Alas, he did not fly. Nor even float. He fell “like a stone,” the paper reported.

Immortality was achieved, but not the way he had hoped. His stunt was captured by the new motion picture technology of the time. That silent film inspired the very popular Jackass videos, which show people engaged in reckless acts of mischief and mortality.

But we do not have to go to Youtube to enjoy the Jackass genre. We have only to read the news. All over the world the authorities are strapping on their absurd parachutes…and climbing to very high places. In Europe, banks borrowed 442 billion euros last month from the European Central Bank. Much of it is lent back to European governments. In America, stimulus funds are used to fix public toilets, as well as to repair Wall Street’s balance sheets. Trillions of dollars have been put at risk in these adventures – $23 trillion in the United States alone. And yet, despite the most daring experiment in stimulus ever, by the end of June, the British economy was 5.6% smaller than it had been a year before, paralleling the decline that followed the crash of ‘29. As for the United States…we await the figures…

On the evidence, stimulus programs aren’t working. In fact, where they are tried the most they work the least. For proof, we go to Stimulation Nation itself. From America last week came news that new house sales had finally turned up. They were up 11% in June, according to the papers. That was the monthly figure. According to the annual numbers, they were down 21% from the year before – at the second lowest since they began counting in 1963. And since the population is much bigger than it was 52 years ago, this was relatively the worst June in history for new house sales. And now that the economy is in a slump, the rate of new household formation has been cut in half. Faced with lower incomes and worsening jobs prospects, people are less eager to set up new households – reducing the demand for new houses.

Unemployment shows no sign of improving, either. The stimulus program was supposed to cap joblessness at 8%. Officially, the rate is now 9.5%. Economist David Rosenberg puts the real unemployment rate almost twice that high. And businesses are cutting jobs even faster than expected. Economist Arthur Okun suggested a rule of thumb for predicting unemployment levels in a downturn. But firms are not only laying off redundant workers; they are laying off workers who would normally be spared. What’s more, those who are left are working the shortest weeks ever recorded.

In the past, workers were quick to move to where the jobs were. The Sun Belt traditionally bounced back first. But Florida, California, Arizona and Nevada have been flattened even more than the rest of the nation – by record foreclosures, government cutbacks and bankruptcies. Now, the jobless stay put…and stay unemployed.

Currently, the excess capacity in the United States is staggering – both in labor and capital. Capacity utilization is only 65%; in theory, output can increase 35% before any new capital investments are made.

Recovery? “Forget it,” says Rosenberg.

Now that the facts are out of the way, we end our critique of stimulus…and turn to laugh at the stimulators. “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back,” wrote John Maynard Keynes. And now it is Keynes’ voice they hear.

“We are all Keynesians now,” said Richard Nixon as he strapped on a crash helmet.

Keynes probably got the idea of a counter-cyclical stimulus in Bible class. And a good idea it was. Simple…intuitively correct…practically demonstrated…and theoretically sound. But he and his followers still managed to screw it up.

First, Keynes’ General Theory is no theory at all…at least not in the scientific sense. It can’t be tested. The results aren’t reproducible. Instead, it’s merely an idea about how things should work, based on an Old Testament story.

Pharaoh had a dream. He dreamt he saw seven fat cows devoured by seven scrawny, misbegotten cows. He didn’t know what the dream meant, so he called for a young Hebrew man who had interpreted dreams for his master. Joseph told Pharaoh that Egypt was to enjoy seven years of abundance followed by seven years of famine. He told him what he should do about it too. He should store all the grain he could from the fat years…so he could pass it out when the going got tough.

This is a story we all know. It is easy to tell and easy to understand. But modern economists twisted it as though it were an inflation statistic. They maintain that when the business cycle turns down, it’s just like a drought. And they can counteract the effect of the drought by giving the economy stimulus – liquidity – from the public sector.

Trouble is, they missed the point completely. Do you recall any public official urging the public to stop spending so much in the bubble years? Do you remember any Treasury Secretary or Fed Chairman suggesting that the U.S. government run real budget surpluses in the fat years? Does any headline from any paper in the nation mention a storeroom in which grain or treasure was stored for the lean years? Not at all! Instead, the feds encouraged people to eat their grain! Governments ran deficits even during the bubble years, with the biggest deficit in history in 2008, just as the lean years began. Now they have no real grain to offer. So they turn to a reckless, disaster-defying stunt – passing out phony money, like sawdust muffins…

Future generations will watch the video and laugh until their stomachs hurt.

Enjoy your weekend,

Bill Bonner

Source: We Are All Jackasses Now

“Geithner plan welcomed,” says the headline story in today’s Financial Times.

“Stocks rally on news of toxic assets proposal,” continues the commentary.

Stocks did indeed rally. The Dow rose 497 points…putting some bounce back in the bounce. We’ve been expecting a healthy rebound. Normally, after such a long and steep sell-off, you can expect a rebound that recovers 30%-50% of the losses. We have not had such a rebound…yet. Maybe this is it.

Otherwise, the financial news is mixed. House sales in February were unexpectedly high. Then again, prices continued to fall.

AMEX looks like it is going to be downgraded…as credit card debt now looks as though it could be heading in a subprime direction.

The dollar continues to fall, (to $1.36 yesterday) and gold continues to stay in the same place – around $950.

But let’s focus on the big news: the Geithner Plan.

The gist of the story is that the government will create a public-private fund to buy up to $1 trillion in the banks’ mistakes. These assets will be auctioned off – in a market sustained and supported by public money. This is a “win – win –win” situation, says Bill Gross of PIMCO, the world’s largest bond fund. We didn’t see the rest of his analysis so we’ll have to guess. It’s a win for the banks because they get to clean out their refrigerators. It’s a win for investors because they get to buy the throwaways at huge discounts – with government guarantees – and then they’ll discover that it doesn’t all have fuzz on it. And it’s a win for the government, because it finally gets rid of that nasty odor coming from the kitchen.

We have neither the time nor the stomach to look closely at this program. But we don’t have to; even from a distance, it stinks.

Why? Because there’s not that much ‘win’ to share out. The assets are worth what they’re worth. By all accounts, they’re worth a lot less than the banks thought they were worth originally. In a better world, the bankers would take their losses, admit their mistakes, and blow their brains out…or at least change careers. In fact, we have a suggestion: they should go into government; there they can make as many mistakes as they like and no one will notice.

But this is not a better world; it’s a world that is full of sin and sorrow…one with a fool on every corner…and an ace up every sleeve.

There won’t be three winners from Mr. Geithner’s plan. There will only be one. Whatever the toxic assets are worth, they will be sold for either more or less than that amount. If they are sold for less, investors will realize a profit. The banks – and their government backers – will lose because they will have given up an asset for less than it was really worth. On the other hand, if the toxic assets are sold for more than they are worth, it is investors who will lose.

Investors’ objective is clear: they want to make money. And they won’t invest unless they think they’re getting the assets for less than they are worth. Bankers’ and the government’s motivations are more complex. Mostly, they just want the problem to go away. So, we’ll put our money on the buyers of the toxic assets, not the sellers. Most likely, they will be the only winners. They will buy the more palatable pieces of meat at good prices; they’ll leave the most toxic pieces for the government. Most likely, the government will be an even bigger loser than it is now.

But the government will lose twice. First, it will lose money in the poker game with private investors. Then, it will lose again when its expensive flimflam fails to restart the economy.

The banks will be better off once they’ve cleaned out their cupboard. No doubt about it. They will be ready to lend again, right? But to whom?

The problem the bank bailout is designed to fix is only a piece of the larger problem…and not the essential piece. Banks have had plenty of money to lend – despite their own toxic assets. The Fed has been willing to give them the most elastic line of credit in history. The problem was not that they didn’t have the money to lend, it was that they didn’t have a creditworthy borrower to lend to.

Take the case of mortgage lending. In their vaults, they have billions of dollars’ worth of mortgage-backed assets. They know that those assets are ‘toxic’ because homeowners can’t pay their mortgages and the value of their collateral is going down. So, those mortgage-backed assets are getting marked down to what investors think they might really be worth.

But what bank wants to take on more mortgage debt? Housing prices are still falling. And homeowners are still in trouble. Toxic assets are being marked down in ANTICIPATION of the poor homeowner going broke. He still has to go broke…and get back on his feet…before he’s a good credit risk. And that logic applies to the entire economy. Businesses, homeowners, and investors need to clean out their cupboards too, before the credit cycle can turn up again. And that is a very long process….

More thoughts to follow…but first, let’s check in with our team in Baltimore…

“In the markets, the buying fervor of this bear trap has reached historic proportions,” writes Addison in today’s issue of The 5 Min. Forecast.

“You’re looking at the best 10 days for the Dow since 1938.

“After yesterday’s 6.8% shot, the index is up 18.8% in the last two weeks of trading. If history does in fact rhyme, the Dow might be sitting pretty for a while:

“The last time the Dow rallied over 18% in 10 days, it held on to most of those gains for over a year.”

“In fact, the Dow at 110 in 1938 ended up being a long term level of resistance,” continues Addison. “The market traded flatly for the next four years, briefly dipped below during the worst of WWII, and then staged a sure and steady rally for the next 30 years.

“So all we have to do is fight and win another global war, pay down our debts and ignite another phase of industrial production… then we’ll be fervently buying, too.”

The 5 Min Forecast is an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

Back to Bill, reporting from London…

According to Frank Rich in the International Herald Tribune, President Obama may be having a “Katrina moment.” The storm caused by AIG bonuses just keeps blowing out windows and taking off roofs. Bailouts are stupid and corrupt, of course. But they play a key role; they help divert the public’s attention…like a guy who picks a fight in front of a liquor store, while his friends rob it.

So far, a poll found that Obama himself has avoided the public’s anger. But the poor AIG executives are being hounded, even at home. Employees are “living in fear,” says one press report, as “busloads” of protesters arrive in front of their Connecticut homes.

Then, the TV cameras catch these poor schmucks as they tell their sad stories. “My husband lost his job at the carwash…and now I have to see these crooks living in houses that I could never even begin to dream about.”

Here at The Daily Reckoning, we do not envy the AIG crew. Nor do we have any desire to take their money away. They stole it fair and square, as far as we’re concerned. But the lumpen are much less open minded.

The House of Representatives actually passed a resolution imposing a 90% tax on AIG bonuses. The measure looks clearly unconstitutional to us. It’s a penalty tax…a Bill of Retainer, specifically outlawed by the Constitution. You’re not supposed to be penalized, after the fact, without due process of law. But who cares? Members of Congress never read the Constitution anyway. And it’s probably better that they don’t. If they took it seriously, they’d have to punish themselves.

But while all this wind was passing through the press, the important story was highlighted at Salon.com: “Economists agree: Print. Money. Now.”

What worries us is that this is all too obvious and too predictable. The economists agree, because they see no alternative. The real problem is not a lack of money for the banks to lend – they can borrow all they want from the Fed at near-zero interest. The real problem is too much debt. And printing money will help ease the debt burden. On paper, people will owe as much as ever, but it will be a whole lot easier to pay with the dollar going down by 10% …or 20%…per year.

So, print…money…now…is just what the Fed is doing. Bernanke said so. And he says he’ll keep doing it as long as necessary.

This unsettles the Chinese, of course. They’ve got $1.4 trillion in dollar assets. They told the United States that they expected it to protect the value of the Chinese holdings.

But how can the feds do that? Quantitative easing is an increase in the QUANTITY of money. Generally, an increase in the quantity means a decrease in the QUALITY of it. That’s how it works. And that’s exactly what the feds want.

So, the poor feds! Out of one side of their mouths, they had to reassure their biggest creditor that they’d protect the value of the dollar…while out of the other, they have to reassure the markets that they will create enough inflation to get the economy moving.

They are caught between Scylla…and Charybdis…on the one hand the rock of deflation…on the other, the Chinese. What can they do?

Our guess it that they are aiming to muddle through…with just a little bit of QUALITATIVE decline in the dollar – not enough to cause the Chinese to panic – but enough to get U.S. consumers, investors and businessmen to loosen up.

Good luck to them.

But there’s no such thing as a controlled “run on the dollar.” Once investors start running for cover, it’s every man for himself. And who knows where it will end up? Foreigners are already exiting U.S. agency debt. It wouldn’t be very surprising that they suddenly rush for cover from all U.S. dollar debt.

Therefore, is it not obvious that the dollar will fall? And bonds will be crushed? And gold will rise?

Almost too obvious. Still, we now have taken down our “Crash Alert” flag for the stock market. But we hoist another one: a Crash Alert flag for the dollar.

The horror! The French leftist newspaper, Liberation, convened a forum of intellectuals to discuss how to get the world economy out of its funk. University professors, social workers, journalists – hundreds of them. We’ll wager that not a one of them had a clue about what is going on…and every suggestion they made would make the situation worse.

Meanwhile, we were surprised to see that the leftist English newspaper, the Guardian, actually shares our critique of the bailout efforts. “The rich need a dose of capitalism,” writes Andrew Lilico. “Capitalism punishes those who invest in companies that fail.”

Well…that’s the way it’s supposed to work. But the meddlers, improvers, and chiselers are out in force.

And what’s happening in that heart of financial darkness, Zimbabwe? The Guardian also reports that children are eating rats to survive. For many, only gold is keeping them from starving.

Unfortunately, they don’t have much gold. The Zimbabwe inflation rate is still running around 230 million percent, despite recent reforms (we don’t know what happened after the government took 13 zeros off its currency; maybe it’s putting them back). So, the only reliable money is either foreign currency – or gold. Many people are panning for gold in the few streams where it is present.

Source: Another Day, Another Trillion Dollars