“Going for Broke” to Avoid a “Financial Collapse”

O! Bama! Where is thy bounce? Maybe it is here…

‘Black Friday’ turned out to be less dark than people feared. Sales rose 3% over the year before. This was a ‘weak start’ to the holiday shopping season, reported the New York Times. But to us, it was surprisingly strong.

In fact, many shoppers were so eager to part with money they would kill you if you got in their way. We’re not exaggerating. This report from the New York Times tells what happened at a Wal-Mart:

“Suddenly, witnesses and the police said, the doors shattered, and the shrieking mob surged through in a blind rush for holiday bargains. One worker, Jdimytai Damour, 34, was thrown back onto the black linoleum tiles and trampled in the stampede that streamed over and around him. Others who had stood alongside Mr. Damour trying to hold the doors were also hurled back and run over, witnesses said.

“Some workers who saw what was happening fought their way through the surge to get to Mr. Damour, but he had been fatally injured, the police said. Emergency workers tried to revive Mr. Damour, a temporary worker hired for the holiday season, at the scene, but he was pronounced dead an hour later at Franklin Hospital Medical Center in Valley Stream.”

Of course, when you’re fighting a major war there are bound to be some casualties…and some collateral damage. As we keep saying, the latest fashion trend is being led by the frugalistas. But some people are slow to catch on…such as the mob in Valley Stream, NY. At least Mr. Damour died in the line of duty…serving his country as it desperately tries to avoid coming to its senses.

It’s war, remember. The feds are spending more on this war than on WWII. They’re ‘pulling out all the stops.’ They’re ‘throwing caution to the wind.’ They’re ‘riding hell for leather’ to rescue the U.S. economy. Getting in their way is dangerous. For investors and store managers.

Investors should check their shorts. A major rally could be very costly. Stocks could easily bounce back half way to where they began. That would put the Dow at about 11,000. If that happens – and it could – don’t forget to sell.

It says in this morning’s International Herald Tribune that the feds are “going for broke” to avoid a “financial collapse.” Yes, exactly…that is where they are going.

Bloomberg came up with its count of how much the war against nature is costing: $7.4 trillion…with $2.8 trillion already committed. We reported a figure over $8 trillion yesterday. By the end of this week, it will probably be $10 trillion.

Anyway you look at it, it’s a big number. It has to be. According to the theory given to us by Keynes, the government has to make up for the spending private citizens are no longer doing. Americans used to ‘take out’ as much as $200 billion per quarter from their home equity. Now, they have nothing to take out. So, that’s $800 billion per year that needs to be replaced right there. And, instead of taking out, they have to put back in…that’s what a ‘balance sheet recession’ is all about. They have to pay off debt and build up savings. Our own guess is that that figure – the amount that used to be spent, but must now be used to repair finances – will rise to about 10% of GDP – or about $1.4 trillion per year. In other words, the feds will have to spend an extra $2.2 trillion per year.

For comparison and reference, the Times is reporting a $1 trillion figure. And economists argue that $750 billion of federal spending would achieve the equivalent of $1 trillion in additional output, thanks to the ‘multiplier effect.’

But today’s Times’ editorial goes on to say something uncharacteristically smart: “fighting today’s crises the government is teeing up the next one. To finance the bailouts, the Treasury is borrowing money and the Fed is printing it. That bodes ill for a heavily indebted nation, presaging higher interest rates and higher prices – perhaps sharply higher.”

Let us remind you of Tainter’s simple explanation for why things fall apart. Problems bring solutions. Solutions bring more problems. And each solution has a cost. Eventually, the weight of all the solutions crushes the system.

But we’re not going to worry about that now. We’ve got a bounce on our hands…finally! The Obama Bounce is here!

Or, at least that is how it looked to us at the end of last week. The shoppers were out…and the Dow had a winning streak last week. It rose again on Friday 102 points. Oil remained unchanged at $54. The euro/dollar exchange rate is staying put too at about $1.27 per euro. And gold rose $8.

*** “It doesn’t affect us…” said Edward, 15. “Except that you don’t let me call for a pizza anymore. I have to go pick it up myself.”

The two of us – Edward and his father – have been living the bachelor life. Elizabeth returned to the United States for her mother’s 80th birthday. The other children are dispersed all over the world. Your author’s mother – who lives with us part of the year – went back to the United States with Elizabeth. That left just the two of us, uh huh…uh huh…

Fortunately, Paris is full of restaurants and other distractions. We had dinner with friends along the canal St. Martin…the restaurants and bars were full. Then on Saturday, we were turned away from one restaurant; it was ‘complet,’ said the waiter.

But wherever we went, whomever we spoke to, the subject was the same – the worldwide financial meltdown.

“Crisis that touches everyone,” says the International Herald Tribune.

Au contraire, the crisis doesn’t seem to have touched anyone in Paris. At least, not much. In Zurich, too, there were few signs of a downturn. Christmas decorations have gone up. Shoppers have come out. Life goes on as usual.

Except for a few banks and pension funds, Europe never got caught up in the credit bubble the way the Anglo-Saxon countries did. Housing prices rose strongly, but were never based on mortgage debt or speculation. Generally, people kept their heads. Europeans never quite got in the party mood…and now have no hangovers.

Over in the English-speaking world, though, it was madness on the way up…and it is madness on the way down. Which is great fun for economists…but a little nauseating to the poor guy who’s just along for the ride.

And now everyone is caught in the gloom of the après-bubble world.

In the United States, auto dealers were the pillars of the local community. They provided convertibles for the high school football games. They led the fund drives for widows and orphans. They supported the local restaurants and bars with bonhomie and dollars.

Now, the auto dealers are in trouble. Not that they aren’t still ready to help the Fair Queen; it’s just that they don’t have any money. Sales have flattened. The salesmen put their feet up on the desk and snooze, confident of being undisturbed. While the crowds trample clerks at Wal-Mart, people selling big ticket items – consumer durables – are as lonely as a hermit. It’s one thing to lay down 10 bucks for a geegaw from China. But a $10,000 or $20,000 commitment demands reflection. And few people who stop to think about it are going to spend money – not with a major recession settling in.

How bad will it get? Of course, no one knows. At the present rate of walking backward, the U.S. economy will retrace 4% of GDP in 12 months. Nouriel Roubini says he expects the slump to take 10% off America’s GDP before it is over.

The recession of the early ’90s took only 1.3% off US economic output. The Great Depression, on the other hand, was a 25% setback (if we recall correctly).

How much will people be ‘touched’ by the slump? Again, we don’t know. What can you do? Prepare for the worst. Hope for the best. Watch out for hordes of shoppers. And beware the bigger bust the bailout brings.

(More about that as our Markets and Money continues…tomorrow… Note that we’re on our way to South Africa today…then on to Mumbai. If you don’t hear from us, it is not that we have forgotten you. Either we have been unable to get an Internet connection…or we are being held hostage by terrorists…)

Until tomorrow (hopefully),

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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