If Bridgewater is Right, the Whole Financial Sector Will be Guttered

One trillion, six hundred billion dollars is a lot of money. If Bridgewater is right, the whole financial sector will be gutted. You’ll remember, dear reader, after manufacturing pulled out of America, the financial industry was left. And retail. Housing. Services. And not much else. The center of economic power shifted from Detroit and Trenton – where they made things – to Manhattan, where they financed them. Mothers ceased wanting their babies to grow up to be CEO of General Motors; they wanted them to go to Wall Street. That’s where the real money was. Finance was the key not only to huge profits itself, but also to the growth of the retail and housing sectors. People bought durable goods and consumer goods on credit. No credit; no purchases. No purchases; no consumer economy.

Well, now GM has lost 75% of its value…and the financial industry is not far behind.

Well, Bridgewater goes on to say that a $1.6 trillion loss in the financial industry will mean a loss of $12 trillion in credit to the economy as a whole. When the lenders don’t have capital, they can’t lend it out. Typically, they lend $10 for every dollar of capital. So if a dollar of capital is wiped off their balance sheets, as much as $10 of credit is erased from the economy.

Here at Markets and Money headquarters in Europe, we’re used to high prices. One billion? Heck, we spend much that on lunch. But $12 trillion begins to sound like real money. And $12 trillion taken out of the U.S. consumer economy begins to sound like the Great Depression. Like Japan, 1990-2006…only worse. Collapsing asset prices. Rising unemployment. Bankruptcies. Defaults.

Of course, no central bank or government will go into that good night without a fight. The Fed will cut rates…and lower reserve requirements…and probably intervene directly in markets. Banks will be effectively nationalized…as has already happened with Northern Rock in Britain. The federal government will increase borrowing and spending to try to offset the money disappearing from the markets and the economy. Yesterday, we mentioned $1 trillion deficits. Think $2 trillion deficits. Maybe more.

What about the foreigners? What about Sovereign Wealth Funds? They’ve got a lot of money. Couldn’t they help recapitalize the credit system? Alas, the SWFs have only $3 trillion currently. And the foreigners? Our guess is that when they realize what is happening they will be desperate to get rid of dollars and U.S. paper of all sorts. Instead, they’ll want real resources, factories, brands, concrete and land. And they will have a great opportunity. As asset prices fall, they will be able to buy more valuable properties in America at bargain prices. Already, Abu Dhabi bought the Empire State Building. A Belgian brewery, run by Brazilians, is buying Budweiser. More to come…

*** How’s our Trade of the Decade doing? Eight years ago we suggested you sell stocks and buy gold. The bull market on Wall Street was over, we thought. A bull market in gold was just beginning.

As far as we can tell, we were right.

The S&P is down about 20% from its high…which puts U.S. stocks barely lower than they were in 2000. But adjusted for inflation, the loss has been spectacular. Remember, oil has gone from around $10 a barrel to around $140 a barrel. Everything else has gone up too. Even by official CPI numbers, the year 2000 buck is worth only about 80 cents. And the dollar against the euro is down about 40%.

Real bear markets typically last 10-15 years. This one has another few years to go. These should be the most interesting ones. Commentators are already looking for a bottom in the stock market. They may have to wait a long time.

An ounce of gold would buy the whole Dow in 1926…again in the 1930s…and once again in 1980. If gold stays where it is, the Dow would have to drop below 1,000 for the gold/Dow ratio to return to one. More likely, the Dow will drop and gold will rise to meet it. In 1999, gold bottomed out at around $260 an ounce. Since then it is up nearly 5 times. The U.S. money supply, however, has gone up 11 times. So, our guess is that there’s plenty of upside left for the stuff they make dental fillings out of. If it were to equal the increase in M3, its price could rise to $2,700 or so.

This is all guesswork, of course. But the Trade of the Decade still looks good to us. Gold and the Dow will probably come together somewhere north of 3,000….

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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3 Comments on "If Bridgewater is Right, the Whole Financial Sector Will be Guttered"

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GM is a large part of the foundation of the economy. If GM is bankrupt, then so is America. The financial sector has already been guttered.
– Got Gold?

Smack MacDougal
Bill writes, “When the lenders don’t have capital, they can’t lend it out. Typically, they lend $10 for every dollar of capital. So if a dollar of capital is wiped off their balance sheets, as much as $10 of credit is erased from the economy.” Lenders lend cash (rent cash to cash rentees). Investors BUY capital (the right to claim future income). Investors buy capital from banks. When banks lend cash in the form of loans, banks buy capital from cash rentees. A bank that has cash or cash equivalent instrument can deposit such with the Federal Reserve as a… Read more »
jack carter
No doubt the bail out is necessary, but will it be sufficient? Almost certainly not. The consumer is in terrible shape and the proposed financial fix does not touch the hell of consumer finance which involves the rest of the financial market now considered “safe”. Will, not really because supply of credit and demand for credit are two very interdependent variables in the determination of the level of economic activity. It is also certainly clear that the load has shifted to the point it is going to topple – no matter what. To Get Ahead of the tragedy we need… Read more »
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