The Day of Reckoning is Upon Us

We are thinking about retiring. Taking up cattle ranching maybe. Or maybe becoming a hermit.

Those are the kind of thoughts that must have passed through millions of minds yesterday.

“The Reckoning…” the New York Times is calling it.

Yes, our ‘Trade of the Decade’ is working like a charm. While the Dow collapses, gold goes up! And from the looks of it, will continue to go up…

But we can’t take any pleasure in it.

“Our business is offering people financial advice,” explained a colleague. “When the market goes down like this, people just lose interest. Nobody wants financial advice. They just want out.”

Now, everyone seems to want out.

And so…the reckoning falls on Markets and Money too…and everyone looks to his own: “How will I afford to pay for the vacation home we bought last year?” “What if I lose my job?” Well, at least I’m not the only one!”

At least, we hope our Dear Readers are safe and sound. Did you pay attention to our “crash alert” flag? Did you sell stocks on rallies, like we suggested? Did you buy gold on dips?

We hope so. That’s about all you can do.

What about bonds? Yes, U.S. Treasury bonds have been rising too. As the crisis deepens, they will probably rise more. But where’s the margin of safety? Put your money into a three-month T-bill and you get almost zero interest. True, you won’t lose any money in nominal terms. When the moment comes for the U.S. government to pay you back, you can be sure the money will be there. But, eventually…and maybe it is still a couple of years away…that money will go bad. (More below…)

Today’s news tells us that the Treasury is getting ready to follow the British example – by nationalizing the banks.

The U.K. approach, explained colleague Andrew Vaughn, “provides Tier 1 capital and a requirement, not a mere hope, that banks will lend. The package specifically precludes the possibility of a bank taking the money, and then just hoarding.

“Yesterday’s interest rate cuts around the globe were a watershed moment,” Andrew continues, “because they were coordinated. It gives markets the signal that action by the authorities in one country is no longer simply going to cause capital flight elsewhere. Without interest rate cuts outside of the U.K., yesterday’s U.K. events would have caused a fall in the pound – the bailout package because of the surge in government borrowing associated with it, and the interest rate cut because of the resulting interest rate differential (the pound would otherwise have become lower yielding relative to other currencies).”

Yes dear reader, it is the new world order. Governments now work together. They’re all going to take over the banking business – to one degree or another. They’re all going to guarantee deposits. They’re all going keep the wheels of finance turning. Hoorah for government! Guvmint is no longer the problem; it’s the solution. And not just one government…but all the world’s governments working in harmony to make a better, safer world.

Or, as David Brooks summed it up in a NY TIMES editorial…what we all need is “leadership.” Hail to the chief!

But wait. Aren’t these the same chiefs who have been regulating, controlling, meddling, intervening, rescuing, and leading mankind since civilization first appeared on the banks of the Tigris? Well, yes. But according to the prevailing sentiment, our leaders took a break after the Reagan/Thatcher revolutions. They went into exile…loafed…worked on their tans…and got fully rested. And now, it’s time to call them back to service. Bring back the old aristocracy of bureaucracy. Let them do what they do best – make an even bigger mess of things.

So far, the more the authorities fix things, the more they don’t work. Prices are going down to where they want to go – despite the efforts of the regulators.

But what’s ahead? No one knows, of course. But it looks to us as though there is more credit contraction where this came from. The boom ran its course. The bubble ran its course. Now, it’s the bust that will run its course.

And the authorities will do what they do too. Look for more intervention. More government spending. More takeovers. More controls. More bodies dragged through the streets.

The feds will continue to try to reflate the bubble. But there are a thousand leaks already…and more holes seem to be popping open every day. Every time a family is pinched by tighter credit or lower revenues, it closes its wallet…cuts spending…and further reduces the air pressure. Every business that sees its revenues falling… Every banker that checks his balance sheet and realizes he has to call in loans… Every investor who looks at his positions and panics…

All of them gasp together…

…and the Great Credit Contraction gets worse.

Bill Bonner
for 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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1 Comment on "The Day of Reckoning is Upon Us"

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Coffee Addict
The current financial crisis identifies huge flaws and gaps in knowledge and contextual understanding. The possible Day of Reckoning for Agora, to which Bill sadly refers, could (or perhaps should) be a call for reflection and change. One certainty is that people are still greedy. People will always like the idea of making money at the end of a keyboard – and if they can easily access the required knowledge edge they will. Properly partnered, Agora (& Port Phillip) could develop some really interesting interactive learning products. “Dear Readers” could use a portal to basically go anywhere they want –… Read more »
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