What We Face Now Is a Depression

Oh…we got a good laugh this morning. Our favorite philosopher, Thomas L. Friedman, suddenly seemed to have understood something important:

“There is no magic bullet for this economic crisis,” said he.

Then, (will wonders never cease!) he actually seemed to draw forth an insight:

“We are going to have to live with a lot more uncertainty for a lot longer than our generation has ever experienced.”

Whoa. That’s like, deep.

We’ll get back to Friedman in a moment…and to why a real depression is arriving…

First, a quick look at the headlines:

“Americans saving more, spending less,” sets the tempo of the times.

On Friday, the Dow lost 148 points. But gold gained $20. The ratio of gold to the Dow tells us that either stocks have much further to fall…or gold has much further to increase. We’re looking for a ratio of one to one. At its peak in 2000, you needed 43 ounces of gold to buy the Dow stocks. Now you need only about 10. Still a way to go. Most likely, the Dow will fall …and meet the price of gold on the way up…at about 3,000.

“America’s love affair with malls is on the rocks,” says a report.

And talk about deflation! India, which is now producing $2,000 cars, announced a project to build laptop computers that will sell for 20 bucks.

But let’s get back to Friedman. What happened to him? Did he drop the hair dryer in the bathtub…and give himself a jolt? Suddenly, he’s saying something that is modest and sensible.

But Friedman’s brush with intelligence lasted only three paragraphs. Then, it’s back to the old simpleton Friedman…with a solution to every crisis…and a fix for every problem his last solution caused:

“The fact that there’s no single pill doesn’t mean there’s nothing to be done. We need a stimulus big enough to create more jobs. We need to remove toxic assets from bank balance sheets. We nee the US Treasury to close the insolvent banks, merge the weak ones and strengthen the healthy few. And we need to do each one right.”

Good luck on that, Tom. These people doing all these wonderful things are the very same people who didn’t notice that anything was the financial sector in the first place. Mr. Geithner was right there at the New York Fed, hobnobbing with the masters of the universe, dining with the captains of the financial industry, nodding in approval as the biggest bamboozle in history was put over on investors and the public.

And even if Geithner were a genius who had warned us about excesses on Wall Street, he still wouldn’t be the fixer Friedman imagines.

You can fix a recession with this kind of tinkering. But you can’t fix a depression. And what we face now is a depression.

*** Yes, dear reader, the picture is becoming clearer and clearer. It is not very different from what we expected…but it is drawing closer. We see more detail. Like an asteroid that is on course to destroy the earth, it is getting close enough so we can make out the hills…the craters…and the dusty plains…

Many thanks to David Rosenberg, an economist at Merrill Lynch, for training his telescope on this rock from Hell.

He notices two disturbing features.

First, it is not a recession; it is a Depression. While there’s no precise difference between the two, a depression is regarded as more severe…and NOT susceptible to normal government fixes. Typically, a downturn is met with lower interest rates and higher government spending. These twin missiles of increased consumer credit and higher deficits blast the asteroid smithereens before it reaches earth.

But as we have opined many times, this time it’s different. We have a real, structural Depression on our hands…caused by too much debt. When people get in this situation, they can’t spend more – even if someone offers them more credit on easier terms.

“People make a very conscious decision not to by, and that kind of decision is not reversed quickly,” said an analyst to the New York Times.

How much debt is too much? Well, private debt is usually about 80% of GDP. Now, it’s about 140% of GDP. That’s about $6 trillion of debt that needs to be paid off…or written off. And that’s after $1 trillion of write-offs in 2007 & 2008.

There are only three ways to attack this debt: inflation, liquidation, or boondogglization. Friedman…and practically all mainstream economists and politicians…favor the third choice. A little of this…a little of that…and something for everyone…

“In order to pass a piece of legislation,” explained a Democrat from New York, “items are added that are necessary to secure the votes.”

The International Herald Tribune tells a bit of what has been put into the Obama plan:

“…there is $54 billion in the bill in the House of Representatives for new forms of “American energy,” a phrase with an air of nationalism, along with a series of ‘Buy America” requirements of dubious legality under trade treaties; $141 billion for education; $24 billion for lowering health care costs; and $6 billion for broadband service…” etc. etc.

Colleague Porter Stansberry adds this assessment:

“Congress wants you to believe we can dig ourselves out of the financial crisis by spending $400 million to research global warming, $650 million to convert analog TVs to digital, $7 billion to ‘modernize’ federal buildings, and $20 billion on food stamps, etc. According to the Wall Street Journal , ‘only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus.'”

We don’t doubt that all this corruption is well-meant. Heck, who doesn’t want to blow up this Depression Asteroid before it hits us? But boondogglization won’t work. Because it doesn’t solve the real problem – the debt. It merely moves debt from the private sector to the public sector; overall, debt actually increases.

There is about $6 trillion worth of debt that needs to be eliminated before the economy can begin to grow again. Liquidation would do it – quickly and painfully. People would get what they had coming. The U.S. dollar-based system would collapse. Everyone would learn a lesson and be better off for it.

But that could happen only over the dead bodies of Ben Bernanke and other key policy makers. Which is our preferred approach. But we are in a tiny minority. Everyone else believes that somehow some hocus-pocus will get us out of this mess without pain or suffering.

Let’s “get all the right people into the room and close the door and put a solution up on the wall,” said Jamie Dimon of JPMorgan Chase.

Eventually, the solution these simpletons are going to look at is the only one that will really work: inflation. Overt. Shameless. Explicit inflation.

Eventually, when their boondoggling is clearly not working…and when unemployment is over 12%…they will turn to Gideon Gono and ask for his help.

When? We’ll take up that issue tomorrow…as the Markets and Money continues!

*** Our daughter, Maria, began her US television career during the Super Bowl. You see her for about a second.

Tough business, acting. You spend three years in acting school…you try out for hundreds of parts…and you get a little gig in a commercial, without a single line.

Until 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

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3 Comments on "What We Face Now Is a Depression"

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You point out some interesting things. Have you read any of the publications of Peter Schiff??


What We Face Now Is a Depression

[…] The Daily Reckoning […]

Jon Bain

A suggestion:
Make Greed a crime of treason, punnishable by a life of cleaning toilets and the only pay being cold, lumpy, unsugared, unsalted, last weeks porridge. And no spoon. You have to eat it with your fingers. During work hours.

Anyone earning over $50 000 per year is guilty as charged.
You all have until September 21st 2009 to get rid of all your earnings. The new law kicks in at exactly 1:02 pm.

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