The real economy is shutting down

Bill Bonner - Fri 24 Jul, 2009

The real economy is shutting down

Vancouver, Canada

Friday, 24 July 2009

What’s good for Goldman is bad for the nation.

We’re attending a financial conference here in Vancouver. Yesterday was actually the tenth anniversary of the Daily Reckoning. A group of readers took your editor to dinner and toasted him.

He was flattered... and grateful for the attention.

But we’re not kidding ourselves. Readers come up to us at conferences and tell how much they enjoy reading the DR. We wait for questions about Quantitative Easing, the Trade of the Decade, the Empire of Debt or other of our important themes. Instead, what they want to know about is:

“How’s your gardener doing? What’s Maria doing in Los Angeles? Did you ever figure out what happened to your missing cows...?”

Readers know what’s important. They want to know more about what really matters.

Still, we are foot soldiers in the lonely battle against economic claptrap; we must march on!

Yesterday came more evidence that the depression is over. The Dow shot up 188 points. From a technical point of view, if you believe that kind of thing, it looks as though the rally has farther to go. We recall setting a target of Dow 10,000. Perhaps we will get there.

Oil traded at $67 yesterday. Gold rose to $954 and bond yields on the 10-year T-note rose to 3.7%.

All of this sounds vaguely inflationary... and vaguely bullish. Besides, Goldman stock is rising. And as we all know, what’s good for Goldman is good for the country.

Wait... we’re kidding... right?

Yes, we are kidding. What’s good for Goldman is generally bad for the country. Goldman makes money by separating investors from their money. Nothing wrong with that; someone has to do it. But the big banks are most profitable when speculation is rampant and debt is growing. That is, when people are going further and further into debt... and speculating on rising asset prices. We know you don’t really prosper by borrowing and gambling. But that doesn’t make casinos unpopular nor lenders unlawful. Bankers, like undertakers, benefit from human frailty. At least, they benefit as long as the government bails them out. Otherwise, they fall victim to their own human frailty.

But this is a minority opinion. Most economists disagree with us. And there are so many of them... if all the economists who disagreed with us were laid end to end... it would be a good thing. They believe that the economy is stabilizing... and on its way back to normal. Trouble is, ‘normal’ ain’t what it used to be.

Wall Street banks are making money, ‘tis true. But they’re not financing new businesses... or factories. They’re not aiding the process of capital formation nor allocating capital in ways that will result in new jobs and new industries. Instead, they are refinancing old debts... and speculating on zombie assets.

This will not increase the real wealth of the planet. Instead, money just changes pockets. Which, of course, raises an interesting question; where did all this money come from? If Goldman’s pockets are fatter, whose are thinner? If the four biggest banks earned a combined $11 billion in the last quarter... who did they take the money from? Who’s got that kind of money?

Meanwhile, we found out this week that the feds have wagered an amount equal to 170% of GDP in their attempt to bailout the world (more below). Part of that money was used to buy Wall Street out of the investments that they didn’t want. Which ones were those? Well, the ones that didn’t work out.

In other words, no wonder the banks are making money.

But while the banks are making billions, cometh another report from another sector – manufacturing. Caterpillar announced its results for the second quarter too. Profits were down 66%. In other words, while the banks were making money speculating with taxpayer’s money, Caterpillar was trying to make things and selling them to customers. Caterpillar not only makes things; it makes things that help other companies make things. Things with motors... big things... things that make noise and give off exhaust... things you use to dig holes and move dirt... things you need if you’re going to have a real economic recovery. Unfortunately for CAT, these things aren’t selling.

So what does this tell us? Well... it suggests that there is no real economic recovery at all. The real economy is suffering... sinking... and shutting down.

This just in from Tom Bulford…

“I’ve found the most exciting way to play the new oil bull market. It’s a company that’s developed a technology that can “see through” the ground to where the oil is. It’s devastatingly effective at finding oil deposits – between 10 and 100 times better than any other method being used today.

“Last week, our ‘scanner’ stock announced a contract to provide its service at several sites operated by an oil exploration company in Texas.

“Hot on the heels of this comes another similar deal. This time it is with a privately owned but unnamed oil company in Texas that drills 40 wells a year. This latest contract is for our company to apply its “QRI space scanner” technology to one prospect at a depth of 11,000 feet.

“I’m watching this carefully. The planned exercise is at a location where oil finds are problematic and costs are high. This means that it is all the more important to define any reservoir with accuracy.

“Of course, there’s no guarantee that it will deliver. But this technology has already been credited with finding oil in other exploration projects. I have a good feeling about this one. And the story is starting to get picked up by international media outlets. That means there are a lot of eyes on this. If the company has any more successful tests, this stock is going to be one of the most exciting ways to play the new oil boom.

“If our scanner technology stock can prove its worth at this more challenging location, then it will mark another important advance. Clearly there is considerable interest in it. Oil explorers are prepared to give it a try and if it proves as successful as it has done hitherto, then its use will only accelerate. The share price is moving nicely… but I think it’s going a lot higher. I’m confident this could make my readers 300% on their money”

Editor’s note: Click here to get in on Tom’s “scanner” stock now.

And more thoughts...

*** The banks are not earning their money helping Caterpillar expand. They’re making their money not because of a recovery, but because there isn’t one. In other words, they’re profiting from the financial stress of the early stages of a depression. There’s a post-crash bounce... and the government is sending a lot of money their way.

As for a real recovery – forget it. There’s no evidence of it. Unemployment is getting worse. Housing is still going down. Profits are going down. Those aren’t the things that presage a recovery... they herald a deeper, darker depression.

The depression darkens because people are not just being laid off – their jobs are disappearing. They do not get called back to work. Instead, they stay unemployed until they run out of unemployment benefits... and then the statisticians in Washington drop them off the unemployment rolls. Currently, the first batch of those people to reach the end of their benefits came this week. Last we looked, the Pennsylvania legislature was passing a law so they could continue drawing benefits for a few weeks more.

We’ve mentioned John Williams and his excellent service called Shadow Government Statistics. He looks at the numbers and figures out how they are twisted and tortured... and then figures out what they would be if they were treated properly. Currently, the unemployment rate nationwide officially is almost 10%. But if you computed the unemployment numbers the way they did back in the Great Depression, Williams says one in 5 people is out of work. In some places the figure is as high as one in four.

In other words, the unemployment numbers are already beginning to look like those of the Great Depression. But that’s true of almost all the numbers. They’ve all got a ‘30s era look to them. And if you stopped water boarding them, they’d tell a similar story. Almost all the indicators are worse than any we’ve seen since WWII.

Unemployment, trade, defaults, foreclosures, bankruptcies, prices, manufacturing... you name it and you have to go back to the end of WWII to find similar numbers. Of course, at the end of the war the wartime economy shut down. Millions of people who have been in uniform... or making tanks and airplanes... were suddenly out of work. Economists thought the economy would go right back into the Great Depression.

Instead, it boomed. Those soldiers and their families had savings. They had pent up demand – they hadn’t bought a new car in 10 years... they were young... they got married... they had children... they needed baby cribs and houses. We remember going to look at one of the first major suburban developments as a child – Harundale – in Maryland, built by the Levitt company...

...Horrible place. But you could buy a house for peanuts... on credit. And it set the pace for the suburban consumer credit expansion of the next half a century.

But what was normal for so many years is not normal any more. Now, consumers are paying off debt faster than any time since 1952. The government, however, is making up for them. Goldman may no longer be able to push more credit onto the public; but it can push one heckuva lot of debt onto the public sector. Wall Street firms helped households ruin themselves in the Bubble of 2003-2007. Now they’re doing the same for the government, helping the feds raise money on a scale never seen before in human history.

As we said... no wonder they’re making money. Too bad.

***

Romulus, Remus, Stimulus: A brief history of monetary madness

BY BILL BONNER

Those whom the gods would destroy are first granted stimulus. When a man wins the lottery, for example, it has a stimulating effect on everyone around him. He usually spends the money quickly – often even before he gets it. But no matter how much he wins, he is usually broke within a few years... often even broker than he was before he bought the winning ticket.

A recent example from the British press: One of the first Lottery Millionaires punched a plumber and ended up in court, says the Telegraph. Michael Antonucci won 2.8 million pounds in 1995. But he “blew his entire fortune,” reported the paper last month. Now he’s reduced to stiffing tradesmen. The amount in dispute was just 400 pounds, what he was billed for a “gigantic ceiling mirror fitted above a whirlpool Jacuzzi.” He had the mirror installed when he was still flush. Now that he’s broke, he can’t pay. Hence, the altercation.

The phenomenon is little different when it happens on a national or even imperial scale. Any money that you don’t earn is stimulus. Without the sweat of honest toil on it money seems to play a pernicious role in history. There are no examples – none – where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it is soon spending more than it can afford...a nd getting into trouble.

The Roman Empire is in some measure a stimulus story. It conquered. It grew. Each conquest brought more booty... gold, silver, land and slaves. And each led to more conquests which brought forth more booty. But the stimulus of this booty stimulated only the need for more stimulus. It did not stimulate real prosperity. Instead, it undermined it. First, slaves bought by rich landowners destroyed the free laboUr market and ruined small farmers. And then, imported wheat from the provinces – paid as tribute – put the large-scale farmers out of business too. Italy was then dependent on foreigners for its food.

In the first century AD, Roman conquests reached the point of diminishing returns; the stimulus came to an end. But borders still had to be protected. And Roman mobs, made up of displaced small landowners and out-of-work laborers, needed bread and circuses which drained the treasury.

The first financial crisis of the imperial period came early. Caesar Augustus tried to solve it... with more stimulus. Neither paper money nor the printing press had yet been invented. So, Augustus increased the money supply in the only way he could; he ordered slaves in the silver mines in Spain and France to work around the clock! This extra money did not bring prosperity; it caused price inflation. In a period of about 3 decades, Rome’s consumer price index almost doubled. Then, when output from the mines could be increased no further, Augustus’s great nephew, Nero, found a new source of stimulus; he reduced the silver content of the coins. This source of stimulus proved ineffective, but enduring. By the time barbarians took over, the silver denarius contained almost no silver at all. Of course, Rome itself was played out too.

Another early and dramatic example of stimulus-in-action came in Spain in the 16th century. The conquistadors increased their supply of money in the time-honored fashion – by stealing it. Galleons brought treasure from the Americas; increasing the Spanish money supply substantially and fatally. The Spaniards had so much stimulus that they laid down their tools.Why should they work? They could buy things.

The discovery of a whole mountain of silver – Potosi – in the middle of the 16th century insured a supply of stimulus that would last for nearly a century. Results? Predictable. Inflation. In the “price revolution” from 1540 to 1640 the cost of living went up throughout Europe. In England, for which we have the most reliable data, prices went up 700%. And Spain, though it covered 40% of its state budget with this easy cash, still defaulted on its debts about once every 15-20 years, from 1557 for the next 10 decades. Spain, like Rome, welcomed stimulus; it never recovered from it.

Now we turn to the biggest misadventure in stimulus ever – the period after the US ‘closed the gold window’ in 1971. In the 150 years before then, nations could stimulate their own economies with cash and credit, but only to a point. They could overspend; but they had to settle up in gold. After 1971, on the other hand, the sky was the limit – especially in the United States of America. The US could settle its bills in paper, which was then used by foreign central banks as monetary reserves. Since foreign banks were eager to add to their supplies of reserves, there was no effective limit on the amount of stimulus available. The Fed’s adjusted monetary base grew 900% since 1985, and more than doubled this year alone. Total US debt tripled – as percent of GDP. As in Rome and Spain, more and more stimulus stimulated spending and speculation, but not real output. During the 2001-2007 period, for example, credit in the US increased by $22 trillion. The nation’s GDP increased only by $4 trillion. For every extra dollar of output, Americans took on $5.50 of debt.

But now the bubble has blown up; the feds are on the case. What do they offer? More stimulus! Cometh a report this week that $23 trillion has already been put at risk in the various bailouts and credit guarantees. As for the US public debt; it is expected to increase until the country goes broke.

Future economic historians will look at these staggering efforts with awe and wonder; they will wonder what the hell we were thinking.