"Going for Broke" to Avoid
a "Financial Collapse"
Bill Bonner
Provided as a courtesy
of Agora Publishing & The
Daily Reckoning
Dec 3, 2008
O! Bama! Where is thy bounce?
Maybe it is here...
'Black Friday' turned out to
be less dark than people feared. Sales rose 3% over the year
before. This was a 'weak start' to the holiday shopping season,
reported the New York Times. But to us, it was surprisingly strong.
In fact, many shoppers were
so eager to part with money they would kill you if you got in
their way. We're not exaggerating. This report from the New York
Times tells what happened at a Wal-Mart:
"Suddenly, witnesses
and the police said, the doors shattered, and the shrieking mob
surged through in a blind rush for holiday bargains. One worker,
Jdimytai Damour, 34, was thrown back onto the black linoleum
tiles and trampled in the stampede that streamed over and around
him. Others who had stood alongside Mr. Damour trying to hold
the doors were also hurled back and run over, witnesses said.
"Some workers who saw
what was happening fought their way through the surge to get
to Mr. Damour, but he had been fatally injured, the police said.
Emergency workers tried to revive Mr. Damour, a temporary worker
hired for the holiday season, at the scene, but he was pronounced
dead an hour later at Franklin Hospital Medical Center in Valley
Stream."
Of course, when you're fighting
a major war there are bound to be some casualties... and some
collateral damage. As we keep saying, the latest fashion trend
is being led by the frugalistas. But some people are slow to
catch on... such as the mob in Valley Stream, NY. At least Mr.
Damour died in the line of duty... serving his country as it
desperately tries to avoid coming to its senses.
It's war, remember. The feds
are spending more on this war than on WWII. They're 'pulling
out all the stops.' They're 'throwing caution to the wind.' They're
'riding hell for leather' to rescue the U.S. economy. Getting
in their way is dangerous. For investors and store managers.
Investors should check their
shorts. A major rally could be very costly. Stocks could easily
bounce back half way to where they began. That would put the
Dow at about 11,000. If that happens - and it could - don't forget
to sell.
It says in this morning's International
Herald Tribune that the feds are "going for broke"
to avoid a "financial collapse." Yes, exactly... that
is where they are going.
Bloomberg came up with its
count of how much the war against nature is costing: $7.4 trillion...
with $2.8 trillion already committed. We reported a figure over
$8 trillion yesterday. By the end of this week, it will probably
be $10 trillion.
Anyway you look at it, it's
a big number. It has to be. According to the theory given to
us by Keynes, the government has to make up for the spending
private citizens are no longer doing. Americans used to 'take
out' as much as $200 billion per quarter from their home equity.
Now, they have nothing to take out. So, that's $800 billion per
year that needs to be replaced right there. And, instead of taking
out, they have to put back in... that's what a 'balance sheet
recession' is all about. They have to pay off debt and build
up savings. Our own guess is that that figure - the amount that
used to be spent, but must now be used to repair finances - will
rise to about 10% of GDP - or about $1.4 trillion per year. In
other words, the feds will have to spend an extra $2.2 trillion
per year.
For comparison and reference,
the Times is reporting a $1 trillion figure. And economists argue
that $750 billion of federal spending would achieve the equivalent
of $1 trillion in additional output, thanks to the 'multiplier
effect.'
But today's Times' editorial
goes on to say something uncharacteristically smart: "fighting
today's crises the government is teeing up the next one. To finance
the bailouts, the Treasury is borrowing money and the Fed is
printing it. That bodes ill for a heavily indebted nation, presaging
higher interest rates and higher prices - perhaps sharply higher."
Let us remind you of Tainter's
simple explanation for why things fall apart. Problems bring
solutions. Solutions bring more problems. And each solution has
a cost. Eventually, the weight of all the solutions crushes the
system.
But we're not going to worry
about that now. We've got a bounce on our hands... finally! The
Obama Bounce is here!
Or, at least that is how it
looked to us at the end of last week. The shoppers were out...
and the Dow had a winning streak last week. It rose again on
Friday 102 points. Oil remained unchanged at $54. The euro/dollar
exchange rate is staying put too at about $1.27 per euro. And
gold rose $8.
*** "It doesn't affect
us..." said Edward, 15. "Except that you don't let
me call for a pizza anymore. I have to go pick it up myself."
The two of us - Edward and
his father - have been living the bachelor life. Elizabeth returned
to the United States for her mother's 80th birthday. The other
children are dispersed all over the world. Your author's mother
- who lives with us part of the year - went back to the United
States with Elizabeth. That left just the two of us, uh huh...
uh huh...
Fortunately, Paris is full
of restaurants and other distractions. We had dinner with friends
along the canal St. Martin... the restaurants and bars were full.
Then on Saturday, we were turned away from one restaurant; it
was 'complet,' said the waiter.
But wherever we went, whomever
we spoke to, the subject was the same - the worldwide financial
meltdown.
"Crisis that touches everyone,"
says the International Herald Tribune.
Au contraire, the crisis doesn't
seem to have touched anyone in Paris. At least, not much. In
Zurich, too, there were few signs of a downturn. Christmas decorations
have gone up. Shoppers have come out. Life goes on as usual.
Except for a few banks and
pension funds, Europe never got caught up in the credit bubble
the way the Anglo-Saxon countries did. Housing prices rose strongly,
but were never based on mortgage debt or speculation. Generally,
people kept their heads. Europeans never quite got in the party
mood... and now have no hangovers.
Over in the English-speaking
world, though, it was madness on the way up... and it is madness
on the way down. Which is great fun for economists... but a little
nauseating to the poor guy who's just along for the ride.
And now everyone is caught
in the gloom of the après-bubble world.
In the United States, auto
dealers were the pillars of the local community. They provided
convertibles for the high school football games. They led the
fund drives for widows and orphans. They supported the local
restaurants and bars with bonhomie and dollars.
Now, the auto dealers are in
trouble. Not that they aren't still ready to help the Fair Queen;
it's just that they don't have any money. Sales have flattened.
The salesmen put their feet up on the desk and snooze, confident
of being undisturbed. While the crowds trample clerks at Wal-Mart,
people selling big ticket items - consumer durables - are as
lonely as a hermit. It's one thing to lay down 10 bucks for a
geegaw from China. But a $10,000 or $20,000 commitment demands
reflection. And few people who stop to think about it are going
to spend money - not with a major recession settling in.
How bad will it get? Of course,
no one knows. At the present rate of walking backward, the U.S.
economy will retrace 4% of GDP in 12 months. Nouriel Roubini
says he expects the slump to take 10% off America's GDP before
it is over.
The recession of the early
'90s took only 1.3% off US economic output. The Great Depression,
on the other hand, was a 25% setback (if we recall correctly).
How much will people be 'touched'
by the slump? Again, we don't know. What can you do? Prepare
for the worst. Hope for the best. Watch out for hordes of shoppers.
And beware the bigger bust the bailout brings.
(More about that as our Daily
Reckoning continues... tomorrow... Note that we're on our way
to South Africa today... then on to Mumbai. If you don't hear
from us, it is not that we have forgotten you. Either we have
been unable to get an Internet connection... or we are being
held hostage.)
Until tomorrow (hopefully),
Dec 2, 2008
Bill Bonner
Source:
http://www.dailyreckoning.com.au/financial-collapse-going-for-broke/2008/12/02/
email: DR@dailyreckoning.com
website: The
Daily Reckoning
Bill Bonner
is the founder and editor of The Daily Reckoning.
Bill's book,
Mobs,
Messiahs and Markets: Surviving the Public Spectacle in Finance and
Politics, is a must-read.
He is also the
author, with Addison Wiggin, of The Wall Street Journal best seller
Financial
Reckoning Day:
Surviving the Soft Depression of the 21st Century (John Wiley
& Sons).
In Bonner and
Wiggin's follow-up book, Empire
of Debt:
The Rise of an Epic Financial Crisis, they wield their sardonic
brand of humor to expose the nation for what it really is - an
empire built on delusions.
Copyright ©
2000-2013 Agora Financial LLC.
321gold Ltd
|