Feds Think They Can Improve the Economy by Buying Things Nobody Wants

In the US, producer prices fell in February, more than expected. Core inflation was barely positive. That is not just a US trend. In Europe, price increases have fallen to the lowest level in 11 years. Japan is experiencing the biggest price drops in many years.

This sounds like a D-word to us…disinflation, almost deflation.

One report tells us that greater than 5% of Fannie Mae mortgages are 90 days in arrears – or more. Another report says it’s 10%.

This too sounds like a D-word. Default.

But wait…

“Fed signals optimism over US economy,” is the lead headline in today’s Financial Times.

The markets responded, pushing the Dow up 47 points to a new high for this bounce…though still midway between its all-time high and its low of March 2009.

Oil rose a dollar too. So did gold. The euro edged up too…

Reading more closely, we don’t see much reason for the Fed’s optimism. And apparently, neither does the Fed. It is leaving its monetary stimulus program in place for an “extended period.” It says inflation is likely to remain subdued “for some time.”

The Great Correction (our term) destroyed nearly 8.4 million jobs (the FT’s count) and wiped out $14 trillion in household wealth. And now Americans are struggling to find firm footing in an economy with fewer job openings, less credit available, and an uncertain growth outlook.

What’s going on? There’s a word for it. Another D-word…several of them. There’s Depression. Deflation. And De-leveraging, for example.

Our old friend Porter Stansberry writes to tell us that we’re wrong about household de-leveraging. The drop in credit we reported yesterday was caused by defaults…not by voluntary reductions in debt, he says.

He’s right. Most of the decline in household credit, so far, comes from defaults. And maybe it is just wishful thinking on our part… hoping that Americans would willingly and eagerly improve their balance sheets. The savings rate is up…but it’s not yet clear whether this marks the beginning of a major trend or not.

But whatever the cause – be it voluntary de-leveraging or involuntary de-leveraging – we think there’s more of it ahead.

Here’s a statistic: 21% of Iraq and Afghanistan veterans are jobless. They’re mostly men. And mostly unprepared for the modern job market. After all, who wants to hire someone who knows how to drive a tank or patrol a gas station?

Ultimately, an economy gets rich by making and acquiring things people want.

Ah…we look back nostalgically at the Bubble Epoch. It was so easy to make fun of people back then. They thought they could get rich by buying things they couldn’t afford with money they didn’t have. Now, we’re in a new era… of sorts. Now, it’s the public sector that has lost its head. The feds think they can make the economy work better by buying things nobody really wants with money nobody really has.

Who really wants to guard a gas station in Baghdad? Nobody we know. Who’s got the money to fund the fed’s $1.8 trillion deficit? Nobody.

And think of the poor fellow who draws that sorry duty in Iraq. When he comes back to the US, what does he have on his résumé? He’s good at guarding a gas station against terrorists? Not many job offers for that skill set.

So, one in five of these fellows is unemployed. And the feds try to do something about it by spending more money they don’t have on more things nobody really wants.

Meanwhile…money may be getting harder to come by…. See below…


This, from Bloomberg:

China, Japan Reduced Holdings of US Treasury Debt in January

March 16 (Bloomberg)China and Japan, the two biggest foreign holders of Treasuries, reduced their positions of US government debt in January as a measure of demand for American financial assets fell to a six- month low.

China remained the biggest owner abroad of Treasuries, even as its holdings dropped by a net $5.8 billion to $889 billion, according to Treasury Department data released yesterday in Washington. Japan cut its holdings in January by $300 million to $765.4 billion, the report showed.

China has been a net seller of Treasuries for three straight months, the longest such stretch since the end of 2007. Chinese officials have questioned the dollar’s role as a reserve currency and recently sought assurances about the safety of US government debt as the budget deficit widens to a projected record $1.6 trillion this year.

“Foreign central banks stopped buying Treasuries in January,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “If this were to continue, if China were to stop recycling its dollars into US Treasuries, it could have dire implications for Main Street America in that mortgage rates could move higher.”

“More Jains taking up santhara,” reports the TIMES of India.

Santhara (also called sallekhana) is the Jain practice of voluntary and systematic fasting to death. Jain texts say it is the ultimate route to attaining Moksha and breaking free from the whirlpool of life and death…

Nearly 500 people took the road to Moksha in 2008, the paper reports. The article goes on to tell us that more women than men starve themselves to death, because they are “more strong-willed” than men.

In the past, when people took the holy vow of santhara they used to advertise it in the local papers. This would allow friends and relatives time to come over and say goodbye. Now, the government is said to be cracking down on the practice; apparently, you are no longer permitted to advertise. Now you have to die alone.

“Eunuchs want rape laws to be gender-neutral,” is another headline from the Indian press. We couldn’t make out the cause of the eunuchs’ complaint. Rape laws are already being rewritten in a more politically correct way; the word ‘rape’ is to be replaced with ‘sexual assault.’ But the eunuchs feel they are still not getting the attention they crave. They are often “the targets of some of the worst sex crimes in India,” said a spokesperson.

“Economy expected to grow four-fold by 2020.” Think the headline refers to the US? Britain? France? Think again. It’s the subcontinent the article talks about.

Edelweiss Capital predicts a nominal growth rate of 13% per year for India…leading to a GDP over $4 trillion in 10 years. Per capital income is expected to rise too – from $1,017 per year now to $3,213.

Imagine what these mean to business and investors. Even if you have a mediocre business you can expect your sales to triple…or quadruple…over the next 10 years.


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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