Sunday, February 8, 2009

Never Fear, the Feds are Here!

Very simple and thoughtful weekend read by Bill Bonner:

Never Fear, the Feds are On the Case

By Bill Bonner

02/06/09 Paris, France We live in a world run by simpletons.

In this morning’s paper is a front-page article describing how Japan “wasted trillions” on its various stimulus programs.

The International Herald Tribune:
“Japan’s rural areas have been paved over and filled in with roads, dams, and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s.”

Public spending was so aggressive, it boosted Japan’s government debt to 180% of GDP – more than two times the current U.S. level. But did all that cement buy Japan out of its slump?

You be the judge. Housing prices in Japan are now back down to where they were in 1975 – nearly 90% below the late-’80s peak. And stocks? The Nikkei index is back down to where it was a quarter century ago. Stocks sell for half their book value – and they’re still considered too expensive for beaten-down, hyper-fearful Japanese investors. The downturn began in 1990. Over the following 19 years, it did more property damage than the Great Tokyo Fire of ’23 and the Enola Gay combined, wiping out wealth equal to three times the country’s GDP. This was despite interest rates at zero…and a heroic effort at Keynesian stimulation.

If America were to follow Japan’s example, it would have to leave its interest rates near zero for the next decade…and add about $10 TRILLION to its public debt. And if it got the same results, you’ll be able to sell your house in 2026 for the same price you paid in 1992.

But the simpletons have no other idea.

“In a nutshell,” continues the IHT report, “Japan’s experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists.”

Are these, perhaps, the same economists who thought America’s super-consumption, eternal-debt economy would never fail? The same economists who thought the bankers were providing a public service, by offering so many people so much credit…and then planting their debt bombs all over the planet? The same economists who forecast rising stock prices in 2008?


The Dow gained 106 points yesterday. The dollar gained ground too – rising to $1.27 to the euro. And gold rose too…plus $12 to $914.

In the United States, jobs are being lost at the rate of 6 million per year. New jobless claims just rose to a 26-year high.

Little by little, the word “depression” is creeping into the press. Yesterday, GE’s top man warned that the downturn could turn into a depression. And Britain’s Prime Minister, Gordon Brown, let slip the d-word during a parliamentary session.

The TIMES of London reports:
“Gordon Brown appeared to acknowledge for the first time today that the world economy was heading for a 1930s-style ‘depression’.

“Mr Brown stumbled slightly over his words at Commons question time, just a week after admitting that Britain was facing a ‘deep’ recession.

“As the financial gloom deepens, he told the Tory leader David Cameron today: ‘We should agree, as a world, on a monetary and fiscal stimulus that will take the world out of depression.’”

But not to worry…the simpletons are on the case. The price tag on Obama’s emergency plan had risen to nearly $1 trillion last time we looked. The Senate bowed to global scorn and ridicule, taking out many of the “Buy America” provisions. Of course, they didn’t do it as a matter of principle…they don’t have principles. Instead, someone must have warned them that if Americans insist on “buying American” the Chinese might insist on “investing Chinese.” And then the whole game would be up. The Ponzi scheme that is U.S. finance requires new money from foreigners in order to pay off the old money that foreigners put in last year and the year before.

The news this morning is that the senators burned the midnight oil…taking out the protectionism and putting in more boondoggles – including a $15,000 tax break for people who buy houses.

So, here at The Daily Reckoning, we have no worries. The feds are on the case. And they’re going to spend, spend, spend…until daddy takes the T-bird away!

*** Wait a minute. The feds are on the case…but haven’t they been on the case for the last 18 months…ever since Bear Stearns went broke? And wasn’t Tim Geithner right there in the room when they decided to let Lehman Bros. go broke…while saving AIG?

Albert Einstein: “Never expect the people who caused a problem to solve it.”

And aren’t the feds’ new plans to save the economy little different from their last plans? Bailouts, stimulus, tax breaks, new, looser credit…aren’t these the same things that were used not only for the last 18 months…but in the Great Depression in the ’30s…and in Japan in the ’90s? Have they ever worked? Nope. Never.

Of course, there’s a good reason they don’t work. As we explained yesterday, you can’t really buy your way out of a depression. Because the problem is deeper than that. The economy is not just taking a rest. It is dead. It needs to be restructured, not revived. And for that, the old structures must be destroyed. That’s what Schumpeter’s ‘creative destruction’ is meant to do. But the feds don’t appreciate it. They talk “change,” but the only change they want is for things to go back to the way they were. So, they’re trying to stop the correction. And they’re using every worn-out trick, every blunderbuss weapon and every claptrap theory they can think of. Bailout the banks…create a ‘bad bank’…nationalize the banks…stop the foreclosures…send out checks…lower interest rates…build bridges to nowhere – they’ll do it all. But it won’t work. All these measures are designed to encourage consumption…in order to support the old structures. But more consumption is just what the economy doesn’t need. It is in trouble because people have spent too much. Now, they have to cut back…and when they do, every enterprise, speculative investment, and household that depended on excess consumption is in trouble.

Ah yes, dear reader…that is where we are. In trouble. At the beginning of a depression. The old structures must be swept away to make way for new ones.

Change! Can it be stopped? Yes we can’t!

“So, what’s the solution?” asked a colleague this morning, after we explained why the stimulus programs cannot work.

“The solution to a depression is a depression,” we replied.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

There are some quotes from Ron Paul about abolishing the Fed that follow Bonner's remarks. Click on the above link to read those if you are interested...