Govts. reluctant to take away stimulants

Mar 11, 2011

Baltimore, Maryland

And the latest installment...

The Dow dropped 228 points yesterday. Everybody blamed a different part of the world. Some blamed a developing civil war in Libya. Some blamed China's big trade deficit (China imports beaucoup energy and raw materials). And some blamed rising interest rates in Europe.

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"Borrowing costs soar on Eurozone periphery," says a headline in the Financial Times.

Remember, Japan, Europe and America all depend on low interest rates. They're all addicted to cheap money. Take away the stimulants and their economies slump.

Ten year yields on Greek debt rose to over 12%. The Portuguese government paid 6% for its latest 2-year funding. A Portuguese debt trader:

"We are not at bailout levels yet, but we are moving in that direction."

Why not just let rates rise to market levels... and force everyone to kick the debt habit? you don't understand, dear reader. Since a slump is just the thing the financial stimulants were designed to avoid, governments are very reluctant to give them up. Instead, they bailout, prop up, and tide over every bank and sovereign debtor who threatens to go into rehab.

But as we've seen on the mean streets of Baltimore, it takes bigger and bigger doses to keep the junkies happy. You cover one bad debt by adding another. And then you have two bad debts to worry about. In Europe, Japan and America, bad debt held by the banks was effectively taken over the public sector. Now, government debt is going bad too.

Meanwhile, on the streets of Japan, we see what the government's 2-decade-long methadone finance program has wrought.

Bloomberg reports:

Japan's economy contracted more than the government initially estimated in the fourth quarter because of a downward revision to capital investment and consumer spending.

Gross domestic product shrank at an annualized 1.3 percent rate in the three months ended Dec. 31, more than the 1.1 percent contraction reported last month, the Cabinet Office said today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 1.2 percent contraction.

Private consumption fell 0.8 percent drove GDP lower in the fourth quarter after the government ended a subsidy program to buy fuel-efficient cars in September and reduced incentives to purchase electronic home appliances in December, a program that will end in March. Capital spending rose 0.5 percent, compared with the initial estimate of a 0.9 percent increase.
Take away the juice; the juice junkies slow down.

Back in the US, the Republicans proposed to take away a little bit of the deficit. The Democrats proposed to take away less. The Senate rejected both proposals.

The Fed has no intention of taking away anything. There is some talk of 'exiting' the zero interest rate/ QE programs.But it is an empty bluff, in our opinion. They won't give up their fix until they have to.

The economy is too weak. Households are too fragile. And the recovery is a sham.

In the news yesterday was a discussion of how much the hike in oil prices will cost the typical family. Gasoline prices have gained about 30% in the last year. April crude traded yesterday at over $100, for the first time in 2 years. This will cost the typical family about $700 per year. That money will have to come from somewhere. Taking it away is sure to cause pain somewhere else. Bloomberg continues:
Nouriel Roubini, the New York University economist who became known for his pessimistic forecasts before the financial crisis, told reporters in Dubai on Tuesday that an increase in oil prices to $140 a barrel could even cause some advanced economies to dip back into recession.

The rising price of gas - which averaged $3.57 a gallon nationwide on Monday, according to the government - is already prompting some people to change their habits.
*** "The columnists and the media have greatly misunderestimated the pain in the lower and middle classes," said a friend at lunch.

"I was talking to my aunt yesterday. She lives in Pennsylvania, out by Pittsburgh. Of course, that's not the most dynamic part of the country. But people there have to eat too. These are working class people, you know. She said that both her sons-in-law had lost their jobs and hadn't been able to find work for more than a year. And her son lost his business and his house.

"What I think is happening is that the big money in the richest part of the economy is distorting the whole picture. If you look at the averages, they don't look that bad. Because there are a lot of million-dollar paydays at the top. But at the bottom, wages aren't going up - if you can find a job at all. And the cost of living is rising. I bought gasoline yesterday. I paid more than $3.50 a gallon. I filled up the tank. It cost me $85. Okay, not a big deal. But there are a lot of people in this country who don't have that kind of money.

"That's why so many people are on food stamps. There's a whole big segment of the population that is struggling. We don't see them. They don't live where we live. They don't shop where we shop. They don't work where we work. They don't eat in the same restaurants. But they're out there."

*** What's going on down on the pampas?

"Most of South America - including Argentina - is in the midst of an economic boom," writes our old friend Doug Casey.

Argentina has a financial crisis about once every 10 years. The last one was in 2002. Another one should be coming up.

But it may not be so bad. What makes financial troubles painful is debt. If you have a house that is worth $200,000 one year...and $100,000 the next, so what? It is the same house. Its roof and walls give the same service.

But if you owe $150,000 on your house, you wince at the thought of a 50% drop in house prices. If you have to refinance, you will have to come up with at least $50,000 to swing the deal.

Argentina - thanks to its own incompetence and instability - has little debt. Fewer than 6% of houses in the country are financed, says Family Office colleague, Robert Marstrand, who lives in Buenos Aires. Who would lend to an Argentine?

So, now the country is practically debt-free. Its assets can go up and down. Crises can come and go. It's like a roller coaster. Whee!

But how are things out at the farm? We put the question to our farm manager, expecting to hear that another drought had dried up the pastures and forced the sale of our remaining cattle. But no! Instead, it is raining in the Andes. In fact, it is raining so much that roads have been washed out. Our farm manager has not been able to get up there to visit. But he sends this update:
Bill, it has been raining hard. The grass is growing again. The roads are
impassable. That's the good news.

The bad news is that old Don Jose Gutierrez died. He was 91 years
old. He lived up in the mountains. I never saw him. But Jorge
said he was a 'good peone.' They had to carry his body down
from the mountains on a horse. It must have been sad. He's been
up there for so long."
Long time Daily Reckoning sufferers will recall that we 'bought the farm' in Argentina about 5 years ago. Since then, one calamity after another has beset us. It is as if we were in the Old Testament - with a plague of bees one year...ants the next. Meanwhile, rainfall fell from 300 millimeters the first year...down to 60 last year. The place was drying up and threatening to blow away like tumbleweed.

It is a cattle ranch. But, as a visitor from Buenos Aires asked recently, 'what do the cattle eat?'

We wondered the same thing. There is nothing there but rocks, cacti, and desert sand. It was then that we realized that we must have bred a new race of lean, low-cholesterol animals, which we call "sand fed beef."

When we began there were more than 1,000 head on the property. Now, we're down to less than 500. Too bad. Cattle prices have been going down in real terms since 1974. During that time the US cattle herd has declined by about a third. We don't have numbers for the decline in Argentina, but it has probably been even greater, as farmer switched to growing soy and other grains.

This fall in production has finally led to an up-tick in prices. And now, the monsoons have arrived. We've gotten 240 millimeters, says the farm report.

Rain, higher prices...hey, the cattle business is looking up.

"Senor Bonner," our farm manager wrote with cheerful news, "this year we won't lose so much money."

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

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