The Lies That Bind…

News Flash:

WASHINGTON (AP) – Consumer spending rose in March by the largest amount in five months but the gains were financed out of savings, which fell to the lowest level in 18 months. A slight rise in incomes added to concerns that the recovery could weaken unless income growth increases more rapidly.

This is supposed to be a recovery. Everyone thinks it’s a recovery. All the papers say so. Investors are betting on it. Politicians and economists are congratulating themselves for it.

The only trouble is, the things that need to recover so that there can be a genuine recovery are not recovering.

On the surface… says the job situation is improving.

Case & Shiller say the housing market is improving.

Yesterday’s news also told us that Europe has agreed to bail out its problem child, Greece. The New York Times:

ATHENS – Greece announced on Sunday that it had reached agreement on a long-delayed financial rescue package that would require years of painful belt-tightening, but the deal might not be enough to stop the spread of economic contagion to other European countries with mounting debts and troubled economies.

The bailout, which was worked out over weeks of negotiations with the International Monetary Fund and Greece’s European partners, calls for 110 billion euros, or $146 billion, in loans over the next three years intended to avoid a debt default.

And so, on the back of this good news, the Dow recovered what it had lost on Friday. Oil traded at $86. And gold edged up 2 bucks.

Up, down, up, down – suddenly, the stock market seems nervous. Maybe it is beginning to realize that the recovery story is a lie…a fake- out…

We have a feeling that the present volatility is going to be resolved by a decisive move to the downside. So, we’ll keep our ‘Crash Alert’ flag up the pole for a bit longer.

Of course, we’ve been wrong about the timing before. And if we’re wrong this time, don’t bother to send us an email. Some of the world’s most important fortunes have been preserved by selling too soon. We won’t mind being a bit premature again.

“This recovery has nothing in common with typical post-war recoveries,” we told our audience in Las Vegas on Saturday, “because the recession has nothing in common with the garden-variety recessions of the post- war period. This time it’s different…”

Which is to say, this time it’s the same…it’s coming back to normal…not getting more bizarre.

In the meantime, unemployment benefits have been extended three times. Now, they’re going to expire with some 15 million people out of work.

The first-time house-buyer credit has expired too.

And the feds have already shot off their monetary and fiscal ammunition… They’ve already used more stimulus than any time government ever used.

And what did we get for it? After $8 trillion worth of banking and financial guarantees…plus deficits greater than any the country has seen since WWII…

..all we get is a small upturn in the key figures. They’re still terrible. They’re just not getting terribler…at least, not right now.

What do you expect? The figures can’t do down forever. They’ve got to turn up. But they look more consistent with a zombie economy and a long, drawn-out correction than with a real, robust recovery…

But wait. The government keeps track of these things, doesn’t it? And it reported on Friday that the US GDP grew at an annual rate of 3.2% during the first quarter.

Well, well, well…guess that settles it. We are wrong again. Recession is over. Break out the champagne. That makes three quarters in a row with positive GDP growth.

But hold on…

The GDP number is just another one of the lies that bind investors and consumers to bad ideas and keep them coming back to bad habits. More on that later in the week…

And more thoughts…

“This country is turning into a police state, and no one seems to notice,” said a young voice over the weekend.

“Mom and I were having dinner in Charlottesville. I thought I’d have a glass of wine with dinner. But the waitress asked to see my ID. It hadn’t occurred to me that I needed to be 21 to have a glass of wine with dinner. I thought that was just for alcohol, like whiskey.

“Mom told the waitress that it was okay, because I was with her. But she said she couldn’t serve me…

“So Mom said, ‘okay, just bring me a class of wine and I’ll share it with him.’ And the waitress said, ‘you better not let me see you doing that.’

“The waitress had somehow turned into a police agent…trying to prevent a college student from having half a glass of wine with his mother…”

More on the police state of things…tomorrow…

Part II of our speech in Las Vegas, in which we explain why the US will go broke:

What does it mean when the financial intelligentsia seems to have no idea what is going on? It means they’ve got the wrong idea about the way things work…and probably no incentive to have the right one.

Goldman Sachs had 21 billion reasons to think it was a good idea to bail out AIG. The bankers who hold Greek debt have 146 billion reasons to like the bailout announced yesterday. And the US government has about 2 trillion reasons to believe the economy is growing.

[As we explained yesterday], there were 8,000 billion numbers between Hank Paulson’s estimate of how much taxpayers’ money would be put at risk rescuing Wall Street and the actual fact. But Hank Paulson is by no means the only major authority or financial celebrity to be wrong. The folks running money for Harvard and Yale – the crème de la crème of financial managers – were spectacularly wrong too.

And so were the people running major banks. But today I will mention just one of them…someone who had already settled up when the financial crisis of ’07-09 arrived. Walter Wriston was the Chairman of Citibank…the bank that eventually got taken over the federal government in the general panic of 2008…he remarked that:

“Governments can’t go broke.”

And here I’ll do a little speculation – I bet that Citibank would NOT have had to seek government support if it had been run by a historian.

Financial history is full of government bankruptcies. The first modern nation to go broke was Spain – which did so 4 times in the 16th century.

The book by Ken Rogoff and Carmen Reinhardt has a nice list of these state bankruptcies. You’ll see there are dozens of them. Some countries seem to be bankrupt all the time. Greece, for example. According to Rogoff and Reinhardt, Greece has been in default about every other year since it gained its independence in the 1820s.

And I’ll offer you a prediction, before this decade is over…or perhaps the next one…dozens of countries will go broke, including the United States of America.

I don’t mean they will close down and go out of business. But they will default on their debts – either by ceasing payment, by forced restructuring, or by intentional inflation.

How do I know that? Well, I don’t. It’s just a guess. And it’s a guess that comes from reading history…not from doing mathematics.

Generally, as I told an audience in India, we seem to be at some major inflation point. I call this period the Great Correction, because it appears that there are several things that are in the process…or perhaps only the very beginning…of being corrected.

  1. There is the 50+ year credit expansion – centered in the US…largely a product of the modern, numbers-oriented way of looking at economics
  2. There is the bull market in stocks, begun in 1982…correction began in 2000 and still is not fully realized. That bull market too owed a lot to modern financial thinking
  3. There is the 28-year-old bull market in bonds, which apparently came to an end in the fall of 2008…but has not yet been completed. Again, this was made possible and sustained by the financial ideas of the mid- 20th century
  4. There is even a 400-year boom in Anglo-Saxon culture – backed by military and economic force – which may be beginning a correction too. And it wouldn’t surprise you to know that these new, modern financial theories are almost entirely the product of Anglo-Saxon academics…

All of these things are connected. The common thread is the 5th thing that needs to be corrected…and the thing I’m going to focus on here today. It’s the rise of a body of thought concerning the way the world works – at least the world of money – which began in England and then was developed in the United States…

..on Friday, I called it “Fab Finance” after the Frenchman who got charged with fraud by the SEC. The idea is to put together slimy packages of debt and sell them to people who don’t know what’s in them. “Lumps for Chumps,” you might call it.

Poor Fabulous Fab got stuck in the hot seat, but he was only following the logical development of a whole body of thinking that dates back almost 100 years….

..and which now seems to be leading the world to something much bigger and much more dangerous than just blowing up a few hedge funds and German banks…

Now, practically all the world’s countries are using Fab Finance. They’re gradually absorbing all the world’s financial risks and putting them on the public accounts…ultimately backed by the full faith and credit of the United States of America.

This year, governments around the globe will issue $4.5 trillion in debt – three times the average over the last 5 years. About $2 trillion of that will be issued by the US.

What’s more, there is NO EXIT from this debt build up. Only about 10% of these deficits is really caused by the financial downturn. Most of it is structural. That is, it is the result of programs that have been in place for years…

These programs just grow and grow…year after year…until they become unsupportable. And most of these programs are sold as Fab Finance…they transfer small, individual risks onto the balance sheet of the whole country.

In fact, if you had to sum up the entire effect of Fab Finance – the whole body of ideas and theories of modern, anglo-saxon economics in the 20th century – you could say that they took small problems and turned them into big ones.

Instead of running the risk that a few people will retire without sufficient funds, we now face the risk that the whole country will run out of money.

Instead of taking the risk that some people will not be able to afford health care, we now run the risk that the whole nation will be bankrupted by public health care costs.

Instead of allowing a few badly managed financial institutions to go under, the feds have put the entire credit of the United States of America at risk.

And in Europe, we see the same thing. Instead of allowing tiny little Greece to go bust, the Europeans are spreading the risks out all over the Eurozone.

I’m sure other speakers will talk about this, so I won’t go into details. It’s the most important economic event of our time. After a huge run up in debt in the private sector, now the public sector is having a go at it…and rolling it up into bigger and heavier balls.

And what happens when the government spends too much and borrows too much? History tells us what happened in the past. Philosophy tells us what should happen. Governments go broke. Always have. Always will.

But I’d like to share with you a headline from The Washington Post on Wednesday. The Post is the paper the politicians and bureaucrats read. So you can imagine how penetrating its insights are.

Well, the headline that made me laugh was this:

“Task force to tackle National Debt.”

Not many things are certain in this life. But I can guarantee you that the bipartisan task force will not get close enough to the National Debt to read the number on its jersey, let alone tackle it.

The Great Depression convinced economists that they needed to be more activist. Now, our economy is responding to economic activism. And it will be destroyed by these modern ideas…and then, and only then, will new ideas arise.

We’re going to see a correction…a regression to the mean of a number of things…including the way people think.

It is not normal to think you can spend your way out of debt.

It’s not normal to think you can consume capital and get richer.

It’s not normal to believe that central economic planning will make the world a better place. The Soviets proved that central planning doesn’t work. We got to see that experiment. But instead of learning from it…we seem destined to repeat it.

More 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

Latest posts by Bill Bonner (see all)

Leave a Reply

5 Comments on "The Lies That Bind…"

Notify of
Sort by:   newest | oldest | most voted
The signs are mounting Bill, I am genuinely scared of what the future holds. I think your sighting if using debt to get out if debt being a recipe for disaster is very apt. When I was 18 I needed surgery for a long suffered jaw injury that needed correction. With no parental guidance I went tobyhe bank and they made the brilliant suggestion that I get a credit card. I did this to the tune if $8,000, of which every cent went to the procedure. I went through months of just paying the interest only and then my car… Read more »
First time poster here. Enjoy you’re writing, Bill. I think anybody with a modicum of common sense can see that there is no recovery and there will be none for a long time. But, the fact that you have to keep reiterating this is proof enough that there isn’t much common sense around. What I’m interested in is, what next? Now, I’ve seen poverty, lots of it. And it’s really not as bad as it sounds. Life goes on. There is enough on this fine planet to keep you smiling. So, if that’s the worst that’s going to happen then… Read more »

Bill, I agree with you 100%. What I have been saying all along is that the current economic condition is really only a symptom of a much deeper problem involving the civilized world’s mentality regarding consumption, lifestyles, and entitlements. Governments around the world are just trying to out run a bullet that will eventually catch up with us all, making victims of even those who live a more prudent life style. History does show that mankind often rationalizes its behavior right into the mouth of “the perfect storm”

Smack MacDougal
Bill writes, “There is even a 400-year boom in Anglo-Saxon culture – backed by military and economic force…” Of course Bill suffers from false belief. The Normans put an end to 600 year run (410-1066) of Anglo-Saxon culture (codified law, codes of conduct) back in 1066. In short, no Anglo-Saxon culture has been around for 600 years! 600 years later, Oliver Cromwell chipped away at monarchical dominance and 100 years after, Americans helped put an end to English culture. At most, anyone can say that a near 100-year boom in American culture has existed, especially because of World War One.… Read more »

smack, you “macs” won’t let it go will you?

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