Our old friend Congressman Ron Paul says we’re headed into a 15-year depression.
He’s probably right. In the old days, panics and depressions ended fairly quickly at least unemployment tended to be short-term. There were no elaborate social welfare systems then. No unemployment compensation. No food stamps or independence cards. People had to make do.
So, when a depression hit, wages fell quickly and people got back to work. They earned less, but the whole economy would adjust, with lower prices for everything.
There were no bailouts and no stimulus plans, either. Mistakes were corrected relatively quickly. Businesses went broke. Men were ruined and had to drink themselves to death.
Now, things are better. If their businesses go broke, they can go on almost as if nothing had happened as long as they owe money to the right people. Heck, they might even get a bonus.
On Friday, the Dow dropped 122 points. What happened to the rally? Is it over already? We wait to find out.
Oil held steady at the end of the week, having risen over $50 to a high for the year. Oil’s rise was entirely explained by the sinking dollar — down to $1.35 per euro on Friday.
Dollar sell-off gathers momentum, explained one headline. Gold soars, Bloomberg added.
Gold shot up nearly $70 an ounce on Thursday. It took a rest on Friday but we don’t think it will take a break from its epic run for long.
But back to the story of the 15-year depression
Goldman says it wouldn’t have lost much money if AIG had been allowed to go broke. So, don’t think for a minute that it wanted the government to save AIG just so Goldman could get its $20 billion back.
The public and its paid representatives in Washington are up in arms. Reporters have been following the trail of the hundreds of billions of taxpayers’ money handed over to Wall Street firms. They discovered that it went into various silk-lined pockets — notably, those of the aforementioned Goldman Sachs, foreign banks and the bankrupt firms’ own executives. The politicians were shocked. Shocked! The public was outraged.
Whence cometh this outrage? Not from any matter of principle that we’ve been able to determine. The taxpayers don’t mind robbing Peter. But they don’t like it when the ill-gotten gains go into someone else. Hey, my name is Paul and I’ve been out of a job for six months, they say. Where’s MY bonus?
Congress sprang into action last week to set things right. But rather than give every Tom, Dick and Harry a big bonus, the House proposed a 90% tax on the AIG bonuses and urged the states to take the other 10%.
The whole thing is a dangerous distraction, in our opinion. The bonus amounts are trivial in comparison to the huge amounts of the bailouts. And when the pols start taking money away from people our sympathy is with the takee, not the taker. Besides, it encourages a very bad idea: that politics, rather than a free market, should decide who gets what.
The next thing you know, they’re going to be telling us which businesses succeed and which fail. Wait a minute they’re already doing that!
Which is why Ron Paul thinks we’re going to have a depression that lasts longer than most marriages. When markets are allowed to work, they often make mistakes — especially when government is fixing interest rates. Periods of growth are punctuated by crises — including sharp breaks in business activity and bouts of creative destruction.u201D Like forest fires, these episodic conflagrations burn off the dead wood, permitting new growth.
But when government allocates capital and resources, it is almost always a soggy disaster from beginning to end. The dead wood never gets cleared away. Instead, it is protected propped up leaving the new shoots to struggle in the shade. Not much growth, in other words.
We repeat: there were only two examples of major depressions in the last century. Both came after a huge run-up in debt. And both were met with programs that economists should be ashamed of — bailouts, stimulus, loans, props, safety nets and hooks. In both cases — the ’30s in the United States and the ’90s in Japan — the depressions continued, on and off, for many years. WWII brought an end to the first one — 12 years after it began. The second one continues — nearly 20 years after the crash of the Tokyo stock market.
And now we have a third one and this time the feds are determined to beat it. What’s their strategy? More firepower! What’s their secret weapon? QE, or quantitative easing, which is actual monetary inflation caused by buying debt directly from the government.
Will it work? Will Geithner/Bernanke succeed where others failed? Will economists finally master depressions and find a way to get creative without the destruction?
Ah we think we know the answer. But in the meantime, we’re enjoying the show
And now we turn to our friends in Charm City, to see what they have for us today
Commodities ain’t dead yet! declared Chris Mayer, lending the editorial team at The 5 Min. Forecast a hand. People ask me if the price spike in 2008 was a bubble. My gut says it wasn’t. Overlay the 1966—1980 commodity bull market on our own and you see an interesting picture:
While the 2008 sell-off was much steeper than what happened in the 1970s, it’s not out of line with historical experience. The biggest rally in commodity prices could still be ahead of us.
If you go back even further and look at the 1929 crash and its aftermath, you get a similar picture. Commodities tanked after the crash. Take corn, for example, which lost nearly 80% of its value from its peak in 1929 to its low in 1932. Yet by ’37, corn put in a new high. It was 20% higher than the 1929 peak. Put another way, the price of corn rose fivefold from the bottom — and this during the Great Depression!
Commodities still have legs, especially with the Fed playing loose with the dollar. The action this past week was just a prelude. Expect the world of useful commodities to hold value better than the dollar. Not only the headline-grabbing oil price, but also food prices. The retail price of food rose about 6% last year. I’d expect we’ll see food prices — and other commodity prices — rise again this year.
The 5 Min Forecast is an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments — in five minutes or less.
Back to Bill, reporting from merry old England
What is quantitative easing? It is hocus-pocus. It is a scam. It is based on the broadest, most obvious lie: that you can create money u201Cout of thin air.
Why are the feds — in Britain, Switzerland and the United States — doing it? We leave the Swiss to their own peculiar circumstances. In Britain and America, the feds have pushed central bank lending rates about as far down as they’ll go. And both governments have begun the usual sort of bailout efforts. What else can they do but inflate the money supply?
Will it work? It depends on what you mean. In a sense, it is already working. The feds have shown the world that they are serious about inflating their countries’ money supplies. Investors have bought gold and sold the dollar and the pound. If they can inflate the currency, they cause debts denominated in the currency to evaporate. During the boom phase, Americans and Brits spent money they didn’t have and ran up debts they can’t pay. The economy can’t grow until those debts are reckoned with. Inflation will reduce them. Of course, if it gets out of hand, it will destroy the entire world financial system.
The pump doesn’t work
Elizabeth might have been talking about quantitative easing. As it turned out, she was about to provide another reason why real estate can be such a bad investment. In Normandy, we have a small farm with about 30 cows. A pump pulls water from a spring and runs it out to the watering troughs. But the pump overheated and burned up. This happened in October. So, a plumber was called. He installed a new pump. That one burned up too.
I was losing confidence in the plumber. But what did I know? Then, he put in another pump in December, and that one froze. That was not his fault, he said, because we had not insulated the pump house so I had to buy another pump. Well, after about a month that one froze too, even after he had supposedly insulated around it.
And then, when they stopped freezing, they began burning up again. That pump house must be like the moon. It is either way too hot or way too cold. I told him that I was going to look for another plumber. We’ve got to have water for the cattle. When the pump isn’t working, poor Nicholas has to go around with a big tank of water behind the tractor and fill all the troughs himself. And he told me that if we don’t get this water problem fixed soon, he was going to quit. I think he’s just about had enough. So, I was going to switch to another plumber, but this fellow insisted he knew what he was doing so he came and installed yet another pump last week. Nicholas looked at it and told me that it wouldn’t work. It was apparently a submersible pump. It was supposed to go down in the well. So, naturally, without the water around it to keep it cool, it burned up immediately.
I asked Nicholas about the plumber. He said he knew Mr. Thierry. Apparently, he inherited the business from his father. But Nicolas told me his father was not really a plumber. He sold washing machines. And he said that he bought a washing machine from the father and it broke down almost immediately. He thought it was installed badly. He thinks the son is continuing the family tradition of incompetence.
After the submersible pump burned up, the plumber told me it was our fault all along because there was a leak in our water line, so the pump was sucking air — causing it to burn up.
I told him that I wasn’t really buying a pump from him or paying him to install the pump. I just wanted water. It was up to him to make sure he had the right pump and that it was installed correctly.
After all this, you’d think he’d give up. I told him to take his pump out, but he got mad and came back and installed yet another pump — this is unbelievable — and brought about a mile of big plastic pipe, which he ran out to the spring, in order to be sure there was no leak. And he put the thing together and left sure that he had solved the problem.
But Nicholas just called to tell me that the pump had stopped working.
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).