Curing the Problem of Over-Consumption by Spending

The Dow got a break yesterday – up 270. Oil closed at $46. Gold rose $6 to $783.

The recession, says Bloomberg, is just beginning.

And a group of economists working for the UN says the dollar is likely to fall hard.

Meanwhile, shopping may be a patriotic duty in America…in Britain it’s “Christmas every day,” says the Prime Minister.

Where do they get these ideas? What makes anyone think you can solve the problem of excess debt by lending people more money? Who is dumb enough to think that you can cure the problem caused by too much spending…by spending more?

Who’s that dumb? Well, most of the world’s leaders and top economists…or so it appears.

They have their claptrap theories, of course. But theories don’t really count for anything. We’ve seen that. They all believed in the free-market…right up to the moment the free-market seemed to be failing. Then, they believed they had to “do something” to protect people. Protect them from what? Protect them from getting what they deserved!

Take Wall Street, for example.

This week, the geniuses at Goldman got another hard whack. Their stock sold off after rumors of a loss of $2.5 billion for the third quarter began making the rounds. That puts Goldman stock down 70% this year.

But what did they expect? What they deserve? This is the company that Hank Paulson put on steroids…with a whole financial engineering department, designing the kind of investment bridges you wouldn’t want to drive over.

Or how about Detroit? The automakers are still haunting Washington. They don’t have any money of their own, so they’re looking for taxpayer’s money. GM says it needs $18 billion – bad.

If they don’t get taxpayers’ money, they say they’ll be forced to turn to the Swedes or worse…the Chinese!

We suspect they’ll get a bailout. But what do they deserve?

Here are companies that have been around for an entire century – plenty of time to learn their trade. And they’ve been in the center of the best auto market in the world – the United States of America. If you couldn’t make it in the car business in the U.S….you had to be hopeless. Nobody bought more cars than Americans.

And these companies had every advantage – they had capital, they had the sales and service networks reaching into every Middlesex, village and farm in the nation. They knew their customers better than any of their foreign competitors. And they didn’t have to ship their cars across an ocean to sell them.

For a half century, it was downhill driving for America’s automakers. But it’s very hard to recover from success. And Detroit couldn’t quite do it. They squandered their money…they missed their market target…they saddled themselves with costs that gave them a disadvantage and hobbled them so greatly it was almost impossible for them to compete – even with the playing field tilted in their favor.

Then, even when asking for a handout, Detroit’s executives couldn’t seem to get its signals straight. They flew into Washington on their private jets…apparently unaware that anyone would notice.

What do they deserve? They deserve to go broke.

*** We’re in South Africa…with little time to write.

What’s going on in South Africa? Near as we can tell the place is still booming. The restaurants are full. Shopping malls are busy. There are cranes and backhoes blocking the roads.

The local paper tells us that the economy is going flat…with zero GDP growth expected for 2009.

Curiously, you can put your money in a bank and get 12%.

“That sounds like a very good deal,” says an American colleague. “It’s not such a good deal for people in South Africa because inflation is about 12% too. You don’t actually come out ahead. But if you don’t live in South Africa and don’t pay your expenses in rand, you don’t care about inflation. What you care about is the exchange rate. So, I ask myself…which is most likely to go down? The South African rand? Or the US dollar? I don’t know. But I’d guess that the dollar is a bigger risk than rand. South Africa is a resource economy, so the rand has gotten hit hard. And the dollar has gone up because so many people want the safety of Treasury bonds. But at some point, the dollar is bound to fall. So, I figure I can collect high rates of interest on South African investments at very little real risk.”

Of course…we’ll see.

Until tomorrow,

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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3 Comments on "Curing the Problem of Over-Consumption by Spending"

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Coffee Addict

“There is no shame in going bankrupt. There is only shame in being owed money by a bankrupt”: a quote from the past.

Clearly, the “re-arranged bankruptcy” for GM and Chrysler which is now being mooted by Alan Gover and others in today’s Bloomberg is the only viable compromise. Lets just get-it-done!

Concerning the other bit of Bill’s post on South Africa, the key to success or failure is political governance. Is it still an each way bet or have things improved?

Charles  Norville
When man kind moved out of the great ice thaw some 11k years ago our brains started to challenge further our surrounding and we developed technology at an accelerating rate. Where man perceives an imbalance it is viewed as challenge, we cannot help our innate genetic behaviour to event things – those with less talent invent bubbles. It has always come down to energy-materials per capita ratio. If a society does not have enough of this ratio to that of an adjoining society, then an application of military or/and economic solution occurs, a process that has advanced superior armies (not… Read more »
Jon Bain
Welcome to Africa, Bill. The rand lost value recently because Americans were pulling out their profits from the stock market to shore up their investments back home, so rands were freely available. It was a misguided sense of patriotism, that means they are throwing good money after bad. But that just means there is an opportunity here for someone else. If you take a look at the buying power of the rand, it is so undervalued, its ridiculous. The value of a currency, is of course determined by what you can buy for it. The ‘official’ exchange rates are a… Read more »
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