The United States: The Largest Ponzi Scheme in the World
by Bill Bonner
by Bill Bonner
San Jose de los Perros, Nicaragua — Greenspan backs nationalization, says a headline.
Well, that does it for us. If Greenspan is in favor of it, we're against it. No one man bears more responsibility for the present worldwide financial crisis and coming depression that Alan Greenspan.
The Fed's job is to take the punchbowl away when the party gets too wild, said former Fed chairman William McChesney Martin. Greenspan did no such thing. As soon as the party began to quiet down and people began fumbling for their car keys, Greenspan added more rum to the punch and turned up the music. By the time the credit cops finally shut it down, people were dancing on tabletops all over the world.
And now, poor Mr. Obama has to deal with the headaches.
Yesterday, the Dow held steady. But the Dow is a bit of a fraud anyway. Failing stocks are routinely removed. In the present case, financial stocks slipped below $10 and were taken out of the index. Result: the index does not measure real world results.
Elsewhere in the financial news, oil traded at $37 at close of business yesterday. The dollar rose — to $1.25 per euro. And gold added another $10, to bring it to $978.
Gold looks a bit stretched. It could be ready for another pull back. But the bull market in gold is unlikely to end anytime soon.
What is odd is that while gold goes up, so does the dollar. And so do U.S. Treasury bonds. It is as if investors couldn't make up their minds. They bid up the price of U.S. Treasuries and bid up the price of anti-Treasuries at the same time. What gives?
On the right side of their brains, they figure that U.S. Treasury bonds are the only place you can put your money and be sure of getting it back. Stocks are a disaster. Bonds — except for U.S. Treasuries — are too risky; heck, even England could go broke.
Commodities? We've seen what can happen there just look at oil! Even gold could easily take a 20% haircut. That's why U.S. Treasury bonds are the place to be.
But wait the left side of the brain is sending a message too. Buy gold, it says; something fishy is going on in the Treasury bond market, it tells us. How it is possible that the feds can borrow trillions of dollars without causing interest rates to rise? How can they increase the quantity of something so much without lowering its quality? Where's the point of diminishing returns?
One question leads to another one: How are they going to pay this money back?' the left side wants to know.
The more the left side thinks about it, the more it doesn't understand what is going on. Let's see the biggest spendthrift on the planet issues trillions more in IOUs with no obvious way to pay back the money
and let's see this same spendthrift actually has the right to pay off its IOUs with more IOUs that it prints up itself .
and it actually WANTS to make its IOUs less valuable so that people won't hold on to them. It wants people to spend its IOUs on goods and services as fast as possible in order to get the economy moving again.
What am I missing here?' asks the left side of the brain of no one in particular.
The rest of the world has queued up to lend America as much money as it might wish to borrow in order to get its consumers to spend again, writes Spengler in the Asia Times. It won't work, but that is another matter
Spengler is a clever guy. Unfortunately, many of his thoughts are unworthy of a clever man.
A fearful world is buying trillions of dollars of securities from the US Treasury, he continues. Of all the cash flows in the world, nothing is more reliable than the tax revenues of the American state, the longest-lasting government on Earth presiding over the world's largest economy.
Yes, and General Motors was the world's most successful automobile company — until it wasn't. The fearful world is buying Treasuries, but not because the tax revenues of the American state are so reliable; they're buying Treasuries because the United States is the only substantial debtor in the world that can make good on its debts with money of its own making. Tax revenues in the United States are falling sharply. Already, they're far short of what is necessary to cover America's public expenses. That's why both Republican and Democratic administrations have run deficits — real deficits — since the Nixon administration. And it's why the United States is now the largest Ponzi scheme in the world. The only way to pay off the old lenders is to bring in new ones — or run the printing press. That's all lenders have to worry about — inflation. And for the moment, prices are going down. They'll keep going down too — until they go up.
President Obama has come up with another plan — for $75 billion, he's going to try to prevent foreclosures. It was determined a half century ago that home ownership was a good thing. Since then, the government has bent the rules in favor of the homeowner — with artificially low mortgage rates and substantial tax benefits. As an unforeseen consequence, the feds helped create the biggest mortgage-backed credit bubble in history. Not only that, they changed the geography of America — with vast suburbs stretching out in all directions, rather than cheaper and more efficient tightly packed apartment buildings.
Now, Obama compounds the mistake
When he signed the $787 billion bailout bill on Tuesday, he warned the nation that we're not at the end of our troubles. Nor does it constitute all of what we are going to have to do to turn our economy around, he said. But today does mark the beginning of the end.''
Maybe so. But it feels like the beginning of the middle to us. We've had the initial shock. We've had a small rebound. Now, we're ready for the second phase. In this stage, we ought to have a better rebound but also another big leg down. Stocks are still selling for 15—18 times earnings (which are falling fast). They need to get down to 5—8 times earnings. That will bring the Dow down to around 5,000, or lower. This could take a long time. We're in a depression, remember. And in depressions economies need to be restructured, not just refreshed.
In the '30s, none of the bailouts and stimulus packages of the Roosevelt Administration did any real good. At the end of the decade, the economy was about where it was when the decade began — with 11 million people still unemployed. And the poor Japanese have been waiting 19 years to get to the beginning of the end of their restructuring crisis. They probably would have gotten to it years ago, were it not for the diligent efforts of Japanese politicians. Instead of letting the banks fail, they bailed them out and propped them up. Result: an on-again, off-again depression that has lasted longer than most marriages.
Our intrepid correspondent, Byron King, offers some more insight:
Congress collects a lot of funds through taxes. But not nearly enough to pay for all the spending. It's not even close. So will Congress raise taxes? And do it during a recession? I don't think so. Herbert Hoover tried that in 1930. Didn't work too well.
What about the federal government borrowing? OK, it borrows a lot. But can it borrow even more? Trillions of dollars? From whom? Who has an extra trillion dollars lying around that they want to loan the U.S.? Will China and the oil-exporting nations continue to buy up U.S. Treasury paper? If so, with what? Chinese exports are down. Oil income is way down as well. (Oil is selling at $34 per barrel today.) So good luck with borrowing.
That leaves the U.S. government with only one choice. The U.S. is about to embark on the greatest currency-creating binge in modern history (excluding that of Zimbabwe, perhaps). A lot of that trillion dollars is going to come right out of nothing. The Fed is just going to monetize the debt. So we'll have new dollars chasing the same amount of goods. That's the basic definition of inflation.
The bottom line is you need to own precious metals. Own gold. How much? For now, the more, the better. Own coins, if you can get 'em. Own bullion, if you can get it. Own shares in good mines with reserves in the ground while you can buy 'em. Just get some gold.
On the other hand, our old friend Mark Hulbert notes that whenever investment advisors become this positive about gold the yellow metal usually goes down.
Dad, this is the best house we've ever had why would you want to sell it?
We were sitting on the verandah last night, having dinner. Beneath us, the waves slapped against the rocks. In front of us, a long, wide beach curved around toward green hills. There are a few lights from the condominia in the distance. Above them, the stars began to sparkle in the sky and the moon lit up the ocean like an old newsreel.
To bring you further into the picture, dear reader, this is a house that we built about five years ago. At the time, we thought we might want to retire here. Property prices were rising so rapidly, we saw little risk. Besides, your editor can't help himself. Some men play golf; he works on houses. He's been at it for the last 40 years; at this stage he can't stop.
The house he built in Nicaragua is probably his best work. He didn't build it with his owns hands. That's probably why, his wife would say. She is no fan of his handiwork. As a carpenter, she thinks he makes a good plumber. As a plumber, she would recommend him as an economist.
But with the help of a good architect and a good crew of workmen, the house went up and now is a delight. It has aged gracefully and now looks like it has been here forever.
The idea was to build a new house on the beach that reflected the elegance and charm of Nicaragua's colonial past. And so it does. Columns, porches, arches, solid wood doors, shutters, cement tiles — all are recreated from elements found in Granada, one of the oldest cities in the country.
Unlike our other houses, this one is coherent. The whole place was done in one style at one time with one design. In France, for example, we have an old house, which was built, rebuilt, remodeled, expanded, reduced and redesigned a number of times over the centuries. To the architectural variety we added our furniture moved over from Maryland ancestral portraits sideboards that belonged to our great-grandmothers and chairs found at a local junk shop.
We still have our house in Maryland too. It is rented out to a carpenter. We built it in the '90s before we had enough money to build a proper house. Your editor did much of the work himself — including the wood parquet that he made from trees on the farm.
It shows, says Elizabeth.
It is not a bad house. But it certainly wouldn't be mistaken for an elegant one.
People get attached to houses. That is why we have so many of them. We can't seem to sell them. One is an architectural gem. Another is where the children grew up. Still another is our family home. And the last of them we keep only because we can't sell it; like one of Elizabeth's broken-down horses, we keep it because no one else will take it.
But each house is a glutton. It eats money. Time. Energy. Attention. Whoever thought houses would be good investments must not have known anything about investments. Or houses. Or women.
Look, we said to Elizabeth, we've got to get rid of these houses. They're costing us money. And in the spirit of the worldwide financial meltdown, we have to cut back.
Are you kidding? They're not worth that much. Besides, the houses are solid. They're not going away. We enjoy them. We can use them. And we can leave them to our children. Not like those gold mining stocks you bought or those Indian stocks; they lost half their value in just a couple of weeks. They could be worthless tomorrow, for all we know. I'd rather hold onto the houses and sell those stocks.
February 21, 2009
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007).
Copyright © 2009 Bill Bonner