No government survives forever

Feb 28, 2011

Paris, France

Psst....want to make some big money? We mean BIG money...

Watch this space. Later this week we'll give you an update on our Trade of the Decade. It's looking better and better. Because the situation is worse than ever....

-------------------------------------------- Union Budget 2011 --------------------------------------------
What does that mean for you and your investments? Which sectors are buzzing and which ones are flat? How will the BSE Sensex be impacted by the new policies? What is the economic forecast for YOU, the common man? To make sense of it in the context of your investments, Equitymaster, in association with PersonalFN, brings you Our View on the Budget.

"What's your view on the revolutions in North Africa,' asked a Dear Reader.

Generally, we avoid having views on things we know nothing about. Which is almost everything. As to what is going on, we have no idea better idea than the State Department or the CIA. Maybe the revolutions are driven tribal rivalries. More likely, increases in food prices - caused by Ben Bernanke - are to blame. And who knows? Maybe people really do crave liberty, democracy and Starbucks' frappacinos.

But man is a restless beast. Often, he is content with the way things are. And then, a stone gets in his shoe...and he begins to limp and complain.

Each has his own private itch. One man has a fat wife and wants a skinny one. One has a slender wife and longs for one with more meat. One wishes he could bring his deceased wife back to life. Another has a lively wife and wishes she were dead.

Ask any of them and he will give the acceptable public line: it's 'freedom' he is after, or so he'll tell the news media. But what kind of freedom? Most often it is the freedom to boss others around. He will want to vote, but only so he can tell other people how they should educate their children, which gods they should worship, and how much money they should send his way.

The only sure thing is that no government survives forever. Francis Fukayama thought he saw the 'end of history,' when democracy got a toehold in Russia. Dictators need to be toppled, often in bloody revolutions. But democratic governments come and go, without making history.

But democracy has a sell-by date too. Its fatal flaw was identified hundreds of years ago. When the majority realizes it can vote itself money from the minority -or from the next generation - the system is doomed. Elected governments change, but the system just goes deeper and deeper into debt -until it can go no further.

What happens then?

We don't know. But we're all going to find out.

In the meantime...

Stocks fell on Monday of last week...and continued falling until Friday. On Friday, the action reversed, with the Dow up 61 points and gold off $6.

What to make of it?

It's too early to say. By week's end it didn't look like the big break in the market that we've been expecting. But who knows? This is a new week. Anything can happen.

But, no matter what happens, it's best to expect what SHOULD happen. And the way we see it, stocks and bonds should go down. The time for making money in stocks and bonds is over, in other words. This the time for getting out, hunkering down, and waiting until the crisis blows over.


There are just too many things wrong with the market...the economy...and the political situation...

...and oh yes...the people trying to deal with these problems are a bunch of...what's the technical word? Oh yes, clowns.

What's wrong with the market? Well...bonds have been going up for nearly 30 years. Yields have fallen from near 20% for 10-year Treasury notes in the early '80s to 3.42% on Friday. Very nice, if you've been holding bonds. And it might lead you to think you can hold them forever. Thirty years is a long time.

Unfortunately, nothing lasts forever...and certainly not a bull market in bonds. Instead, trends in the bond market tend to last about a generation. Yields generally fell from the '20s until the Eisenhower administration. Then, they rose until Paul Volcker finally got control of inflation in the early '80s. Next, they fell for the next three decades.

Are they still falling? No one knows. But it looks to us as though they've found a bottom. And even if they haven't, you're probably better off thinking they have. Because the bottom can't be too far off...and there could be Hell to pay afterwards.

Meanwhile, over in the stock market, stocks are expensive - close to the record highs of '29, '66, and '99. In fact, nominal prices are about where they were in the late '90s, after doubling over the last 2 years. If the bulls are right, these high prices are just the beginning.

But what could drive them higher? The consumer economy runs on two important pistons of prosperity. Employment gives consumers more money to spend. And rising housing prices increases their net worth. Neither of those pistons is firing now. There are half a million fewer people with jobs now than there were 2 years ago. And house prices are still going down.

How is it is possible for a genuine prosperity to develop under these conditions?

But gets worse. The fed are still adding debt to the system - even while the private sector desperately needs to off-load it. Not only that, they are making the entire system dependent on negative interest-rate financing. The Fed lends below the level of consumer price inflation. Businesses, consumers, banks and speculators soon NEED cheap money just to keep going. Most of all, government needs it. You can easily see how this works. Zero interest rate financing allows the US government to run a deficit of $1.5 trillion this year. But the feds only have revenue of $2.2 trillion. So, they're spending roughly 60 cents more for every dollar they take in. And soon the official interest-bearing debt will be at $15 trillion - nearly 7 times revenues....

Now, imagine that the feds had to pay interest at just 5%. Let's see, 5% of $15 trillion is what...$750 billion....or about a third of all tax revenues.

Do you see the problem? Low interest rates permit the feds to borrow. They run up huge debts...and then they have so much debt that they can't afford to raise rates. They are stuck. They have to keep borrowing until it's too late to stop...until we're all busted.

*** We went out to the country this past weekend.

"What's happened around here," we asked our gardener.

Damien knows everyone in the area and everything that happens. We counted on him for a quick update.

"Oh...nothing. Nothing ever happens here. Everything is exactly the same...

"You know how dull it is out here in the country. Nothing ever happens...

"Of course, Marie know her? She and Jacques were always arguing. But they seemed to get along somehow. Jacques is a fun-loving guy. Marie Jeanne is a bit harder to live with. Very intense. She wore the pants in that family.

"Well, they finally called it quits. After about 30 years of marriage. I wasn't particularly surprised, because they never got along that well.

"And I figured that Jacques had had enough. But when I saw Marie Jeanne she explained that she and Bernard Toffler have been seeing each other for the last two years. Apparently, Jacques knew all about it. Bernard would stay with her at her house while Jacques was in Paris. Then, when Jacques came home for the weekend, Bernard would go back to his house.

"I asked her what it was like, living with two men. Her husband and her lover at the same time. She said it was 'very complicated.' I don't doubt it.

"Personally, I've never been married and now, at my age [Damien is 48] I don't think I ever will. But I don't see how you can get along with one person...let alone with two at the same time.

"But I guess that was the problem. She couldn't get along with Jacques. So he's out of the picture.

"Now, poor Bernard has to put up with Marie Jeanne. She's a handful.

"Oh...and what else? I guess you know that Annette had a stroke and Rafael had his bone marrow transplant?

"Annette was driving home from town. She drove off the road twice. To the right side each time. She got home and called the doctor. They sent an ambulance for her. But then when she got to the hospital she seemed fine so they sent her home. Fortunately, she called her friend know, she's a doctor...and she told her to get right back to the hospital. She was having a stroke.

"Now, the right side of her body isn't working right. She can't raise her right arm...and she speaks out of the left side of her mouth. It's a shame. Because she was so pretty. Well, I guess she still is pretty. I haven't seen her. But it's not easy for a woman of her age to recover from that. She's at least 70.

"Old people are always having trouble. That's just the way it works. It's Rafael that makes me feel bad. He's only 19. And he seemed to be doing so well. The last time I saw him, he looked good. And I heard that his leukemia had been cured...or it was under control.

"Then he had a relapse when he was traveling and he had to come home. They put him the hospital. They've been giving him radiation...and chemotherapy...and they keep him in a tent, because he has no immune system. It took a long time to find a donor for a bone marrow transplant. It has to be a perfect match. And now you have to hope and pray it works. Because if it doesn't work, well...I don't think there is anything else they can do.

"I feel sorry for the whole family..."

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

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2 Responses to "No government survives forever"

krishna murthy

Mar 1, 2011

i have been reading your views in the daily reckoning for last few months. you dont need my certificate that your thinking is exhaustive and your understanding of the economy as a whole is total. i am not an economist. i am an accountant, in india they call me chartered accountant. my hobby and my passion by the way is to know the art of investing. i am yet to come across a good investment idea from you. except that you have recommended gold in the past. give me some real good investment idea.


C K Vaidya

Feb 28, 2011

I think the global food prices started rising rapidly when George W Bush announced a huge corn-ethanol programme, mainly as a counter to global warming. Environmentalists had pointed out at that time also that the carbon emission from growing and processing corn into ethanol exceeds the savings from conventional fuels. Food and agriculture experts had pointed out that the sugarcane to ethanol progamme adopted and perfected by Brazil was much better environmentally and diversion of corn to fuel would result in significant price rise in basic food items starting with corn and spreading to other grains as well. However, Bush administartion went ahead with the programme.

Unfortunately, I don't have hard data on hand as to how much corn is getting converted into ethanol today. I suspect that it is significant to cause drop in supply for food.

I think this ought to be investigated deeper instead of making Bernanke the ONLY whipping boy for food price rise. Weather in many parts of the world has also played havoc resulting in drop in food production.

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