IPFS
A Housing Bust Chronology
Written by Bill Bonner Subject: Economy - Economics USAWe’re heading for the hills…really!
Last week, stocks went up. Stocks went down. Not much was proved one
way or another. The week ended in a draw, as near as we can tell.
But we think we are making progress in understanding what is going
on. The private sector is de-leveraging. Now, it’s the public sector
doing the heavy lifting. It is leveraging everything it can.
Leverage in the private sector led to the banking crisis/bear market
of 2007-2009. Debt always leads to trouble. Next up: a crisis in the
public sector.
But wait…hold on…not so fast…we haven’t reached the end of the
private sector crisis yet! Bank lending is still falling. House prices
are still falling. Unemployment is still falling. Soon, stock prices
will be falling again too…
First, let’s see what’s in the headlines. Last week there was a lot
of press about the pay czar and his efforts to limit compensation in
the companies that the feds bailed out. The public and the news media
love this sort of thing. It’s a battle between the greedy rich and the
public interest, or so they believe. The public hates bankers. But they
don’t want to see just pay capping; they want to see knee-capping. We’d
like to see it too. Or maybe public flogging. Or at least a lapidation
or two.
But our true sympathies are with the greedy CEOs. After all, they
stole the money fair and square. They should be allowed to keep it. The
feds wanted to leverage up the financial sector by giving money to the
banks.
What’d they expect? The bankers took it.
Yes, the financiers are paid outrageous amounts of money – far
beyond anything they are worth. In fact, if you studied it carefully,
you’d probably discover that their net contribution to the betterment
of mankind is now negative.
The bankers are betting that the money they were given by the feds
will be worth less next year than it is this year. So they exchange it
for everything and anything, confident that when it comes time to pay
it back it will be even easier to come by than it is now.
So far the bet has gone their way. Copper has doubled. Gold is up
20%. Stocks markets all over the world are up 60%. Foreign currencies,
too, have beaten the dollar.
Will the wager against the dollar continue to pay off? Well, that’s
the big question. If so, you should stay in stocks, gold and
commodities. If not, you should move to cash.
But it hardly matters to the gamblers. They’re playing with someone
else’s money! If the bets go well, they pay themselves huge bonuses. If
they go badly…well…hey…gimme a bailout!
In the long run, bets against the dollar are almost sure to turn out
okay. All paper currencies go to zero, eventually. But in the short
run, who knows? The whole world is betting against the greenback. With
such a massive short position against the buck, it would be just like
Mr. Market – aka Mr. Mischief- maker — to send the dollar up.
But you can’t blame the bankers. They’re performing a very valuable
service. They are helping to separate fools from their money. Too bad
we taxpayers are the fools…
Among all the whiners and kvetchers about bankers’ huge bonuses hardly a single one draws the obvious conclusion:
That them that deserve to go bust should be allowed to do so.
“I remain of the view,” writes Martin Wolf, a bit pompously, in The Financial Times, “that the only thing worse than rescuing the system would have been not rescuing it.”
He’s welcome to his opinions. And if he used his own money to bail
out the bankers we would have no objection. In that case, it would just
be a futile and foolish act. Instead, he insists upon using our
money…which raises the charge from stupidity to larceny.
Another message that came through last week was that the real
economy is not improving. Good news came in from several quarters. But
the news that really counts – housing prices and jobs – was bad.
“It’s all bad. That’s all we know,” said John Stepek, editor of MoneyWeek.
“People ask if we’re going to have inflation or deflation. The bulls
think we’re going to have inflation. The bears bet on deflation. But
I’m not sure it matters. We’re probably going to have both.
“The point is, whichever we have, it’s going to be the bad sort.
Neither inflation nor deflation is necessarily bad. Prices have to
adjust. That’s how the market conveys its signals. When prices rise, it
tells producers to get busy and increase output. When prices fall, it
tells them to lay off. In the natural order of things prices usually
fall. Or, they should fall. This is ‘good’ deflation. It just means
that producers are becoming more efficient, as they should. There’s
good inflation too – when prices rise due to increased real demand.
When people earn more money, they can buy more things; prices rise.
“But what we’re going to see is bad. Bad inflation. And bad
deflation. It is the result of monetary problems and mismanagement. And
it is going to send all the wrong signals and inevitably make things
worse. First, the deflation is bad because it is result of a massive
de-leveraging accompanied by a write-down of debt and assets. It’s a
depression. Or a major recession. Or a ‘great contraction.’ Call it
what you will. It’s a deflation in which prices fall…and it’s not going
to be any fun.
“Then, there’s most likely going to be bad inflation too – caused by
the central banks printing too much money. This is bad inflation
because it is just an increase in the quantity of paper money, not an
increase in real demand.
“We don’t know exactly what is coming. But whatever it is, it will be bad.”
Another big item in last week’s financial press was the “Cash for
Houses” scheme. The feds give new house buyers an $8,000 tax credit.
But since not all new buyers buy because of the credit, the actual cost
to the government per additional new house purchased is much higher
than 8 grand. For each additional house purchased because the credit
taxpayers are paying as much as a quarter of the entire cost of the
house.
And now there is a proposal to extend and broaden the credit. Soon it may be “Cash for Everything.”
This sounds crazy, but there are a lot of economists who think more
stimulus is necessary. Nobel prize winner Paul Krugman, for example.
And Richard Koo, mentioned here last week. They’ve seen what happened
in Japan. And they see that the real economy is not recovering as they
hoped it would. Now, they warn that America might have a “Lost Decade”
if it doesn’t continue to stimulate the economy.
How long must it continue bailing out and stimulating? Until
consumers have finished de-leveraging, they say. How long will that
take? Maybe another 5 years, by our calculation…maybe much longer.
But wait…the whole problem is too much debt, right?
Yep.
But the only way the government can stimulate is by going further into debt, right?
Yep.
And isn’t the budget deficit already at $1.6 trillion…or 11% of GDP…the most it has been since WWII?
Yep.
Well, then where’s the benefit? Won’t the public sector have to de-leverage too?
Bingo!
How does the public sector deleverage?
Two possible ways – honestly…and dishonestly. It can pay down its
debts to a level at which they can be carried even if interest rates go
up sharply. They did it after the War Between the States…after WWII…and
even during the Clinton years. Believe it or not, when the
Congressional Budget Office looked ahead in 2001, it saw a budget
SURPLUS for 2008 of more than $600 billion. Surpluses had been coming
in for years during the Clinton administration. They thought it would
keep going like that. Instead, 2008 saw a DEFICIT of nearly $500
billion.
The higher the debt and deficits go the harder it is to pay them
down honestly. Eventually, the feds reach the point of no return…like a
guy who’s so deep in debt he can’t possibly work his way out. Then, you
get another crisis…either in the form of default…or (hyper)
inflation…or both.
Bill Bonner
The Daily Reckoning
The Daily Reckoning