Mr. Market Beats the Bailouts

Well, the fans are getting their money’s worth. After staggering through the last four or five rounds, the Dow suddenly came back to life yesterday.

It got up off the mat. Straightened its shorts. Did a little dance. And then wham… By the time the bell sounded, it was up 284 points.

Gold ended the session almost unchanged.

So what do you think? Who’s gonna win this match? Mr. Market? Or the fixers?

We’ll tell you: Mr. Market.

We don’t know how. We don’t know when. But we know two important things:

First, the fixers don’t know what they’re doing.

Second, what MUST happen WILL happen.

Bernanke and Geithner tried to fix this fight. But the fix wouldn’t stay fixed. Each time they proclaimed victory, along came new evidence that Mr. Market wasn’t giving up. And for the last couple of weeks, Mr. Market seemed to have the fixers on the ropes.

The fixers tried all the usual tricks – cheap money, bailouts, and boondoggles. In fact, they used more tricks and fancy footwork than anyone ever had before. Still, the economy barely responded.

And now, the latest figures show that the ‘recovery’ isn’t developing as it was supposed to. Trillions of dollars’ worth of stimulus and there are still 11 million unemployed and 40 million people on food stamps.

An IMF economist says he thinks real estate prices are headed lower. Inventories of unsold houses remain extremely high. Foreclosure rates are at record levels.

The job picture is disappointing too. With the government spending so much money, you’d think we would see a big improvement. But, by and large, people who lost their jobs in the crisis of ’07-’09 are still out of work. Many of their jobs were not merely put on hold – they were eliminated forever. And the economy is not creating many new ones.

Economists believed that a falling dollar would help US exports…increasing employment in the US. But when Europe got into trouble, the dollar went up! Americans felt the warm glow of schadenfreude. But the falling euro is great for Europe and a disaster for the US. Germany was already one of the top exporters in the world. Now, Germany is exporting even more. And US employment is still sinking.

Consumers are ready to spend. They’re willing. But they don’t have any money. We reported yesterday that people are earning less of their money from the private sector than ever before. The rest of their spending money comes from the government. They’re called ‘transfer payments’ – money that is transferred from one person to another. You see the trouble right there. If you have to transfer the money from one citizen to another, there is no net gain.

In fact, there is a net loss. Anytime you take money away from people who’ve earned it…and give it to people who didn’t…you are asking for trouble. Don’t believe it? Try it in your neighborhood. Let us know how it works out.

Of course, the fixers have no idea what they are doing. All they have is a crackpot theory about the way an economy works. They stick with it despite the fact that it makes no sense in theory…and has never actually worked in practice.

In the real world, Mr. Market always wins. He always wins because he IS the real world.

You can’t fix fights in the real world of economics. You’re wasting your time trying.


Probably the most important news this week comes from the Telegraph in London, relying on figures from John William’s Shadow Stats:

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever.

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to “grit its teeth” and approve a fresh fiscal boost of $200bn to keep growth on track. “We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on,” he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr. Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. “You truly cannot make this stuff up. The US government is freaked out about the prospect of a double-dip,” he said.

Mr. Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 – just as the Fed talked of raising rates – gave a second warning that the economy was about to go into a nosedive.

Mr. Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called “creditism” has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.

– President Obama banned drilling in the Gulf. Poor Obama. The pundits are practically blaming him for the oil spill. They say the oil slick is his “Katrina moment.” Or that his response to the disaster calls his competence into question…

The underground gusher may or may not be coming under control. The news this morning is contradictory.

But it seems unfair to pin the problem on America’s chief executive. What does he know about drilling for oil? Or about plugging holes under the ocean? Nothing.

He’s a bright fellow…but he’s spent his entire life in academia and politics. What do you expect? He doesn’t understand how the natural world works…or how an economy works. All he has are plenty of experts around him to give him a bum steer.

Until next time,

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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7 Comments on "Mr. Market Beats the Bailouts"

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My recollection was that the statement said they stopped publishing M3 because it did not any more value (than M2 did), not due to erratic-ness.


Oops, typo; ….did not ADD any more value….


While I love to give a Politician a good verbal dressing down as much as the next commenter, I absolutely fail to see how the oil problems are Obama’s fault. It’s not like he can go down there and fix it, I’m sure BP are doing everything they can to fix the problem. They can’t drill relief wells any faster. Banning drilling is probably the worst action, because it will freeze out the one thing that could bring the region back to life after the plug is fixed : new investment and new jobs.


Foreclosure rates are at record levels.

Strategic Defaults are up it seems…


That’s an amazing story from Florida. Thanks for that Shoes. Shows clearly that the US housing market and it’s lenders will take many years, if ever, to recover.


Comment by Davo on 2 June 2010:

That’s an amazing story from Florida.

I have a friend whom lives in Phoenix Arizona, he says the same is happening there as well.. people are not paying the mortgage.
Houses in Phoenix Arizona are at what is for us bargain levels and I had contemplated buying a couple to rent out, he suggests I wait as they have further to fall over the next 12 to 24 months. With family homes becoming home to multi generations there are a lot of empty houses in Phoenix so rental demand is low.


“…rental demand is low…”

Pretty much sums it up. Build where there’s less than 1% vacancy rate… and help someone who needs a place to live. An alternate sentence ending… and let someone else pay it off for you… . ;)

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