State of Mind
by Bill Bonner: Borrowing
Your Way Out of Debt and Other Normal Abnormalities
time. Like history. Or wine. Or cement.
At first, they
are loose, fluid
and watery. Then, over time, they dry up
develop more body
from our trip to Argentina are still congealing
like a stone wall. Well show it to you in the days ahead.
lets turn from the pampas to the developed world
world of money. That is, let us turn our attention from the vivid
world of real things and real people
to the absurd blah blah
world of economics.
in the 2 months we were gone? Anything important? Not that we can
tell from the papers. The headlines are almost the same as they
were when we left.
The Great Correction,
for example, hasnt gone away. Instead, it seems to be intensifying.
11 million homeowners are still underwater. Every one
of these houses is a candidate for foreclosure
and every one
puts downward pressure on the housing market, which has been falling
for the last 5 years with hardly a let-up.
Yes, Dear Reader,
this month marks the 5th anniversary of the Great Correction. It
began in April 07, when its weakest link subprime mortgage
debt snapped. Since then housing has been losing value. And
with 11 million houses still priced below the amount of their mortgages,
this housing bear market could last for another 5 years before it
finally comes to an end.
goes down so do the balance sheets of Americas households.
And without improving balance sheets it is very unlikely that households
will substantially increase spending. This will leave the economy
hobbling along about as it is now
with the lowest growth rate
of any post-war recovery
and completely dependent
on more loose change from the feds.
No, that hasnt
changed either. When we left the feds were still trying to sort
out a debt crisis by adding more debt. Nothing has changed since.
Americas feds keep lending money they dont have to borrowers
who cant pay it back.
students are the subprime borrowers. Can you imagine a more subprime
group? Students dont have jobs. Theyve never proven
they can earn money. Their credit histories are as thin as their
resumes. And yet the feds have extended $1 trillion to this group.
How long will be before that blows up? Probably not too long.
in Europe, subprime debt is concentrated at the government level.
The subprime borrowers were the countries at the periphery of Europe
Ireland, Portugal, Greece and Spain who would have
a very hard time paying their bills when the lending stopped. When
we left, Greece was struggling. Now, its Spain.
was able to borrow more money this weekend. But its costs rose;
Spanish debt now yields over 6%.
At 6%, according
to the experts, European nations can still keep going. If the debt
rises to 7%, on the other hand, their goose is cooked
to us that Spanish debt isnt already at 7% or more. These
countries should have gone broke years ago. The only way they avoid
it now is by promising to do things they cant do. Cutbacks
austerity measures are solemnly put into budgets.
They lower GDP, lower employment, and raise opposition parties to
new levels of absurdity and notoriety. And never quite reach their
to central banks
they never go broke.
the deal is pretty straightforward. The Fed prints. The feds borrow
the counterfeit money and spend it.
the central bank prints up money too. It lends it to the banks.
The banks lend to the marginal governments around the periphery.
This puts the banks in a bad situation. Theyre holding a lot
of subprime government debt. But the central bank keeps lending
them money to buy more!
has the story:
(Bloomberg) Spanish, Italian and Portuguese banks are loading
up on bonds issued by their own governments, a move that shifts
more of the risk of sovereign default to European taxpayers from
of Spanish government debt by lenders based in the country jumped
26 percent in two months, to 220 billion euros ($289 billion)
at the end of January, data from Spains treasury show. Italian
banks increased ownership of their nations sovereign bonds
by 31 percent to 267 billion euros in the three months ended in
February, according to Bank of Italy data.
French banks, meanwhile, have cut holdings of those countries
bonds, as well as Irish and Greek debt, by as much as 50 percent
since 2010 in some cases. That leaves domestic firms on the hook
for a restructuring such as Greeces last month and their
main financier, the European Central Bank, facing losses. Like
Greece, governments would have to rescue their lenders with funds
borrowed from the European Union.
in sovereign-debt holdings by Spanish and Italian banks has been
fueled by the ECBs 1 trillion-euro long-term refinancing
operation, or LTRO, initiated in December, to provide liquidity
to the regions lenders. Encouraged by their governments
to take the money and buy bonds, banks borrowed 489 billion euros
on Dec. 21 and 530 billion euros on Feb. 29.
in so-called peripheral countries Spain, Portugal, Ireland,
Greece and Italy profit also was an inducement: They could
borrow at 1 percent to buy government bonds yielding between 6
percent and 13 percent.
In Europe as
in America, nobody goes broke
until they all go broke.
in Greece, farmers are organizing special food relief
programs to help children in the cities who are said to be almost
starving. The government, meanwhile, is preparing to head off food
the communist party, which was practically dead a few years ago,
is coming back to life
like the zombie it is
leadership of Jean-Luc Melenchon. Unlike the responsible
politicians in Europe, Melenchon wants no cutbacks in government
spending. Just the contrary. He wants to increase it. For example,
the minimum wage would go up from about $1,600 per month to $2,300
per month. And the top marginal income tax on rich people, those
who earn more than about $500,000 per year, would go to 100%.
star is rising. His left coalition could get 12% or more of the
vote on Sunday. Which is only natural. Promise the mob that you
will give them free money; few will resist it.
*** Alone among
the developed nations
America has something the others dont
and by the look of things, something they dont want.
The US population is growing!
Yes, dear reader,
when it comes to having babies
or importing babies from other
America still has what it takes. The UN says that
US population will increase by nearly 27 million people by 2020.
million people is about 40 cities the size of Baltimore. If each
one of these people lives in a household of four people, its
more than 6 million new houses
and, assuming they are all two-car
families, about 12 million autos. And, of course, each family needs
a dishwasher, a toaster oven, a refrigerator, and so forth. A lot
of stuff, in other words.
the rest of the developed world, America is still enjoying a major
population boom. After all, Japans population is shrinking.
So is Germanys. Europe as a whole is still growing, but not
by much. And after 2020, it begins to shrivel up too.
population growth may not be as strong as it is advertised. Why?
Because more and more people are sneaking out.
As we reported
yesterday, illegal immigrants are going home
as well as the
children of legal immigrants. And now comes word that native-born
Americans are slipping away too. Yes, according to our sources,
742 US citizens leave the country every hour and dont
So many are
leaving that Sen. Barbara Boxer has proposed legislation
a law that would make it impossible for Americas to cross the border
until they settle up with the IRS.
The noose tightens
Bonner is the author, with Addison Wiggin, of Financial
Reckoning Day: Surviving the Soft Depression of The 21st
The New Empire of Debt: The Rise Of An Epic Financial Crisis
and the co-author with Lila Rajiva of Mobs,
Messiahs and Markets (Wiley, 2007). His
latest book is Dice
Have No Memory.
Since 1999, Bill has been a daily contributor and the driving force
behind The Daily Reckoning.
© 2012 Daily Reckoning
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