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The Daily Reckoning

Falling retail sales could spell recession

It looks like the US economy is headed into another recession. That’s what usually happens when retail sales go down for three months in a row.

By Guest blogger / July 26, 2012

In this June file photo, a woman walks into a Lane Bryant store in San Jose, Calif. Americans cut their spending at retail businesses for a third straight month in July, and Bonner thinks that could mean the US is headed for another recession. (AP Photo/Paul Sakuma, File)

Paul Sakuma/AP/File

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Stocks down another 104 points yesterday…measured by the Dow.

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Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).

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What’s going on…? What’s going on?

That was a song by Marvin Gaye. It was also the question the interviewer asked. Followed by, what’s going to happen next?

But those are questions no one can answer. All we can do is guess…speculate…and wonder.

“Deflation now. Inflation later” is what we’ve been saying for the last 4 years.

The interviewer seemed happy with the answer. And the elaboration:

Japan now…but don’t be surprised when we end up in Argentina.”

What do Japan…Argentina…and the US all have in common? They can print money. And when their backs are to the wall, that is what they will do.

But that’s later, remember. Right now, investors are lending money to governments at the lowest rates in history. They do not ask anything more than to get the money back. Eventually. And since the US and Japan can print, they are confident that they’ll paid.

But what about Argentina? Turns out, Argentina borrowed in dollars too…and pledges to repay, in dollars. So, you might think you’d get the same interest yield in an Argentine bond as an American one.

But what’s this? The yield on the ‘Boden,’ which is what they call Argentina’s dollar bonds, is over 17% — which is more than 10 times what you get from a 10-year US note. What gives? Simple. Argentina can print pesos. It can’t print dollars. So investors are afraid that when time comes for repayment, the Argentines won’t have enough dollars on hand.

No such problem in the US. And as long as this recession or ‘contained depression’ continues…investors will probably continue to treat US debt like a mattress. You put your money in. You can get it out when you want. You don’t make anything. But you don’t lose anything either.

But how long will this Japan-like slowdown continue, our interviewer wanted to know?

“Hard to say,” was the reply. In terms of private sector debt, the downturn is taking out an amount equal to about 10% of GDP every year. But there’s still the equivalent of 100% of GDP of excess debt left to go before we’re down to ’70s levels.

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