What The Berlin Wall Should Have Taught Us

Bill Bonner - Mon 09 Nov, 2009

The 'mother of all jobless recoveries'

Buenos Aires , Argentina

Twenty years ago today... the Berlin Wall came down. This marked the end of the greatest controlled experiment in economics ever conducted. What did economists learn? Nothing... more below...

The financial crisis of ’08-’09 was not a head cold. It didn’t go away.

It was more like diabetes, a stroke, or cancer. It was serious. Life threatening. We may not recover. Our only hope is to change our habits, undergo some nasty treatments... and endure a long convalescence.

But that’s not what most people think. They are convinced that the feds gave the economy a miracle drug. It cleared up the trouble lickety-split. Now, our troubles are behind us.

The Dow moved up 17 points on Friday, leaving it above the 10,000 mark. Gold rose too – it is at a new record high, only $5 below $1,100 as we write this. (It’s above that level now, at $1,108 – ed.)

According to the news reports, the US economy is ‘growing’ again. Yes, that’s the official storyline.

But wait, what kind of growth is this? David Rosenberg:

“All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush.”

The quacks at the Fed and the Treasury department have delivered the biggest jolt of adrenaline in history. People in the private sector won’t spend? Heck, the feds will spend for them!

It took the Fed nearly one hundred years to grow its balance sheet – which is the foundation of the US money supply – to $800 billion. Then, after Lehman Bros. went broke, it doubled its balance sheet... to more than $1.8 trillion.

Early last week, the Fed announced that it would keep the fire hose-sized IV in place. Then, by the end of the week, the G-20 meeting of finance ministers confirmed said they were all sticking with their stimulus programs.

You can’t put that much cash into a financial system without getting some kind of reaction. Goldman is making record profits, for example. How does Goldman make money? It is a finance business. It profits by offering credit. When credit expands, the moneylenders and speculators at Goldman make money.

The private sector isn’t borrowing. Every day brings more proof.

Consumer credit contracted again in September – the 8 th month this year.

Unemployment just passed the 10% mark, reports the New York Times.

“Small Businesses Hunker Down to Survive,” says another headline story.

Another big bank went bust in California.

But while the private sector de-leverages, the public sector expands. Now, it’s the feds who are doing the borrowing – about $1.7 trillion this year.

This is great for the people who help the feds finance their spending. But all it does is add more debt to the system. And debt is the real problem.

If former director of the Office of Management and Budget (OMB), David Stockman, is right, we’ll see deficits over $2 trillion for a decade.

What people once took for absurd they now take for granted. Such as trillion-dollar deficits. For even with a hole in public finances equal to 13% of GDP, the US House of Representatives passed a law overhauling the health care system, at a cost of more than $1 trillion.

What were they thinking?

Well, they were probably thinking that ‘deficits don’t matter.’ And they were probably justifying the expense on the grounds that it was ‘countercyclical spending’ that would help pull the US out of its slump.

Whatever they were thinking, they weren’t remembering what happened 20 years ago. It was 20 years ago today that the Berlin Wall fell, bringing to an end a 40-year demonstration project. The East Germans/Soviets wanted to show the world how well economists working for the government could run an economy.

And we found out!

More below... after this news picked up from our London HQ:

We saw a snippet in an email detailing the benefits of the new rare “give away” deal our colleagues at Fleet Street have put together.

Don’t let this pass you by…

Remember, what they’re proposing is that you cancel any subscriptions you might have with their top six investment advisory services. These are publications that aim to help you profit… and to protect your assets.

Scrap any existing deal you have. (If you don’t have any subscriptions, it’s your chance to get what you’ve been missing, but without subscribing…)

You see, if you seize this rare opportunity, they’ll send you every piece of research they release through these six noble advisories… without having to subscribe.

We’ve seen this develop… and it’s impressive. Get all of that advice – monthly newsletters, weekly updates, special reports, specific buy and sell signals by email (even SMS message to your mobile phone in some instances)… just by joining their special “elite investors” group for a one-off massively discounted fee. Then, you’ll receive everything for as long as it’s published, without ever paying normal subscription rates.

We thought it was a crazy offer when we first saw it… but it just got even crazier, according to the email we’ve just read. We’ll quote:

“But it doesn’t end there!

“The invitation also promises you no less than 17 reports in addition to the 6 investment advisory services mentioned above!

“That’s an incredible offer.

“Amongst these 17 special reports you’ll find:

The tech revolution that could shoot one of the UK’s brightest companies rocketing to a 165% gain!

The risk-reduced way to invest in forgotten Falkland oil.

This ‘deal maker’ share could make early investors a 65% return on their money!

The “rewind trade” that could make you a 184% profit AFTER the oil price surges!

How 150 million Russians could make you a 50% gain on one UK-listed stock…

Like we said, it seems like an incredible – even crazy – deal. And it’s one you should take a look at.

Remember, though, this closes on 19 th November, so you’ll need to be quick.

Our advice: just have a look at what is on offer… how these advisories have performed… and how they could help you navigate the markets ahead. Then, see how this extremely rare offer allows you to get all this research and guidance for a frankly nonsensical discount.

Click now: Details on how you can get in on this elite group are here.

Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.

And back to our rambles...

*** In 1949, the Soviets and the Allies divided Germany into two parts. One part followed a traditional capitalistic path to reconstruction. The other part took the socialist road. Remarkably, they kept this test going for 40 years.

Of course it was misery for many of the test subjects. People were so eager to get out of the East German control group, they risked their lives jumping over the barbed wire. Then, when the wall was down, the population of East Germany collapsed... more than one out of every ten people moved to the West!

But it was a great experiment for economists. Too bad they didn’t learn anything.

What they should have learned is that when it comes to making people materially better off, government spending is a poor way to do it. It’s great for the few favoured firms who help Washington raise and spend its trillions. It’s great for Goldman, in other words.

But what if you don’t have an inside track with the government? Well, you’re out of luck. You get to stand in line to buy inferior goods and services – produced by government-owned industries and protected monopolies. That was what the East Germans did. And, of course, you get government bureaucrats telling you what to do... and preventing you from improving the quality of your life.

That’s what they did in East Germany. And that’s what they’re doing, now, in the United States of America – in a less obvious, less heavy handed fashion. Who owns the biggest auto company in the US? Who provides the finance for the finance industry? Who controls the health care and education industries? Who’s the biggest employer? Who finances our houses? Who runs our banks?

Well... you know the answer.

But here’s another question: who’s headed for bankruptcy? Same answer.

What can you do about it? All you can do is to anticipate where this is heading... and position yourself to profit. Or, at least position yourself to protect your assets.

In that regard, you may want to replace the FED with the GLD, if you know what we mean. The Fed is derelict in its duty to protect your paper dollars. GLD – an ETF for gold – is a very simple way of doing your own central banking.

But should you buy GLD now? Ah... they don’t make it easy, do they?

*** Buy gold now?

A quick answer: it depends.

If you’re buying gold for quick profits, you will probably be disappointed if you buy it now. The price has been going up for weeks. It’s probably ready for a rest.

Also, gold moves up with stock prices – both anticipating an inflationary recovery. We think this will turn out to be a mistake. There is no real recovery underway. And no inflation either.

If and when stocks collapse, gold will go down too. At least for a while.

But if you are buying gold as the Chinese and the Indians are buying it – as a monetary reserve, not a speculation – there is no time like the present. Sometime in the future, we wish we could tell you when, gold at $1,100 will seem like a giveaway.

Until tomorrow,

Bill Bonner
For The Daily Reckoning

Editor’s note: You have eight days remaining to gain access to our top advisory newsletters without subscribing. Don’t be left outside this privileged group of investors. The doors close on 19 th November.

To gain entry now, click here.

Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.