Inflate Your Debts Away

Markets and Money has moved to its Summer Schedule. Which is to say, your editor is working only half days. The rest of the time, he is painting shutters and fixing tractors.

We arrived on Friday at the family place here in the Poitou-Charente region of France. A wedding drew us hastily hither on Friday. But now we have settled into our familiar August pattern. Three out of six children have already arrived. One other will come in a week or so. Friends and other family members will trickle in for the next few days.

Since we’re on our holiday schedule, we’ll make these Markets and Moneys short and to the point.

The stock market in the US was flat on Friday. Gold rose $13. China edged out Japan to become the world’s second largest economy. Bonds rose. And the dollar fell.

The Bloomberg report:

The Institute for Supply Management-Chicago Inc.’s business barometer rose to 62.3 this month, exceeding the median forecast of economists surveyed which anticipated the measure would drop to 56. The June reading was 59.1 and figures greater than 50 signal expansion.

The Thomson Reuters/University of Michigan final index of consumer sentiment declined to 67.8 this month from 76 in June. A preliminary measure issued earlier this month was 66.5.

The Standard & Poor’s 500 Index fell 0.1 percent to 1,100.07 at 12:12 p.m. in New York. The yield on the 2-year Treasury note drop to 0.55 percent from 0.58 late yesterday and touched a record-low 0.546 percent.

The worst US recession since the 1930s was even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing, according to the Commerce Department’s annual revisions also issued today.

The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books, the report showed. Household spending fell 1.2 percent in 2009, twice as much as previously projected and the biggest decline since 1942.

Consumer Slowdown

Consumer spending, which accounts for about 70 percent of the economy, rose at a 1.6 percent pace last quarter, compared with a 1.9 percent rate the previous three months that was smaller than previously estimated, today’s report showed. Job gains have been slow to take hold, curbing household purchases.

The economy lost 8.4 million jobs during the recession that began in December 2007, the biggest employment slump in the post-World War II era. So far this year, company payrolls grew by 593,000 workers, according to Labor Department figures earlier this month.

More than 7 out of 10 Americans say the economy is still mired in recession, and the country is conflicted over how to balance concerns over joblessness and the federal budget deficit, according to a Bloomberg National Poll.

Just like the experts, Americans are torn about whether the federal government should focus on curbing spending or creating jobs, the poll conducted July 9-12 shows. Seven of 10 Americans say reducing unemployment is the priority. At the same time, the public is skeptical of the President Barack Obama’s stimulus program and wary of more spending, with more than half saying the deficit is “dangerously out of control.”

At this stage in the typical post-war recovery, the economy should be steaming along with GDP growth of about 6%. The latest reading, alas, came in at only 2.4% for the second quarter. Growth has been cut in half from the end of last year. The recovery – if there ever was one – is now faltering.

Of course, you, Dear Reader, know that there never was anything resembling a real recovery. You can recover from a fall. You can recover from a broken heart. You can recover from a head cold. You cannot recover from death. You can only become a zombie. The US economy merely became more zombified, after the crisis of ’07-’09.

Houses are underwater. People are living on food stamps and unemployment compensation. The feds control major industries. Banks are kept alive with tax money. And GDP ‘growth’ was pushed up by boondoggles, bamboozles and bailouts.

But now, even the zombies are beginning to shuffle. They need more flesh…more blood…

In this regard, Federal Reserve Governor Bullard has let the cat out of the bag. He says the best remedy at this stage would be further doses of quantitative easing. He’s right – at least within the strange context of central banker thinking. If your goal is to get the zombies moving…you need to give them some juice. And when you’ve already cut your rates to zero (the current rate is actually 0.25%), and you’ve run a deficit of $1.5 trillion, what else can you do? You’ve got to print money, right?

There are some very smart people who believe inflation rates are going up – soon. They’re urging investors to dump the dollar and US bonds. Their logic is very clean and very solid:

The US government owes more than it can pay. When a debt cannot be paid by the borrower, someone else must pay. Typically, it’s the lender who pays when the borrower defaults. But the US government doesn’t have to default. It has another alternative, the aforementioned quantitative easing – monetary inflation, in other words. Instead of defaulting on its debts directly, the federal government can inflate them away.

We have no real argument with this line of thinking. We have a hunch, however, that it won’t work out that way. It’s too obvious. Instead, we see the zombies staggering on for years…

Hey… Here’s someone who likes at least one side of our Trade of the Decade – long Japanese small cap stocks, short Japanese government bonds. Leslie P. Norton reporting from Barron’s:

EARNINGS IN JAPAN ARE outpacing expectations nicely, leaving Japanese valuations at attractive levels. Outside Japan, however, the picture in Asia is mixed, raising questions about the outlook for stocks as results are reported in August.

In Japan, despite the strong yen, a host of big companies delivered upbeat results last week, including Sony (NYSE:SNE), Honda Motor (NYSE:HMC), Nissan Motor (TYO:7201), TDK (LON:TDK), Kyocera (NYSE:KYO), and Canon (NYSE:CAJ). “In my 20 years of covering Japan, I have never seen such a positively surprising earnings season, with banks, autos and electronics all leading the way,” says John Vail, chief investment officer at Nikko Asset Management in Tokyo.

In Japan, however, the P/E ratio for the benchmark Topix index is “as low as I’ve ever seen it,” says Nikko’s Vail. “The forward dividend yield is equal to the US yield, and nearly double the 10-year Japanese government bond. You have to have a very dramatic reversal in the global economy to justify the current low valuations.”


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

Latest posts by Bill Bonner (see all)

Leave a Reply

3 Comments on "Inflate Your Debts Away"

Notify of
Sort by:   newest | oldest | most voted

I thought it was winter in Australia? Do the toilets swirl counter clockwise?


…yes tim, until australians evolve to where their hearts beat in the right side of the chest cavity, they will always be destined to play second fiddle to their northern hemisphere cousins…

Tony Hansen

re – You cannot recover from death.
Kerry Packer did, for a while, beat both death and taxes.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to