The World According to Bill Bonner

We begin with the proximate financial picture:

In the late ’90s, New York enjoyed a classic stock market bubble centered on technology shares. It did not take a genius to see that it would blow up; they always do. At the time, we expected the U.S. economy to follow Japan’s path with a long, slow, soft slump that would deflate asset prices over the next 10 to 20 years.

Japan’s Nikkei Dow hit a high over 39,000 in 1989. This week we read in the International Herald Tribune, "Japan [finally] roars out of its doldrums." The Tokyo stock market rose to 12,896! If America were to follow the same trajectory — as we guessed it would — in the year 2015 you might read in the paper, "America springs back to life…Dow rises to 4,000!"

If this sounds extraordinarily gloomy, we point out that it is not our fault; it is only typical of the way stock markets work. There are upswings that last from 15 to 20 years followed by downswings that last 15 to 20 years. After WWI, stocks ran up to the 1929 high. Then, they crashed and dragged around until the depths of WWII. After WWII began, another big surge to the upside, peaking in 1966. Thereafter, stock prices shilly-shallied around, but generally sank until 1982. That was the year that Business Week famously pronounced that stocks were not just down, but out. "The Death of Equities," its cover pronounced. But the news of stocks’ death was greatly exaggerated. In August of 1982, stocks entered a bull market that lasted 18 years.

America’s stock market bubble exploded in January 2000. But the damage was focused — as was the bubble itself — on tech shares. The Nasdaq has tracked the Nikkei fairly well with a 10-year lag. The economy and the broader market followed a different path. After seeming to sink into a Japan-like decline, the Bush/Greenspan team gave the world the biggest jolt since the invention of the electric chair. The federal budget swung from a surplus to a deficit — a swing of $700 billion. Interest rates were shoved down below inflation and remained there for more than two years. This was more stimulus than the world had ever seen. It produced the biggest bear market rally the world has ever seen, too; this time centered on residential real estate.

We have a friend whose story is probably typical. The man is now in his 50s. He never earned very much money and lived hand-to-mouth all his life. But he bought a small house when he was in his ’30s, and then a larger one when he was in his ’40s. Now, through no effort of his own, he finds himself with a house said to be worth $1 million with a very small mortgage on it.

He is now a millionaire. But where did that money come from? It seems to have come out of thin air. It may be said that it is merely a reflection of changing preferences in the society. Instead of spending their money on fur coats or McDonald’s meals, people choose to spend their money on housing; so, they are paying more money for houses. But we see no evidence in the statistics that fur coat sales have declined, nor have McDonald’s revenues. The property bubble added trillions to the net worth of Americans since 2001. If it were merely a shift of preferences, the figure would have been flat; something else would have had to go down in order for property to go up. But that is not what happened. Property levitated, as if by magic.

People don’t ask questions when they think they are getting rich. The question marks come out later — along with the recriminations and show trials. For now, people happily count their money; they don’t ask where it came from.

Japan’s property bubble occurred almost simultaneously to its stock market madness. Both then deflated: first stocks and then real estate. Property prices fell as much as 80 percent, and are still at their deflated levels 15 years later.

Americans think their houses are actually worth more than they were five years ago, but most of that increase is a puffed up bubble…a delusion…a fiction, just as it was in Japan. We are waiting for the bubble to (finally) pop. When it does, we expect a resumption of the bear market/recession that began in 2000/2001. Asset prices should deflate for at least another 10 years.

But there is a big problem with trying to apply the Japanese experience to the U.S. market. America needs a bear market, to bring stock prices down to more appealing levels. It needs a recession, too, to encourage Americans to save and reduce the trade deficit. America needs trouble, in other words, like white-hot steel needs a hammer, to beat out its fantasies and harden it up. It’s too bad Americans are so deep in debt. They cannot take a beating; they can’t afford it.

What’s the difference between a Chippendale table and a carrot? Both could be the same temperature. Both are made of plant fibers. Both are found in the dining room. They must be the same thing!

But they are not.

Nor is the government of the United States the same as, say, the government of Switzerland or Zimbabwe. They are all lawfully constituted. They are all sovereign. They all are democratic. But they are very different.

Around the time of the first Roosevelt, America became the world’s largest economy and its fastest-growing empire. Americans grumbled and hesitated; they were reluctant to get into WWI, and dragged their feet at the opening of the Second World War, too. But gradually, they took on imperial attitudes and soon were concerned not only with protecting themselves; but also with protecting people they had never met, whose languages they did not speak, and whose countries most could not even find on a map.

The business of empire, stripped of its vainglorious elements and world-improving pretensions, is essentially a protection racket. The imperial power provides protection. Subject peoples, vassal states, and homeland citizens pay for it. This program worked fairly well throughout the Cold War period when protection was what people wanted. But the failure of the Soviet Union left a vacuum: How can you run a protection business if you have nothing to protect people from?

"The 9/11 disaster changed everything," say the pundits. Of course, it did not really change anything. Terrorists never represented a serious threat to the empire. Much like the anarchist gangs of the early 20th century, groups such as the Bader-Meinhof gang, or the Symbionese Liberation Army later on, the 9/11 terrorists were merely a nuisance. But people do not really think. Instead, they react to sentiment and symbols and go along with almost any program that comes along. ‘People believe what they need to believe, when they need to believe it,’ we like to say. The empire needed an enemy. Lacking a better candidate, they had to make do with terrorists, and then use the "war against terrorism" to pry their way into wars against other nations.

Militarily, the U.S. Empire is in the peak of health. Financially, it looks weak and vulnerable…

And now the Russkies!

In the 17th, 18th and 19th centuries Europeans spread out around the globe. There are now more Irish in America than in Ireland, and more Greeks in Sydney than in Athens. The Spaniards populated Latin America. Italians filled up Jersey City and Buenos Aires. Germans settled Pennsylvania and the Midwest.

But now birthrates are falling throughout Europe. In Italy, young men stay with their mothers until they are in their mid-thirties. In Germany, women no longer marry, and no longer have children. In Spain, a catholic country that used to have the highest birthrates in Europe, the maternity wards are empty, and silent.

And in today’s Moscow Times comes a report that birthrates are falling in Russia, too. In order for a population to remain constant, the average woman has to have about 2.1 children. Recent studies show Russian women having only 1.5. At that rate, the population of Russia is falling by 700,000 people per year; soon to rise to one million per year. In 30 years there will be 20 to 30 million fewer Russians.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.