Government Could Succeed in Reflating the Bubble

A hedge fund manager came by the office yesterday.

“There’s a new theory making its way around Wall Street,” he explained. “Some people think that the government will succeed in reflating the bubble. They’re putting so much money into it that they’re going to be able to create one last super-bubble…a little like the 2004-2007 period.”

Anything is possible. We were surprised the feds were able to inflate the last bubble. Back in 2002, we thought the bubble days were over – instead, the biggest bubble of all was still ahead.

The dotcom bubble had exploded. Stocks were going down. The economy was in recession. But the recession turned out to be very, very mild. Most people seemed unaware that there was a recession at all. Spending never went backwards…not an inch. In fact, all the trends already in place continued…and got much, much larger.

It is very different now.

“There’s a major change going on; most people have not noticed,” said our new friend. “People are spending money differently. First, it is obvious that they are forsaking the higher priced stores. Our fund is taking advantage of this in a very simple way. We’re short the luxury retailers and long the discount stores. Because people are changing their shopping habits. And we expect this to go on for a long, long time.

“They’re also buying different things. Everyone knows that sales of guns and ammunition are going through the roof. There are actual shortages of some items. But people are also stocking up on gardening supplies. They’re planting gardens in order to grow some of their own food. And they’re buying home entertainment systems – videos…sound systems and so forth. Instead of going out to the restaurants or the movies…they’re staying home. So, they’re making their homes more comfortable…and safer.

“Speaking of safer…sales of home safes are also taking off. They want to protect what they’ve got.

“And speaking of restaurants…have you looked at what is happening? Same phenomenon as in the retail sector. The lower priced, fast food places, such as MacDonald’s, are doing fine. But just look at the ‘casual’ dining places – the places where middle class people go to eat…places like Appleby’s and Friday’s. They’re losing a lot of business.

“What I think is happening is this: people are reorganizing themselves for a different, less expensive lifestyle. They’re spending less already…but they’re preparing to spend even less in the future. Instead of going out to the mall or to a restaurant…they’re going to stay home.”

Whence cometh this desire to stay home? Remember, this is not a recession…and not even a phony recession such as we had in 2001-2002. This is different. It’s a balance-sheet depression. People are cutting back in order to repair balance sheets.

How do you repair a balance sheet? It’s not as easy at taking it in to the Pep Boys…or the muffler shop. Instead, you have to pay down debt and increase equity. You have to become wealthier by saving money, rather than spending it. That’s what companies are doing. That’s what individuals are doing. And that’s what the government ought to do.

Americans were saving almost nothing a couple years ago. But in the first quarter of this year, they saved 4.2% of disposable income – or $453 billion (annualized). That’s up from just $20 billion a year before.

Saving money is the wrench you need to repair a balance sheet. After a very long time, finally, American grease monkeys are getting to work.

“Americans are making big structural changes in the way they live. These changes are going to have a big impact on the economy for many years to come,” our friend concluded.

Until tomorrow,

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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