The Daily Reckoning

A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo in this file photo.Bonner argues that the solutions being proposed to solve the world's financial issues only protect the status quo, helping the wealthy get wealthier and the poor get poorer. (Issei Kato/Reuters/File)

Increasing debt to avoid depression only benefits the wealthy

By Bill Bonner, Guest blogger / 12.20.11

Have yourself a merry little depression…

What’s this? Christine Lagarde, IMF chief, said last week that the world’s nations needed to work together to avoid a 1930s-style depression.

But seeing the way they work together…and where they seem to be headed…we’d prefer a depression.

The idea of the world’s authorities is not to solve the debt problem, but to make it larger. One bank goes bust; they get a bigger bank — a central bank — to bail it out. One country goes broke; they get a bigger country to bail it out.

The US bailed out its financial sector. Europe has had trouble getting together to bail out its fringe nations. But gradually, in fits and starts, the pieces are coming together. We will all bail each other out. Then, we will all be bailed out. Together.

We need to act “as collectively as possible,” says Lagarde.

She means that we all have to accept more debt…in order to prevent depression. That is, all the feds’ horses and all the feds’ men are supposed to make sure that 1) stock holders don’t lose money…2) bankers don’t go broke…3) speculators don’t get wiped out…4) business executives don’t lose their jobs… Daily Reckoning readers will note, with a wry smile, that these are precisely the things that OUGHT to happen.

Which also happens to be what a depression would accomplish… It’s why we have depressions…and why we need them. They don’t have to be long, drawn-out disasters. They can be short and sweet. But they have to get the job done.

On the other hand, let us look at what all this collective, depression-preventing action is accomplishing. In a word or two, it is protecting the insiders at the expense of the outsiders. That is, it is doing what government always does. But it is doing it in a particularly galling way. Here’s the latest on what the insiders are up to, from the Guardian:

Revealed: huge increase in executive pay for America’s top bosses
 Exclusive survey shows America’s CEOs enjoyed pay hikes of up to 40% last year — with one chief executive earning $145m

Chief executive pay has roared back after two years of stagnation and decline. America’s top bosses enjoyed pay hikes of between 27 and 40% last year, according to the largest survey of US CEO pay. The dramatic bounceback comes as the latest government figures show wages for the majority of Americans are failing to keep up with inflation.

America’s highest paid executive took home more than $145.2m, and as stock prices recovered across the board, the median value of bosses’ profits on stock options rose 70% in 2010, from $950,400 to $1.3m. The news comes against the backdrop of an Occupy Wall Street movement that has focused Washington’s attention on the pay packages of America’s highest paid.

Three of this year’s top 10 earners come from the healthcare industry. Top earner John Hammergren at McKesson, the world’s largest healthcare firm, made $145,266,91 last year — most of it from stock options.

2010 was a great year to lose your job as a CEO. Four of the 10 highest paid CEOs were retired or departing executives. Ronald Williams, former head of Aetna, a health insurer, exercised 2.4m options for a profit of $50.4m. Aetna’s stock price declined by 70% from when Williams assumed the role of CEO in February 2006 until his retirement. At pharmacy chain CVS, Thomas Ryan made a $28m profit on his options. During Ryan’s 13-year tenure as CEO, CVS Caremark’s stock price decreased almost 54%.

Omnicare’s Joel Gemunder retired last August and received cash severance of $16m, part of a final-year pay package worth $98.28m.

Interesting, no? Many of the top earners are in the zombie health care industry. It is a zombie industry because it is so heavily controlled, subsidized, and protected from competition by the zombie government.

In our way of seeing things, no CEO is worth $145 million. Or even $1 million, for that matter. But that’s what you get in a degenerate pseudo-capitalist system.

Meanwhile, the average working man — who has no clue about the whys of it — is getting pretty chuffed.

“$740 billion pay gap threat to US recovery” says The Financial Times. That amount is the money that would have gone to US working people if they had maintained their share of national income at post-war average.

The FT is scratching its head, trying to figure out how the economy can recover when the people who do the buying have so little money. According to its figures, the average worker would have $5,000 more this year alone, if wages were still at 63% of national income. Instead, they have sunk to only 58% of national income…with more going to the bosses and stockholders.

For his part, the working stiff is less concerned with what it means to the economy and more concerned with what it means to him:

“Like a lot of Americans, I’m pretty ticked off,” said an Occupy Wall Street protestor. “It’s not that there are rich people. It’s that the people with a lot of money over the past few decades have rigged the system so that there’s not a fair chance to anyone anymore.”

He’s right. The system is rigged. Probably not the way he thinks. But rigged nonetheless.

The feds rigged it. They turned America’s leading business sectors into zombie-controlled, value-destroying industries. They turned the nation’s money into an ersatz currency. And they pushed the country’s middle class households in debt holes they find it difficult to climb out of….

And then, when the whole degenerate system was ready to come crashing down…they bailed out the debt-mongers…and propped up the whole corrupt system with $29 trillion in money that didn’t belong to them.

A merry little depression would have been so much better.

“Poor America…” writes a French friend. “It’s not the land of the free anymore. Now, it’s the land of slaves.”

The FATCA law (Foreign Account Tax Compliance Act) will force banks across the globe to collaborate with the IRS. An explanation of the huge repercussions this legal precedent will have on banks and banking clients.

Once FATCA — Foreign Accounts Tax Compliance Act — is enacted on January 1, 2013, banks worldwide will find themselves subject to the American tax administration bureau known as the IRS (Internal Revenue Service). Adopted in March, 2010, FATCA is a facet of the broader Hiring Incentives to Restore Employment (HIRE) Act which is designed to promote employment opportunities in the United States. In order to finance the HIRE Act, fighting tax evasion is even more in the spotlight than it has been in the past and Washington wants to use its political clout to get its message across this time. What this really means is that foreign banks — or FFIs (Foreign Financial Institutions) — will be obliged to conform to a long series of procedures designed to identify US Persons (US citizens & Green Card holders) subject to American taxes. This naturally concerns American citizens but likewise extends to American nationals’ foreign spouses. However, the long arm of the US administration will even be going so far as to include foreigners residing outside American borders, some of whom may have never even set foot on US soil. This is due to the fact that non-American banks will be obligated to report portfolios which include American assets even if they belong to foreigners with no ties to the US.

“We used to be so happy when we got to the US,” said another European. “We felt we could breathe more freely. The country was so big…so prosperous…and so open.

“That was what I remember from about 20 years ago. But now it is quite different. I dread coming to the US. We came through US customs in Atlanta a few weeks ago. My wife had a half-eaten sandwich in her bag…which she had forgotten about. They put us in a special room and treated us like we were criminals. It was ridiculous…and humiliating.

“But there’s always something. Someone is always yelling at you. Everything is illegal or forbidden. It just doesn’t seem like the same country it was a few years ago. So, we only come here when we have to for business reasons.”

*** “There goes the republic,” says an article at Truthdig, by Robert Scheer.

The defense authorization bill that Congress passed and President Obama had threatened to veto will soon become law, a fact that should be met with public outrage. Human Rights Watch Executive Director Kenneth Roth, responding to Obama’s craven collapse on the bill’s most controversial provision, said, “By signing this defense spending bill, President Obama will go down in history as the president who enshrined indefinite detention without trial in US law.” On Wednesday, White House press secretary Jay Carney claimed “the most recent changes give the president additional discretion in determining how the law will be implemented, consistent with our values and the rule of law, which are at the heart of our country’s strength.”

What rubbish, coming from a president who taught constitutional law… Sadly, this flagrant subversion of the constitutionally guaranteed right to due process of law was opposed in the Senate by only seven senators, including libertarian Republican Rand Paul and progressive Independent Bernie Sanders.

Regards,

Bill Bonner,
 for The Daily Reckoning

File photo of bars of 250 gram fine gold being stored at a plant of gold refiner and bar manufacturer Argor-Heraeus SA in the southern Swiss town of Mendrisio. Bonner argues that gold is going to skyrocket in value in the coming years, and investors shouldn''t be fooled by the downswings of the past few days. (Arnd Wiegmann/AP/File)

Which way will gold swing?

By Bill Bonner, Guest blogger / 12.16.11

Have yourself a merry little depression.

Dow up 45 points. Gold down $9.

We’re still waiting for a major correction in the gold market. Each time one begins, it seems to run out of steam before doing any real damage. At yesterday’s closing price, $1,577, gold is still solidly ahead for the year.

So, where’s the soft spot? Where’s the test? Where will it come from? When?

Don’t worry, dear reader, Mr. Market will test us. He’ll throw his curve ball. We have to be ready.

What if…

…instead of testing us on the downside, he tests us on the upside? This is not a prediction. Just a thought. What if gold suddenly shot up…and looked like it was going to the moon. What would we do?

Citigroup’s metals expert puts a $3,400 price on gold “in the next year or two.”

Jim Rogers makes a similar forecast.

What if they’re right? We only mention it because The Trickster has more than one trick up his sleeve. And he’s perfectly capable of running the price up to $3,500 BEFORE testing us.

We could get giddy, watching the price of gold hit record after record. And then, just when we think it is ready to scale its final peak, gold could turn tail and run for the valley. We wouldn’t believe it. We would hold on. We would wait for it to go back up.

And then…wouldn’t we feel stupid, if we’d taken that ride all the way to over $3,000…and then rode it all the way back to today’s level? Wouldn’t we be put out with ourselves, if we sold out then…thinking gold had put in its final top and we missed it?

According to the 50% principle…it could hit $3,000…collapse to barely $1,500…and then soar again…possibly going to $5,000…or even $10,000. That’s what we’ll get in the final ‘crack up’ boom that is coming.

Who knows?

But what we see is more upside than downside for gold. Because the motor pulling gold up still has a lot of gas in the tank.

In the US the feds spend $1.60 for every dollar they raise in taxes. In Europe, the euro-feds prepare to bail out their banks and sovereign debtors.

And guess how much the feds have already spent? They were so desperate to avoid a debt crisis…or a depression…that they threw the throttle wide open on the biggest rescue effort the world has ever seen. Bloomberg calculated that $7.7 trillion were put to work. Our estimate was higher — about $10 trillion, we guessed.

Well…we were both way off. Here’s the news report:

As part of the Ford Foundation project “A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis,” Nicola Matthews and James Felkerson have undertaken an examination of the data on the Fed’s bailout of the financial system — the most comprehensive investigation of the raw data to date.

The extraordinary scope and magnitude of the recent financial crisis of 2007-09 required an extraordinary response by the Fed in the fulfillment of its lender-of-last-resort function.

The bottom line: a Federal Reserve bailout commitment in excess of $29 trillion.

Whoa! The feds put at risk an amount equal to 200% of US GDP. And for what? So that a depression wouldn’t knock 5% off GDP? Even the Great Depression of the ’30s only set the US back by 30% of GDP. A similar setback today would cost the economy less than $5 trillion.

Do you see what we see? Even if it worked — which it didn’t — the feds’ efforts would have been a disaster. Who would spend $29 trillion to save $5 trillion?

But wait. There’s more. This assumes that a depression is unnecessary…or that it doesn’t do any good. We know that’s not true. A depression does a lot of good. It wipes out bad investments and eliminates bad speculators. It forces capital into more productive, more profitable uses. It kills off zombie industries. It retires worn-out industries…and reduces costs so that new industries can arise. It’s the ‘destruction’ that Schumpeter’s ‘creative destruction’ needs.

The more we think about it, the more we’re beginning to like depressions. After scammy bailouts and bogus recoveries, a depression would be something to look forward to.

Bill Bonner
 for The Daily Reckoning

A file photo illustration of gold bars taken at the Czech National Bank in Prague. Gold tumbled to its lowest level since early October on December 14, set for its weakest monthly performance since September,but Bonner argues that investors shouldn't back out yet. (PetrJosek/Reuters/File)

Gold drops, but should you drop it?

By Bill Bonner, Guest Blogger / 12.16.11

Hey…what’s going on with gold? The dollar up, gold down. When we checked yesterday the price was crashing through the $1,550 level.

Our friend, Dennis Gartman, tells us to get out. Here’s the report:

Gold, in the 11th year of its longest winning streak in at least nine decades, is poised to enter a bear market, according to Dennis Gartman, who correctly predicted the slump in commodities in 2008.

The metal…may decline to as low as $1,475, the economist wrote today in his Suffolk, Virginia-based Gartman Letter. He sold the last of his gold yesterday. Bullion has already dropped 13 percent from the record $1,921.15 reached Sept. 6 and $1,475 would extend that to more than 20 percent, the common definition of a bear market.

“Since the early autumn here in the Northern Hemisphere gold has failed to make a new high,” Gartman wrote. “Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull.”

In China, the second-largest consumer, gold imports to the mainland from Hong Kong surged 51 percent to 86.3 tons in October to a monthly record, according to the Census and Statistics Department of the Hong Kong government. China imported more than 300 tons for all of 2010, Yi Gang, People’s Bank of China Vice Governor, said in February.

“Buying of that sort should have sent gold prices soaring,” Gartman wrote. “One of the oldest rules of trading is simply this: a market that cannot or does not respond to bullish news is a bearish market not a bullish one.”

But another friend, Dominic Frisby in London, says ‘not so fast…’

Well, gold is up about 16% on the year so far. So no bear market there.

This compares with an S&P 500 which is ever so slightly down; a FTSE 100 that’s down around 10%; a commodities index that’s also down around 10%; a US bond market that’s up about 17%; and a US dollar which is ever so slightly up.

If we use the definition that a bear market is a market that is down 20% from its highs, then Gartman may well be right. I don’t say it will happen, but there is a very good chance that gold could fall more than 20% from its early September high of $1,920 an ounce.

This would be perfectly normal. Gold has had three 20% corrections since this bull market began in 2001. Once in 2006, again in 2008, and just three months ago in September — yes, just three months ago. If you look at intra-day prices, it fell from a high on 6 September of $1,923 to a low on 26 September of $1,535. I make that 20%.

So, first, I look at the fundamentals for gold. Have these changed? No. If anything they’ve intensified. I won’t go on about them here save to say we are going through a generational monetary [unraveling] and in such a situation you want to own gold. You may well also need your metaphorical tins, guns and bomb shelters at some stage, but I do not have a buy signal on those just yet.

So…in or out? You know our answer, dear reader.

Gold has been going up for 11 years straight. Or is it 12? It needs to settle down. Rest. Catch its breath. And, like a lover, it needs to test its most ardent admirers.

How far would it have to go do to give gold buyers a proper shake-out? Maybe to 1,300. Maybe 1,200. Typically, a bull market retraces nearly 50% of its gain before completing its rendezvous with the top. We don’t know if that’s true or not…it’s just what the old-timers say.

Gold has gone from about $260 to over $1,900. Let’s see, take off half of that gain and you have $1,080. Whoa… Are you ready for that kind of test, dear reader?

If it goes down that much, even we might have to revisit our convictions.

In the meantime, sell stocks on rallies, buy gold on dips.

Bill Bonner
 for The Daily Reckoning

Euro coins are seen in this photo illustration taken in Rome. Developed nations will borrow approximately $10 trillion next year, making world finances increasingly vulnerable to inflation and other market fluctuations. (Tony Gentile/Reuters)

What happens when countries can't borrow money?

By Bill Bonner, Guest blogger / 12.14.11

Darkness without a dawn…

The Dow down 167 yesterday. Gold down $48. Nothing to get excited about.

The excitement is still ahead. When the Dow cuts through the 10,000 mark and heads to 6,000. Stay tuned…

In the meantime, yesterday’s Financial Times told us that the industrialized nations will borrow $10 trillion this year. Next year, the figure should be higher.

Where does all that money come from? It’s more than the world’s total savings. Not that we know exactly, but total world GDP is about $50 to $60 trillion. Savings should be about 10% of that — or only about $5 to $6 trillion.

So how are the developed nations able to borrow so much?

With so much debt turning over, it makes the world financial system extremely vulnerable to inflation…or just a change of sentiment in the bond market. Which makes us wonder. What would happen if the lenders balk?

We are, as all Dear Readers know, in a Great Correction. And in a great correction asset prices fall…along with a general fall-off in employment, consumer spending, investment, GDP growth and all the other things that make a robust economy. Demand drops…which typically causes prices to fall (or at least not to rise as quickly as before). There is less demand for credit as for everything else. So, the pool of available bonds falls…forcing up bond prices and forcing down bond yields.

Got that?

Well, don’t worry if you don’t. Because there’s at least a 50/50 chance it won’t happen that way.

So far, the Great Correction has followed the usual script. Bond yields have fallen. Price inflation has generally come down. But demand for credit — as evidenced by the aforementioned $10 trillion government financing costs — is running hot. ‘Typically’ may not matter. Because this is no typical downturn. And it wouldn’t be too surprising if all this demand for credit pushed up bond yields.

Wouldn’t that be a drag?

And here we find ourselves with a grim, but philosophically amusing, insight. Typically, every cloud has a silver lining. Every glass that is half empty is also half full. And dawn follows even the darkest night. That’s just the way the world works. But what if the cloud has no lining, neither of silver nor of anything else that reflects light? And what if the glass is completely empty?

In the normal economic world, low interest rates are the half-full part of the correction glass. A correction comes. Asset prices go down…along with all the other things mentioned above. But interest rates go down too…which make it easier for new projects to clear the “hurdle rate.” At 6% interest, for example, a new project has to return at least 6% to breakeven. Any new investment that won’t produce more than a 6% minimum gain is quickly abandoned. But as the correction drives down yields, to say 3%, all of a sudden a lot more investments begin to make sense. Dawn comes.

Lower inflation rates…and lower asset prices…help too. As prices fall, shrewd investor and careful businessmen can put their money to work again. Employees are re-hired. Household earnings recover. Soon, the downturn is over.

Both booms and busts are, normally, self-correcting.

But leave it to the feds to stop the sunrise. This huge demand for credit from the industrialized governments could drive up interest rates. Imagine what that will do. Already in a slump, households, businesses and investors could find their borrowing costs going up, not down. They could find prices rising, too, especially the prices of energy and food. What a world…a major slump, but with rising prices and rising interest rates!

And then, consider what happens next. The feds will err again. They will feel obliged to finance government borrowing themselves. Here’s the Bank of International Settlements, giving us the heads up:

The Bank for International Settlements Sunday issued an oblique endorsement of coordinated action by the world’s largest central banks to ease funding conditions for banks. “A freezing of interbank markets in major funding currencies, as during the recent crisis, may require the ability to supply official liquidity in major currencies in an elastic manner,” the BIS wrote in its regular quarterly report.” — MarketWatch

It was only a week ago that 6 major central banks announced a coordinated rate cut — expected to juice up the markets. And now all major central banks seem ready and willing to sacrifice the integrity of their currencies in order to protect their bond speculators.

This is what we expected all along. But we didn’t expect it so soon. It causes us to revisit our “long, dark road to Tokyo” forecast. You remember our prediction: the US has already followed Japan through one “lost decade.” We figured it would lose another one as the Great Correction drags on.

But things could happen faster…and worser. Japan financed its own deficits with its own money. Now, everybody is running deficits. And the amounts to be refinanced are staggering. Bond buyers may balk…or simply be unable to swallow so much debt.

Which will cause the central banks to come into the picture — with coordinated money-printing. Instead of going down, bond yields and consumer prices could go up.

Think things are bad now? Wait until the economy has to deal with a Great Correction and inflation.

Bill Bonner
 for The Daily Reckoning

Greek and others European national flags flutter near an euro symbol outside the EU Parliament in Brussels in this file photo. Bonner argues that Europe's debt needs to come down, and that means a slumping economy–something that people must get used to seeing as the world's economies continue to stall. (Francois Lenoir/Reuters/File)

We have to change our views on growth and economic recovery

By Bill Bonner, Guest blogger / 12.13.11

What’s new?

When we signed off last week, the Germans and the French were trying to hold Europe together. This morning, they are still trying.

“Don’t you live in Europe?” asked a friend at a party over the weekend.

“Yes…much of the time.”

“Well, maybe you can tell me what is going on with this European debt crisis?”

“I was hoping you would tell me.”

The closer you to get to Europe, the harder it is to see what is going on. In the trees of constitutional changes, pledges of solidarity, plans A-Z, official and unofficial announcements from more than a dozen different sovereign countries and half a dozen European agencies…it’s hard to see the forest of debt.

Debt levels need to come down. And falling debt levels mean a slumping economy. The rest is detail.

In America, stock market investors generally decided to ignore the debt problem last week. The unemployment rate went down, largely because people who couldn’t find jobs were taken off the list. Consumers still seemed ready to buy, as long as the price was right. And Congress does not seem serious about cutting spending…which gives people hope, either because they’re dim enough to think that Congress knows what it is doing or they’re bright enough to know it doesn’t. Either way, they’re sure the US government will spend, spend, spend…until it can’t spend any more.

People tend to view the future through the lens of the past. If you’re under 70, you have lived almost all your life in a world where economic growth was a fact of life. It slowed sometimes. It stopped from time to time. But it always came back. All you had to do was to stick with it. Whether you were an investor, a businessman, or a householder, you learned that as long as you could stay the course, you would probably come out okay. Your investments would go up. Your business would do better. And your standard of living would rise.

Naturally, you came to believe that that was the way things were s’posed to be. Economist David Rosenberg explains the US mindset with the following quote:

Because human psychology is slow to change, a broad economic move usually occurs in three stages. The first stage begins when some unexpected event shatters an overdone psychological environment. Yet, while some people respond immediately to this new lesson, most people, as they find it outside their past experience, do not believe it. They need more evidence — that is, a second stage. Typically, the majority become convinced during the second stage and therefore the psychological background changes. People begin to act differently, and their behavior soon affects the performance of the economy. (Dick Stoken, as quoted by Arthur Zeikel in On Thinking)

But Rosenberg agrees with us. Something big has happened. Something has changed. And it could change the way we think. Instead of believing that ‘recovery’ is right around the corner, we may begin to think it will never come.

Rosenberg says that major changes in our attitudes will come in 8 different areas:

EIGHT AREAS OF BEHAVIOURAL CHANGE TO WATCH FOR IN 2012

1. Frugality on the part of the global consumer (living within our means; retirement with dignity)
 2. Austerity on the part of sovereigns (spending cuts/tax reform)
 3. Nationalism (an umbrella for protectionism and isolationism: mean reversion for globalization)
 4. Political movement along the ideological and fiscal spectrum (from gridlock to change)
 5. Geopolitical change (wars, elections and regime changes)
 6. Changes in inflationary/deflationary expectations
 7. Changes in growth expectations
 8. Changes in asset allocation preference (fund-flows/de-risking)

He may be right. Markets make opinions.

Bill Bonner
 for The Daily Reckoning

This file photo shows boarded-up buildings in Camden, N.J. According to Bonner, teh gap between average net worth and median net worth in the United States is widening, which means America has a growing class of very poor people . (AP Photo/Mel Evans, File) (Mel Evans/AP/File)

Americans are poorer than they think

By Bill Bonner, Guest blogger / 12.09.11

Americans are poorer than they think…

Dow up again Tuesday. Gold still bouncing around…

The press is still focused on Europe. A “deal over eurozone fiscal rules,” was announced earlier in the week. Every day brings more speculation about what form the final deal will take…and whether the European Central Bank will lend a hand.

Nobody really wants to sell stocks. Because a real deal might send stock prices shooting up in a giant Christmas rally.

They don’t want to buy either. Because a failed deal might send them collapsing. So investors watch…and wait.

In America and Europe investors are playing it cool. Congress has to extend the payroll tax cut by December 16th or the economy is probably going to bite the dust. But no one seems particularly concerned about it.

The automatic cuts probably aren’t going to happen — at least, not the way they were supposed to happen. The pols are negotiating now. Their challenge is how to scam the voters and investors by pretending to cut spending, without really cutting much of anything.

They’re pretty good at it; we’re pretty sure they’ll get the job done.

But despite all this backdrop of chicanery and tomfoolery, the real USA is in deep trouble. The number of people living with the help of US government food handouts has risen to 46 million — a new record.

And figures from Credit Suisse’s World Wealth Report show that the typical American is a lot poorer than generally believed. The report compares average wealth to the median wealth. For the benefit of Dear Readers who have forgotten the distinction, average is what you get when you add all the wealth together and divide by the number of people. Put in a few super-billionaires and everyone looks rich. The median, on the other hand, is what you get when you separate the people into two groups…those above and those below. At the center is the “median”…or what we usually refer to as the “typical” American.

In Britain, for example, the average wealth is $258,000. Not bad. But it’s not what most people have. It’s just what you get when you average all those rich people — with their very expensive houses in London — along with everyone else. Few people in Britain actually have $258,000 net worth.

The median net worth is not even half that amount — $121,000. That’s what the typical fellow has. And even that amount depends heavily on real estate prices that have still not come down in Britain.

But get this. In the US, the average wealth figure is a little less than in Britain — $248,000. But the median figure — what most people actually have — is much less, only $53,000.

What this means, says our Bonner Family Office chief economist, Rob Marstrand, is that “wealth in America is heavily skewed to the rich, with a lot of adults with very little net worth.”

Compared to the typical Japanese or European, the typical American is only half as rich. Half the people in the US have less than $53,000 net worth. You can imagine what the bottom 20% have.

This is a devastating and grim insight. It explains why so much of America seems, well, so poor. Because it is poor. People don’t have any money. They dress poorly. Eat poorly. Live poorly.

Compared to Britain and Europe, much of the difference can be explained by the housing bubble, and subsequent housing crash in America. If we remember correctly, the US housing stock was valued at about $20 trillion in ’07. It lost 33% of its value, putting a quarter of mortgaged houses underwater and wiping out about $7 trillion of “wealth.”

This explains why there are so many reports of people living in motels…and, according to a recent CNBC report…in automobiles. Yes, families have taken to living in trucks and cars.

We recently rented an RV for Thanksgiving. The idea was to give our son and his family somewhere to stay when they came for the holidays. It was as nice as a small apartment, with three TVs and sophisticated electronic gizmos we couldn’t quite figure out. But the poor aren’t living in Class A motor-homes. They’re living in panel trucks and old vans.

In this regard, it is probably worth pointing out that the recent news of a decline in unemployment was a fraud. The news reports told us that 120,000 jobs were added last month. Unfortunately, 150,000 are needed just to keep up with population growth…and 500,000 to convincingly claim to have a ‘recovery.’

And the only reason the jobless figure improved was because the statisticians knocked 300,000 job seekers off the list. Never in history have so many people been unemployed for so long. So, the quants figured that if they hadn’t found a job by now, they might as well give up. Which flatters the figures, but it doesn’t do much for people looking for work…or for people who are trying to understand what is really going on.

What we take from these figures is that America has a huge and growing class of very poor people…who are bound to be getting more desperate…and more angry…as time goes by. Unless there is genuine growth, they have no way to expand their spending, no way to get good jobs, and no hope of ever getting ahead.

When you put the unemployed together with the under-employed…those with pick up work but no fulltime, stable jobs…the total rises to one of five people in the labor pool.

Bill Bonner
 for The Daily Reckoning

This file photo shows new $20 notes as they come off the press at the Bureau of Engraving and Printing in Washington. The central banks are printing more money, but most consumers won't benefit, Bonner argues. (J. Scott Applewhite/AP/File)

Fed prints more money, but consumers won't see it

By Bill Bonner, Guest blogger / 12.02.11

Is the Great Correction still underway? Yes it is! The Wall Street Journal reports:

Consumers continued to cut debt levels in the third quarter, largely as they pulled back from the housing market again, the Federal Reserve Bank of New York reported Monday.

For the most recent quarter, overall debt loads for households fell 0.6% from the prior quarter, for a drop of around $60 billion to $11.66 trillion. The bank said mortgage balances recorded on consumer credit reports fell by 1.3%, or $114 billion, while home equity lines increase by 2.3%. The retreat in mortgage borrowings was the primary driver of the overall drop in consumer borrowing.

Hey, wait. If the central bankers are printing money, why should consumers continue to cut back?

Ah…glad you asked. The central banks are bailing out speculators, bankers, and the feds…not households. The money only reluctantly gets to the consumer level…or not at all.

Instead, the rich get richer…courtesy of a corrupt money system. They get bailed out of their mistakes…and handed a lot of money they don’t deserve.

And the poor? Do they get richer simply because the central banks coddle bondholders? Do the bondholders set up factories and provide middle-skill jobs? Do the speculators invent new industries? Do the insiders set up small businesses and build companies that create new wealth?

Don’t make us laugh, dear reader.

No…the system just becomes more corrupt…and more zombified. Here are the insiders at work…the people the central bankers are trying to help. Bloomberg has the story, from Richard Teitelbaum:

Nov. 29 (Bloomberg) — Treasury Secretary Henry Paulson stepped off the elevator into the Third Avenue offices of hedge fund Eton Park Capital Management LP in Manhattan. It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co.

Now, amid tumbling home prices and near-record foreclosures, attention was focused on a new source of contagion: Fannie Mae and Freddie Mac, which together had more than $5 trillion in mortgage-backed securities and other debt outstanding, Bloomberg Markets reports in its January issue.

Paulson had been pushing a plan in Congress to open lines of credit to the two struggling firms and to grant authority for the Treasury Department to buy equity in them. Yet he had told reporters on July 13 that the firms must remain shareholder owned and had testified at a Senate hearing two days later that giving the government new power to intervene made actual intervention improbable…

At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.

Around the conference room table were a dozen or so hedge-fund managers and other Wall Street executives — at least five of them alumni of Goldman Sachs Group Inc., of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.

After a perfunctory discussion of the market turmoil, the fund manager says, the discussion turned to Fannie Mae and Freddie Mac. Paulson said he had erred by not punishing Bear Stearns shareholders more severely. The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship” — a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets.

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.

The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information…

Yesterday, our colleagues over at The 5-Minute Forecast provided a chilling connection between the former Treasury Secretary’s “insider tip” to his old Goldman buddies and a piece of legislation…

The US Senate is close to passing legislation that would allow the president to use the military to imprison anyone — including US citizens — indefinitely, and without charges. The measure has bipartisan support, sponsored by Republican John McCain and Democrat Carl Levin.

“Combine the recent efforts by John McCain to create a police state with the revelations of Paulson’s corruption (crony capitalism),” writes John Robb at Global Guerrillas, “and you can only conclude that worse is coming.”

Indeed, Robb sees the development of what he calls a “hollow state.”

“The hollow state,” he writes, “has the trappings of a modern nation-state (‘leaders.’ membership in international organizations, regulations, laws and a bureaucracy) but it lacks any of the legitimacy, services and control of its historical counterpart.

“It is merely a shell of a state that serves as a legal conduit and enforcement mechanisms for global financial interests to loot what’s left of the state’s economy. Corruption and violence are its only traits.”

Regards,

Bill Bonner
 for The Daily Reckoning

In this file photo, a street money exchanger, counts US dollars, in downtown Tehran. Central bankers have agreed to print more money to ease debt burdens, but many argue this is not a permanent solution to the problems facing heavily indebted nations like Greece and Italy. (Vahid Salemi/AP/File)

Markets soar, but has anything changed?

By Bill Bonner, Guest blogger / 12.01.11

Whoa! The Dow rose almost 500 points yesterday. Whoopee! Hallelujah!

It was like the Second Coming on Wall Street. As if He walked across the East River…and announced it Himself:

“The fix is in.”

But it was not the sacred that spoke yesterday. It was the profane. The world’s central banks, to be precise. They got together. More like a meeting of mobsters than a gathering of the gods. They made it clear.

You want money? You want cash? You want something you can take to the bank? Well, you’ve got it!

“A move by the world’s central banks to lower the cost of borrowing exhilarated investors Wednesday,” the Associated Press reports, “sending the Dow Jones industrial average soaring 490 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.”

It was the Dow’s biggest gain since March 2009.

Large US banks were among the top performers, jumping as much as 7 percent. Markets in Europe surged, too, with Germany’s DAX index climbing 5 percent.

Wednesday’s action by the banks of Europe, the US, Britain, Canada, Japan and Switzerland represented an extraordinary coordinated effort.

But amid the market’s excitement, many doubts loomed. Some analysts cautioned that the banks’ move did nothing to provide a permanent fix to the problems facing heavily indebted European nations such as Italy and Greece. It only buys time for political leaders.

“It is a short-term solution,” said Jack Ablin, chief investment officer at Harris Private Bank. “The bottom line on any central bank action is that it papers over the problems, buys time and in some respects takes pressure from politicians… If nothing’s done in a week, this market gain will disappear.”

Banks stocks soared as fears about an imminent disaster in the European financial system ebbed.

But wait.

What has really happened? The central bankers have given out the word that they’ll print up as much money as necessary. So what’s new? Haven’t they been doing that all along? What is lending at zero interest rate? What is buying the government’s debt? What is taking the toxic bonds off the banks and brokerage houses?

What is really new? Not much.

You remember our advice, dear reader? Sell stocks on rallies. Well…what are you waiting for?

And if we were speculators we’d be selling stocks…even stocks we didn’t own. Because we have here an opportunity. The market is rising on hope, not on reality. And today, it might rise a bit more…

…until it finally realizes that there is no really good reason to be so bullish.

Stocks are bits of businesses. And businesses do not make more money just because the central banks print money. If this were not so, a few years ago, Zimbabwe’s companies would have been the most profitable on earth. Under the leadership of Gideon Gono, the central bank of Zimbabwe was printing up trillion-dollar notes and handing them out all over town. Trouble was, you couldn’t even buy a cup of coffee with them. In fact, you couldn’t buy a cup of coffee anyway…the whole economy was in such disarray nobody could get any coffee. Or anything else.

That was at the end. At the beginning money-printing works miracles.

But businesses do not operate in the realm of the mysterious or the sacred. They are remarkably down-to-earth undertakings. They’re real enterprises with real revenues and real expenses. They make money by selling goods and services. And, taken all together, they only make as much money as the economy itself allows. In other words, it’s not possible for all the businesses to do better than the economy that supports them.

So, now we can ask you a question: will the economies of the world’s countries do better, now that the central banks have announced they will print more money?

Or will they do worse?

It’s hard to say. But by our reckoning, the world is in the grip of a major correction. Among the things the correction is likely to correct is the money system…in which central banks have the power to create “money” out of thin air.

Would the correction correct something that didn’t need correction? If central bankers refused to print money there would be no need to correct them, would there? So this latest announcement just confirms what we thought all along.

Printing money is easier than raising taxes. It is also easier than borrowing…especially when lenders get wary. All that stands in the way is the integrity of the central bankers themselves.

Looks like that just gave way…

Bill Bonner
 for The Daily Reckoning

Students from the College of Arts, Sciences and Engineering at the University of Rochester graduate at the Eastman Quadrangle in the rain in Rochester, in this file photo. Because of the bad economy, many young people are delaying moving out of their parents' homes. (Malanie Stetson Freeman/The Christian Science Monitor/File)

The economy has changed. Expect hopes and dreams to follow.

By Bill Bonner, Guest blogger / 11.22.11

Not much action in the markets on Friday. It was a helluva week, though. At the beginning it looked like Europe wouldn’t make it to the end. Yields were rising to dangerous levels. Greece was clearly bankrupt. Italy would fall too, unless Germany came to the rescue. And investors weren’t too sure about France.

But as the week progressed investors calmed down. Or, at least they got used to being frightened. “Maybe they’ll muddle through after all,” they said to themselves.

And so the week ended. Nothing decided. Nothing resolved. More questions than ever.

Now, almost everyone has come around to our way of seeing things. In report after report, we see economists and analysts conceding that we’re in for a long spell of trouble. Official reports and estimates show next year’s GDP barely growing. Unemployment forecasts show the number of people without jobs staying high for years.

Most analysts now also recognize that 1) the real cause is too much debt, and 2) the feds can’t do much about it.

Here’s the New York Times with a typical hard-luck story:

Every year, young adults leave the nest, couples divorce, foreigners immigrate and roommates separate, all helping drive economic growth when they furnish and refurbish their new homes. Under normal circumstances, each time a household is formed it adds about $145,000 to output that year as the spending ripples through the economy, estimates Mark Zandi, chief economist at Moody’s Analytics.

But with the poor job market and uncertain recovery, hundreds of thousands of Americans like Ms. Romanelli (and her boyfriend, who also lives with his parents) have tabled their moves. Even before the recession began, young people were leaving home later; now the bad economy has tethered them there indefinitely. Last year, just 950,000 new households were created. By comparison, about 1.3 million new households were formed in 2007, the year the recession began, according to Mr. Zandi. Ms. Romanelli, who lives in the room where she grew up in Branford, Conn., said, “I don’t really have much of a choice,” adding, “I don’t have the means to move out.”

Ms. Romanelli, who works as an assistant editor at Cottages & Gardens magazines, is one of the luckier “boomerang” children who have found jobs and at least can start saving for their own place someday. As of last month, just 74 percent of Americans ages 25 to 34 were working. It is perhaps no wonder then that 14.2 percent of young adults are living with their parents, up from 11.8 percent in 2007. Among young men, 19 percent are living with their parents.

But even some young people who can afford to move out have decided to wait until getting on more solid footing. Prudence, not necessity, has kept them at home.

Jay Bouvier, 26, has a full-time job teaching physical education and health and coaching football and baseball at a high school in Hartford, near his parents’ house in Bristol. He could rent his own apartment — after taxes he makes about $45,000 a year, he says — but has decided not to. He says he will stay with his parents until he has saved enough to buy his own house.

“I have it pretty good at home, since it’s so close to my work, and financially I just feel like it’s smarter for the long run to buy,” he said. He says that living with his parents enables him to set aside about half of each paycheck. “It’s like I pay rent, but to myself.”

You see, it’s not just the economy that has changed. So have attitudes. Hopes. Dreams. Plans.

“Markets make opinions,” say the old timers. This market is turning Americans into a nation of pinch-pennies and stay-at-homes.

With the whole world economy in a bit of a funk you wouldn’t expect oil to be over $100 and gold to be over $1,700. Or would you?

As to oil, much of the emerging world is still growing strongly. Over the last 4 years, for example, China has grown 70 times faster than the US. That’s a lot more income in a lot more pockets in China. And that’s a lot of people who want to use from energy. It’s only natural that the price goes up…because supplies are sluggish; they can’t increase as fast.

There are also growing numbers of people who suspect the US and Israel are about to start another war. The Republican candidates are talking about Big Sticks. They expect to get money from the defense industry…and votes from the lumpen voters… by promising to throw their weight around overseas.

A war with Iran might be hard to contain. At the very least, you’d expect the price of oil to soar…which would almost certainly seal the deal on a worldwide depression.

As to gold, it appears that governments are buying. Here’s the Bloomberg report:

LONDON—Total central-bank gold purchases in the third quarter more than doubled from the second quarter and were almost seven times higher than a year earlier as countries continued to diversify reserves, according to a World Gold Council report.

At 148.4 metric tons, gold buying among central banks was at the highest since the sector became a net buyer of the precious metal in the second quarter of 2009, according to the quarterly report.

Central banks and other official institutions, by comparison, had bought 66.5 tons of gold in the second quarter and 22.6 tons in the third quarter of 2010.

*** A man in India was marrying his daughter. His old friend attended the wedding and noticed that the husband came from a different, and inferior, caste.

“Doesn’t it bother you that he’s from a different caste,” he said to the father of the bride.

“What? Different caste? She works for the Morgan Stanley. He works for Goldman Sachs. Same caste.”

And now the global financial Brahmins are on the case. Monti, Draghi, Papademos… ‘technocrats,’ the papers call them.

And US. Treasury Secretary Geithner too. Right schools. Right jobs. Right responses. As head of the New York Fed he was right there when the biggest bubble in history was created. He made no objection. He raised no alarm.

And then, when the bubble burst he was at the scene of the crime again…with the rest of his caste. At the height of the crisis in ’08, Lloyd Blankfein visited him 39 times. He spoke to the Goldman chief more often than he spoke to his own chief – US president Barack Obama.

This elite caste invented derivatives and sub-prime mortgage debt. Now, they pretend to solve the problems they caused.

Regards,

Bill Bonner,