"
UNEXPLANATORY
by Bill Bonner
Pity the poor central
bankers.
They are so busy - plotting the destruction of their own paper
currencies...and worrying, says the news report from Montreal, about the
"structural problems in Europe and Japan." They will not have time to wonder
about the strange character of the U.S. recovery.
Why are there so few
jobs? People are collecting unemployment benefits at the highest level in 19
years. Why are there no profits? As a percentage of GDP, profits have been cut
in half since 1998...and show little sign of improving. It's all so
'unexplanatory', as Eric says above.
Since we doubt that central bankers
will take the time to wonder about these things.... in today's letter, we will
wonder for them.
Why such a peculiar recovery?
We know the central bankers a re busy,
so we will not dilly dally. Here's the answer: this recovery is not like other
recoveries because it is not a recovery at all. It is more like what ballroom
dancers call a 'hesitation.' The beat goes on...and after a moment, the dancers
will pick up their feet.
If we're right, the latest downturn is not like any
in America since the Great Depression. Expecting it to resemble a typical
post-war recession is like expecting yoghurt to taste like latex paint. They may
look a little alike, but they serve very different purposes.
Instead, as
we've been saying for a long time, America's economic malaise is more like
Japan's long, slow, soft depression that began in 1989. Only time will tell. In
the meantime...we wonder...
The course of the U.S. economy is set, we
believe, not by current policy failures in Washington nor by whatever silly
feeling consumers pick up from the evening news.
It is determined by the
past.
"In terms of quantity of money and credit creation," writes Dr. Kurt
Richebacher, "the Fed's easing has been a sweeping success. But in terms of its
effects on GDP, national income and the financial markets, it is an outright
disaster. These are, of course, the only effects that matter."
Fish gotta
swim; birds gotta fly. Debts gotta be paid.
And the sun, that shined for a
long day's boom in America, has gotta set sometime.
There are more and more
signs that while the consumer's will to spend is as robust as ever, his ability
grows weaker by the day. Debt levels are at record levels - as we've noted many
times. So is the amount of a consumer's income that must be used to service it.
A little note in the news a few days ago pointed out that real incomes - after
inflation and taxes - fell in April. This should
have set off alarms from one
end of the empire to the other....but not a peep was heard.
But the retail
stocks seem to have noticed. The retailers were the strongest group - buoyed
by
consistently good sales figures and bubbly poll results.
Now they seem
to have turned a corner...and headed down.
What's more, a closer inspection
of sales numbers from the first quarter reveal not the strength that was widely
reported in the media...but weakness. "Current year-over-year rate of change in
final sales," notes the ContraryInvestor.com, "rests at a four decade low...As
you know, it is strength in final sales that will ultimately light the way to
this recovery being something more than largely inventory driven."
Rising
property values and even greater borrowing have kept consumers steadfastly on
their roads to ruin. But the road is getting bumpier and bumpier. "Housing Takes
More Money," reports Money magazine. Consumers are spending more and more of
their money on housing costs. They've mortgaged up their houses as never before.
Owning less of their own homes, they have to pay the mortgage companies for the
parts to which they no longer have clear title. According to the Money article,
19 million Americans now pay more than 35% of their incomes
to keep a roof
over their heads - up from just 16 million in a similar circumstance 10 years
ago.
Another item from yesterday's papers tells us that consumers are having
a hard time keeping up. "More Owners Are Behind on Mortgages," says a headline.
And bankruptcies, as widely reported, are becoming more and more common -
especially among older people.
In addition to other puzzling signs, there is
the stock market. Stocks are said to 'look ahead' to changes in the economy. But
if the economy is on the mend, the stock market doesn't seem to see it. Not that
investors don't look for it. Time after time, they squinted into the setting sun
and thought they saw dawn. Nearly everyday, in fact, the Republican
hallucinatories - George Gilder, Lawrence Kudlow and Arthur Laffer - announced a
new morning for America, thanks to the Bush administration and silicon
chip.
"Nine times in the last 26 months they have followed the new era bull
market mantra and bought on the dips," writes old friend Ray DeVoe (whom we've
never met...but feel we know). Each of those times, they were wrong. Stocks are
still down for this year...down for last year...and down for the year
before.
"Surely, it must be time for a rally," say the patsies. But the
insiders keep selling 4 stocks for every one they buy. And stocks keep going
down. What does the stock market see ahead?
EVEN MORE UNEXPLANATORY
"Excessive debt accumulation was, of course...a prime ingredient in the
financial condition that was to overtake a large sector of the economic system:
illiquidity. It was, indeed, an illiquid, over-expanded colossus of debts,
rather than an excessive money supply, on which the price structure of the late
1920s rested."
- Melchior Palyi, in The Twilight of Gold
"In death, all debts are
paid."
- Shakespeare
The world's most powerful group of price fixers is
meeting this week in Montreal. None were elected. But the public seems to prefer
to leave the world economy in the hands of un-elected bureaucrats, rather than
elected ones; its admiration for democracy goes only so far.
Central bankers have a lot to talk about, we are sure - comparing perks and
publicists, for example. Still, between cocktails and dinner, the managers of
the world's managed moneys might let the conversation wander...over to the
curious U.S. recession and even curiouser recovery.
"This downturn pattern
has no precedent in the whole post-war period," writes Dr. Kurt Richebacher.
"Investment spending is unusually weak and consumer spending unusually strong.
Yet this pattern has at least one ominous parallel, but before World War II: the
U.S. economy of 1926-29."
Neither angelic economists, nor the archangels at
the world's central banks have an explanation. In today's letter, we rush in.
"Debts gotta be paid," we remember writing "Or otherwise settled..." we add
today.
"Last year," explains Dr. Richebacher, U.S. national income grew by
$178.6 billion. Debts, on the other hand, increased more than $2 trillion. Debts
of the nonfinancial sector were up $1.1 trillion, and debts of the financial
sector by $916 billion. All in all, debts rose more than 10 times faster than
income. Broad money, by the way, increased $882.7 billion. Consider that barely
9% of the total credit creation in 2001 turned into GDP and income
growth.
"In the fourth quarter of last year," (Richebacher never lets up...),
"the consumer increased this outstanding debt by $610 billion, but his spending
on goods and services increased by only $120.6 billion. Businesses borrowed
$377.65 billion while cutting their outlays on fixed investment and inventories
by $163.3 billion."
Telecom debt alone now equals nearly as much as the
combined total of the S&L crisis of the '80s and the junk bond crisis '90s -
about 5% of GDP. Taxpayers ended up paying an amount equal to 3% of GDP to bail
out the S&Ls.
We left off yesterday wondering why stocks are not going
up. If the nation really were looking ahead to a recovery, shouldn't stocks be
able to see it coming?
Instead, stocks seem to see trouble.
"I view the
U.S. economy as being in the early stages of a post-bubble shakeout," writes
Stephen Roach. "Most others see the context quite differently - as a fairly
standard business cycle, dominated by a powerful, yet self-correcting, inventory
dynamic. Only time will tell who's got this one right."
While we will wait
for time to tell the tale, along with everyone else, we still can't help but
wonder: What will become of all this debt?
There are only three
possibilities. Sooner or later, debts are either paid off, written off, or
inflated
away. Taking up the third possibility, we note that the Founding
Fathers defined a dollar as 371.25 grains of fine silver. Determining the value
of gold coins, the Coinage Act of 1792 decided that an ounce of gold was equal
to 15 ounces of silver.
Later generations found the legal connection between
precious metals and paper money inconvenient. The issue was debated off and on
for years - whenever some backwoods yahoo decided to make an issue of it. For
example, Nebraska congressman Howard Buffett took it up
in 1948. "So far as I
can discover," said the father of the world's second richest man, "paper money
systems have always wound up with collapse and economic chaos.
If human
liberty is to survive in America, we must win the battle to restore honest
money."
More than half a century later, we look back nostalgically at 1948's
dollar...and its liberty.
Neither has survived. Back of the envelope
calculations tell us that today's dollar is worth only 5% to 20% of what it was
worth when the Coinage Act was passed.
Almost no one misses liberty. And few
would mind if the dollar kept waving a long goodbye. In fact, most economists,
consumers and politicians count on it. They are betting that a gentle decline in
the dollar...along with yet more money and credit from the Fed....produces yet
another inflationary boom in the American economy.
But, "for the first time
in history," concludes Dr. Richebacher, "the economy and stock market have
slumped against the backdrop of rampant money and credit creation.
"These
unprecedented experiences raise some highly critical questions; Why has the
deluge of money andcredit failed to boost the economy and financial markets in
any significant way? And what, exactly, is behind the US economy's miserable
profit performance? These are the
two most important questions to
scrutinize."
Central bankers rule the globe, we are told. "One begins to see
the global economy as a vast network of interconnected strings," explains
William Pesek, "all being controlled from above by Greenspan, Macfarlane
(central banker of Australia) and a handful of other monetary policy
makers."
Yet, following the biggest pull on credit lines in history...the
world's economy has barely budged. Central bankers, perhaps after dinner, might
want to check their twine.
Your
reporter...
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