This just in...Ben Bernanke and Tim Geithner have rushed to Los Angeles. If they can revive an entire world economy...why not the 'King of Pop?'
Fans are hopeful...but here at The Daily Reckoning we take a discouraging view of these revival efforts. We admire the achievements of science and technology; as for the works of economists and central bankers, well...we'll wait to see how things turn out.
Fans are hopeful...but here at The Daily Reckoning we take a discouraging view of these revival efforts. We admire the achievements of science and technology; as for the works of economists and central bankers, well...we'll wait to see how things turn out.
Best Stocks To Buy For 2010
Yesterday, we took up the biggest illusion of the Bubble Era. We held it up to the light...and noticed:
So deeply rooted is this illusion that it will take more than a strong wind to uproot it.
We're talking about the idea that government bureaucrats can do a better job of allocating capital than free markets. Everyone seems to believe it. They're allowing a handful of economists - who failed the critical test; not one of them noticed the market tsunami coming last autumn - to direct the flow of trillions worth of savings. They've already put at risk more than $12 trillion. Right now, they're denying the need for more 'stimulus,' but that is likely to change.
$12 trillion is a lot of money. Adjusted for inflation, it is still more than twice as much as America spent in all of WWII. But it's not just the money...it's the future of the world economy that is at stake.
In a nutshell, the meddlers believe they can borrow their way out of debt. If you say that the key problem in America is debt, they won't argue with you. But they think that they can overcome that problem by borrowing trillions more.
Many times have we argued that they will fail. We laugh at building dog walks ...bailing out businesses that have lost their way...and paying huge bonuses to Wall Street execs. But those are just the obvious flaws. Down deeper, in the dark, corroded heart of the government economist is a fatal conceit.
We know from the experience of the 20th century that Friedrich Hayek was right. He called it the "Fatal Conceit": the idea that central planners working for the government are free from sin and error. He wrote early in the century...when National Socialism and Communism were still popular.
Now we know; central economic planning doesn't work. Everywhere it was tried it was a disaster. The more the bureaucrats planned, the bigger the mess they made. But now we are supposed to believe that central financial planning will save the world from the mistakes of the bubble era. That is the grand illusion waiting to be toppled. What fun it will be to see it come down!
When the illusion does topple, though, be sure that you aren't taken down with it. Or at least be sure that you've built a solid foundation that won't be shaken to core when the walls come tumbling down. Start building your foundation today.
Now, the news from The 5 Min. Forecast:
"Americans are saving at the highest rate in 15 years," reports Ian Mathias on the beat for The 5. "According to this morning's personal income and spending report from the Commerce Department, the consumer savings rate is up to 6.9%, its best since 1993. Americans have stashed away an estimated $768 billion, an all-time high. Bravo...now if only our government would follow suit...
"'Under current law, the federal budget is on an unsustainable path,' begins the latest report from The Congressional Budget Office. The report, titled The Long Term Budget Outlook, was about as bad as you'd expect...maybe even worse. At the heart of the matter, this chart:
So deeply rooted is this illusion that it will take more than a strong wind to uproot it.
We're talking about the idea that government bureaucrats can do a better job of allocating capital than free markets. Everyone seems to believe it. They're allowing a handful of economists - who failed the critical test; not one of them noticed the market tsunami coming last autumn - to direct the flow of trillions worth of savings. They've already put at risk more than $12 trillion. Right now, they're denying the need for more 'stimulus,' but that is likely to change.
$12 trillion is a lot of money. Adjusted for inflation, it is still more than twice as much as America spent in all of WWII. But it's not just the money...it's the future of the world economy that is at stake.
In a nutshell, the meddlers believe they can borrow their way out of debt. If you say that the key problem in America is debt, they won't argue with you. But they think that they can overcome that problem by borrowing trillions more.
Many times have we argued that they will fail. We laugh at building dog walks ...bailing out businesses that have lost their way...and paying huge bonuses to Wall Street execs. But those are just the obvious flaws. Down deeper, in the dark, corroded heart of the government economist is a fatal conceit.
We know from the experience of the 20th century that Friedrich Hayek was right. He called it the "Fatal Conceit": the idea that central planners working for the government are free from sin and error. He wrote early in the century...when National Socialism and Communism were still popular.
Now we know; central economic planning doesn't work. Everywhere it was tried it was a disaster. The more the bureaucrats planned, the bigger the mess they made. But now we are supposed to believe that central financial planning will save the world from the mistakes of the bubble era. That is the grand illusion waiting to be toppled. What fun it will be to see it come down!
When the illusion does topple, though, be sure that you aren't taken down with it. Or at least be sure that you've built a solid foundation that won't be shaken to core when the walls come tumbling down. Start building your foundation today.
Now, the news from The 5 Min. Forecast:
"Americans are saving at the highest rate in 15 years," reports Ian Mathias on the beat for The 5. "According to this morning's personal income and spending report from the Commerce Department, the consumer savings rate is up to 6.9%, its best since 1993. Americans have stashed away an estimated $768 billion, an all-time high. Bravo...now if only our government would follow suit...
"'Under current law, the federal budget is on an unsustainable path,' begins the latest report from The Congressional Budget Office. The report, titled The Long Term Budget Outlook, was about as bad as you'd expect...maybe even worse. At the heart of the matter, this chart:
 |
"The CBO (which is a government arm, mind you) predicts that, under the most likely scenario, our national debt will exceed 100% of our GDP by 2023...200% by the late 2030s.
"In formulating its projections, the CBO used two scenarios. The first, the 'extended baseline scenario,' assumes things will remain about the same over the next decade... all scheduled changes under current law will occur and all budget projections will be met. The second, its 'alternative fiscal scenario,' accounts for budget changes widely expected to occur...like preserving Bush tax cuts for the middle class, reigning in the alternative minimum tax, and failure to drastically cut Medicare costs.
"Both scenarios paint a dark picture for our fiscal future. No CBO report has ever predicted this much debt, accumulated at such a rate. And we hasten to add, the CBO is assuming - like the rest of the government - that the worst of the recession is largely behind us.
"So can we stop this runaway train? Sure, says the CBO...but it won't be easy. Even under the less severe scenario, 'an immediate and permanent reduction in spending or an immediate and permanent increase in revenues equal to 3.2% of GDP would be needed to create a sustainable fiscal path for the next three-quarters of a century.'
"If we're reading this right, that means Uncle Sam will need to cut spending or raise taxes by about $440 billion and maintain those adjustments every year for a long, long time. Under the CBO's worse, more likely scenario, it's closer to $740 billion."
Ian writes every day for The 5 Min. Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. It's a free service available only to subscribers to Agora Financial's paid publications, such as the Hulbert #1 Performing Stocks Investment Letter, Outstanding Investments.
And back to Bill, with more news and opinion:
In the news yesterday, the Dow rose 172 points. Oil rose a bit, after a pipeline in Nigeria was attacked. Gold was up a little too - plus $5.
All of this market action is just noise. The real plot to this story is the one we've been following here in these reckonings. The world economy is entering a depression. So far, nothing the feds have done has managed to stop it.
In Japan, analysts keep an eye on exports as a way of gauging the health of the global economy. If Japan isn't selling, other nations aren't buying. And if ships stop loading goods 'Made in Japan,' global trade is in trouble.
In the month of May, Japan's exports declined 40% year on year.
Yesterday came similar news from Europe. Industrial orders in the Eurozone dropped 35% in April, from the year before.
"Fed on hold as slump eases," reports The Wall Street Journal. What exactly is meant by 'slump eases' is unclear. As near as we can tell, the slump is getting worse.
"New home sales plunged 32.8%." Bloomberg reports that house prices in California and Las Vegas are being hit hard by a wave of foreclosed properties. Yes, dear reader, the anklebone is still connected to the leg bone.
Best Stocks For 2010
Bloomberg also reports, "jobless claims are up."
A fellow loses his job; he can't pay his mortgage. The house goes onto the market and pushes down prices. Prices in California are off 30% year-to-year, with the median house at $267,000. In Las Vegas, the median house is only $135,000 with 75% of sold properties coming from foreclosures.
The housing market is slow. But it works like other markets. It reacts...then, it over-reacts. It shoots. Then, it over-shoots. One study we saw said that housing prices were now down to "reasonable" levels. But there's no law that says they can't go to unreasonable levels. They were very unreasonable two years ago; they're likely to be very unreasonable in the other direction before this depression is over. Hold on; maybe you'll be able to get the median house in California for $199,000.
The WSJ notices that the leg bone is connected to the knee bone too, "house price falls are cutting into economy," it says.
Well, what did you expect? That's what house price declines do. People feel poorer because they are poorer. And with no source of ready cash - they spend less. Then...the whole economy weakens...etc....etc.
We've been over that enough times already. You don't want to hear it again.
And remember how we warned of a big increase in credit card defaults? When the slump began...and consumers could no longer "take out equity" from their houses...they turned to credit cards to fill the gaps in household budgets. Since then, there has been no increase in household earnings. To the contrary, household earnings have gone down. So the fellow with more credit card debt and less revenue is in a predictable jam. What does he do? He defaults.
"Credit card delinquencies at record," says one headline.
"Credit card charge offs break record," says another.
And these aren't the only kind of defaults the United States will be bracing itself for. A second wave of mortgage loan defaults is headed this way. Batten down the hatches and otherwise prepare...once it hits these shores, it will likely do much more damage than the first wave. Get information on how to protect yourself - and your portfolio - in our new special report.
Elsewhere in the news, we find GM closing plants and Ford cutting out half its suppliers.
Yes, the Fed is on hold. It dares not do anything else. Its voodoo revival program has not worked. The corpse of the real world economy is as lifeless as ever.
What will it do next? We wait to find out.
And poor Michael Jackson: RIP.
A fellow loses his job; he can't pay his mortgage. The house goes onto the market and pushes down prices. Prices in California are off 30% year-to-year, with the median house at $267,000. In Las Vegas, the median house is only $135,000 with 75% of sold properties coming from foreclosures.
The housing market is slow. But it works like other markets. It reacts...then, it over-reacts. It shoots. Then, it over-shoots. One study we saw said that housing prices were now down to "reasonable" levels. But there's no law that says they can't go to unreasonable levels. They were very unreasonable two years ago; they're likely to be very unreasonable in the other direction before this depression is over. Hold on; maybe you'll be able to get the median house in California for $199,000.
The WSJ notices that the leg bone is connected to the knee bone too, "house price falls are cutting into economy," it says.
Well, what did you expect? That's what house price declines do. People feel poorer because they are poorer. And with no source of ready cash - they spend less. Then...the whole economy weakens...etc....etc.
We've been over that enough times already. You don't want to hear it again.
And remember how we warned of a big increase in credit card defaults? When the slump began...and consumers could no longer "take out equity" from their houses...they turned to credit cards to fill the gaps in household budgets. Since then, there has been no increase in household earnings. To the contrary, household earnings have gone down. So the fellow with more credit card debt and less revenue is in a predictable jam. What does he do? He defaults.
"Credit card delinquencies at record," says one headline.
"Credit card charge offs break record," says another.
And these aren't the only kind of defaults the United States will be bracing itself for. A second wave of mortgage loan defaults is headed this way. Batten down the hatches and otherwise prepare...once it hits these shores, it will likely do much more damage than the first wave. Get information on how to protect yourself - and your portfolio - in our new special report.
Elsewhere in the news, we find GM closing plants and Ford cutting out half its suppliers.
Yes, the Fed is on hold. It dares not do anything else. Its voodoo revival program has not worked. The corpse of the real world economy is as lifeless as ever.
What will it do next? We wait to find out.
And poor Michael Jackson: RIP.
Scarcely a block from our office in Paris is a monetary phenomenon that has escaped the financial press. In one of the highest-cost economies in the world, you can buy a woman's shirt for 2 euros. A dress? Four euros. A man's jacket can be had for the price of a cup of coffee.
The shop is tended by Chinese merchants...apparently dodging France's employment laws by only hiring family members. The merchandise, too, dodges high rents by squatting the sidewalk, under improvised blue awnings.
How come such cheap duds in such a dear city? The latest figures show negative consumer price inflation in 14 countries. In Ireland prices are collapsing at a 4.7% rate. In the United States, they are falling at 1.3% annually - their biggest drop in 59 years. In Britain, consumer price inflation is still positive...but falling. But clothing on the Boulevard de la Villette seems to have been thrown out of an airplane. It is not in deflation; it is in hyper-deflation.
What could cause it? A guess: excess capacity, inspired by excesses of credit, consumption and claptrap during the Bubble Epoque. Spurred by what seemed like insatiable demand from the United States and Britain, Asians built superfluous factories...Greeks bought superfluous ships...and Americans built superfluous malls. Now, the feet are in the other shoes - the cheap ones. The action of the bubble years produces an equal and opposite reaction: excess supply bedevils the market. Unable to sell superfluous brand name clothing, the rag trade strips off the alligators and polo sticks and dumps clothes on discount racks.
Last week, we warned about the extremely destabilizing effects of hyperinflation. One day middle class men are saving money for their daughters' dowries. The next, they are putting knives between their teeth and swimming across the Rhine.
Today, we deny hyperinflation thrice before the cock crows...and then deny we denied it. First, Professor Alan Blinder in The New York Times: "the clear and present danger, both now and for the next year or two, is not inflation but deflation."
The shop is tended by Chinese merchants...apparently dodging France's employment laws by only hiring family members. The merchandise, too, dodges high rents by squatting the sidewalk, under improvised blue awnings.
How come such cheap duds in such a dear city? The latest figures show negative consumer price inflation in 14 countries. In Ireland prices are collapsing at a 4.7% rate. In the United States, they are falling at 1.3% annually - their biggest drop in 59 years. In Britain, consumer price inflation is still positive...but falling. But clothing on the Boulevard de la Villette seems to have been thrown out of an airplane. It is not in deflation; it is in hyper-deflation.
What could cause it? A guess: excess capacity, inspired by excesses of credit, consumption and claptrap during the Bubble Epoque. Spurred by what seemed like insatiable demand from the United States and Britain, Asians built superfluous factories...Greeks bought superfluous ships...and Americans built superfluous malls. Now, the feet are in the other shoes - the cheap ones. The action of the bubble years produces an equal and opposite reaction: excess supply bedevils the market. Unable to sell superfluous brand name clothing, the rag trade strips off the alligators and polo sticks and dumps clothes on discount racks.
Last week, we warned about the extremely destabilizing effects of hyperinflation. One day middle class men are saving money for their daughters' dowries. The next, they are putting knives between their teeth and swimming across the Rhine.
Today, we deny hyperinflation thrice before the cock crows...and then deny we denied it. First, Professor Alan Blinder in The New York Times: "the clear and present danger, both now and for the next year or two, is not inflation but deflation."
Best Stocks Market of 2010
Second, BusinessWeek elaborates:
"...the inflationary effects of the new money are being fully offset, or more than offset, by the far-reaching and long-lasting impact of household debt repayments. Whether it's voluntary frugality or under the coercion of creditors, Americans have abruptly switched from living beyond their means to saving more and working down the debts they incurred during the bubble years."
Third, as Ambrose Evans Pritchard puts it in the Telegraph: "the Fed's efforts to boost the money supply are barely keeping pace with the deflation shock. Stimulus is not gaining traction. The credit system is broken."
Professor Blinder explains why:
"In normal times, banks don't want excess reserves, which yield them no profit. So they quickly lend out any idle funds they receive. Under such conditions, Fed expansions of bank reserves lead to expansions of credit and the money supply and, if there is too much of that, to higher inflation. In abnormal times like these, however, providing frightened banks with the reserves they demand will fuel neither money nor credit growth - and is therefore not inflationary."
Reserves are what nobody wanted in the bubble years; now we live in a world of squirrels. Bankers add to their reserves; so do individuals and businesses. Americans saved an average of 7% of disposable income since the '30s. In the 2002-2007 bubble, that rate fell to zero. Now, it's back to nearly 5% and rising. Thrift is making a comeback. People are changing their own automobile oil. They are cutting their own hair and planting their own gardens.
When consumers cease consuming, producers cease producing. And shippers have nothing to ship. World trade has collapsed by more than it did at this stage of the Great Depression. And at 65% of capacity, there are more idle factories in America than at any time since they stopped making tanks and airplanes after WWII. Business earnings are falling, with no pricing power in sight. In this respect, this downturn is much more deflationary than Japan's recession of the '90s. When Japan went into a slump, the rest of the world continued to grow. Japan could continue to manufacture and export products - at a profit. Still, with so much excess capacity, producer prices in Japan fell in nine of 10 years in the '90s.
And now the denial: These commentators are right; deflation is the immediate problem. Our guess is that it will be deeper and more vexing than even they believe. The feds' money machine is broken. They can add reserves. But they can't turn the reserves into price inflation at the consumer level. Result: deflation...maybe hyper-deflation. But far from eliminating the danger of hyperinflation, falling prices practically guarantees it. In other words, it's not inflation we worry about; it's the lack of it. Unable to stimulate inflation in the usual way, the feds are forced to resort to extraordinary measures.
Only central banks with their backs against the wall - like Germany in the '20s...Argentina in the '80s...and Zimbabwe in the '00s...would dare to risk hyperinflation. But if its efforts to produce mild inflation don't work, the United States will eventually be in the same desperate position.
"...the inflationary effects of the new money are being fully offset, or more than offset, by the far-reaching and long-lasting impact of household debt repayments. Whether it's voluntary frugality or under the coercion of creditors, Americans have abruptly switched from living beyond their means to saving more and working down the debts they incurred during the bubble years."
Third, as Ambrose Evans Pritchard puts it in the Telegraph: "the Fed's efforts to boost the money supply are barely keeping pace with the deflation shock. Stimulus is not gaining traction. The credit system is broken."
Professor Blinder explains why:
"In normal times, banks don't want excess reserves, which yield them no profit. So they quickly lend out any idle funds they receive. Under such conditions, Fed expansions of bank reserves lead to expansions of credit and the money supply and, if there is too much of that, to higher inflation. In abnormal times like these, however, providing frightened banks with the reserves they demand will fuel neither money nor credit growth - and is therefore not inflationary."
Reserves are what nobody wanted in the bubble years; now we live in a world of squirrels. Bankers add to their reserves; so do individuals and businesses. Americans saved an average of 7% of disposable income since the '30s. In the 2002-2007 bubble, that rate fell to zero. Now, it's back to nearly 5% and rising. Thrift is making a comeback. People are changing their own automobile oil. They are cutting their own hair and planting their own gardens.
When consumers cease consuming, producers cease producing. And shippers have nothing to ship. World trade has collapsed by more than it did at this stage of the Great Depression. And at 65% of capacity, there are more idle factories in America than at any time since they stopped making tanks and airplanes after WWII. Business earnings are falling, with no pricing power in sight. In this respect, this downturn is much more deflationary than Japan's recession of the '90s. When Japan went into a slump, the rest of the world continued to grow. Japan could continue to manufacture and export products - at a profit. Still, with so much excess capacity, producer prices in Japan fell in nine of 10 years in the '90s.
And now the denial: These commentators are right; deflation is the immediate problem. Our guess is that it will be deeper and more vexing than even they believe. The feds' money machine is broken. They can add reserves. But they can't turn the reserves into price inflation at the consumer level. Result: deflation...maybe hyper-deflation. But far from eliminating the danger of hyperinflation, falling prices practically guarantees it. In other words, it's not inflation we worry about; it's the lack of it. Unable to stimulate inflation in the usual way, the feds are forced to resort to extraordinary measures.
Only central banks with their backs against the wall - like Germany in the '20s...Argentina in the '80s...and Zimbabwe in the '00s...would dare to risk hyperinflation. But if its efforts to produce mild inflation don't work, the United States will eventually be in the same desperate position.
No comments:
Post a Comment