Let the fire burn itself out - The Daily Reckoning

Let the fire burn itself out

Feb 19, 2015

- By Bill Bonner

Bill Bonner
Buenos Aires, Argentina

Dear Diary,

First, we are here in Buenos Aires, enjoying a rainy afternoon on the Calle Guruchaga. It is calm. It is pleasant. The food is good. The wine is strong. The women are good looking.

And the US government has our back!

No kidding, the NSA probably told the embassy we were in town. The following message came to our cellphone, unbidden:

    The U.S. Embassy informs U.S. citizens living and traveling in Argentina of a silent march in Buenos Aires from Congress to the Plaza de Mayo, planned for Wednesday, February 18 from approximately 5:00 p.m. to 9:00 p.m. (1700-2100), to mark the one month anniversary of the death of Alberto Nisman. You should expect disruptions in public transportation and traffic. While this event will take place in the capital city, marches may occur in other cities throughout the country.

    Even demonstrations intended to be peaceful can turn confrontational and escalate into violence. You should avoid areas of demonstrations, and exercise caution if in the vicinity of any large gatherings, protests, or demonstrations. Review your personal security plans; remain aware of your surroundings, including local events; and monitor local news stations for updates. Maintain a high level of vigilance and take appropriate steps to enhance your personal security and follow instructions of local authorities.

It would be impolite and ungrateful not to thank the US Embassy. Its concern for our safety is admirable.

Meanwhile, the Dow was off a little yesterday. Gold was up a little. Neither was worth discussing. So, let's turn our attention to that very rare phenomenon: real intellectual progress.

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Well, let us not overstate it. In the world of ideas, there is one step backward for every step forward. This at least is a step in the right direction:

We used to think that every forest fire had to be snuffed out immediately. Now, forestry officials realize that it is often better just to let them burn themselves out. They burn up the dry tinder and help the forest regenerate.

So too it was only a few decades ago that we believed that childhood fevers were something to be feared and stopped.

"I'll give him something for that fever," said the friendly pediatrician. Then, they came to see that fevers, too, were not a bad thing. They were nature's way of combatting germs. Raising the body's temperature actually made for a swifter recovery.

This intuition has also been picked up in the business world. We're not up on the latest airport biz jargon but we've observed that organizations that have the least top-down, least authoritarian business cultures seem to do best . If this has become a fad in the business world, we would like to claim some credit for it. For the last 35 years, we have been answering employees' questions as follows: 'I don't know...what would you do?'

This response was regarded as evidence of stupidity at the time. Lately, it has been attributed to cleverness. But it actually arose naturally out of ignorance and desperation; we really had no idea.

But central banks have learned nothing. Instead of letting the correction of '08-'09 do its work, they put out the cleansing blaze with a hose of liquidity. The result: dry tinder continues to build up. As reported here last week, worldwide debt has risen to $200 trillion since the crisis. Government and business kept borrowing without let-up. And now comes word that the consumer sector too is going deeper into debt. 24/7WallSt.com reports: US Household Debt Nears $12 Trillion

    In its fourth quarter 2014 report on household debt and credit, the Federal Reserve Bank of New York said that debt rose by $117 billion in the quarter, and total indebtedness at the end of December totaled $11.83 trillion. That is a year-over-year increase of $306 billion.
They've stopped corrections. They've stymied fevers. And now, on the ground, the tinder is thicker than ever. But watch out, we're beginning to see more and more sparks. Fifty-dollar oil. $1.6 trillion in government debt trading below zero yields. Ambrose Evans Pritchard:
    Sweden has cut interest rates below zero and launched quantitative easing to fight deflation, becoming the latest Scandinavian state to join Europe's escalating currency wars.

    The Riksbank caught markets by surprise, reducing the benchmark lending rate to minus 0.10pc and unveiled its first asset purchases, vowing to take further action at any time to stop the country falling into a deflationary trap. The bank presented the move as precautionary step due to rising risks of a "poorer outcome abroad" and the crisis in Greece.

    Janet Henry from HSBC said the measures are clearly a "beggar-thy neighbour" manoeuvre to weaken the krone, the latest such action in a global currency war that does little to tackle the deeper problem of deficient world demand.

If Europe is alight, China is like an exploding fireworks factory. In the space of a few months, China has gone to trying to damper down the effects of so much capital rushing into the country, to trying to increase it.

Why? China's huge debts are secured by real estate. And real estate prices in the Middle Kingdom are falling. Zero Hedge:

    ...new-home prices in the world's most populous country just recorded their biggest annual decline eve r!

    On a sequential basis, housing prices in the primary market fell 0.4% mom in January, more than the 0.3% decline in December. 64 out of 70 cities monitored by China's National Bureau of Statistics (NBS) saw housing prices fall from the previous month (vs. 67 out of 70 cities in December). The largest month-over-month price fall came from Quanzhou, a lower tier city in Fujian province.

    Broken down by Goldman, on a year-over-year, population-weighted basis, housing prices were down -5.0% (vs. -4.3% yoy in December). Hangzhou continued to be the city with the largest price correction, with the yoy housing price down 10.1%, vs. 9.9% in December.

    What's worse, is that the tepid dead-cat bounce seen in the past few months has once again ended and is now headed lower yet again.

Let nature take her course? Let the fire burn itself out? Not a chance.

Telling other people what to do, even though you don't know what you're talking about, is the cornerstone of US foreign policy. Worldwide, the economics profession - forgetting 2 centuries of thoughtful analysis on the subject - has taken it up too. Economists have become control freaks, desperate to stop any freely-occurring event in the markets, especially if it is a correction.

But what is a correction if not a forest fire in the economy...burning up the mistakes, getting rid of the undergrowth, and cleaning up the economy?

And what is a bear market if not a fever...raising temperatures so as to kill the parasites that feed on the economy's vital organs?

Without little corrections and small fevers, won't the next crisis be even bigger?

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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