Yodelers & Sausage-Eaters Know Best

Bill Bonner
Provided as a courtesy of Agora Publishing & The Daily Reckoning
Jun 18, 2009

The Dow fell another 107 points yesterday. Oil held steady at $70. The dollar fell to $1.38. And gold rose $4 to 932.

What if the rally is over? Could be... it began on March 9th. That makes it more than three months old. Most likely, it will continue through the summer. But who knows?

The important thing to remember is this:

There can be no major, sustained bull market without one of two things happening.

Either the mistakes of the Bubble Epoque must be cleared away... allowing for a new era of genuine growth and real prosperity. At best, this would take a few years to achieve. Just imagine how long it will take to restructure GM into a profit-making business again. Just imagine how long it will take consumers to pay down their debts so they can begin to spend again. Just imagine how long it will take to save enough money to build new factories... and convert shopping malls to warehouses and apartment complexes... And just imagine how long it will take with the feds fighting it tooth and nail. At least a decade!

Or people must be willing to go even further into debt... thus increasing the errors of the debt-soaked boom. Anything is possible. But here at The Daily Reckoning we think the economy is already saturated with debt. It can't absorb more. Besides, the financial industry is no longer capable of pushing debt on the public. That machine is broken. The bubble in finance exploded when Lehman Bros. went down. Once a bubble blows up, it can't be reflated.

And so far, the feds' efforts to reflate the bubble in consumer finance have caused a return of speculation in oil, commodities, and emerging markets. There is no sign of consumer price inflation or expanding consumer credit. Instead, consumer credit is contracting.

So don't expect a real bull market.

Instead, let's move on... this just in:

The Financial Times reports that a vending machine company is soon to install machines in Germany where you'll be able to buy gold as easily as buying a chocolate bar. There's one machine already in the Frankfurt Airport, where for 30 euros you can buy a 1-gram wafer of gold.

Already, in Switzerland, you can buy gold in the post office.

What do these yodelers and sausage-eaters know that we don't? Germany was required to pay reparations after WWI. The amount was about $1.121 trillion in today's money. In gold. She had no choice. She had to turn over her real money - gold - to the victorious French and English. Thus, she had no real money left in the domestic economy. What could she do? Germany printed up marks... not backed by gold and experienced hyperinflation, up close, in the '20s. Coming not long after the debacle of WWI and the Treaty of Versailles, it not only destroyed the economy... it also wiped out savers and destroyed Germans' residual faith in their own sausages. Soon after, there were armed gangs of communists and national socialists fighting for control of the streets. And we all know how that turned out...

So, back to the U.S.A.: The United States has entered the third and final stage in the life and death of a great country.

America's history can be divided into three broad stages. The first stage was industrialization. This is what took the United States from a marginal nation of settlers, explorers, farmers, entrepreneurs and religious refugees to become the world's richest and most powerful country. The source of its wealth and power was its factories... and its people. The factories were the best in the world. And the people how labored in them were accustomed to hard work, saving, and self-discipline. There were no free lunches in America during this period. The fastest growing cities of the time were manufacturing centers - Chicago, Gary, Detroit, Pittsburg, and Birmingham. Thanks to its smokestacks and assembly lines, the US could make things better, cheaper and faster than any other country, with the possible exception of Germany before WWI and Japan after WWII. That is how the US became the world's largest creditor - by selling US-made goods to foreigners. And it's how the United States won WWI and WWII too. American factories could turn out more tanks, more planes, more guns and more butter than any other nation. And the United States had an abundant source of fuel too; "Texas Tea" they called it.

After WWII America enjoyed its glory days. It was on top of the world... in practically every sense. The United States was #1.

Nothing fails like success. The New Deal had fundamentally changed Americans' relationship to the state. Federal meddlers began playing a larger and larger role in the economic life of the country. Soon, American attitudes evolved to fit the circumstances. With the world's reserve currency... a huge lead over its competitors... and a government that promised to take care of its wants and needs, the US workforce relaxed. Gradually, it shifted from making things to buying them... while industry turned its focus from production to sales... and then, financing. Then, the United States entered the second stage: financialization.

In this second stage, the center of gravity shifted from the wealth-producing factories to the financial centers - mainly Manhattan. Prices of real estate in New York soared. Wall Street came to be seen not merely as a place to invest the proceeds of honest toil... but a way to create wealth. The most ambitious college graduates turned from engineering and manufacturing first to sales and marketing and later to finance; because that's where the money was. At the peak, in the Bubble Epoch, 2003-2007, Wall Street was drawing in the world's leading scholars in mathematics and statistics... These people were creating the biggest debt bombs in history... exotic, complicated financial concoctions... that eventually blew up in their faces.

Detroit went into a decline as early as the late '60s. GM continued to make cars, but it looked to financing as a way of make money. GMAC became the major source of GM's profits. Still mills along the Monongahela River began to rust in the '70s. Ships began to come to the US laden with goods in the '80s and '90s... and to go back empty. The US Fed tried to stimulate the US economy on several occasions, but it had a strange effect. It put more credit in the hands of US consumers - who used the money to buy goods from overseas. In effect, the US Fed was stimulating manufacturing in China!

But in 2007-2008 the bubble in consumer debt blew up. GM went broke in May of '09. The financialization stage ended. In its place comes a new stage: politicization, the third and fatal phase of a great nation.

Where is the money now? It took the train from Grand Central Station in Manhattan down to Union Station in Washington, DC. Want money? Ask Washington. It's pledged an amount equal to three times what it spent in WWII to the fight against deflation.

Where is the power now? Just ask Chrysler bondholders; in the end it didn't matter what their contracts said... when the US government turned against them, their goose was cooked. The Obama Administration, owner of GM, now sets top salaries and determines what kind of cars the company will make. Washington also determines which businesses will be kept alive - AIG - and which will die - Lehman Bros. Now it's the politicians, not Wall Street, nor investors, who decide the allocation of big capital...

And when ambitious young people buy a ticket to begin their careers, are they going to Milwaukee... to Manhattan... or to the lobbyists' mecca in Northern Virginia?

Jun 18, 2009
Bill Bonner
email: DR@dailyreckoning.com
website: The Daily Reckoning

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