trillions spent trying to prevent this from happening.
The short summary:
- Two decades of seeming prosperity have been entirely wiped out since 2008, putting the net worth of the households at the same level it was in the early 1990s.
- The housing crash is the main cause of the wreckage, but the actual income of the median family has fallen by 7.7% since 2007. The report compiles data from 2010 and would probably be worse in this respect if it included data from today.
- Nearly all measurable increases in what the government calls economic growth actually come from consumers depleting what resources they have and not saving much, if any, income at all.
- Meanwhile, 75% of households report that they are still holding an unchanged level of debt. Those households paying less in debt finance are doing so because they are deferring student loan payments and refinancing houses at subsidized rates.
It’s actually difficult to come up with a metaphor to fully capture the grim reality here. We could fall back on the farmer that is eating the seed corn held for next year’s planting. Or perhaps we could imagine a household that is feeding the fireplace with shingles from the roof. In short, this is not a sustainable pattern of family finance, and it is currently driving American wealth straight down.
To the extent we are not entirely aware of this, there can only be two reasons. First, the proliferation of debt finance is providing a temporary illusion. Second, the technological revolution came just in time to vastly increase the efficiency of just about everything industry and households do, thereby enabling more blood to be extracted from the economic turnip than anyone ever thought possible.
Take away those two factors and the true impoverishment of the American family would be undeniably obvious and produce a political reality that would be more revolutionary than anything we’ve seen in any existing lifetime.
We are surviving, and even somewhat thriving, despite the fact that we are getting ever poorer. This is an interesting economic paradox. The tools that we work with today — cloud computing, instantaneous communication, the time cost of operations reduced from years to minutes — have saved us from something that might have made the Great Depression seem miniscule by comparison.
Technology is so wonderful that it can actually serve as a kind of mask for underlying decline. Imagine a fisherman at a lake that has a systematically declining population of fish. He had been using a cane pole to fish, but one day, someone invents a digital fish finder and gives him a boat. This vastly expands his daily catch. It feels like prosperity, and it’s true that his time is much better spent, but the underlying reality is still there. Eventually, the fish population will die out.
Another feature of the world since 2008 is that government and the central bank has pulled every conceivable lever to prevent what has happened from happening. It has not only failed to accomplish that end. It has actually forestalled the necessary liquidation that would have created a clear path forward for the rebuilding of prosperity. All of the interventions have stopped the readjustment process, squandered trillions of dollars and cultivated a regulatory thicket that chokes the life out of all but the hardiest — or most politically connected — of capitalistic enterprises.
Imagine an alternative scenario: The bust of 2008 was permitted to happen. Bad banks and financial institutions were allowed to go bankrupt. No sector was saved. Housing prices plummeted. Fannie and Freddie took their lumps. Government slashed spending. The entire economy was deleveraged.
The effects would have been shocking, but temporary. Workers would have shifted from failed sectors to newly profitable ones. Consumers would have pulled back and had every incentive to save as never before. The poor could have afforded homes. Actually, homes would have become marketable as never before. The new savings would have funded investment, and the rebuilding of prosperity would have been massively aided by the great technological revolution.
Alas, this is not the reality we face. Instead, we are experiencing right now something very similar to what has always vexed, not just the Soviet Union, but every society burdened by a catastrophically large and intrusive government. We are getting poorer. And we are putting up with it. For now.
Regards,
Jeffrey Tucker,
for The Daily Reckoning
Joel’s Note: Well, some people are putting up with it. But not Jeffrey. And not members of the Laissez-Faire Club. If you haven’t yet heard, the LF Club is dedicated to finding “workarounds” to the “catastrophically large and intrusive government” that free individuals so detest. The LF Club’s reports (like this one) are filled with practical, do-it-yourself tips on how to live a freer life each and every day.
So if you find yourself moaning and complaining about incessant government meddling into your affairs — a common enough affliction, to be sure — perhaps today is the day to actually do something about it. Take the first practical step by learning a bit about the Laissez-Faire Club here.
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| | | | | And back to Bill who has the rest of today’s reckoning... | | | “Déjà vu” is a French expression that means...well, you know what it means.
For our purposes, we will use it to refer to the slumpy economy...and to the feds’ response. We’ve see it all before.
“Dans la merde” is another French expression...which refers to where you end up when the feds’ undertake to fix it.
But the Dow shot up 217 points last Friday. Gold went up $18. How to explain it?
With Europe on the brink of a blow-up (where it’s been for years)...China’s economy slowing down dangerously...and much of the rest of the world already in recession you’d expect investors would think twice before buying more stocks. After all, what are stocks? They’re shares in real businesses. When those businesses do well, the shareholders should do well. But businesses don’t usually do well in a recession.
Investors, however, seem to be following a different line of thinking. They are responding to two entirely different hypotheses.
1. The economy is doing well. That was the news in the latest unemployment report. Therefore it makes sense to own stocks and gold. As the economy improves, more people will borrow and spend. As they do so, interest rates and consumer prices will rise. Businesses will do better as their sales rise. Higher inflation rates will cause gold to go up, too.
2. The economy is not doing well. And the worse it does the more pressure builds on central bankers to ‘do something.’ What can they do? Only add more cash and credit. More liquidity will send both stocks and gold up. |
Now, you will look at these two hypotheses and think you have discovered a sure thing, no? A can’t-lose proposition, right? Either the economy is doing well. Or not. Either way, stocks are going up! Win...win...right?
Wrong!
How about a third hypothesis? In this one, the whole world is sliding into recession. Britain and Europe are already there. Japan is almost there. The US is trailing, but not by much.
Recession is what should happen. The developed economies are still in a Great Correction. And the effects of massive doses of new credit...cheaper money...and a big increase in the world’s money supply (central bank assets have doubled since ’08)...are wearing off. Once again, the private sector is trying to correct its mistakes — shucking off bad debt however it can. People are being more careful with their money — which is why sales fall and unemployment rises.
Nothing new about this either.
And nothing really new about the feds’ reaction. Murray Rothbard described the feds’ response after the crash of ’29:
“If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial position. In an act unprecedented in its history [but repeated after ’08..] the Federal Reserve moved in during the week of the crash...the final week of October...and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week the Federal Reserve doubled its holding of government securities...” |
Then, as now, the big increase in money supply produced something that looked like a recovery. Rothbard continues:
By mid-November, the great stock break was over, and the market, falsely stimulated by artificial credit, began to move upwards again. |
In our current episode, stocks have recovered from their ’08-’09 crash. Banks, teetering on the brink of collapse, were saved too — as the feds let it be known that they would do ‘whatever it takes’ to spare them from the consequences of their own mistakes.
And the leaders of the rescue, mainly Ben Bernanke himself, are hailed as heroes...having saved civilization. The 1930s had its heroes too. The first was Mr. Herbert Hoover, who had engineered rescue efforts following the Great Crash. Rothbard:
President Hoover was proud of his experiment in cheap money and in his speech to the business conference on December 5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates. |
We know, however, that the heroes of the ’30s had not really saved the financial system from a day of reckoning; they merely postponed it...and stretched it out.
The crash and depression of ’20-’21 was more severe than the current crisis, but it was over within 24 months, during which time the feds made no rescue attempts. The washout after October 1929 probably would have been short and violent, too. Instead, the feds came to the rescue and turned it into a 20-year period, which included a Great Depression and WWII.
That’s our third hypothesis: déjà vu all over again, with more intervention, but no real recovery. Instead, the day of reckoning will be pushed into the future...and the whole correction process will be turned into a long, painful episode of little growth, high unemployment and periodic financial crises.
And here’s an additional forecast: Ben Bernanke will not want to re- live the ’30s. He will not want that déjà-vu experience. When the US economy is ‘dans la merde,’ he will give it more cash and credit...so that it is even further ‘dans la merde’!
Regards,
Bill Bonner,
for The Daily Reckoning
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