Submitted by Bill Bonner via Acting-Man.com,
Good and Bad News
Today, we have bad news and good news. The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.
The bad news: It will be much worse than that. On Monday, the Dow rose another 43 points. Gold seems to be working its way back to the $1,200 level, where it feels most comfortable.
“A long depression” has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.
Newspaper from October 24 1929, a.k.a. “Black Thursday” – at this point, the panic had just begun with the market losing 11% in one day. On the next two trading days (Friday and Saturday – at the time, the market was open on Saturdays) the market rebounded slightly, then came “Black Monday” and “Black Tuesday”, which erased all doubt about the seriousness of the situation
Old People Are Dead Wood
First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the US. As we’ve described many times, as people get older, they change. They stop producing and begin consuming.
They are no longer the dynamic innovators and eager early adopters of their youth; they become the old dogs who won’t learn new tricks.
Nor are they the green and growing timber of a healthy economy; instead, they become dead wood. There’s nothing wrong with growing old.
There’s nothing wrong with dying either, at least from a philosophical point of view. But it’s not going to increase auto sales or boost incomes – except for the undertakers.
Mr. Hislop is looking forward to booming business
Photo credit: State Library of Queensland
The Cure for Debt? More Debt!
Second, most large economies are deeply in debt. The increase in debt levels began after World War II and sped up after the money system changed in 1968-71.
By 2007, US consumers reached what was probably “peak debt.” That is, they couldn’t continue to borrow and spend as they had for the previous half a century. Most of their debt was mortgage debt, and the price of housing was falling.
The feds reacted, as they always do… inappropriately. They tried to cure a debt problem with more debt. But consumers were both unwilling and unable to borrow. Their incomes and their collateral were going down. This left corporations and government to aim only for their own toes.
Central banks created more money and credit – trillions of dollars of it. But since the household sector wasn’t borrowing, the money went into financial assets and zombie government spending.
Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.
In order to revive the credit creation machinery, the Fed has monetized incredible amounts of debt, via Saint Louis Federal Reserve Research. With the end of QE 3, its balance sheet has begun to subtly decline … click to enlarge.
The Cronies Are in Control
Third, the developed economies have been zombified. The US, for example, is way down at No. 46 on the World Bank’s list of places where it is easiest to start a new business. And only one G8 country – Canada – even makes the top 10.
How to get ahead in the world of today….
Cartoon by Stahler
Paperwork. Expenses. Regulation. High taxes. High labor rates. Entrenched competition with aging, loyal customers. All are endemic from Boston to Berlin to Beijing.
Leading industries – heavily controlled and regulated, including defense, education, health and finance – are practically arms of the government. All are protected with high barriers to entry and low expectations. Competition is barely tolerated. Innovation is discouraged. Mistakes are forgiven and reimbursed.
Meanwhile, the masses are encouraged to become zombies too, with generous rewards for those who 1) do nothing, 2) pretend to work or 3) prevent other people from doing anything. After all the zombies, cronies and connivers get their money, there is little left for the productive economy.
How it all works in crony heaven – until it doesn’t anymore – via bastiatinstitute.org
The Solution Begins When Markets Crack
Typically, these problems – too much debt, too many zombies, and too many old people – lead to financial crises. Then, they are “solved” by either inflation or depression. And the solution begins when markets crack.
Markets never go up forever. Instead, they go up, down and even sideways. They breathe in and out. And after sucking in air for the last 30 years, US financial assets are ready to exhale. Legendary asset manager Bill Gross comments:
“When does our credit-based financial system sputter/break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.”
When that happens, problems begin to take care of themselves, in one of two ways…
A quick, sharp depression wipes out the value of credit claims. Borrowers go broke. Bonds expire worthless. Companies declare bankruptcy. The whole capital structure tends to get marked down as debts are written off and financial assets of all kinds lose their value.
Or, under pressure, the feds print money. Debts are diminished as the currency loses its value. The zombies still get money, but it is worth less. Inflation adjustments cannot keep up with high rates of inflation. Pensions, prices and promises fade. Either way, the slate is wiped clean and a new cycle can begin. But what rag will clean the slate now? Stay tuned…
You knew there would eventually be a picture of the living dead.
Some sort of sharp deflationary depression is the most likely outcome, because of the ‘workout’ psychology that accompanies debt. Creditors will likely try to wring every last dollar they can out of their ‘assets’. These types of actions have a strong risk of creating a contracting spiral. Rising interest rates will be an aggravating factor.
Consolidation! Restructuring! Settlement! Default! Bankruptcy! Repudiation! Debt does not have a particularly bright future as the economy lurches ever closer to an extremely painful reset…
Consider these factors: In 1929, 59% of Americans had farm roots, nearly 100% had Christian roots, citizens were mostly united in support of the Constitution, Truth, Justice and the American way; TPTB were just a club of Satanic Elites but not the controllers of virtually everything and an all powerful cabal hell bent on enslaving us, natural resources were plentiful, people had real wealth (farmland, silver, gold and lead); and there were not any nuclear Super Powers (one has 1.5 billion people) joined with a host of other countries and 1.5 billion Demonic Muslims hell bent on our destruction. Your grandfathers Great Depression was very different; ours could easily become the Great Destruction. .
The problem is we are a complex adaptive system with high a division of labor. And that complex adaptive system supports the government through taxation in one form or another.
Complex systems fall to a lower level of complexity. As productivity and less labor specialization and trad occurs, there will not be enough to tax. Although, the government will try.
Mark, they just add some zeros to the balance sheet down at the Fed. They will steal or print electronically what ever they need unless and until they decide it’s time to let it all crash. Who knows when that will be.
Ok bill, nice read. How about some answers. Let’s say the government started promoting the things that would fix the things you mention. Let’s encourage white people to have kids. Let’s encourage minority kids to work, instead of going to college. Let’s encourage business in america.
Bea Lever your buying into a bunch of ignorance pumped up by others.
The most they can do is ban cash to trap the underground econmy. Which of course will backfire. As people will avoid the taxes by doing theirselves. In other words, lots of services will dry up. And the remaining jobs will overlap into other services.
Money printing won’t work either. See Milton Friedman “Money Mischiefs” for documentation.
In 1929 the nation was probably 90% white with Christian roots .This poisonous ideology called cultural Marxism was not part of American culture. People were independent because they had to be.No welfare , no SS ,no food stamps , no unemployment. People had to find work. All of my grandparents live on farms.Times were hard but they had food .Very little if any crime. If
We have another depression a hurricane of violence will cover this nation. They’ll be no safety even when trying to grow food.I see a complete break down of trust among people especially people of different races.It will be Hellon earth.
Star ,white kids will not save us .There is an article on the bolg Daily Stormer about white kids. It is depressing but I think the guy is right. The white kids have had it far to easy plus they have been indoctrinated with White guilt. There will be very little resistance from young white people.The government and the media are just to powerful. I think he is right.
Damn can’t spell . To much alcohol in the brain.
You’re right, bb. White kids won’t save us. But white women could, should they decide to become women again.
Now is the time for all good Women to come to the aid of their Countrymen. Have you guys given any thought to what happens if God removes His Hand of Protection form this nation so endowed by The Creator to be a Golden Cup in His Hand, A Beacon of Freedom’s Light and Succor to the world? God has and He gave a message to a Woman, Dr Patrica Green (ref “Tsunami Prophecy” on Youtube). Let those that have eyes see and those that have ears hear, Amen.
It’s just a cycle.
The last “correction” of the magnitude we appear to face was 1720-1784 or so (basis London Stock Exchange.)
This one, for reasons cited, will be worse.
I think the first part of it will be a credit collapse & deflationary depression. Once that bottoms, all the idiotic things our rulers are then doing will LOOK like they’re working, so they’ll do MORE idiotic things and for a time, the economy will look like it’s returning to the Go-Go times of the last 20 years.
That rally will eventually fail, leading to social unrest, war, citizen-government clashes, you-name-it.
It’s all been baked into the cake by 20 years of complacency.
I think the adventure of life is going to get ticked into a higher gear.
DJIA is sitting on support but price is NOT oversold on a Slow Stochastic like it was in mid-April (at a slightly lower price shelf.)
VIX is sailing higher, possibly because people are getting a wee bit nervous and want a to lay in a few hedges despite their near-certainty that soon we’ll be back in New All Time High Land.
We’ll see. If Mr. Market can get some more selling going, this is going to get interesting fast.
DC, are you a professional Investor or Adviser because you talk like one (re my son) and as if there still really “is” a market (ref to Blow Job Bill’s definition). I believe 80% of Wall Street Shyster’s business is HFT (ref the 6May2010 crash of 999 points in a few minutes starting about 2:30 PM); I think the rest of the trades are retirement funds, hedges and The Plunge Protection Team. All money that passes through Wall Street is subject to be stolen like in an Abbott and Costello routine. It’s musical chairs played in a house of cards run by fourflushing montebanks.
robert h siddell jr
Here is how Wall Street banks work
Civil War II. That much violence and chaos will steel the population. I think it is going to be real bad and guns will decide what is right.
How depressing (pun intended) would it be if there was no “bang” to end this bullshit? What if all that happens is a continuation of the current looong, slow decent into grinding poverty and despair?
Goodness knows that I want an exclamation point at the end of this, but you can’t imagine how goddamn disappointed I’ll be if the whole world banking run-facist-fuck fest just keeps clicking along and we all become even more like shit kicking serf to the majestic Lords of this proto-fuedalistic world.
My greatest fear is not conflict….my fear is is a pointless, boring end to my life with nothing resolved, which will mimic the same end as all the braindead gutless wonders around me who never knew what was going on, or gave a shit, for that matter.
Maybe that is the greatest ironic curse…that is; to be a cassandra surrounded by morons.
@Robert Siddell Jr,
If I sound like a pro investor it’s because I spent a full college degree’s worth of money (in losses) learning what I know, which is that I suck at it. I’ve studied markets and analysis for 22 years, longer and deeper than most people who do it professionally. I think most people who do well in the market are actually just herding with others, and the last 33 years have been unusually kind to the bulls.
Seriously, I agree that HFT is running the show, but it’s not a perpetual motion machine. It’s more like LTCM (from 1998) on steroids, raised to a large exponent. It increases the likelihood of a cataclysm.
Trees don’t grow to the sky. Economic axioms have not been repealed. This, too, will pass. Bonner alludes to what’s going on, but he doesn’t quite it the mark.
We have a populace besotted with perceptions of vast wealth, when in fact all it is is the most crowded trade ever. Everyone is on one side (the bull side) and what we’re experiencing today is actually even worse than the one-sided silliness of the tech moon-shot in 1999 and early 2000.
Everyone who tries to employ REASON and RATIONALITY in investing has been slaughtered (then, and now.) People who believe the Fed’s managers are fools have been hammered like tent pegs. Mr. Market is building a VAST scaffolding on which to hang nearly every participant in the stock (and bond) market. He (I like to anthropomorphize here) is beating the bears at ever opportunity, until eventually even the staunchest bear capitulates. That will be the top.
I capitulated two weeks before the NASDAQ topped in March 2000. Had I remained in my position I’d have made a small fortune as it fell 80% in the ensuing 18 months. But Mr. Market outlasted me.
I’ve shorted this absurd rally a couple times, only to be reminded that trend-following is how people make money. I currently am in a position that is tiny by every measure, and occasionally goof with a speculation here or there, but I learned that I am not well suited to this game.
A man’s got to know his limitations. The weekly trend for stocks is still clearly up, but there’s a chance this is a place where a change of trend can emerge.
I hope to keep what I have, and eventually recognize a low and begin to place long bets in a few years. Today’s market looks vulnerable, or it could eke out a new high, but I seriously doubt it has years left in the bull run. When the system rolls over this time, I very much doubt it will be salvageable as it was in March, 2009. I saw the low form then, but I never thought the herd had another optimism rally left in it. Boy was I wrong.
Loved the vid. Reminds me of my first military assignment when I was making about $4,000 per year. I left with about $50 in my Citrus & Chemical Bank of Bartow Fla passbook savings account but when I got back and went by the bank, they said I had zero. Wooa says I, look here: $50!. No Sir, says she; there is a monthly FEE of $5.00 and you have $0.00. Banks and brokers et all crooks can kiss my grits.
dc.sunsets says:
@Robert Siddell Jr,
If I sound like a pro investor it’s because I spent a full college degree’s worth of money (in losses) learning what I know, which is that I suck at it. I’ve studied markets and analysis for 22 years, longer and deeper than most people who do it professionally.
I had to look at the author to make sure I hadn’t written that. Mr. Market taught me humility and the ability to laugh at myself. Of course no one goes directly to home base like that, first you go through some self destructive activities like drugs, alcohol addiction, an affair or two, a divorce and maybe some jail time, then comes the sought-after humility.