Investors Might Lose 30% in Purchasing Power Over the Decade Ahead

The weekend gave people time to think. Too bad. Thoughts lead to action, which leads to trouble.

What the commentators, pundits, and policymakers are thinking about is how to ‘fix’ problems in the capital markets. Most of them couldn’t fix a flat tire, of course. But that doesn’t stop them. They imagine that they can find the hole in the world’s money system…and patch it.

“U.S. readies overhaul of financial regulation,” is today’s big headline in European version of the Wall Street Journal . The article goes on to tell us that a whole group of changes are coming our way. As near as we can tell, these changes mean nothing – they are simply rearranging the bureaucrats’ desks. This is the plan put forward by Hank Paulson, former Goldman chief executive and now head man at the Treasury.

Critics charge that it doesn’t go far enough…that it is really an extension of the deregulation trend that got us into trouble in the first place. A whole chorus of whiners is now calling for re-regulation of the financial institutions – with heavy emphasis on mortgage lending.

“Free market thinking takes hit from U.S. economic crisis,” reports an AFP story. “Bush mortgage bailout in the works,” adds the New York Post .

Alas, ‘improvements’ seem unavoidable.

March 14th, 2008, was the ‘day the dream died,’ according to Martin Wolf in the Financial Times . The dream was the dream of “global, free-market capitalism,” says the report. The world’s wake-up call came, it continues, when the Fed decided to bailout Bear Stearns.

The ‘dream’ was more like a hallucination, in our opinion. We can imagine that we live in a free market world. But the world’s central banks have been fixing the price of credit, fudging the numbers on inflation, and printing money all along. Now that we have a crisis on our hands – embellished and exaggerated by central bank planning – the long knives are out for ‘free enterprise.’

The ‘Anglo-Saxon’ model – as full of illusions, conceits and absurdities as it is – is still the best model, because it allows fools and their money to part company relatively quickly. Every other model merely slows it down…gumming up the gears with special privileges, protections, and government-granted larceny. The real problem in today’s capital markets is not that the machinery of capitalism is broken, but that it’s working. And that is what the reformers aim to stop. They want to ‘fix’ the markets… like you would ‘fix’ a stray cat – so it couldn’t have kittens. What they really want is to neuter the market…spay it, so it is a cuddly pet, but one that doesn’t give you any trouble.

So far, U.S. homeowners have lost probably about 12% of the wealth they thought they had in their houses. The total capital value of the residential housing market is about $20 trillion. So, a 12% loss is equal to about $2.4 trillion. A few foreign housing markets have been hit harder – Ireland, Spain and Iceland, for example.

The equity markets have been hit by similar losses. Equity funds alone have seen $100 billion of cash pulled out by nervous investors. But here – something curious – “In an ugly global crisis, U.S. markets not so bad,” another WSJ headline.

In 2008, the Dow is down 7.9%. But foreign markets are down more. France has lost twice that amount. Germany has dropped even more – 18.7%. But the biggest losses are in the go-go markets of the East. Indian stocks have lost nearly 20% of their value. The Shanghai stock market has fallen 32%.

Overall, non-U.S. and Canadian markets are down about 15% – meaning, that the world’s equities have taken a loss of about $4.5 trillion in local currency terms…or about $3 trillion when measured in dollars. (The dollar has gone down so that dollar-based investors have lost less on foreign markets than local investors.)

We have been pointing out that these huge reductions in the implied wealth of the world’s investors weigh heavily on the deflation side of the scales. The money people thought they had is disappearing. To a hedge fund investor, the vanished money may mean nothing more than a missing digit on his portfolio report. But to a marginal homeowner, the losses force him to change his standard of living – cutting back on expenses so as to balance his family budget. For not only does he have less money, his costs keep going up. Every three months the American Farm Bureau buys a typical bag of groceries. This quarter, the price was up 8.9% over a year ago. And gasoline? It’s up 64 cents a gallon over the last 12 months.

“Economic downturn worsens in March,” says Money Watch.

A good part of the world economy seems to be drifting into a slump – despite the efforts of the feds to keep the money flowing.

“Capital shortage lingers despite Fed’s latest steps,” reports the WSJ . The banks are rebuilding their balance sheets; they’re not taking on more risky credits.

Analysts will take aid and comfort from the performance of the U.S. market so far this year; they will see it as a sign of strength that American equities have sunk less than others. But it is really a sign of weakness. While foreign markets soared over the last 10 years, U.S. stocks went nowhere. Having not gone up, now they’re not going down. And while they are not going anywhere, the value of the dollar continues to fall – wiping out stockholders’ real wealth. In terms of what they can buy on world markets, U.S. stock market investors have lost 25% to 30% of their purchasing power over the last decade. They’ll probably lose another 30% over the decade ahead.

And so, we turn our weary eyes back to Japan. The sun set on the land of the rising sun 18 years ago – when the air went out of Japan’s bubble and the Nikkei crashed.

Japanese authorities have been pumping ever since – but the air leaks out about as fast as it goes in. This year alone, the Nikkei has lost 16% of its value, bringing it down to a level that is less than one-third its peak in 1989.

In real terms, we suspect that that is where U.S. stocks will end up too – maybe five years from now…maybe ten years.

But – not without a fight!

“Japan’s ‘lost decade’ offers dire pointers for the Fed,” says a headline in the Financial Times today. The pointer is that the Fed should act fast and aggressively to bailout the banks and homeowners. According to legend, Japanese officials dithered. They failed to react quickly enough so that by the time they finally got moving, it was too late…a deflationary slump was already underway and impossible to reverse.

Ben Bernanke went over to Japan years ago to offer advice on how to get out of the deflationary trap. Now, he has a chance to show the world how it’s done. Will he succeed? We doubt it.

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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Paulson’s plan has clearly been some time in preparation, waiting for the proper trigger event (much like the Patriot Act and 9/11). Without being too cynical, there will be much devil in the detail and inevitably a transfer of power to friendly interests, which may dwarf any beneficial effects.

The Fed has presided over the path to this debacle — it would seem its role as guardian of Wall Street is to be cemented. Nothing I have seen so far convinces me this will avert the events already in train.

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