The Daily Reckoning
The sun sets behind the dome on Capitol Hill in Washington. Despite proclamations of both government officials and private-sector financial analysts to the contrary, the US is experiencing depression-like conditions. (Jim Young/Reuters)
Why the US economic recovery is a scam
The depression is alive and well, thank you.
The Dow rose 91 points yesterday. Gold fell $6.
Officially, the crisis is over. Everyone says so. Central bankers and Treasury officials have been congratulating themselves. It’s been a year now since the end of the world didn’t happen. These fellows take credit for it.
Bernanke said yesterday that he’ll keep the monetary spigots wide open for a while longer…but that’s just because the recovery is fragile. He also talks of an ‘exit’ from stimulus programs, now that the economy is getting back on its feet.
Claptrap! Balderdash! Flimflam!
The mainstream economics profession is guilty of dereliction of duty. They should be telling people that this ‘recovery’ is a scam. They should be warning investors that the markets could fall apart any day. They should be buying gold and selling US Treasuries…and explaining to the politicians that you can’t buy your way out of a depression with phony dollars squandered on wasteful projects!
Instead, the dopes are patting each other on the back…praising themselves for saving the planet from destruction.
But what really has gone on? And what’s going on now?
Glad you asked.
First, there is a real economic phenomenon going on – the depression. It’s alive and well…and doing just fine. Households are de-leveraging. Businesses are building up cash. People are losing their jobs. Savings rates are edging up.
Almost everything is happening as it should.
Depressions are times of falling prices. Markets are always discovering what things are worth. In a depression, they find that assets – stocks and real estate primarily – are not worth nearly as much as people thought.
That’s why we have our ‘crash alert’ flag still flying. Prices are vulnerable to sharp, unannounced drops until they finally get down to real depression levels. Since that hasn’t quite happened yet…we figure it’s still to come.
On the employment front, this depression has put more than 6 million people out of work. And every month, more people join the unemployment ranks. So far, so good. The US economy didn’t need so many marble countertop installers and so many mortgage refinancers. (If only something could be done to get rid of lobbyists!)
But the worst thing about a depression is that it holds jobless people prisoner for so long. Many of them will become lifers…they’ll never work again.
In that regard, this depression is similar to Japan’s 20-year depression, 1990-2010. After the bubble burst, the Japanese…who were aging faster than any race ever had…figured they needed to get serious about saving money. So, they cut back on spending…and saved. Domestic spending collapsed. Fortunately, the rest of the world – especially Americans – were still spending their fool heads off. And Japan is an export-led economy. Even so, with its own consumers dragging their feet, the Japanese economy didn’t go very far or very fast.
The Japanese put their vast savings, directly or indirectly, into Japanese government bonds…helping the government fund its massive stimulus programs. Of course, the stimulus programs were a waste of money. The economy never really recovered…and now the government is expected to have gross debt equal to 200% of GDP next year, according to the IMF.
For reference, the US is expected to reach 100% of GDP next year. Britain is hard on America’s heels with debt at 94% of GDP.
And now Americans are entering retirement savings mode too. The biggest age cohort – the boomers – need to do some fast saving in order to finance their retirements. They’re cutting back…not just temporarily…but permanently. They will never, ever again spend money like this did during the big bubble years 2003-2007. That’s what makes for a durable depression…
Another thing that makes for a depression is a lack of lending. Bank credit is still falling. Households cut back because they need to get out of debt…and save money for retirement. Businesses cut back too. New projects typically don’t do well in a depression. Small businesses struggle…and fail. Big businesses get bailouts and subsidies. Depressions are times to neither a borrower nor a lender be.
Debt is only increasing at the government level. But that’s another story for another day…
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Snow falls on a Wall St. street sign in front of the New York Stock Exchange. Matt Taibbi of Rolling Stone Magazine has written a scathing rant against Wall Street's dirty dealing. (Brendan McDermid/Reuters)
Rolling Stone: Wall Street’s con is alive and well
Matt Taibbi of the Rolling Stone has released his latest rant against Wall Street’s dirty dealing, and it’s a doozy. The pummeling of financial markets as a result of the crisis has done little to stave off Wall Street’s insatiable greed… and has instead done a great deal to amplify the creativity of banks to find new ways to extract profit from easy prey like the bumbling or complicit US government and the blindsided US taxpayer.
From Taibbi in Rolling Stone:
“There’s even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn’t call the cops is known as the ‘Cool Off.’
“To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don’t so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash.
“Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids’ playroom, knowing it and actually watching the whole scene from start to finish are two very different things.
“In that spirit, a brief history of the best 18 months of grifting this country has ever seen”
Taibbi then launches into a detailed and colorful description of each of the seven greatest financial atrocities he’s witnessing. He likens each unsavory strategy in the world of international high finance to one of seven popular scams run every day by regular con men in the street…
- CON #1 THE SWOOP AND SQUAT
- CON #2 THE DOLLAR STORE
- CON #3 THE PIG IN THE POKE
- CON #4 THE RUMANIAN BOX
- CON #5 THE BIG MITT
- CON #6 THE WIRE
- CON #7 THE RELOAD
He also pulls in quotes from knowledgeable industry players that have their own independent critiques of the swindles currently underway. For example:
“Had AIG gone bankrupt, Goldman would have likely lost much of the $5.9 billion that it pocketed as collateral. ‘Any bankruptcy court that saw those collateral payments would have declined that transaction as a fraudulent conveyance,’ says Barry Ritholtz, the author of Bailout Nation.”
Ritholtz is an occasional contributor to The Daily Reckoning as well as a speaker-alum of the Agora Financial Investment Symposium. He’ll be back in Vancouver again this year… and you can learn about how to attend here.
Taibbi’s latest article is again a must read if you’re at all interested in how banks are making record profits in the worst economy since the Great Depression. Rolling Stone has the entire article entitled, Wall Street’s Bailout Hustle.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
"When the government spends a dollar... it perverts the entire economy and creates zombies and parasites." – Bill Bonner (Newscom )
Central planning and the parasites it creates
Not all economists are charlatans. At Harvard is Robert J. Barro, who just computed the net costs of the government’s 2009 stimulus program. It was originally expected to cost $787 billion and is now estimated to come in with a final price tag of $862 billion.
What do you get for that kind of money? Well, Mr. Barro calculates that each dollar of public stimulus spending costs the economy $1.50 in foregone private spending. A “bad deal,” he says.
His work involves a purely macro-economic look at the subject. He believes government spending is subject to a “multiplier” which reduces or enlarges its effects. In the first couple of years, he assumes, the net effect is positive…since the government is spending money without raising taxes to pay for it. But then, tax receipts inevitably have to go up to pay the costs of the stimulus. And taxes are subject to their own multiplier. Take out a dollar in taxes and the economy shrinks by more than a dollar! Which makes the whole transaction, not only a waste of time and money…it makes the whole society poorer.
‘There’s no such thing as a free lunch,’ even in fiscal stimulus, says Mr. Barro. The bill for the stimulus spending must be paid. Taxes must be increased. And when you’ve done the math all the way to the end of the transaction, you find that you’ve lost money.
But Mr. Barro is has a much more generous spirit than we do. He offers no judgment on the character of the government spending as opposed to the private spending it replaced. Like all modern economists, he assumes that a dollar is a dollar…and a dollar spent by government is more or less as good as a dollar spent by the private sector.
But a dollar spent by the government is nothing like a dollar spent by the private sector. A fellow might spend his own dollar unwisely. But at least he gets what he deserves. When the government spends a dollar it does worse than waste the money…it perverts the entire economy and creates zombies and parasites.
Here’s an interesting item from The Wall Street Journal… India produces barely half as much rice per hectare as China…3.4 tons per hectare as compared to 6.5 tons in China. Even dirt poor Bangladesh gets a better yield on its rice land – with 3.9 tons per acre of output.
What’s the matter with India’s farmers?
We return to a Daily Reckoning dictum to explain it. Anyone can make a mess of things, but to really cause a catastrophe you need taxpayer support.
Yes, Dear Reader, India’s agricultural sector gives us yet another example of central planning at work. In the ’70s, when India was even more of a socialist country than it is now, the government decided to boost production by giving farmers subsidized fertilizers. This led, as might have been predicted, to the overuse of fertilizers…one of which – urea – severely damaged the soil. Subsidies, bailouts, quantitative easing, fiscal stimulus – all produce perverse effects. In this case, the effects are so perverse that India can no longer feed itself. It’s forced to import a large part of its food. Naturally, food prices are rising – up 19% last year.
But the cost of food itself is only part of the story. There’s also the cost of the subsidies. In 1976, the fertilizer subsidy program cost $640 million. Now the price tag is up to $20 billion.
Both the soil and the budget are getting worn out. As crop yields decline, desperate farmers put on more and more cheap fertilizer. And then, as the food output goes down, the government thinks it has to ‘do something’ to fix the situation. What can it do? Provide more subsidized fertilizers!
Way to go, feds.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
How much government growth is too much government growth?
Government growth does not equal economic growth
A couple of years ago, we used to get such a kick out of making fun of the financial industry. Its pretensions were absurd and shocking. Its delusions were breathtaking. Its leaders were lunkheads and grifters.
But the financial industry blew itself up in 2007-2009. Now, what do we have?
The government! Doing all the same things…making the same mistakes (only worse)…and working hard to blow itself up.
“Basically, it’s over…” says Charlie Munger. Warren Buffett’s partner figures the glory days of the US economy/empire are behind it. He spelled this out in what he calls “a parable,” in Slate Magazine.
This puts Munger in direct opposition to all those economists, bankers, politicians, pundits and meddlers who think they can do better than the financial industry. Martin Wolf, in The Financial Times, says the challenge is to “walk the tightrope” between too much additional stimulus and cutting off stimulus too soon.
Richard Koo and Paul Krugman think the feds need to give the economy a lot more stimulus in order to offset the forces of contraction.
Most people think the economy will muddle through somehow…thanks to all those geniuses working at the Department of the Treasury and the Fed.
Dream on! The economy might muddle through or it might not. (The Wall Street Journal says growth rates have already retuned to normal.) But if the economy does pull out of this depression…it will be in spite of all those ham-handed central planners who are telling it what to do, not because of them.
Yesterday, the Dow fell 100 points. Gold dropped $9.
As far as we can tell, we’re still in a depression – that is, a deflationary contraction. You’ll see a lot of contradictory statistics and BS analyses for the next 5 to 10 years. What you won’t see is real growth…not until debt is substantially written off, costs are reduced and a new economic model is discovered. The ‘growth’ we’re seeing now is largely an illusion, a mirage, and an attractive nuisance. We’ll have to pay for it later!
To put it another way, you won’t see real growth until there’s something solid to build on – a new foundation of lower costs and fewer leeches.
Yes, dear reader, the problem is not a liquidity problem. It’s not a banking problem. It’s not even just a debt problem. The bigger problem is that the US economy – but nearly the same could be said of Japan…the UK…Italy…and other places – is too expensive, too rigid and too full of zombies.
Munger is right. At least, he’s right about what has gone on so far. The financial industry turned the country into a casino…and too many people lost their money.
We don’t know what happened in the second part of Munger’s parable. We couldn’t get the 2nd page of the Slate article on our laptop screen. But he’s a smart guy. We doubt he missed the government’s role. First, the private sector loaded itself up with debt. Now, it’s the feds’ turn.
Was it Ronald Reagan who said of the Soviet Union, that it was on the “wrong side of history?” The derelict Bolsheviks were definitely on the wrong side of history in 1989. We knew it. They knew it. It was such a glaring problem; they had no choice. Their economy was imploding – thanks to rigid central planning. They gave up and switched sides.
But now it’s the US that is on the wrong side of history. Like the Soviet Union, it tries to impose its will, by force, on Afghanistan. Like the Soviet Union, it has too many expenses and not enough income. And like the Soviet Union, it tries to impose its will on the domestic economy too – by central planning. Not exactly in the heavy-handed fashion of the old apparatchiks… This is post-Berlin Wall central planning. Collectivism with a clown face.
The US nationalizes key industry and borrows heavily…shifting the weight of economic ‘growth’ from the private sector to the government. Everything from home finance, banking, insurance, automobiles, employment and food is now owned, provided or subsidized by the US government.
After the Soviet Union fell…the rest of the world went over to look down the collectivist hole…and then slid in too. In October 2009, the IMF counted 153 separate stimulus or bailout programs. If you bought a house or a car in 2009, you may very well have had the government to help you. And now, if you hire a new employee, you will have the government by your side again. If you get sick, you will have the comfort of knowing that the feds are in practically every examining room, every operating room, every drug laboratory, and every pharmacy. And if Obama has his way – there will be even more of them. Is there any economic act, howsoever trivial, that no longer involves government support, approval, or funding?
Munger may have pointed out. Or maybe he didn’t. In either case, we will: the US economy was at its strongest before it was burdened by so many people depending on it…and so many smart people helping it along.
It won’t make much progress again until it gets rid of those people. And that won’t happen until it has crashed…and become desperate. Living at the expense of others is a hard habit to break.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
There are more banks currently on the FDIC's "problem list" than anytime in the last 17 years.
Commercial real estate loans drive more banks onto FDIC’s 'problem list'
Over 700 banks in the US are distressed according to the FDIC, the largest number since 1993. The latest additions to the “problem list” are largely resulting from commercial real estate loans gone sour. The FDIC anticipates bank difficulties continuing to worsen in 2010 before there’s any chance of the situation beginning to improve.
According to MarketWatch:
“Based on the result, roughly one in 11 of the approximately 8,000 U.S. banks are on this list, with regulators expecting a significant expansion in the number of failures throughout 2010, boosted in large part by increased losses on commercial real estate sustained by mid-sized and smaller banks. See more on analyst expectations for 2010 bank failures.
“‘This year, the losses are going to be heavily driven by commercial real estate, we’ve known for some time and we have been projecting that,’ FDIC Chairwoman Sheila Bair told reporters. ‘The pace is probably going to pick up this year and for the total year it will exceed where we were last year. Overall, the banking system is challenged but stable, but is performing its credit extension role.’
“Bair said it takes longer for losses on commercial real estate to work through the system because frequently borrowers may have cash reserves and can continue to make good on payments for a while, even as a downturn expands.”
The Deposit Insurance Fund that the FDIC uses to protect member banks maintained a negative balance again in the fourth quarter, this time with a $20.9 billion loss… an all-time record low for the fund. You can read more details about situation in MarketWatch coverage of how about 10 percent of all FDIC-insured banks are “troubled.”
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Berkshire Hathaway vice chairman Charlie Munger write a parable recently about a nation that has squandered much of its success and stands at the precipice of financial ruin. (Newscom)
Berkshire Hathaway vice chairman advocates return to simpler America
Charlie Munger, vice chairman of Warren Buffett’s Berkshire Hathaway, shares many of the plain-spoken ways of his more famous business partner. Munger also grew up in Omaha, Nebraska, and has the kind of charm that seems to come from trying to do things right by keeping them simple.
Over the weekend he had a parable he wrote published by Slate… and it’s outright depressing. He describes a nation, not unlike the US, that’s been the envy of the world since its inception. It has gotten that way by frequently, if not always, making good decisions and making them for the right reasons.
Yet, as the piece is entitled… “Basically, it’s over.” The nation has squandered so much success and so many good works that it now stands at the precipice of financial ruin.
Via Slate.com, here’s a passage from the parable:
But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life.
These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland’s citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called “the bucket shop system.”
The winnings of the casinos eventually amounted to 25 percent of Basicland’s GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere).
So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called “financial derivatives.”
Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland’s currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.”
As the parable goes on, and as one would expect, Basicland does soon encounter hardship and the consequences are dear. In telling this story, Munger laments a time gone by, a simpler America with more honest work and clearer-cut morals.
Over time, as we’ve covered before, banking incentives shifted around in ways that have served to promote many negative outcomes… the kind that we’ve seen cause several large boom and bust cycles. Toward the end of the piece Munger describes that “the country’s credit was reduced to tatters.” Let’s hope it’s a fate that is not yet sealed.
Read the complete parable from Charlie Munger of Berkshire Hathaway in this Slate commentary.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
There could be yet another possible explanation for the financial crisis, says Jeffrey Friedman of the Cato Institute. (Newscom)
Misguided regulations caused the financial mess
So many explanations have been offered for the financial crisis, then reheated and reexamined, that it’s nearly impossible to imagine a new theory worth considering. However, Jeffrey Friedman of the Cato Institute has found one. He looks at a little-discussed regulatory mechanism that incentivized banks to put a disproportionate share of capital into what turned out to be some very toxic assets.
Friedman explains in the Cato Policy Report:
“In 1988, financial regulators from the G-10 agreed on the Basel (I) Accords. Basel I was an attempt to standardize the world’s bank-capital regulations…
“It differentiated among the risks presented by different types of assets. For instance, a commercial bank did not have to devote any capital to its holdings of government bonds, cash, or gold — the safest assets, in the regulators’ judgment. But it had to allot 4 percent capital to each mortgage that it issued, and 8 percent to commercial loans and corporate bonds…
“The United States implemented it in 1991 [...] Ten years later, however, came what proved in retrospect to be the pivotal event. The FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision issued an amendment to Basel I, the Recourse Rule, that extended the accord’s risk differentiations to asset-backed securities (ABS): bonds backed by credit card debt, or car loans — or mortgages — required a mere 2 percent capital cushion, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie.
“Thus, where a well-capitalized commercial bank needed to devote $10 of capital to $100 worth of commercial loans or corporate bonds, or $5 to $100 worth of mortgages, it needed to spend only $2 of capital on a mortgage-backed security (MBS) worth $100.
“A bank interested in reducing its capital cushion — also known as ‘leveraging up’ — would gain a 60 percent benefit from trading its mortgages for MBSs and an 80 percent benefit for trading its commercial loans and corporate securities for MBSs.”
As Friedman describes above, the regulations intended to improve the operations of the banks instead put the wheels in motion for a financial mess. It shows how oftentimes meddling in a system is worse than leaving it alone.
For more details and insight into the causes and consequences of the financial crisis visit the Cato Policy Report’s coverage of a perfect storm of ignorance.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
A woman walks by a Technicolor display showing their many color films in Las Vegas, NV. (Newscom)
US unemployment and the Technicolor depression
2/22/10 Baltimore, Maryland – Worse than the Great Depression…
Stocks ended Friday trading not much higher than where they began. Gold rose $3. Oil is trading over $80 a barrel this morning. And stocks in Asia are “recovering” from the Fed’s discount rate increase of last week.
If the market wanted to crash, it would have plenty of reasons to do so. China is tightening bank lending rules. Here in the US, there is the aforementioned Fed discount rate increase. In Europe, Greece is going back to the marketplace to raise more money. And in the Mideast, today’s news tells us that many Kuwaiti could be wiped out by the latest downturn in their multi-billion dollar investment industry.
Many things could go wrong; something will.
If no panic comes it is because the market is just not ready to panic. Still, we leave our “Crash Alert” flag flying…and stand clear. There is just more downside to this market than upside. Markets are always discovering what things are worth. We don’t want to be holding a lot of stocks when the market discovers that they’re worth only half what we paid for them. So, the flag stays up…until prices come down.
Gradually, people are coming to two contradictory realizations. On the one hand, there really does seem to be a kind of economic renaissance going on…or, at least that is what you might think if you read the business and investment news. On the other hand, people are also coming to realize that we’re in a depression.
We’ll leave it to the mainstream press to describe the rebound, such as it is. We’ll focus on the depression.
“Millions of Unemployed Face Years Without Jobs,” says The New York Times.
Readers may wonder what kind of economic renaissance fails to produce jobs. Answer: a depression.
As we’ve opined many times in the past, a depression is not just a time when people stand in line to get bowls of soup or sell apples on street corners. It’s a time of adjustment…when mistakes of the previous boom are corrected…and a new economic model is found for going forward. This doesn’t happen overnight, no matter how much federal money is put to work helping it. In fact, the government money just gets in the way…distorting the picture and delaying the necessary changes.
Those black-and-white depression days of the ’30s are gone. Now, we have a depression in full Technicolor…with plenty of shades of gray, too.
More people today get food handouts than ever got them in the ’30s. We call our soup lines the Food Stamp Program. More people are out of work too….
…but here you have to look carefully at the figures to understand it. In the ’30s, there was no public safety net. No unemployment compensation…no severance packages…and no government welfare. People didn’t give up looking for a job; they had no alternative. They kept looking until they found something. Either you were working…or you were jobless. If we reported the numbers the same way they did in the ’30s…the number would already be up near Great Depression levels…at about 15% to 18% joblessness.
But there’s something else. Now, there are more people per household working. Back in the ’30s, the man of the house was the one that had a job. Typically, the family relied upon him, and him alone, as the breadwinner.
And guess what? If you look at the men of the house…men 25-54…what you see is that one out of every 5 of them is out of work.
For men…this is clearly a Depression…no, it’s worse. Not only are they unemployed. They’re going to stay unemployed for a long time. Because it takes times for a depression to do its work. And when it is over – maybe five or ten years…or 20 years ahead – not only won’t they find their old jobs again…they may never work again. And they won’t have wives or families either.
Men’s jobs are disappearing – jobs in manufacturing and building. As the NY Times explains, they probably aren’t coming back any time soon. What’s more, studies show that the longer a person stays unemployed the harder it is to get back into the workforce. Employers don’t like to take a chance on someone who’s been out of the job market for a long time. They’re afraid they’ve lost the habit of work…or that there’s some other reason why they have been out of work for so long.
Women’s jobs…in information and services…are doing relatively well. So, men not only lose their incomes…they lose their places in the family, and in the world. What woman wants to marry a guy without a job and without income? Not many. During the Great Depression, marriage and family were almost automatic. People got married. Then, for better or for worse, they lived in families.
Even before the depression began, marriage had become optional. Women get more college degrees than men. They typically don’t like “marrying down.” They delay marriage while developing their careers…and then, when they are ready to marry, it’s hard to find a suitable man.
Result? Well, we don’t know where this leads. But it doesn’t look good for the beer-swilling, football loving X chromosome half of the population.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Are current market conditions reminiscent of the 1970s, when a series of rallies disguised a bear market? A still from Milos Forman's 1979 movie "Hair" is shown here. (United Artists/Album/Newscom)
Market rally like the 1970s?
02/17/10 London, England – Yesterday’s big move in the Dow throws us back to our customary position – uncertainty, bordering on da-daism. The Dow rose 169 points yesterday. Gold shot up $29 to $1119.
“I think, therefore I am,” said Rene Descartes. How did he know he thought? And what if he thought he wasn’t? Would he not be? He should have tried following the stock market! It would have improved his philosophy. “I think I think,” he would have emended his famous quotation. “But maybe I don’t…”
Yesterday morning we were uncertain about the direction of the stock market. By evening, we weren’t so sure… We thought the markets were headed down. But yesterday’s strong showing puts our hypothesis in doubt.
Why should stocks go down? Because they’re-priced for a strong recovery. But we’re not getting a strong recovery. We’re not getting any recovery at all. Investors were bound to notice, sooner or later.
A new index of the trucking industry – based on how often they fuel up their big rigs – fell 37% in January, from a big rise in December. Neither unemployment nor housing show any sign of real improvement.
Greece is on the edge of default. China sits on the Great Wall like Humpty Dumpty…threatening to fall off at any moment.
And yet…there is still no big sell-off in the stock market. Why?
Our old friends Mary Anne and Pam Aden recently suggested that this market was like the period in the ’70s when a bear market had already begun – years before – but which was marked by a couple of major rallies. The rallies lasted about 17 months each. And each time, the Dow approached its previous high.
Hmmm…maybe they’re right. This rally could go all the way to the summer.
Let’s put the all-time high of the US stock market at January 2000. The Dow had gone up about 11 times since its low in 1982. Then came the bear market. First, the Dow got whacked in 2001. And the government came in with the largest stimulus package the world had ever seen. That brought about a rally…a large rally…that took the Dow over 14,000 – well over the previous high. Even so, if you adjust the Dow for inflation it made no real progress. And then, in 2007, the Dow got whacked again. This brought the Dow down below 7,000, reaching its low point last March. Since then, stocks have been rebounding.
A typical bounce – if anything is typical – takes a few months and recovers about half of what was lost. This bounce is typical in that it recovered about half of what was lost. But it has gone on for much longer – like the big bounces of the ’70s.
How did the ’70s period end? Inflation increased and the Dow sank. It didn’t hit its final low until August 1982. But at that point, stocks were undeniably cheap. You could buy the Dow for about 5 times earnings.
Will we relive the ’70s?
Passing through the airport in Washington, we noticed a bar. It was named “Harry’s Bar” or something like that. What caught our eye was the décor. It had beige stone on the walls…greens and browns…and sleek wood paneling. Just like the ’70s…
And then, we noticed. Elizabeth had on a new outfit. There was something familiar about it. A flouncy sweater…jeans flared out at the pant leg…
“Yes, the ’70s are back in style,” she explained.
Some would say that Barack Obama is another throwback – to Jimmy Carter. He seems indecisive…and aloof from the people. He seems destined to be a one-term president too.
The politicos in Washington regard Carter as a failure. Yet, to us, he is still a hero. He was the only presidential candidate your editor ever voted for. And he turned out to be one of America’s greatest presidents. He didn’t push the nation to war or to bankruptcy. He left Washington and the nation more or less as he found them. What more can you ask for?
But Mr. Obama is no Jimmy Carter. On Obama’s watch the nation will take on about $5 trillion in extra debt. While Carter left the nation in no worse condition than it was when he took over the helm in 1977, Obama will leave it much worse off.
Of course, his idea that energy conservation was the “moral equivalent of war” was silly. But at least it was mostly harmless.
Besides, Jimmy Carter displayed enormous personal courage. First, he did a remarkable thing – he actually cancelled a pay raise for the military. Then, in 1979, Carter was fishing in Plains, GA, when his presidential boat was attacked by a giant, mad ‘swamp rabbit’ that tried to board without permission. Alone and unarmed, the president beat off the invader with an oar.
As far as we know, no other president has been similarly threatened…and none has shown Carter’s sangfroid under attack.
But back to the ’70s?
Probably not. The ’70s period was marked by stagflation, following the Johnson Administration’s big spending and Nixon’s elimination of the gold backing for the dollar. The CPI reached as high as 14% at one point. And Paul Volcker – a Carter appointee – fought it seriously…driving yields on the 10-year T-note up to 18% at one point. This was co-incident with a severe recession, and it got the job done. It turned around the bond market, the stock market, and the economy. The stage was set for an 18-year boom.
Today, inflation is not the immediate threat. Deflation is still the proximate problem. Here in England, inflation rates are going up. The papers whine that Britain’s middle-class is caught in a vise – between rising living costs and a punky economy. And sooner or later, inflation will be a major problem again – for Britain and America. Pundits argue about whether it will be sooner or later.
We don’t know. But our guess – and it is only a guess – is that the process of deflation, deleveraging, and depression has only just begun. The problems – too much debt, too many bad investments, too much money badly allocated – that existed before the crisis of ’07-’09 have not been corrected. There are still millions of people in houses that they can’t afford. There are still millions of mortgages for more than the houses are worth. There are still trillions of dollars at risk…still waiting to be worked out, written off, or inflated away.
The major contribution of the Bush/Obama administrations has been to add to these credit mistakes with trillions more in federal debt. That, too, will have to be reckoned with. But now there is Ben Bernanke at the Fed, not Paul Volcker. Now we are dealing with deflation (we think), not inflation. And now we have total official US debt 10 times as great as it was when Carter left office…and 3 times as much in terms of GDP.
What can we expect? Well, here’s one thing we feel fairly sure of: ahead lies a crisis much worse that the recession/bear market of the early ’80s.
What is wrong with these New York Times columnists? David Brooks is a smarter version of Thomas Friedman…which is to say, he is more thoughtful. But his thoughts seem to run into similar dead ends. He notes that more men in America are finding it difficult to be the breadwinners of their families. Women now get more college degrees than men. And women typically work in industries that are not suffering as much as construction and manufacturing, where men work. Result: men are out of work and out of money. And who wants to marry a man with no work and no money? So, men end up being lonely too.
Naturally, Brooks has a solution: “we need to redefine masculinity, creating an image that encourages teenage boys to stay in school and older men to pursue service jobs.”
That’s right. “We” need to do that.
And this too: “somebody has to provide institutions for unaffiliated 24-year-olds.”
Don’t worry. Someone will. Someone will give them black shirts. And set them to marching in the streets, beating up ‘class enemies.’ Someone will do something…and make the situation worse.
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All aboard to the US roller coaster deficit ride. (Newscom)
US budget deficit: Enjoying the ride on the road to ruin
02/16/10 London, England – Let’s focus on the good news. Well, our first item is good news if you were fool enough to follow our “Trade of the Decade.”
We suggested that buying Japanese stocks could be the best investment you can make in the next 10 years. We immediately heard from dozens of friends and enemies. The friends were concerned because they thought we’d made a bad bet. Enemies were delighted that we’d lost our grip completely. After all, they remarked, who in his right mind would buy Japanese stocks?
Well hardee, har, har… Guess what market is leading the world so far this year? That’s right… Japan. (Here, colleague Alex Green explains why Japan hasn’t been such a bad bet after all.)
We’re six weeks into the new decade, we’ll claim victory now…and change the subject. Who knows what will happen in the next 514 weeks.
Meanwhile, here comes more good news: the US federal government may not go broke after all. Rep. Paul Ryan, who hails from the sovereign state of Wisconsin, has come up with a solution.
Before we get to the solution, however, let us take a minute to describe the problem. In short, the feds are spending too much money they don’t have. The Obama administration says it doesn’t see any balanced budgets anywhere in America’s future. The Congressional Budget Office, a far-sighted group if ever there was one, looks all the way to 2080. It sees no hint of fiscal equilibrium either. Just deficits and debt. By its estimate the US budget grows to 50 percent of GDP and the official US debt rises to 7 times GDP.
This exercise by the CBO is not a forecast. It is merely an extrapolation. If present trends continue, that is where we would end up by the time your author is 131 years old. Of course, there is no way present trends could continue that long. Even at 2 times GDP…debt cannot be sustained. It would cost more than half of all America’s tax revenues to the pay the interest on such a large debt. Already, depending on how things go in the economy, as much as 30 percent of the money borrowed by the US could soon be necessary just to pay the cost of past borrowing.
Fortunately, Mr. Ryan has a solution. He calls it a “Roadmap for America’s Future.” After studying it for all of 30 seconds, we’re convinced that Mr. Ryan should get a GPS. His roadmap is a series of squiggles, dodges and twists to US tax laws…along with a few torques to the spending side too… that leads the country to a dead end. Most of his effort has been concentrated on bringing health care outlays under control. No effort is made, on the other hand, to cut military spending. Typical. Weak, limp, pusillanimous. The benefits now; the costs later. That’s why America’s residual respect for Congress is just about exhausted. The institution is incapable of correcting its own mistakes. Instead, it just makes them worse. Even with Mr. Ryan’s roadmap, America drives in the wrong direction for the next half a century. It is only sometime after 2050 that the federal budget deficits finally stop.
Any solution that doesn’t pay off until we’re all dead is no solution at all. It’s a way of avoiding a solution…which is what Congress desperately wants to do. A real solution will come. But not from Congress. Instead, it will come unbidden. And unwelcome. Like the plague.
At least, that’s our reading of history. Once the system tips out of control it stays out of control until it finally blows itself up.
It would be fairly easy to get the budget under control…that is, if there were no political system to prevent you. The US government shouldn’t be in the business of giving out drugs or regulating heart transplants. It also shouldn’t be in the business of telling the rest of the world what to do. The solution is simple: abandon the imperial agenda…let people take care of themselves, both at home and abroad…and downsize the federal government.
But that is not going to happen. We may be on the road to ruin…but too many people are enjoying the ride. We’re not going to stop any time soon. More than 40 million people on food stamps…thousands of military contractors…millions of government employees… People who want the government (other citizens) to pay for their gall bladder operations. People who pay no taxes. GM executives. AIG bondholders. University administrators. Lobbyists.
It is a wholly rational and completely foreseeable trend. People always seek to improve their wealth and status in the easiest way possible. What’s the easiest way? Take wealth from someone else. That’s why criminals are still in business…after thousands of years of trying to stop them.
But common criminals lack status – except in the ghetto. So, the smarter, better connected and better educated of their ilk go into government. Or they use government for their own ends. That way, they get other peoples’ money. But they also get respectability…even an elevated social status.
Congress is supposed to confront the problems of the nation…and solve them. But with more people getting something from the government than supporting it, Congress is not likely to change course. It responds to the perverse will of the people…and to its own corrupt predilections. We are all victims of democracy now…
The government grows…deficits become unstoppable…and the empire sinks under the weight of so many parasites.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
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