Gary’s Note:
The Fed would have us all think that it is saving the day by
monkeying with interest rates…but Bill Bonner shows us that
nothing good comes of central bankers encouraging the growth of
debt.
By Bill Bonner
November 4, 2009
Gualfin, Argentina
Earthlings are all convinced that a financial crisis of cosmic
proportions befell the planet last fall. Had the authorities
failed to act with determination and speed, it would have been
the end of the world. In the popular mind the politicians have
saved capitalism from its own excesses.
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Our
views are different, but not extra-terrestrial. Once upon a
time, not so long ago, they were even respectable. The gist of
our message two weeks ago was that debt is dangerous. It feels
good at first. But give a society too much debt — either in its
private sector or the public sphere — and someone’s going to get
killed. That’s why the present situation is such a delight to
serious economists; it offers more data points. We get to see
how much straw the feds can add before the poor camel’s back
breaks.
What’s the best way to get through a debt crisis? Straight
through was our advice last week. For at least a thousand years,
the business cycle went round and round without help from
central bankers or economists. It is only since these geniuses
have been on the case that really serious problems have arisen.
The Panic of 1920 — in which the US government did nothing but
cut taxes and spending — was quickly forgotten. The Panic of
1929, on the other hand, was followed by massive rigging and
jiving by the authorities. It took 20 years and a world war to
overcome; today it is still remembered as the Great Depression.
Martin Wolf, speaking, gravely, for the world’s intelligentsia
in The Financial Times last week, proclaimed that: “the
only thing worse than rescuing the system would have been not
rescuing it.” But he is wrong; of all the many blessings
economists may bestow upon a grateful people, improving the
economy is not one of them. An economy is a natural thing. It
can be improved by the striving of entrepreneurs, the prudence
of bankers, and the sweating of field hands. But when it comes
to the macro-economic policy, forbearance is the quality that
pays. Any initiative on the feds’ part inevitably makes things
worse.
The
Bubble Era, like the Great Depression, was largely — but not
completely — the result of government initiative. Artificially
low interest rates — intended to counter the modest downturn of
2001 — sent the wrong message. Consumers — notably those in
Britain and America — bought things they couldn’t afford.
Producers — notably those in Asia — made things for which there
was no real market. Debt piled up. Mountains of it.
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As
consumers bought more and producers made more the economy grew.
But much of the economic “growth” of the 2001-2007 period was
fraudulent. It was based on debt spending, not on genuine
increases in purchasing power. Debt pretends to be real money.
It looks like the real thing, but it is not. It stimulates the
economy like counterfeit money. It causes production and
consumption, but of the wrong sort. Former Reagan era Office of
Management and Budget director David Stockman estimates the
level of “counterfeit GDP” at $4 trillion in the US alone.
The
fraud was discovered, though misunderstood, when sub-prime debt
began to implode. The economy had been kissed hard; millions of
houses had been built, bought and sold. Now, owners couldn’t pay
for them. All of sudden, the counterfeit money began to shrivel
up. Lenders, investors, and householders all began to
de-leverage; paying down the debts as fast as they could,
defaulting on those they couldn’t.
Rather than come to the obvious conclusion, that they should
never have meddled with the economy in the first place, the feds
began rescue operations on a breathtaking scale. The British
government increased spending to 140% of revenues. America now
runs a stimulus program nearly equivalent, in economic impact,
to WWII. Not since 1945 have the two pages of its ledgers —
debits and credits — told such different stories, with almost $2
of spending forever $1 in tax receipts. Britain will add almost
50% to its government debt in the next three years. David
Stockman expects the publicly held US national debt to almost
double in the next five years.
Even
at those levels, many economists think the government should do
more. Nobel Prize winner, Paul Krugman is one. Richard Koo is
another. They’ve warned that the US (and by extension much of
the rest of the world) could suffer a Lost Decade, like Japan,
if the government slacks off before consumers have finished
de-leveraging. At least they understand what is going on. Too
bad they missed the point of it. The problem is too much debt,
not too little spending. Leveraging up the public sector doesn’t
help. Even government debts must be paid — if not by the
borrower, then by the lender. The feds are smooching more
ardently than any debt lover in history; next, we get to see who
dies...or at least who defaults.
Regards,
Bill Bonner
 |
We’ll get to your overwhelmingly glowing responses to the
article on Detroit agriculture tomorrow. Today, enough with the
silver lining. Here’s more of that big, fluffy black cloud,
Shooters…
The
Fed is still pimping debt.
This
morning the Associated Press folks are reporting, “Federal
Reserve policymakers are sure to leave a key interest rate at a
record low to entice Americans to spend more and help the
economic turnaround.”
No
kidding!
“‘I
don’t think there is confidence at this point that the economy
is firing on all cylinders by itself,’ said Bill Cheney, chief
economist at John Hancock Financial Services. ‘It is not ready
to be weaned off the extra fiscal and monetary support.’”
And
this is why you never listen to economists.
The
economy isn’t “ready to be weaned off the extra fiscal and
monetary support”? Ha! The poor fellow is dead! This is like a
doctor shooting heroin into the corpse of someone who just died
of a heroin overdose.
The
economy as we have known it is no longer with us. It is
departed. Deceased. Has shuffled off its mortal coil. This is an
ex-economy.
This
is what we keep bleating about at this here bar. We’re going to
be doing things differently. What do you get when you run out of
cheap energy and out of credit? We’re finding out…
We
watched industrial civilization ramping up for two centuries.
Then we watched it all rush off the cliff and fly through the
air on the momentum provided by credit and wishes…
But
now gravity is having its way. Wishes, votes and lies can’t
trump physics, Shooters.
The
collapse and remaking of Detroit is a sign of things to come.
But more on that tomorrow…
For
now here’s more of that black cloud on the energy front from
Peak Oil man Byron King…
“On energy, basically, the world is past the Peak Oil point in
terms of crude oil output. The world maxed out crude oil
output in 2005 or 2006, at about 74 million barrels per day.
Everything over and above that number is now coming from
natural gas liquids (NGLs) and other things, like Canadian oil
sands. Here’s a chart that gives you more details.
“To the innards of an oil refinery, it might not matter that
the feedstock is unconventional. But from the standpoint of
future energy planning, it’s clear that we’re entering the
backside of Hubbert’s Curve. Conventional oil output is all
downhill from here. Don’t let yourself be misled by any happy
talk from anybody.
“And — a pet peeve of mine — NO! The Bakken Formation of North
Dakota DOES NOT hold “400 billion barrels” of oil. That’s an
urban myth. It’s sheer fantasy. Bakken is a modest-sized oil
deposit that requires high technology and lots of money to
develop. It WILL NOT save the national bacon from our
long-term energy predicament.
“Here’s what you need to know: The world has peaked its
conventional oil output. Accept it. Live with it. Deal with
it.
“It’s not just me saying this, either. This was a major theme
at the recent conference of the Association for the Study of
Peak Oil & Gas (ASPO) in Denver. And coincidentally, I heard
oilman T. Boone Pickens say pretty much the same thing just
the other day.
“Can the world increase its unconventional sources, while
traditional oil sources decline due to depletion and
underinvestment? That’s the big question, right? My answer is
that we should expect less oil going forward and expect that
we’ll pay a LOT more for it. It’s “Energy & Scarcity,” as
advertised.
In true Halloween tradition, that pale apparition you see,
clanking chains and all, is the
Ghost of Col. Drake.
“The NGLs and other unconventional oils are now the only thing
that lets the world oil its wheels in the face of increasing
global demand. And not for too many more years, I believe.
Eventually, we’ll see Peak NGLs. And Peak Oil Sands. And Peak
Other Stuff, although I’m mildly optimistic about algae
biofuels — another story entirely.”
Where will go? What shall we do?
Why,
look to Argentina for more clues, of course…
Gary, I just wanted to let you know your link to the account
of the young man who lived through the collapse of the
Argentine economy in 2001 has to be one of the most important
information resources you’ve made available to date. I don’t
know how I missed it before, but I did. And I am so glad I did
not this time.
Please, please let your readers know that if they follow that
link and read from beginning to end, they will probably gain
more genuine insight into what works and doesn’t work during
such a collapse than a stack of books by ‘survivalist’ writers
will ever teach them. It was terrible and fascinating at the
same time. Obviously a bright and ambitious young man whom
fate has placed at the eye of a national tragedy, speaking to
us one-to-one through his account of what it is like to be
aware of food, security, arrest and social decay issues every
waking moment of your life.
He
turns much survivalist received wisdom on its head and makes
so much sense, to those of us who do not relish the fantasy of
proving our manhood through vigilante sweep of our
neighborhood after a collapse. For the vast majority who read
to understand, to avoid desperate situations such as he
describes, this is a rare bit of news direct from the
trenches. It certainly had me questioning some of the basic
assumptions I’ve made about a reasonable level of
preparedness. I think most of us who are trying to be
responsible, ready for something far less than green shoots
and rosy scenarios, will find this information to be as
thought provoking as it is disturbing.
Thanks for bringing it to my attention once again...
For
those of you who missed it, find the account of survival in
post-collapse Argentina
here.
And
lastly today, a Shooter writes, “I would have bought!”…
It
is your job to convince us and lead us to profitable investing
via the Agora financial model.
But
many of us do not fit the profile of the net worth it takes to
play this game.
I
get frustrated with Agora, in this respect. I would have liked
to have purchased Steve Sarnov’s Option Hotline newsletter and
recommendation. The price was right at $500.
I
did not purchase because we never have the prospect of talking
to the person or at least someone to help make the decision as
to taking the risk of not only the newsletter but the actual
participation in the market.
I
see the sales letter (I have done a bit of study in
copywriting) and not being able to ask questions and take the
sales letter at face value is a very difficult thing to
overcome, so I didn’t by. The promise of success is great,
but truth is another matter.
How
do you propose to overcome this purchasing dilemma and help us
who sit on the fence take advantage of what may be good
programs? The ability to ask the guy promoting the product
would have went a long way to purchasing the product.
I
think there is great value in Steve’s program but hey I am
still on the fence and have missed the discount.
Never have the prospect of speaking to us? Oh, good bar patron,
forgive us for not making it clear that you can always call us
directly: 1-866-361-7662.
This
isn’t to a call center thousands of miles away and full of surly
people with indecipherable accents.
Sitting just twenty feet below me on the first floor are a
handful of financial experts who would love for you to call them
with any questions.
Of
course, they can’t answer any personal investment advice…
But
they can answer any and all questions about our
publications to your complete satisfaction.
And
of course, you can always reach your ever lovin’ Whiskey
editor at
gary@whiskeyandgunpowder.com.
I can’t give personal investment advice, but I so like hearing
from you.
We’ll talk more tomorrow.
Regards,
Gary Gibson
Managing Editor,
Whiskey & Gunpowder
