The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery
The Daily Reckoning
Friday, December 18, 2009
Bill Bonner, delivering today's reckoning from Paris, France...
It must be snowing all over Europe. Zurich was beautiful in the snow. So is Paris. The snow seems to quiet the place down...and cover over its imperfections. And the cafes and bars...brightly lit, warm and charming...are so inviting you can barely make it home at night.
This morning, it is still snowing. We were tempted by several cafes. But we made it into the office anyway. There's reckoning to be done; someone has to do it.
Yesterday, the Dow cracked a bit - down 132 points. The crack in the gold market widened; gold fell $39.
What does it mean? Everyone is talking about the rise in the dollar. It's up to $1.43 per euro...a three-month high.
"The US economy all of a sudden doesn't look so bad; the rest of the world doesn't look so good," was one explanation given in The Wall Street Journal. Investors are going back to safety, said another report.
We were puzzled as to why stock markets were doing so well. If investors were really fearful, you'd think they'd be pulling their money out of expensive stocks, especially out of the go-go 'emerging' markets. This year, the three leading performers are Brazil, Russia, and Indonesia, up 140%, 129%, and 115% respectively. Even in the US, shares are selling for far more than recent experience would seem to justify.
But yesterday, maybe the sell-off in the stock market finally began. We'll have to wait and see.
Meanwhile, over the last couple of weeks, an idea has been taking shape. The future is like a child. It will grow into an entirely new person. One that has never existed before. But it is a product of the past too. It may have Mom's eyes...or Aunt Lou's quick temper. It lives in a house originally bought by Dad when he was working for IBM in the '80s. And it uses money that is controlled by an organization set up under the Wilson administration.
When we look ahead, we see enough elements of the past to confuse and mislead us. "Those who do not study the past are doomed to repeat it," say the schoolteachers. But what about those who DO study history? At least one of Hitler's top generals had in his pocket a copy of Caulaincourt's recollections of Napoleon's disastrous Russian campaign, when he was taken prisoner at Stalingrad.
We are supposed to believe that investors can avoid the calamities of the past by studying what happened in previous market cycles. To some extent it is true. You read enough stories of bubbles and you begin to get an instinct for them - at least at the extremes. That is how some of us were able to foresee the dotcom blow-up in '00...and later, the blow-up in the financial sector in '08.
Part of the problem is just filtering out the noise in the system. Probably 99% of what you heard is just noise - distracting information, misunderstood phenomena, and dubious data. When you read the commentariat...the pundits...the newscasters, economists, and analysts who are telling you what is happening and what lies ahead, you have to remember that most of them had no idea what was happening two years ago. Now, they have even less of an idea of what is happening.
We don't have any idea either. For, like a newborn babe, this period in our financial history bears some resemblance to past cycles. The most striking resemblance is to the depression period of the '30s in the US...and the long, slow depression in Japan since 1989. But it is different too. As you will see, below, we have far more to reckon with that we did in the '30s.
Of course, those who misunderstood the financial bubble of '03-'07 (Ben Bernanke thought it was a period of "Great Moderation" caused largely by his own superior handling of the Fed) now misunderstand the post- bubble world.
They think it is a technical challenge. They imagine that if Bernanke - whose bid for another term cleared the House yesterday - can just make the right adjustments, everything will be hunky dory.
Alas, Bernanke will do an even worse job than we would do. We have no idea. He has a bad one.
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And more thoughts...
Ben Bernanke is Time's "Man of the Year." Reading the commentary, it is clear that the popular press has even less of an idea of what is going on than Bernanke himself.
The more we think about it, the more our jaw drops. In Copenhagen this week, a large group of apparatchiks and hacks got together to discuss a 'climate deal.' There, Hillary Clinton pledged US support to a plan to spend $1 trillion to try to influence the earth's climate. Governments can do many things, but can they really improve the weather? There is no evidence for it. Not even a respectable theory.
In Washington, meanwhile, Ben Bernanke is spending trillions to try to improve the economy. Can he really do that? Again, there's no evidence for it.
The depression continues...
Jobless claims went up last week. And Bloomberg reports that the "shadow inventory" of houses is going up with it.
In the "shadow inventory" are houses that would be for sale if owners thought they could find a buyer at a decent price. We would add in the houses of people who are about to make "strategic defaults" on their mortgages.
The WSJ reports:
"A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what it known as a 'strategic default,' walking away from their mortgages not out of necessity but because they believe it is in their best financial interests."
Some 5.5 million people have houses that are 20% or more underwater. One of them, spotlighted in the WSJ, had a house worth $230,000 and a mortgage of $318,000.
Here is one way the problem of too much debt is solved...not by paying it off, but by writing it off. The homeowner in this situation can improve his balance sheet - wiping out $88,000 worth of debt - without lifting a finger. Logically, he could go to the lender and cut a deal. But lenders won't want to get their customers started on bad habits. So, he will just cease paying his mortgage. His credit rating will suffer. But what does he care? He's fed up with debt.
The house will be seized by the bank. Then, it will come out of the shadow inventory and into the light of the active housing market - pushing prices down.
The good ol' WSJ has noticed the big shift in attitudes. No longer able to afford spending, Americans are deciding that spending isn't cool.
"We seem to be at a cultural inflection point that we haven't seen since WWII," said one market researcher.
"Their value system is shifting from aspiring to material wealth to aspiring to a better life," said another one.
Yes, dear reader, runaway consumerism has run off the road. With 6 billion people now competing for stuff, the whole idea of having a lot of stuff is being called into question. In the first place, there's not enough stuff around to permit everyone to have as much as Americans - at least not without some huge technological breakthroughs. In the second place, Americans have run out of money to buy stuff. In the third place, it takes a lot of energy to make and transport so much stuff; the US no longer has access to cheap energy. And finally, the US economic model - in which growth is a result of stimulating consumers to buy more stuff - no longer works.
What will replace consumerism? Hey...we don't know. Besides, we feel pretty proud of ourselves for just figuring out this much. More in today's essay, below...
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----------------------------------------------------------The Daily Reckoning PRESENTS: Equipped with the luxury of hindsight, one may hope to identify epoch-making inflection points littered throughout the past, on the stroke of which the course of politics, art, culture and finance all pivoted. But what about the history-making moments underway this very moment, today? What are they and how will they shape the future for us all? Nobody can say for sure, of course, but Bill offers some thoughts and guesses in today's essay anyway. Please enjoy...
Depression on Wheels
By Bill Bonner
Paris, France
When the price of oil hit $150 a barrel, the first major alarm sounded. Something was wrong. Now we have a clearer idea of what it was.
To make a long story short, leading economists have a one-stop solution for just about everything: stimulate consumer spending. But $150 oil warned us: continue down that road and you will run out of gas. There isn't enough oil in the world to allow US-style consumption for everyone.
Two weeks ago, Dubai gave us another wake-up call. Thought to be risk- free, since it was implicitly backed by all the oil in the Middle East, Dubai World nevertheless stopped paying its debts. And this week yet another bell banged our eyes open. Greece announced first that it would not try to reduce its deficits...then, that it would. Hearing the news, the financial world rolled over and went back to sleep. But The Wall Street Journal offered a hint of trouble to come: "Markets force Greek promise to slash deficit," said its page one headline.
If markets could force the Greeks to trim their deficit - about 13% of GDP...not far from the US level - could they not force Britain and America too? Coming right to the point, the fixers face not just one crisis, but many. They have a growth model that no longer works. They have aging populations and social welfare obligations that can't be met. They have limits on available resources, including the most basic ones - land, water, and energy. They have a money system headed for a crack-up, and an economic theory that was only effective when it wasn't necessary. Now that it is needed, the Keynesian fix is useless. If a recovery depends on borrowed money, what do you do when lenders won't give you any?
But let us backtrack to a smaller insight. Then we will stretch for a bigger one. Americans are supposed to be insatiable shoppers. For at least three decades, the world counted on it. It was the growth model for almost all the Asian manufacturing economies...and for resource producers everywhere. But as we approach the biggest shopping season of the year, a survey of consumers signals an earthquake. Americans plan to spend an average of 15% less during this holiday season than the year before. Only 35% say they will take advantage of post-Christmas sales, traditionally when the stores unload unwanted inventory. They seem to be satiable after all.
Push come to shove, Americans react like everyone else. Now, they are being shoved into a new world, very different from the one they have come to know. In 1973, the American working stiff went into a decline. His weekly earnings, in real terms, went down for the next 36 years. The typical worker earned the equivalent of $325 a week in 1973...adjusted to constant 1982 dollars. By US official accounting he was down to $275 a week in 2009. Unofficial estimates put the loss as high as two-thirds of his purchasing power.
Yet, his spending increased anyway. How? He squeezed the rest of the world. The US trade gap began to go seriously negative in 1992. By 2006-2007, foreigners were shipping to America nearly $900 billion more per year in goods and services than they received in exchange. This gave the typical American a standard of living few people could afford; too bad, he wasn't one of them.
Now he's up against billions of Patels and Hus. They work for less. They save more. They want more stuff too. And they're suspicious of the dollar.
Their economies are growing faster...and better. Because they don't have 50 years of accumulated success on their backs. That's the trouble with success; it adds weight. In their heyday, the mature economies could afford to squander and regulate. But that trend, too, is reaching its limits. Even without the cost of 'stimulus,' practically all the world's leading economies are headed for insolvency. And yet, this week, Paul Krugman gave his solution to the weak results from stimulus spending so far - add $2 trillion more!
All of a sudden, the most reliable givens of the past half a century aren't given any more. Americans were the big winners of the post-WWII period. They got used to it. At first, they wanted to make things; later they just wanted to have them. And with the benefit of cheap oil and resources, and then cheap labor and cheap credit, they were able to get more stuff than any race ever had. Now they are shackled to it, unable to move forward or to back up.
Meanwhile, Europe - led by post-war neoclassical Jacques Rueff in France and Ludwig Erhard in Germany - pursued a different course. While Americans subsidized consumption, Europe taxed it. Credit was expensive, not cheap. And then, the European Central Bank had the great advantage of having a chief banker whom no one paid any attention to. He might talk about stimulating consumption, but he did nothing.
And now the world is reckoning with much more than a consumer debt bubble. It is reckoning with a depression on wheels...the end of the consumer spending era. We don't know what kind of world will take its place. But it won't be the one the feds are trying so desperately to save.
Enjoy your weekend,
Bill Bonner,
for The Daily Reckoning The Daily Reckoning - Special Reports:
Saturday, 19 December 2009
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