So I say, “I was just wondering, because it looks like the economic slowdown has shown up in the Dow Jones Transportation Average, which has made so little money in shuffling goods hither and thither that a share of all the companies in the index earned a total of 82 cents, which is down from the $170.63 they earned at this time last year.”

He looks at me and asks, “Who cares? And what in the hell is a hither and thither?”

So I grab him by the arm and say, “Well, as a self-employed person yourself, and as any self-employed person can tell you, there have always been times when earnings drop to 82 cents! Sometimes less! Like that time when ‘word of mouth’ got around about me and nobody would engage my professional services because everybody had heard that I was incompetent and pretty stupid, and there were long, long stretches where I did not make even 82 cents because I was, like they said, incompetent and stupid.”

Then he says, “You saying I’m stupid? You looking for trouble?”

Suddenly, being the professional that I am, I could see that we were not going anywhere with this conversation, probably because he was prejudiced against smelly, drunken old men coming up out of the smoky darkness of a low-class strip club and grabbing his arm, yammering about economics.

Thus forewarned, I cleverly I reply, “Do I think you are stupid? Is that what you are asking me? Well, answer me this… Do you think that it is Beyond Freaking Insane (BFI) that the Federal Reserve is creating so much money and credit so that the federal government can borrow and spend the money, plunging us even farther into debt so that the total national debt, now at a terrifying 80% of GDP, will rise to 100% of GDP and then so horribly, terribly much more? Is this, in your trucking opinion, the Totally Wrong Thing (TWT) to do, and that the only Smart Thing To Do (STTD) would be to buy gold, silver and oil as protection against the complete ruination of the buying power of the dollar thanks to such oversupply of dollars and crushing debt?”

I figured he was going to say “Huh?” so when he looks at me quizzically and says “Huh?” I shout, “Exactly! And normally I would not even remark upon it except to seize the opportunity to ridicule the morons who own the stocks in the transportation index because, as I write this, they have bid the index up to a closing price of $3,705.92, making the price-to-earnings ratio soar to an unheard-of, laughable, impossible, ludicrous 4,493! Hahahaha! A P/E of 4,493! Hahaha! The normal range of P/E ratios is from about 4 or 5 up to 21, with the average being about 12 to 14! But the Transports are at 4,493! Hahaha!”

Again, he looked at me and said, “Huh?”

Before I could tell him that after due consideration, yes, I think he is an idiot who should be buying gold, silver and oil, both our attentions were diverted as the beautiful Miss Angela Divine began taking the stage.

As she slithered her hip-grinding way to the pole, gyrating to the beat of pulsating rhythm of the primal music, I noticed that she was wearing a gold G-string bikini! That’s my girl!

Source: A Truckload of Bad Data

Achilles was said to be dipped in the river Styx and made invulnerable. But his mother held him by his heel, leaving that part untouched by the magic waters. Naturally, that is where a poison arrow got him.

The moral of this story is that you have to go all the way. If you want your baby to be invulnerable, put him all the way under the water… even the heels. Or, maybe there’s another point: that there’s always some place where you’re vulnerable.

For the purpose of today’s tale, we’ll take the second possibility. Try as you may, you can never escape all risks.

All over the world, consumer prices are falling. The world has too much capacity… too many factories… and too many workers. Too many, that is, for current demand. The ‘world’s mouth’ – the USA – has gone on a diet. And if the US reduces its intake, that means the rest of the world – especially China – must reduce its output. Otherwise, the whole thing will become unbalanced.

Yesterday’s news tells us that despite press reports of a recovery, the key indicators of real economic growth are still falling. Almost one out of 10 mortgages are now delinquent. And the rate of foreclosures is increasing faster than any time in the last 30 years. Housing prices, meanwhile, fell 16% in the 2 nd quarter, from a year earlier, according to the National Association of Realtors.

Unemployment claims went up last week. The sharp eyes of the Financial Times see the link: “Mounting joblessness fuels US housing crisis,” says its headline.

In the real economy, people are cutting back… with the inevitable results we discuss every day here in the Daily Reckoning. One major consequence of reduced demand is too much supply. The factories built in China to supply products to America during the bubble years now find they have no market.

Currently, overcapacity and oversupply are causing prices to fall. Falling prices mean rising currency values. Each unit of ‘money’ buys more stuff. But there are many competing currencies, and they don’t all rise and fall together. Even in a world of deflation, some currencies will deflate more than others.

The dollar is, of course, the world’s main money. In a sense, the whole world economy is under its heel. But it is a heel that has never been dipped in the river Styx. It is now a heel that waits for an arrow.

PIMCO is the biggest manager of bond funds in the world. It says the greenback is going to lose its status and lose its value.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” says its Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” doom the currency.

Both China and Russia are calling for a new global currency to replace the dollar.

“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” continues the PIMCO report.

Meanwhile, our old friend Jim Rogers says he is moving all his assets out of dollars and buying Chinese yuan. And Warren Buffett warned this week – writing in the New York Times – that “greenback emissions” threaten the whole world econo-system.

But what does it mean? What are the threats to you? What are the opportunities? If you pay your bills and keep score in dollars, what does it matter if the dollar loses value against the yuan? If prices are generally falling, the dollar is actually getting stronger, isn’t it? So what if some other currencies are getting even stronger still?

The trouble with the Achilles heel is that it is connected to the Achilles tendon… which is connected to the leg muscles… which is what keeps the whole thing moving forward. Cut the tendons and the feet go flippety, floppety and you get nowhere.

Yesterday came word that the US deficit for 2009 might come in lower than expected. Instead of borrowing $1.8 trillion as anticipated, the feds might only borrow $1.58 trillion. Well, that still leaves them about $680 billion short – even if every dollar of trade deficit and every dollar of domestic savings is applied to it. But definitely a step in the right direction! This gap must be closed by quantitative easing, that is to say, by printing press money. So, holders of old dollars are bound to wonder how much their savings will be weakened by the addition of so many new ones.

They’re likely to wonder, too, how much those US Treasury notes will be worth after this monetary inflation catches up to them. At some point, they are likely to think twice about buying more of them… and possibly even want to sell the ones they have already. Either way, it could create a nasty financial whirlpool which sucks down the entire world economy. As private investors reject US dollar credits, the Fed would be forced to print up more money to buy them itself. As the Fed buys more, private investors become more fearful that this monetary inflation will lead to consumer price inflation; they may panic and dump all dollar-denominated assets.

But if investors drop the dollar, what do they take up in its place? Oil… maybe. Oil is selling for $72 a barrel, even while the world is in a major downturn. What makes it so expensive, if not the fear that the currency in which it is quoted is more slippery than the black goo itself? And gold? Yesterday, gold lost $3. But is still trading in the mid-$900s – not far from its all-time high. And this at a time when consumer price inflation is going down! In the US non-oil export prices are falling at a 5% rate. If people are buying gold as a hedge against inflation, they must know something we don’t. Consumer prices are falling…actual CPI rates are negative in many countries already. Take out the effect of speculation on oil and commodities, and deflation is probably a fact of life almost everywhere. Gold buyers are not hedging against an increase in the price of bread, in other words; they’re hedging against a poison arrow directed at the dollar itself.

*** It is a real Ouzilly summer.

We feared we would be alone this summer. Our children almost all grown, we imagined ourselves sitting on the veranda and talking just to each other, like a pair of old shoes left in the closet. No family was coming from the US to visit. Our daughters were pursuing their careers. Our sons had plans of their own.

But then a Swiss friend came. And then his mother came. And then the boys showed up. And then an Irish journalist. And then and Italian egg producer. And then an Argentine singer. And then, a girl from across the street. And then a girl from the village. And then… the house was full…

In the kitchen yesterday, three women busied themselves… making jam… polishing the old stove… sharing gossip and jokes. It was like a scene from an earlier era… when people had regular kitchen staff. Our ‘staff’ are all volunteers and part-timers. Still, the ambiance was rich and convivial.

“Do you want a cup of coffee?” one asked.

“Yes… but I’ll make it….”

“No… I’ll make it… you shouldn’t make it. You’re the head of the house. You’re the one who keeps the place going…”

“Oh… yes… well… that’s a nice way to look at it…”

“Yes, without you, we’d have to go to the beach for the summer… and we wouldn’t have the pleasure of working in this hot kitchen. I’m just joking. It’s fun working in the kitchen. This is where the action is. Did you know that? It was always the kitchen that was the place to be… in these big old houses. That was where the maids and gardeners and all the staff hung out… in front of the fire. It was often the only warm room in the house. Everyone wanted to be in the kitchen. And it was where the food was.

“And people in the kitchen know what is going on… The maids come down and report on the state of the bedrooms… and who is sleeping with whom. Yes… that’s the way it was… at least in France. And they hear who is arguing with whom… and about what. And the staff keep their eyes and ears open… and then they come into the kitchen and talk. There were never any secrets in a place like this… the people in the kitchen knew everything…”

Source: The Achilles Heel of the World Economy

Here is Warren Buffett’s view:

“Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

“They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

“The United States economy is now out of the emergency room and appears to be on a slow path to recovery.”

This is probably the view shared by most economists and most investors. It is not our view. From where we sit there is no recovery underway…and there never will be one. You can recover from a hangover. You can recover from a nasty divorce. You can even recover from an earthquake. But once a depression begins, you can only endure it. Get on with it. Get it over. And then, you can begin rebuilding again. You will never recover the economy you had before the crisis. You must find a new economic model.

A headline from yesterday: “Reluctant shoppers hold back recovery.”

That’s one way to put it. Shoppers don’t have any money. They need to cut back. Most likely, they will cut back until their savings rates reach 10% of disposable income. That will take $1 trillion out of consumer spending. The economy cannot possibly recover under those conditions; it can’t return to its same old, consumer-led, credit-fuelled self. Instead, it must go through a period of transition – in which output is depressed – until it finds a new personality, better suited to the new economic circumstances.

But Buffett is not worried about the depression. He’s worried about how the recovery is financed:

“.. enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.”

Buffett does the maths. This year, the US deficit will total $1.8 trillion. Since 1920, the largest peacetime deficit was 6% of GDP. This is 13% of GDP. The magnitude of it alone should be cause for alarm. But there’s more. Where does this money come from? Even if you could direct 100% of the net US trade deficit (about $400 billion, the money that ends up in foreigners’ hands as a result of American spending) and 100% of American’s savings (estimated to be about $500 billion), you’d still be $900 billion short.

Desperate borrowers should expect to pay high rates of interest. A borrower who doesn’t need the money can shop for the best rates and hold out for a good deal. But when a person needs to borrow, he takes what the market gives him.

Yet, one of the most curious things about the financial world circa 2009 is the yield on the 10-year Treasury note. It has fallen to under 3.5%. Despite record borrowing by the feds, lenders content themselves with the lowest yields in nearly half a century. Go figure.

The market seems to be anticipating a depression. Why else would bond yields be so low? If the economy sours…and the stock market sinks…the safe yields on Treasury bonds will seem like a good alternative. But Buffett believes the Treasury yields are not as safe as they appear. That other $900 billion has to come from somewhere. And the feds can’t allow interest rates to rise significantly; that would undermine all their stimulus efforts. High real interest rates depress economic activity. So, what can the feds do?

“ Washington’s printing presses will need to work overtime,” says Buffett prophetically.

Of the two ways of financing the deficit, one is a flimflam; the other is robbery. In the great credit expansion consumers borrowed so they could buy things such as automobiles. Now, the feds borrow and bribe the voters with money to buy automobiles. No matter who does it, borrowing for consumption is merely taking from the future. Then, when the future comes…the account has to be settled. Result: no net gain. What was consumed in one year is not consumed in the next.

Of course, the feds don’t spend money the same way consumers did. Consumers wasted their money on frou-frou and watchamacallits of their own choosing. The government wastes money on different things – like turtle crossings and billion-dollar bailouts.

Not that we’re complaining about government spending. We’re just pointing out that it’s not the same as private spending. What makes goods good is that people choose them and buy them with their own money. They get what they’ve got coming. But the feds are spending other peoples’ money. If they get any goods at all it is practically an accident.

But what we’re talking about this morning is the dollar. According to Buffett, the dollar is in danger. He’s worried about the larceny, not the flim-flam. Printing up additional dollars robs savers. Each new dollar created to buy US debt makes each one already in existence – say, in a vault in the Bank of China – worth less than it was before. If that isn’t true, the whole body of economic thinking from Adam Smith to Irving Fisher is nothing but a fantasy. And the only way to protect the value of the dollars held by savers, theoretically, is to withdraw the stimulus money before inflation sends prices soaring.

Buffett is an optimistic fellow. He believes that responsible authorities will turn off their dollar-printing machines in order to protect the greenback. Here at the Daily Reckoning, we’re not so sure.

First, the depression is likely to be worse than people think. This will mask the effects of dollar printing. Plus, it will make the need for more dollars – more federal spending, more US debt – seem more urgent than ever. Instead of pulling the plug, they’ll turn up the speed.

Second, the feds are not really interested in the health of the real economy anyway. This is an insight which is obvious, but one that only came to us recently. When the feds put in place absurd policies to delay and restrain the inevitable correction, they are making things worse, generally, for everyone. But the politicians are responding to their constituents’ demands. One campaign donor wants to keep his business alive. Another wants to keep his job. Still another promises the feds high paying jobs on Wall Street, after their term in Washington is over. Millions of others — more than enough to turn an election – want free pills and mortgage subsidies and so forth. When the feds try to bailout the economy, they are only doing their jobs! They’re not going to stop doing their jobs – especially in a depression – just to protect foreign dollar-holders.

Source: Flim-Flam, Robbery and the Economics of Depression

Could be. We’re not betting one way or the other. But we’re pretty sure this rally is going to end… and end badly… sooner or later. So far, the rally surpassed the rally in ’29 by a few weeks… but has not quite reached its magnitude. It will need another few hundred points to reach the ’30 level.

But when the rally is over… then what?

Despite the fact that a majority (!) of economists polled by the Wall Street Journal say the recession is already over, there is no durable recovery.

Nouriel Roubini explains why:

“Data from the US—rising unemployment, falling household consumption, still declining industrial production and a weak housing market—suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.

“Moreover, for a number of reasons, growth in the advanced economies is likely to remain anaemic and well below trend for at least a couple of years.

“The first reason is likely to create a long-term drag on growth: Households need to deleverage and save more, which will constrain consumption for years.

“Second, the financial system— both banks and non-bank institutions—is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.

“Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anaemic and deflationary pressures still persist. As a result, businesses are not likely to increase capital spending.

“Fourth, the releveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.”

Roubini thinks the US will climb out of recession towards the end of the year… but then, it could fall back into a ‘double-dip’ recession. Maybe he will be right. Maybe this downturn will resemble Japan’s multiple recessions over the last two decades. Or maybe it will be a single, deeper and longer lasting slump – like the one in the early ‘30s. We don’t know. Either way, it should be thought of as a depression, not a recession. Because it is fundamentally different. And the difference is:

Recovery is impossible.

If the markets were to recover, it means they need to go back to the way they were. That, dear reader, ain’t gonna happen. Because it can’t happen. The economy can’t go back to what it was. In the 2005-2006 period, it was in the throes of a credit cycle blowout… where it took more than $5 of new credit to produce one stinkin’ extra dollar of output.

Consumers had to borrow $100, in other words, in order for the GDP to go up $20. It was a period of madness that couldn’t possibly be sustained… and now, can’t possibly be revived. Who’s going to invest in another condo development in Florida now? Who’s going to buy derivative debt at 2006 prices? Who’s going to build another factory in China to produce more things for American consumers who can’t pay for them?

Well, ha ha… that’s the funny thing; the Chinese ARE building more factories.

But we’ll get back to that later.

Comes word this morning that Florida has lost population, for the first time since 1946! People are leaving the sunshine state because the big boom in suburban sand is over. A large part of the Florida economy was based on building houses for people coming down from the north. Now those people are going home and trying to pay off their debt. The point is, after a bubble… like after adultery… things never go back to where they were before. You can pretend that they are the same. You can act like they are the same. You can try to make them the same. But they never are.

A recession is merely a sprained ankle or a head cold. You can recover. But a depression is fatal. There is no going back. There is no recovery.

Trying to ‘recover’ from a depression is a futile fight with the future. Governments try to restore the old economy – as it was. They prop up the old industries. They bail out the failed executives and speculators. They pass out money to people, encouraging them to make more of the same mistakes that got them into trouble in the first place.

But there is no going back. It’s a depression. The model has to change. The future… whatever it is… has to express itself.

The US budget deficit hit a record $180 billion last month. July’s deficit was nearly $30 billion more than total tax receipts for the month. In July, the feds only took in $151 billion in taxes…giving it the worst margin in history. For every dollar of revenue, the federal government spent $2.15.

Not a very good business model. But the feds seem determined to stick with it – they’re going to make it up on volume. Deficits are expected to exceed $1 trillion every year for the next 8 years. And that assumes the economy ‘recovers.’ If it doesn’t recover, the deficits will be much worse… with falling tax revenues and the need for even more stimulus.

The feds are running into the brick wall of the future. They’ve made promises – mainly to older voters – that now have to be fulfilled. And the number of older voters is increasing… as the Baby Boomer generation enters its retirement years. Social Security and health care promises alone will add trillions to federal deficits. By one estimate, US debt could rise to 300% of GDP by the middle of the century.

Of course, this poses a bit of a problem. US GDP is about $14 trillion. Three times that amount would be $42 trillion. Who’s got that kind of money to lend to the US government? No one. First, because the world doesn’t have that much in savings.

Second, because even if they did, they are unlikely to want to lend it to such a huge debtor. Of course, we’re always surprised by what people are willing to do with their money – and anything is possible.

But more than likely the US will be forced to trim its promises… or inflate them away.

*** As dear readers know, we have become suspicious of inflation. Not that we don’t expect it; in fact, we think we’ll see it in its souped-up hyper version sometime in our lives. What we’re suspicious of is the easy assumption that the feds can create inflation at will… and control it. They can’t. They aren’t that good. Even at inflation they are hapless and incompetent. And their hands aren’t completely free.

First, they have to answer to the Chinese bond vigilantes. The Chinese are watching. If it looks like the feds are increasing the inflation rate – thereby reducing the value of Chinese savings – they could send the US government and the US economy into chaos simply by selling their stash of Treasury bonds.

Of course, the Chinese don’t want to do that – because it would mean hundreds of billions in losses. But push them far enough… make them afraid enough… or cause them to get mad enough… and they could strap on their shootin’ irons.

Second, there are also the ineluctable results of a major credit contraction… and a gross oversupply of capacity. Both are pushing down prices and could do so for many, many years. They can be overcome by aggressive use of the printing press. Argentina and Zimbabwe proved that. But neither Argentina nor Zimbabwe depended on credit from the Chinese. Inflation may be a monetary phenomenon, but hyper inflation is a political phenomenon… the feds only resort to it when they have no choice. We’ll get to that point; but right now, it is still far away.

*** Shutters should be added to our list of the world’s greatest inventions. What’s on our list? Crispy duck. Berets. The semi-colon. And now shutters.

It has been hot here in France. The sun beats down; the temperature has risen to the high ‘80s. We have no air conditioning. But we have shutters. We close the shutters, partially, in the morning to block out the sun. Then, in the evening, when it cools off, we open them up and enjoy the cool air. In the winter, you close shutters at night to conserve heat. In the summer, you use them to regulate heat and light. And always, they protect windows, curtains and fabrics.

We still remember the louvred shutters on our grandparents’ house in Maryland. With the shutters closed, rooms were mysteriously dark… even in the middle of the day. When they were opened, it was like the opening of the cathedral doors on Easter Sunday… the light came in and the room was transformed. And in the summer, when it rained, we left the shutters closed and the windows opened. The fresh, moist air was a delight.

And now, with the coming of the credit contraction, real shutters are ready for a comeback.

Source: Recovery is Impossible

Friday, the Dow dropped 76 points. It’s probably going down soon… but maybe not yet. The Dow would have to rise to about 10,350 to equal the ’29 bounce. And heck, it’s not September yet. September is traditionally the worst month for investors… followed by October, November, December, January, February, March, April, May, June, July and August.

But what’s this? The morning news: Chinese stocks suffered their worst day since November – with the Shanghai index down 6%.

The rally is probably not over; still we wouldn’t want to be long when the market opens in New York this morning.

Many analysts regard everything beyond the price data as noise. You never know whose ideas or whose explanation or whose predictions are correct, they say. All you really know for sure is the price.

According to the Efficient Market Hypothesis, the price has in it all the information, theories and delusions of all the players in the world. By this reasoning, the price information is ‘perfect.’ No one can know more about what a stock should sell for.

Many analysts think they can watch the patterns of price movements and find some clues at to what they will do next. They see ‘heads and shoulders,’ ascending triangles and descending tops… and think they mean something. For us, here at the Daily Reckoning, price movements tell us something, but only in their extreme form… and only because we have an intuition about the way nature works.

When we see a price that has suddenly shot up, for example, we expect that it will suddenly shoot down sometime in the future. When we see a series of price increases over a long period of time, on the other hand, we expect to see a series of price declines over a long period of time, too. If we look closely, we find that the price at the end of the long incline is exceptionally high… and the price at the end of the long decline is exceptionally low. We believe – intuitively and logically – that exceptional things don’t remain exceptional for very long. That’s why they are exceptional. Broadly, when prices are exceptionally high they will fall – to the point where they are exceptionally low, and vice versa.

Beyond that, we draw little nourishment from the price numbers. They don’t tell us why things are happening. And while we recognize that it is impossible ever to really know why anything happens (the number of butterflies possibly flapping their wings in China is beyond our comprehension), we are nevertheless heirs to the old story-telling tradition of our deathward marching tribe. We want to know why things happen the way they do… we want heroes and villains… we want winners and losers… we want a plausible story that explains what is going on.

We have maintained an episodic correspondence with Jack Lessinger for nearly 20 years. Jack is a “socio economist.” That is, he’s looking at the big picture of economic trends as they fit into the wider world of social life.

What Jack sees – in his new book, “The Great Prosperity of 2020,” is a series of booms and busts that correspond to the way people think about themselves… what they want… and how they want to live. This is what defines American capitalism, he believes. And then he connects these phases of American capitalism to development patterns and real estate trends. Since about the beginning of the 19 th century, he sees three major forms of capitalism – the small-scale frontier capitalism which peaked out about the mid-1800s… followed by large-scale industrial development which reached its zenith, according to Jack, at the beginning of the 20 th century… followed by the consumer society that we grew up with.

Each major trend rises and falls. Prices rise and fall with them. The first wave of development raised prices of frontier land, first in the Mississippi River basin… and then out on the prairies. In real terms, farmland in some part of the mid-west hit peaks in the speculative fever of the 1880s that have never been seen since. Then, the development of the next phase pushed up values in major industrial centers – particularly in Chicago – whose growth far surpassed the older cities such as New York and Philadelphia. There too, prices in inner city Rust Belt metropolises have never been higher. Then, came the Material Age… when the consumer was king. Every king wanted his own suburban castle… and his carriage, with horse power provided by Chevrolet or Ford.

The bigger picture was that energy was cheap and US manufacturing was leading the world in the post-WWII era. Cheap energy seemed to make suburban life a sensible, affordable alternative to the city. In the suburbs you had the advantages of being close to a major city – with access to jobs, entertainment and education. You also had the advantages of country living – backyard swimming pools, gardens, lawns, fresh air, and space.

Movement to suburbia began in the ‘20s. By then, the first suburbs were being built north of Baltimore… connected to the downtown area by tramways and paved roads. The richest families began by buying summer places on the high ground of Guilford and Mount Washington. Then, as transportation improved… and the cities became more and more crowded with immigrants and factory workers… the rich lived year-round in their leafy refuges.

As the trend developed, the suburbs spread… and the middle classes joined the exodus. By the ‘80s, practically all that was left in the central cities were drug addicts and welfare recipients.

Meanwhile, in the early phase of the consumer trend, wages for ordinary working stiffs were going up rapidly. A guy could graduate from high school, get a decent job, and expect to earn more and more money. This gave him the wherewithal to buy more and more stuff. So buying stuff became a national past-time. “He who dies with the most stuff wins,” was the basic rule of the game.

The first challenges to stuff culture came early, says Jack. The hippies and counter-culture movements of the ‘60s were basically a reaction to the excesses of consumerism and suburbanism. Then, prodded by the oil crisis, there was a counter-trend movement towards self-sufficiency and independence in the ‘70s. Those early attacks were beaten back by credit and bubble markets. It seemed crazy not to enjoy the benefits of stuff culture when it was at its apogee in the late 20 th century.

But now the consumer economy has played itself out, says Jack. It is spent, worn out and passé. Here at the Daily Reckoning we described the Bubble Epoque – the final, blow-out phase of the trend – day by day, during the 2001-2007 period. Now, we are describing the bust-up. The consumers are broke. The suburbs are démodé. The lust for stuff has given way to a lust for security, stability, and simplicity.

The shift from one major trend to another one is typically marked by depressions. The transition period requires retooling, re-pricing and often, relocating. The suburbs are unlikely to be a growth area in the next socio-economic trend. Instead, it is likely that suburban property hit its all-time high in 2005-2006. We will never see those prices again – ever. People will move. They will move to new areas.

The “season of depression,” to use Jack’s term, usually lasts 20 – 30 years. We are in one now. He puts the end of the depression – and the beginning of a new period of prosperity – at 2020.

*** “You couldn’t get away with that in the US. I was amazed. It was like a Las Vegas show… but a wild Las Vegas show…”

The boys were excited Friday night. They found a nightclub that would send a bus to pick them up at midnight… and bring them back at 5AM. The club was about 20 miles away… in the middle of rural France. It seemed improbable… but there it was… advertising a ‘Dental Floss’ night. (Referring to those micro-size underpants worn by young women…)

And so they made their arrangements by telephone. And at midnight… the bus came to pick up three of our boys… plus a French friend and an Irish writer who is spending a few days with us. Your editor went to bed….

“I can’t believe they wanted to do that,” said Elizabeth. “Imagine being trapped in a nightclub for 5 hours… and what could you do… the loud music… the cheap alcohol… it just sounds like torture.”

It sounded like torture to us. But the boys seemed to enjoy it. We awoke to sounds of laughing and talking. It was 5:30AM. The boys were back. From the sounds coming through our bedroom window, it sounded as though they had had a ball. We had to wait until noon on Saturday, after they finally woke up, for a report:

“It was amazing. They had dancing go-go girls who were practically naked. They did some dance numbers… and then they visited the tables. They were very friendly.

“It was run very professionally… the bouncers did their jobs well – big black guys. Someone spent a lot of money building the club.”

“What did you do?”

“We danced. We drank. We joked. The girls seemed especially interested in Edward (15). We had a good time….”

“Didn’t anyone ask for Edward’s ID?”

“No… no one seemed to care how old he was. Edward really enjoyed himself. Of course, his eyes almost popped out of his head. And he’s probably ruined for normal life… he’ll spend the rest of his life trying to recapture that excitement of his first nightclub experience…”

Source: Working Out What’s Behind the Price

At least stocks are doing well. The Dow rose another 36 points yesterday. In terms of time, it’s already beat the bounce of ’30… it’s in its 6 th month. In terms of stock prices, it’s still a laggard, however. US stocks are up about 45% from their low of 6,547 on the Dow. By that measure, the current reading of 9,398 falls a little short of the 50% increase registered 5 months after the ’29 low.

Yesterday’s news was a big disappointment for mainstream economists. It’s ‘back to the drawing board,’ says the Wall Street Journal.

The dumbbells were already celebrating the end of the recession. Just yesterday, we reported on a survey of 53 of them. They figured the stimulus was working and the recession was coming to an end.

Even the Fed seemed to think so. The Washington Post headline: “Fed views recession as near end.”

But here at the Daily Reckoning summer headquarters we were doing some more painting yesterday…

… which means, we were doing more reckoning…

We don’t know when the recession will end… but we’re dead sure that those 53 economists interviewed by Bloomberg… and those at the Fed too… don’t know either. Few of them seem to have any idea what is really going on.

And now comes news that the economy is not recovering as planned.

“Even with Cash for Clunkers retail sales fall,” reports the New York Times. Retail sales were expected to go up in July. Instead, they went down.

Bummer.

Economists also expected unemployment numbers to go down. Instead, they went up in July… and last week, 558,000 people filed for unemployment benefits – up from the week before. That brings the total to 6.7 million jobs lost since the downturn began in December ’07.

Oh… and what’s this? Foreclosures hit another record high in July… making the third new record in the last 5 months.

This is a “recovery that only a statistician could love,” says another Washington Post headline.

You can prove anything if you torture the numbers enough. But if you need a job… or need to sell your house… or refinance your mortgage – good luck to you!

And here… in the spirit of summer… of warmth and camaraderie… we would like to offer the above-mentioned economists a little help: Pssst… it ain’t a recession; it’s a depression.

Since 1945, the US economy – and much of the rest of the world economy – has been carried on the backs of American consumers. First, they spent money they earned during the war years. Then, they spent money they earned in the big boom of the ‘50s and ‘60s. And then they spent money they hadn’t earned at all. They borrowed from future earnings… increasing total US debt from just 120% of GDP in the ‘70s… to 370% of GDP in 2007.

In the last 15 years of that period, especially, each time the consumer showed a reluctance to continue spending, the feds rushed to give him more credit. And during the final 5 years – the Bubble Epoque – debt doubled.

Now, the consumer has dug in his heels. He’s not going a step further until he unloads his excess baggage of debt.

Once again, the feds are trying to stimulate him. The Fed’s key interest rate is practically at zero. The feds are pumping money into the economy as fast as they can. And they’ll give a fellow up to $4,500 if he’ll agree to kill his old car. The Cash for Clunkers programs seem cruel to us auto enthusiasts, but they have been popular, all over the world (more below.) But what good do they do?

Even with the stimulus spending… and the stimulating low interest rates… he’s still not willing to add debt. Of course, this is just what happened in Japan. The public sector spent; the private sector saved. Net result: an on-again, off-again recession that has lasted almost 20 years.

That’s a depression. It’s a point where the model no longer works. Look, how could the US economy recover? It’s a consumer-led economy, so the consumer would have to spend more money. But he’s not earning more money. He has no prospects of earning more – not with 10% unemployment and a punky economy. So, the only way he can spend more is by borrowing. Ergo, the only way the consumer economy can grow is by adding more consumer debt. Is that possible? Could the ratio of debt to GDP go to 400%… 500%… to the moon?

Well, we’ve weren’t born yesterday. We’ve been around long enough to know that almost anything is possible.

This morning’s news tells us that the federal deficit through July comes to $1.27 trillion. We didn’t think that was possible. And despite this inferno of new debt… the 10 year Treasury bond yields barely 3.6%. We never thought that was possible either.

So, anything could happen. But generally, government stimulus only works when it is not needed. That is, it only works when it goes in the same direction as the underlying trend… not against it. Just like you can make a sailboat go faster by unfurling the sails, you can speed up an expansion by offering more and easier credit.

But now, the underlying trend has reversed. It’s no longer a credit expansion; it’s a credit contraction. The consumer has had his fill of debt. He’s cutting back on his spending and paying off debt. That’s what the July figures show. That’s been the history of entire downturn. That’s why it’s a depression, not a recession. It’s a major change of direction that will take years to accomplish. Now, stimulus is not only useless – since it is against the major trend – its counterproductive. It delays and contradicts the adjustments that need to be made.

But wait. We know what you’re thinking – that the Cash for Clunkers program is a success, because it encourages consumers to buy. See. Sometimes central planning really works, right? Yes, and if you look no further than the auto sales figures for proof, who can argue? Alas, a centrally planned economy is a perverse thing… where every positive statistic has the crumpled up bodies of tortured numbers buried beneath it. Take away the ‘free money’ from the feds and there’s nothing left. No real increase in demand… just a temporary demand based on a temporary and unsustainable stimulus.

Encouraging people to buy too much was what caused the problem in the first place. Encouraging them to buy more now is not a solution, it’s just a continuation of the same flawed policy of stimulating consumer demand… a policy that has been in place for decades.

But now the wind is blowing in the other direction. The government may not like it, but they can’t stop it.

***

Vandal Economics

“In keeping with the requirement that old engines be
destroyed, mechanics across the country poured sodium
silicate into crankcases and revved engines, causing mass
car death. “It just don’t make sense,” said a
used-car-parts salesman in Dayton, Ohio. In Glenview,
Illinois, mechanics watched a blue 1994 Chevy Lumina van
wheeze and choke for five minutes before stopping. “That’s
a good American GM product,” said service manager Mark
Rolla, “that won’t die.”

Harpers Weekly

Let’s open up the hood and take a better look. Does ‘Cash for Clunkers’ really work, we ask? In answer, we guffaw. Then, we invite dead economists to guffaw with us.

Richard von Stigl, among others, pointed out in 1923 that there is a big gap between real economics and the vulgar economics that drives policy decisions. On the one hand, serious observers study what happens in a pure, natural economy and draw their truths from its crystal streams. On the other, the meddlers distort the economic world so much that the observations of the old economists hardly matter. Downstream from the meddlers’ camp the water is not even fit to drink.

In theory as well as in fact, the planners never know what they are doing:

“The… knowledge of the circumstances of which we must make use never exists in concentrated or integrated form,” began Friedrich Hayek in 1945, “but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

A “good” is a good only insofar as it is good to the person who wants it. The public servant – as able and self-less as he may be – has to guess. History and theory tell us what happens; he usually guesses wrong. Only the individual knows what he wants and how to get it. He compares one good against others – using prices to guide him to where he gets the most good for his money. But when the government steps in with its subsidies, it effectively contaminates the stream of price information. Now, the consumer, with no clean signal to guide him, makes mistakes. He may be lured to buy a new car. The central planners may be pleased. They see the effect they desired – more auto sales. But what don’t they see? We invite Frederic Bastiat for an opinion (1850):

“Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse.”

But who listens to Bastiat or Hayek? Ten countries have taken up ‘cash for clunkers’ programs. In Britain the government puts up 2000 pounds to grease the deal… with a total of 300 million earmarked for the program. In America, the ‘cash for clunkers’ program was extended last week, giving buyers a bonus of $3,500 or $4,500 when they turn in an old vehicle. In France, buyers get 1,000 euros toward the purchase of a new car.

Everywhere, the program is hailed as a success. It is widely thought not only to boost auto sales, but to help revive the economy, reduce pollution, cut oil imports and even lower highway deaths. We haven’t heard that buying a new car contributes to weight loss but we haven’t seen the TV news. Even ‘free market capitalists’ such as Larry Kudlow say they like it:

“The cash-for-clunkers rebate program is working. … And the price tag of the program is a mere $2 billion compared with the trillions of dollars Washington has been wasting. So, for once in our lives, Washington spending is giving us a good bang for the buck.”

Bastiat knew better. He described a scene where a boy had broken a shop window. The store’s owner was annoyed, until a foolish economist pointed out that the broken window was a blessing in disguise. It gave work to the glaziers and glass makers. The glaziers then could buy other things… and thus did the whole economy enjoy a bounty from this single act of vandalism.

But wait; Bastiat wanted to know: if you could improve the lot of mankind by breaking windows, why not smash every window in Paris? And if you could improve the lot of mankind circa 2009 by crushing cars, why crush them all? And knock down London and New York too. Think of the boom that would accompany the rebuilding!

Obviously, it doesn’t work that way. Replacing broken windows, or crushed cars, takes resources away from some other uses. This unseen effect is actually greater than the seen effect – the improved market for new cars. Lured by phony price information, buyers send phony signals to the rest of the economy. The automakers produce more cars than they need. Steel, which might have gone to refrigerators is used for car doors. Oil, which might have been used to generate electricity, is used to stamp out fenders. Savings, that might have been invested in new industries, go to prop up an old one.

Kudlow allows himself a peek at the unseen consequences: “… yes, it’s quite possible that government rebates today will steal car sales from next year. But let’s cross that bridge next year… ” Then, he even wonders, briefly, at the obvious foolishness of it… almost as though he were a serious thinker: ‘Well, why not just spend another $100 billion and give consumers checks for everything?’ Or, ‘Why not spend another trillion?’ Well, I don’t want to go there… ”

No one wants to go there. The old economists shake their heads: ‘it’s a fraud,’ they say. The rest of them don’t give a damn.

Source: An Unsustainable Stimulus

The Dow was up 120 points yesterday. Now, we’re beating the bounce of 1930. The post-crash bounce in 1930 lasted 5 months. Ours began on March 9 th… so it is now in its sixth month.

And like 1930, people are coming to believe that recession is almost over… and happy times are here again.

Heck, we’re sure the trouble is behind us now; 53 economists said so!

Aug. 12 (Bloomberg) — Recovery from the worst recession since the 1930s has begun as President Barack Obama’s fiscal stimulus — derided as insufficient and budget-busting months ago — takes effect, a survey of economists indicated.

“The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the monthly Bloomberg News survey. Analysts lifted their estimate for the third quarter by 1.2 percentage points compared with July, the biggest such boost in surveys dating from May 2003.

“We’ve averted the worst, and there are clear signs the stimulus is working,” said Kenneth Goldstein, an economist at the Conference Board in New York.

“A federal program to replace older vehicles with more fuel-efficient ones helped boost sales of cars and light trucks last month to the highest level since September, according to industry figures. Automakers, operating with lean inventories, will resume output to meet the jump in demand.

“Cash-for-clunkers was the icing on the cake,” said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. “It’s well-timed stimulus syncing with cyclical forces leading to a ramping up of production.”

Yes, now the economy is firing on all cylinders… or just about. Yep. No doubt about it. Still, there are some nagging doubts. The latest figures show foreclosures still increasing – up 7% in July from a year before. And house prices are still going down. And unemployment is still going up. And consumer prices are falling… indicating a Japan-like deflation. And business profits are falling. And consumers are cutting back. But except for that – housing, jobs, sales, profits and deflation – everything is working out beautifully.

Now that we mention it, all the indicators of real economic activity are down.

So, the feds aren’t taking any chances. Yesterday came news that the Fed would continue buying bonds at least through October. And they are not likely to raise rates either. The banks can borrow at practically zero interest… and use the money to buy Treasury bonds. The 10-year yields about 3.7%. In effect, they’re lending the money back to the people they got it from… and earning 3.7% for their trouble.

But, take away the stimulus spending… and the stimulating low interest rates… and what have you got? An economy entering a depression.

Oh, there’s the rub, isn’t it? If the feds hand out money so people can buy automobiles, people buy automobiles. If they don’t give out the money, people don’t buy automobiles. If they buy automobiles, of course, it looks like the economy is recovering. But take away the giveaways, and the recovery disappears.

Solution: keep giving away money!

Hold on… something wrong here. If you could generate economic prosperity by giving people money so they could buy things… why not give them money to buy everything? Why just autos? Why not give them money to buy financial advisory services? Ah… now we’re talking!

But let’s keep this serious… well, as serious as we can be when we talk about programs designed by knuckleheads.

So, the feds are encouraging people to buy autos. Set aside the fact that buying too many autos and other things is what got them into trouble…

… if giving people money so they could buy things actually made people prosperous, welfare recipients would be the richest people on the planet. Obviously, it doesn’t work that way. What makes people rich is the ability to earn money… not their ability to get handouts. And remember, too, the feds don’t really have any money to hand out.

They can only get money by taking it from its rightful owners – either in taxation or loans. Or, they can print it up themselves. In any case, the money adds nothing real or extra to the economy. It merely distorts the economy… twists it… misleads it… and makes it a bigger mess than it was already.

*** Here’s another reason housing prices are going down: housing priorities are changing. Baby Boomers are entering a phase in their lives when people typically escape from urban/suburban centers in favour of small towns and rural areas. If this pattern continues, it will mean a big shift of population, say the experts.

Remember, it’s what you do, who you do it with, and where you do it that counts. By the time a person reaches middle age, the first question is usually settled… the second is often in doubt… and the third is actively being considered. That is, few people begin a new career after the age of 50… but it seems like more and more decide they might want to try life with a new partner.

“I can’t imagine it,” said Elizabeth. “It just seems like too big an adjustment. It took me a quarter century to get used to you. I don’t know if I could get used to someone else…

“On the other hand, it might be fun to try… ”

Well, for whatever reason, it seems like people are changing partners – even at a rather advanced stage in life. And as for the where to live – it’s a question on practically every baby boomer’s mind.

“I just got tired of living in the city,” said a man who spent his entire career in Paris. “Just too much hassle. I’d rather visit occasionally than live there.”

Our friend has moved to the country not far from here. He has set up a small woodworking shop in a garage and happily spends his time making chairs and tables. When his house is full of them, he’ll probably have to give them to friends and relatives.

“It’s much nicer living out here than in the city,” says another friend. “And much cheaper. You can buy a whole house for half the cost of an apartment in town… and then you don’t have to pay for parking… you can raise chickens and vegetables… and you can even heat with wood, if you want. You don’t really have to spend much money at all.

“And the quality of life is higher. Small towns are more friendly. They’re prettier… usually. They’re easier. So they’re perfect for people who are retired.

“And here in France, there’s another phenomenon. When people retire, they want to go back to where they came from. Usually, they have a house they inherited from parents or grandparents. So, they leave the apartment in Paris to their children, who are just building their careers. And they retire to the country. It’s not a bad way to live.”

*** We are enjoying our month in the country. Not exactly a vacation… but close. We work in the office from 8AM until lunchtime at about 2PM. Then, we turn our attention to other things. In the summer, that means painting. We’re repainting the billiard room, because Elizabeth decided that the curtains needed to be changed. And then, we’re repainting a farmhouse, top to bottom, before renting it out.

Painting is a fairly relaxing occupation. You can do it while thinking about other things. Rolling the walls or cutting in the corners, some men might think of going hunting… or playing golf. We try to figure out what is going on in the world economy. For these are remarkable times we live in. We see what is happening… pretty much what we expected. But we’re not sure where it leads.

Readers may have noticed a shift in our thinking recently. Well, you can blame latex. As we were painting in the billiard room we began to see that governments are more incompetent than even we had realized. They can’t create inflation on demand. A few months ago, we were preparing for inflation… even hyperinflation. Now… we’re not so sure. The depression and the Chinese vigilantes may hold off inflation… even for years.

Does this mean you should sell your gold? Well… we wouldn’t go that far. Even in the Great Depression gold and gold mining stocks rose in price. And the one and only sure thing is that the world’s monetary system is dangerously unstable. We’d hold gold until it settles down. Just don’t count on getting rich from it.

Source: An Economy Entering a Depression

Well… when we go figure, we figure there’s something fishy about it. In fact, we figure it’s a fraud.

In America, the bear market bounce took a little jig downwards yesterday. Stocks – measured by the Dow – fell 96 points. Oil fell below $70. The dollar and gold remained almost unchanged.

But China’s revved up so hot she seems likely to throw a rod. We’ve been telling our Dear Readers to stand clear.

At least, that’s the case with the Chinese stock market. It’s a bubble. And it’s getting ready to pop.

As for the economy… we figure it’s a fraud…

Chinese officials have a funny way of counting. When products are shipped from the factory, for example, they are counted as ‘sales’ even though no one may actually buy them.

There are some other ways of keeping score that tend to tilt the game in China’s favour – at least, on paper. When you add up all the scores – it shows China a big winner. But by the end of the day, it isn’t at all clear that China’s economy is growing at such a breakneck speed. In fact, it isn’t clear that China is really growing at all – not in a genuine and helpful way.

And here… perhaps we should pause. We are about to tell you that China is a scam. It’s not really becoming more prosperous. But before we do, we have to explain what prosperity really is.

Do you remember the Bubble Years? Of course you do. They just ended scarcely 24 months ago. Well, during those years we were told that we were getting richer. Two forms of evidence were presented – one statistical… the other observational. The numbers told us that GDP was growing. Since economists figure GDP grow is the same as prosperity… they thought Americans were getting richer.

There was also the evidence available to anyone with eyes. You could look at any driveway; there you would find two or three cars – new cars… big cars. And behind them was a brand new McMansion… Bubble Era vintage…

Yet, both forms of evidence were misleading. Americans were spending. The spending showed up as GDP growth. The faster they spent, the more new cars and new houses they had too.

But they were not creating wealth… they were consuming it. They were spending money they hadn’t even earned yet. They were not only consuming existing wealth, in other words, they were consuming wealth that hadn’t even come into being… tomorrow’s wealth. You couldn’t see this happening by looking at the GDP numbers; instead you had to look at balance sheets. And even then, you needed to look at them with a suspicious eye.

On the one side, debt was clearly swelling up; it doubled during the 2001-2007 period. On the other, assets were swelling up too. But the assets were of the overpriced, bubble-era variety… houses and stocks that were subject to easy correction. And when the correction came, assets declined… and debt grew heavier and heavier. Now, Americans have twice as much debt… and their assets are back to where they were 10 years before. Net result: impoverishment, not wealth.

Consuming wealth is not the way to get rich. It’s the way to get poor. But it would take someone without a Ph.D. in economics to see such a simple and obvious truth. Given a fellow a computer and an advanced degree in economics and he’s ready to believe anything…

Yes, dear reader, in His majesterial wisdom, God – or whatever wiseacre created this system – set up something so subtle and complex that it is beyond the reach of human tinkering. That’s why the meddlers always make things worse. That’s how they put the ‘great’ into the depression of the ‘30s – by interfering with the markets’ natural corrective mechanisms. And now these simpletons think they can stop the correction underway since ’07 – with stimulus, bailouts, and boondoggles.

Yes, they admit, it was excess credit that put American consumers into such a jamb. But, heck, now we’ll let the government do the borrowing. The government will make up for the demand that has been removed from the private sector. The private sector is paying down debt at roughly $1 trillion per year. And now the public sector is adding debt at roughly $1 trillion per year. That ought to do it, right?

Ha… ha… yes… why not… And while we’re at it, let’s round off pi to a whole number so it will be easier for school kids to remember.

But wait a minute… we’re talking about China, not the US. And we’re talking about Chinese meddlers, not the American variety. And we’re talking about the Chinese depression… not the depression in the advanced economies.

But wait… you’re probably wondering… ‘What Chinese depression? China is booming… isn’t it?’ Well, read on…

Here’s a question for you: if China were really growing at 8% per year, how come its electricity consumption is going down?

We’ll provide an answer. Because the Chinese bureaucrats can jiggle and jive the numbers for employment, GDP, and inflation. But the number of kilowatt hours consumed in China is just a number. It is not computed. It is not seasonally adjusted. It is not tortured by statisticians nor tormented by economists. It is just a number. And that number is a smaller number than it used to be.

Oh, and here’s another number. China’s exports for July were down 22% from the year before. Here’s another question; how can an export led economy grow when its exports are collapsing?

Again, we have an answer: when it is not really growing.

China is growing, say the meddlers, because meddling works. China is spending $586 billion (proportionally nearly 3 times as much as the US) to keep its economy booming. The program must be working, say the economists, because China’s economy is still growing.

But is it? Most of the money is spent on infrastructure. The Chinese are doing what the Japanese did before them. Japan bailed out its banks and spent trillions on infrastructure. There were years when little Japan was pouring much more cement than the entire USA – channeling rivers, building bridges to nowhere, and creating highways for no one. What did they get for their money? Well, you could say they got a lot of infrastructure… and the most cemented–up country on the planet. Is that a good thing? We don’t know. But one thing they didn’t get was durable economic growth.

Why not? The easy answer is because an economic system is too sophisticated to yield to these ham fisted interveners. Another way to look at it is because the economy had already spent too much… creating too much capacity. Adding infrastructure that could handle more capacity was not a solution.

But heck… it’s summer. And in the sum… sum… summertime, we’re not going to criticize our fellow man. Instead, we’re just going to laugh at him.

In China, for example, the government’s stimulatory programs are having the same flaccid results they got in Japan. Prices are going down. The Chinese feds are trying to get people to spend more money – just as they did in Japan. But people do not spend more when prices are falling. They wait for a better deal. And as they wait, consumer demand falls… forcing prices down further. Japan has gone through almost two decades of on-again, off-again consumer price deflation. Now it’s China’s turn. Consumer prices in China have been going down for the last 6 months… and are now reported falling at a 1.8% annual rate.

How could prices be going down in a booming economy? Well, because the economy isn’t booming. Instead, it’s burdened with overcapacity – just like Japan’s. And like Japan’s it is probably doomed to go through a long period of re-adjustment… before a durable recovery can begin.

Source: China is a Scam

Yesterday, we estimated that it would take 19 years for the economy to complete its de-leveraging . It was not a very scientific estimate. But total debt has gone down about $2 trillion over the last 24 months. So, if it continued at that rate, it would take about 19 years to erase the extraordinary amount of debt built up in the bubble years.

Now, along comes the Comstock crowd with roughly the same guess – two decades. They figure that the savings rate will go up to 10% and that the effect of taking that money out of the consumer economy will be to put the US into a long, soft slump – just as we predicted in our first book.

And there’s another reason to expect a very long period of downsizing: that’s just the way economies work. Market cycles are very long. Interest rates went up from the Great Depression all the way to the Reagan Administration. Then, they went down… and may still be going down. Stocks go up and down in cycles that last 30-40 years, peak to peak. The peak in ’29 was followed by another peak in ’66 which was followed by another peak in ’99.

Economic cycles are long too. Consumer debt, compared to disposable income, hit a low in 1945. It went up for the next 62 years. It only peaked out in 2007. If the chart were symmetrical, the process of de-leveraging (getting rid of debt) would show a downtrend until 2069!

And maybe it will.

But there’s no point in looking that far ahead. What we have in front of us is the opening stage of a depression… a market crash followed by a major economic re-adjustment. The new reality is that consumer demand is down… and will stay down for a very long time, at least until debt has reached more manageable proportions. Ken Rogoff says that will take 6-8 years. We say it could take 19 years. There’s about $20 trillion in excess private sector debt to be eliminated. It will take time to get rid of it.

And it will take time to re-jig the world’s economies to the new economic realities.

John Hussman explains…

“The U.S. economy lost a quarter of a million jobs in July. Meanwhile, over 400,000 workers abandoned the labor force (and are therefore no longer counted among the unemployed), which prompted a slight decline in the unemployment rate despite the job losses . In the context of an economy still strained by high levels of consumer debt and still record delinquency and foreclosure rates, labor market conditions are still troublesome. Still, the pace of job losses and new unemployment claims has clearly softened from the pace we observed early in the year.

“If we knew that this was a standard economic downturn, we might conclude that the recent improvements are durable. However, nothing convinces us that this is a standard economic downturn.

“Call me skeptical. But if you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP.

“That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.

“When market crashes are coupled with changes in the fundamentals that supported the preceding bubble – as we observed in the post-1929 market, the gold market of the 1980’s, and the post-1990 Japanese market, and currently observe in the deflation of the recent debt bubble – they typically do not recover quickly. Indeed, the hallmark of these post-crash markets is the very extended sideways adjustment that they experience, generally for many years. “

*** It’s a real Ouzilly summer… bright sun… long evenings on the veranda… cool nights.

Yesterday, while we were painting in the sun room, we noticed a group of people wandering around the yard. They were taking photos… pointing at things. It was as if a group of tourists had walked in and decided to have a tour. But with them was an old man, bent over … and wearing the blue outfit of a French working man. This was no tourist.

“Mr. Bonner?” a middle-aged woman began the conversation.

She then introduced the group. It turned out that the old man – Mr. Brillaud – had been born on the property 90 years ago. Now, here he was… with his children and grandchildren. She asked if they could have a look around the place.

“Of course,” we replied.

“I was born right up there,” said the old man – pointing to the top floor of the house. “Oh, Mr. Bonner… you’d like to hear the stories this house could tell. I was born in 1919. My father came back from the war in 1920. He worked on the farm until he had a heart attack when he was 55 years old. My grandfather lived here too. He had gone over to the nearby village with a wagonload of gravel… the horse reared up and turned the wagon over. My grandfather was killed.

“My mother was a cook here.” He pointed to the kitchen.

“But it was very different then. There was a whole community around the farm. There were the Cornettes, who lived in the house across the road. And the Desportes, who lived in the house down the lane. Oh… and a few other families too. It took so many people to make the place work.

“And is the old bread oven still there? You know, in that building at the end of the courtyard?”

“Yes… it’s still there,” we told him.

“We used to love that place. It was where we made bread for the whole village. It was always warm. And it smelled so good.

“We had to do everything ourselves. We grew the wheat. Then, we milled it. And then we made bread. And we had chickens for eggs. And cows for milk. And, of course, the vegetable garden. I don’t think we had any money. But it wasn’t a bad life.

“Then, they changed the whole thing in the ‘60s. They put in place a law that said you had to pay the people on a farm… and contribute to their social security. Then, there were too many people on the farm for it to support. So, they all moved away. The only ones left when you got here were the Debonnet family, weren’t they? Francois was still here. And now he’s retired too.

“Oh, and what have you done to the octagon?” he motioned to the building that we transformed into a library/office. We walked over to have a look.

“It used to be for ironing,” he continued. “There was a big brick fireplace in the center. We didn’t have electric irons, you know. Instead, there were heavy irons on top the fireplace. It had an iron top, you see. You’d come in here and there would be irons on the fireplace, getting hot… and usually one of the maids ironing sheets. It kept them pretty busy.

“Of course, it kept us all busy. We didn’t have any 35-hour workweek back then. We worked all the time.”

*** Donovan is coming! Donovan… a handsome young Swiss man… a friend of a friend… did the cooking for us a few years ago. He is widely remembered.

“Isn’t he the one who got that girl in the village pregnant?” asked one of the boys at dinner last night.

“No, he’s the one who took the car and wrecked it. He didn’t have a driving license… ” explained another.

“And I remember when he went out in the evening… he went into town… and then, for some reason, he had to walk back. That’s about a two-hour’s walk. And he was so out-of-it he walked by the house and just kept going… until he finally realized he had gone too far… so he had to walk an hour back. He came into the driveway about 6AM… looked like he had been hit by a truck… ”

“ He made quite an impression on all!” said another source.

“I will never forget Donovan — not to mention the most memorable week of my life! What a thrill it was to sit under the spreading linden tree near the garden wall, reading and sipping on a peach royale whilst millions of bees happily kept to their work above my head. Later, I toured the garden below and helped the Dashing Mr. D. gather gooseberries. One of my fave pics is Chef Donovan at the outdoor grille off the veranda, cooking up the evening’s feast: wild boar steaks. Incredible! And incredibly delicious! My first experience of centuries old art work and architecture in Europe was on our impromptu guided tour of churches in and near Montmorillon on a rainy Monday; Donovan, of course, in the lead with all manner of historical information. And I believe Donovan had a hand in the spectacular midnight fiery pyre display that thrilled and awed us all, and celebrated St. John’s Day if memory serves. Is it exaggerating to claim Donovan the sine qua non on our d’Ouzilly experience?”

Source: Prepare for a Long Period of Downsizing

By this time I am losing interest, as I suspected as much, and would have been surprised if things had turned out otherwise. I say this with a certain haughty-yet-snotty attitude because the Austrian school of economics is so easy to grasp, so intuitively correct and now so provably correct, that it is easy to anticipate the long-term when a central bank is creating excessive amounts of money and credit, especially when the majority of it is used to expand government spending. Child’s play!

So seeing the future clearly in economics is easy, unlike forecasting other social institutions, like marriage, which I thought meant that I would be happy for the rest of my life, but which meant that I did not remotely understand the full ramifications of such an arrangement that was not, and I emphasize NOT, even hinted at when we were dating, which should be grounds for some kind of legal action so that I can get my life back, instead of having it wasted by her, and the stupid kids, and the stupid relatives, and the stupid neighbors, and the stupid job, and all the stupid stuff you have to do as a result of being so stupid as to say “Goodbye!” to a life of mindless, selfish hedonism in the first place where, with any luck, you would be dead by now, lying in some gutter with a big smile on your stupid face, instead of putting up with spouses, children, neighbors, et al who are all so stupid that they don’t buy gold, silver and oil even after I always deliberately end the “Happy Birthday” song with, “And if you’re not buying gold, silver and oil, then you are not going to get your wish because the Wish Fairy knows that you are too stupid to know what to do with that kinky stuff for which you are secretly wishing.”

But this is not about any of that, but about the way that the government has now “changed the way it accounts for natural disasters, such as Hurricane Katrina,” which ought to make you suspicious, especially as it was done for “eliminating much of the prior volatility in income calculations”, whatever in the hell that means.

I imagine that the government could use it as an excuse to “find” more money to spend by reducing accrued costs or disguise the fact that government is incompetent. Either one.

I personally think it is the latter, and not just because I am a suspicious and paranoid little rat who thinks that the government is an expensive, disastrous, giant dead-weight loss that is out to get me, but because another interesting change is that “Personal income was revised up over the last decade, after the government boosted its adjustments for the underreporting and non-reporting of income using more recent data from the Internal Revenue Service.”

Of course, I think this is so the government can now say, “Hey! Income was up over the last decade, so shut up about how we are a bunch of incompetent and dangerous bunch of arrogant pinheads who actually believe the stupid stuff we say, like how we say that continual government deficit-spending and continual expansions of money and credit by the Federal Reserve are some kind of blessing and not the most stupid things that we could have possibly done!”

The “found money”, in case you were wondering, apparently comes from income increases as a result of the housing boom, and “in the most recent years reflect gains from rents, interest and proprietors’ income”, as if that distorted boost to income is now “the new norm” or something! Hahaha!.

Finally, the Commerce Department “shifted food services, which include meals purchased at restaurants or served in schools, out of the food category.”

Paradoxically, “As a result, the Fed’s preferred inflation gauge – which tracks consumer spending and excludes food and fuel – was pushed up by 0.2 percentage points for the three-year period from 2006 to 2008.”

Later, they explained that “The reason for this is that costs of meals away from home are not as volatile as fresh food, the government said, and therefore services should be included in the measure commonly known as the core index.”

They now compute inflation in “meals away from home” by disregarding the cost of the food, which is going up, and look only at the cost of the labor in preparing the food, which is going up, but not by as much right now because unemployed people are willing to work for peanuts? Hahaha!

If blatant corruption to disguise inflation and incompetence is not enough to convince you to buy gold, then there is nothing I can say to change your mind.

Fortunately, that means more for me, and at lower costs, until the day when you say “Oops! Oh, woe is me for not having listened to the Wonderful And Wise Mogambo (WAWM) when he said to buy gold, silver and oil, and now I rue that fateful day, just as he said I would, and I see that he was right when he said to buy gold, silver and oil, which would have made me, too, say, ‘Whee! This investing stuff is easy!’”

Until next time,

The Mogambo Guru

Source: How Do You Like Your Books Cooked?