The Planet’s First Worldwide Bailout

The rally seems to be continuing. The Dow rose 70 points yesterday. Oil slid up to $44. Commodities went up too. And gold shot up $34 – to $808.

The markets must be “looking ahead”…right over the worst economic news in 60 years.

It’s the “worst spending slump since ’42,” says a headline at Bloomberg. In ’42, the United States was at war with Japan and Germany. And it looked for a while as though we might lose! No wonder spending collapsed…the economy was shifting to a ‘war footing.’

And now spending is collapsing again. And this time the economy is again shifting to a war footing – a war against deflation. Why fight deflation? Doesn’t it lower the cost of living? Doesn’t it make it easier for poor people to eat?

Well…yes…maybe. Deflation lowers prices. Deflation favors the poor…at least in the early stages.

The number of corporate bankruptcies is expected to soar next year. According to the Financial Times’ tally, more than 300,000 businesses will go bust in America, Britain, Western Europe and Japan. Who owned those businesses? Not the poor.

You can do the math as well as we can, dear reader. Imagine that each bankruptcy puts 100 people out of work. Let’s see, that 30 million people without jobs. The middle-class unemployed draw down their savings and begin spending their pensions; the poor will have to continue to live hand to mouth. Advantage: the poor again.

Yes, it’s the planet’s first Worldwide Depression. And the planet’s first Worldwide Bailout. Now the meek are inheriting the world. The downtrodden are getting up off the ground.

The latest news from India tells us that the government is pumping $4 billion into the economy to try to pep it up. $4 billion may not be much to you…we’re now used to trillion-dollar bailouts…but India is a poor country. A billion still means something.

The latest measure brings to $60 billion the total India has committed to the fight against the slump. Even that, say critics, will not be enough. But India is not in such a bad slump – at least, not yet. GDP is moving ahead at a 7% annual rate. Indians may be poor…but they have little debt…and they’re getting less poor every day.

Our Indian colleague, Ajit Dayal, says India is in a good position:

“Our financial sector never went in for sub-prime debt. There is very little consumer credit in India. Inflation is going down; it’s expected to be only about 1% next year. The economy is still growing fast. We have a huge domestic demand; we aren’t as reliant on exports to the USA as China is. And our stocks are very cheap. You can buy companies in India now for less than the cash they have in the bank…and at 2…3…5 times earnings. There is even an oil company paying a 10% dividend. India will be just fine. And as soon as foreign investors realize it, Indian stocks will rise again.”

Meanwhile, in the U.S.A., Mr. Obama hints at what is ahead. It will get worse before it gets better, he keeps saying. And if it doesn’t get worse on its own…he’ll help make it worse!

The Financial Times reports:

“While noting the US budget deficit might already surpass $1,000bn, Mr. Obama added:

“‘We understand that we’ve got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can’t worry about the deficit.'”

So you see, Republicans…Democrats…deficits still don’t matter. Even though deficits are the root cause of the present predicament, the Obama Administration is planning to give us more of them. Oh dear reader…this is going to be Hell to live through…but it’s going to be fun to watch.

We’re going to see more transfusions than in a Baltimore emergency room on Saturday night…there’s going to be blood all over the place. Deficits will hit more than $2 trillion before this is over.

And what else? The price of gold will probably go to $2,000…so take advantage of the low price now, while you can.

Yes…it’s going to be fun…

Will all these bailouts work? Of course not. The government has no real savings. What can it do? Either borrow…or just print up the money the way they do in Zimbabwe. Either way, all it is doing is shifting resources away from people who earned it…and towards people who didn’t.

It’s a hidden tax that people don’t complain about…because they don’t understand it. Who will be the recipients? The insiders, of course…but also the outsiders. That is, while the elites will skim a good deal of the loot for themselves, quite a lot of it will go to “the poor.” Why? Well, two reasons – one legitimate…the other corrupt. Since the poor have no balance sheets to repair, the feds can be sure that if they give the poor money it will go right back into the economy. More importantly, the poor vote. And you can buy more poor votes for less money than you can buy rich ones.

So you see, dear reader, the poor are coming out way ahead. Everyone else is losing money…and they had nothing to lose.

Keep reading for today’s guest essay, where Alice Rivlin, who was the first director of the Congressional Budget Office, and now works at the Brookings Institution, explains why she thinks deficits matter.

*** So far, the bailouts have worked like a straightjacket. The more the feds fight against the correction, the tighter the straightjacket binds…restricting their movement even further. Already, they’ve committed more than $10 trillion in various bailout measures…and the more they try to fix the problem, the worse the problem gets.

They’ve not got much wiggle room left. As for monetary policy, the Fed has used all but 100 of its basis points. A couple more rate cuts and the key Fed rate will be zero.

Could it go below zero? Not really. But the feds could impose a penalty on cash deposits…as Switzerland once did. Or…they could simply inflate the currency so people will want to get rid of it as quickly as possible. Either way, people who save their money for a rainy day will lose money.

Of course, they’re losing money already. The real rate on savings is negative… the inflation rate is about 3% or 4% while the return from money market funds is zilch. Well, actually, zilch would be an improvement. Savers are losing a couple of percent per year – just to inflation.

Who saved money? Not the poor.

But even the savers count themselves among the lucky ones. Stocks are down about 50% worldwide. Mutual funds have gotten hammered. Hedge funds have been clipped for big losses. Leading American brand-name companies are down 50% to 80%. Middle-class Americans have seen their 401(k)s cut in half…while their houses have lost 20% of their value, and are still going down.

The poor have none of these things. In fact, the poor have no financial assets at all.

Remember the advice financial planners used to hand out: put your money into a balanced portfolio of various asset classes. One might go down…but they won’t all go down.

Oh yeah? Almost every asset class has been hit hard…growth stocks…retailers…technology…energy…emerging markets… And not just stocks, suppose you put your money into one of those nifty partnerships with swaps and SIVs and other investments the experts said were as safe a T-bonds? You’d be lucky to have anything left at all.

And commodities? Weren’t they supposed to be so scarce that they couldn’t go down? Even we cynics at Markets and Money were almost convinced. We knew oil was too expensive at $147…but we thought it was fairly priced at $90. Now, it’s less than half that.

Just goes to show…you never know. You know that what must happen, will happen. But you never know how much it will happen…or when.

Now investors are losing money in EVERY ASSET CLASS – including cash. Is this a first? Maybe.

But now we can more fully appreciate the elegant wisdom and justice of the free market system. Mr. Market may be a hanging judge…but at least he’s fair.

The great asset bubble seemed to prove out the old expression “the rich get richer and the poor get poorer.” But it was all a mirage, caused by a bubble in credit. The rich were getting richer…but only on paper. And now paper of all sorts is going up in smoke. The “rich” have lost a quarter to a half of their wealth. The poor have lost relatively little. Now, the rich get poorer. And the poor? Well, they will always be with us. But being poor is not so bad. Many of the middle-class lumpenhouseholders, for example, are “upside down” on their mortgages. They’re below zero, in other words. The poor – with nothing – are ahead of them.

Who would have thought?

*** The English press has focused on the personal side of the downturn.

Turns out, a lot of women who married rich men in the financial industry were in it just for the money. “Toxic wives,” at least, that’s what the press calls them.

A recent article mentioned a man who had turned to his wife a year ago and asked:

“Would you still love me if I lost all my money?”

“F*** no,” was the reply.

The banker thought his wife was just being playful. But when he lost his job in The City (London’s answer to Wall Street) she moved out…taking what little money he had left.

The commentators despise these women; they married men only for the money. But what’s wrong with that? Money was all these men had. Besides, anyone who marries for money earns it.

Meanwhile, the Financial Times reports on another phenomenon, said to be linked to the financial crisis. Men and women – usually married – are turning to “adultery websites” for comfort. One is called “Illicit Encounters” and features people who appear to be professionals – many from the financial industry. They describe themselves as investment bankers or stock analysts, go by handles such as “Alpha 123” or “CityGent”, and say they are looking for love, romance, or just casual sex. The website charges men 119 pounds. “Women go free.”

Until tomorrow,

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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