Great Correction v/s Great Blundering Reflation

Apr 20, 2012

Baltimore, Maryland

The more things don't change...the more they remain the same. You can quote us on that.

On the surface, very little changed in the 2 months we were away.

The Dow was about 13,000 in mid-Feb. It's still about 13,000.

The yield on the 10 year US note was about 2%. No change there either.

The euro was about $1.30. It's $1.30 today.

Gold is a little lower. Big deal.

But down deeper....did anything more substantial change...evolve...develop?

Apparently not. Back in the winter, the Europeans were pretending to fix Greece. Now they're pretending to fix Spain.

But's something that might be nobody believes the fixes will stay fixed.

"Europe's Rescue Plan Falters," says the front page of the Wall Street Journal.

Yesterday, widely reported was the fact that Spanish banks held more delinquent loans than at any time since 1995. The world seemed to be waking up too to the realization that when you pour bad money after good money you end up with no money.

The ECB's $1.3 trillion worth of loans to banks was supposed to put a stop to liquidity problems. After all, investors know that borrowers can get more money. The ECB lends to the banks. The banks lend to the governments. You can't go broke that way. Not as long as the money keeps flowing.

But wait again... "After months of using that cash to buy their government's debt," reports the WSJ, "banks in Spain and Italy have little left."

Let's look at this more closely.

The banks have a lot of bad debt, left over from the go-go lending mania in the bubble years.

Led by Ireland, the governments bailed them out. But that put the governments themselves in jeopardy. They didn't have any real money to lend the banks. They had to borrow. They just gave the banks money that they had borrowed themselves. So then investors began to wonder about Ireland, Greece, Portugal, Spain and Italy. And guess what? They found that they were going broke too.

That's when the central bank came to the rescue. The idea was to bail out the banks and the governments at the same time. The ECB's LTRO program looked like a winner, for a while. The plan was simple enough: lend the money to the banks; make sure the banks lend to the governments.

You see the problem, don't you? It was just a variation on the US model of trying to fix a debt problem with more debt. In the US version, the Fed buys US government debt, effectively financing the government with printing press cash. In Europe's version, the ECB lends to banks...who then lend to, say, Greece. Now, they all have more debt than they can pay.

So now, bond yields are rising again...with Spanish debt back over 6%. And Spanish banks are in worse shape than ever.

Meanwhile, the Italians are staggering under the same kind of weight. In order to get financing last year, they promised to balance the budget next year. But now next year is getting close and a balanced budget is still far away. Says Mario Monti...well, maybe the year after!

You go, Mario...keep spending...keep borrowing...and tell your friends at the ECB to keep printing... ------------------- "Please continue this good work for the entire community at large" -------------------

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So what's changed?

Nothing. And it's going to keep not changing until it can't go on any longer.

And some more thoughts...

*** You see, dear reader, change is a natural thing. So is the desire to prevent it. And what we're seeing now is a natural struggle between the Great Correction - which wants to eliminate debt...and the Great Blundering Reflation - in which the feds desperately try to add to the world's debt supply.

Why are the feds so keen to add debt? They're not really. What they want to do to is to prevent change. And they only things they've got to work with are brute force...counterfeit money...and debt.

But even the USA is scheduled to enter a phase of European-style austerity. Beginning next on Jan. 1st, a combination of tax hikes and spending cuts should grip America and force it into something the newspapers are calling "Taxmaggedon."

In Greece, ...debtors kill themselves...children go hungry...the unemployed threaten insurrection.

In Spain, mobs attack banks...half of all youths are unemployed...and the banks face huge losses from bad debt.

So far, America has avoided those scenes of desperation. But unless Congress takes action to deny what it has promised, like Mario Monti did yesterday, the Great Correction is about to get even greater. Tax rates are scheduled to go up. Automatic spending cuts are scheduled to take deficits down. These are the cans that Congress kicked down the road last year. The Bush/Obama tax cuts will expire in 2013. And - because Congress was unable to come up with a sensible budget - the axe will fall on government spending too.

What will happen if "taxmaggedon" comes as scheduled? Experts say GDP will fall by 3%. Hey, that would put it in negative territory.

And the recovery? Over. Finito. Kaput. And unemployment? Up. Houseprices? Down.

But wait...will the feds allow such a thing?

No, probably not. They will try to block it. Congress will kick the can again. Tax rates will rise...but not as much as they are supposed to rise. Spending will be trimmed...around the edges...but not seriously.

And then - when the economy and stock market take another dive, as they did in August of 2010 and again in September of 2011 - the Fed will announce another program of QE.

If there is any real change - a real Great Correction, in other words - it will be over their dead bodies.

Which is just the way we'd like it.

*** Elizabeth reports on our trip to Argentina...

Our trip to Gualfin this year coincided with the greatest rainfall the finca had known in half a century or more. Gustavo and I were riding along the steep trail that clings to the mountainside along the way to our high pastures of Compuel, and he stopped at a pool of water soaking into the path. "I've never seen water here in my entire life", he said. And neither had his 86-year-old grandfather, he added. Gustavo was taking me to see ancient petroglyphs that he discovered on the mountainside facing his arriendo, or farmstead. But the presence of water is perhaps the most impressive sight that anyone at Gualfin can remember. Everywhere we went when we first arrived at Gualfin five weeks ago, the question was the same: "Y el campo ?"

"Que linda!" would follow the answer rhetorically, without a pause for our tentative Spanish. The rain brings life to every nook and cranny of the ranch - the cattle are visibly fattening, their coats gleaming in the strong clear light of this high altitude valley, the alfalfa has been cut and harvested four times, the new reservoirs are brimming with water that reflects the intense blue of the sky, and a profusion of flowers decks meadows, mountainsides, and the marshy land along the riverbeds. There are even weeds springing up between the stones of the courtyard and audaciously growing out of the mud-based barro that tops roofs of houses and the stone walls of corrals.

Being at Gualfin, cut off from our regular daily life, was meant to be quiet, possibly even dull. It has been nothing of the sort. Electricity is furnished by solar panels; after a cloudy day we light candles as darkness falls, have dinner, talk, listen to Jules play guitar, go to bed. But the days are full of action.

The day starts with the sun appearing as a reddish glow in the quebrada between two mountains, visible from our bedroom window. It's chilly in this early autumn season, so you have to leap out of bed and dress fast. We have breakfast in the comedor: hot tea made from juju, eggs, toasted pan casita, local honey and goat cheese.

In the farmyard next to the house, the cock is crowing and out the window of the comedor we see Jorge, the capataz or farm manager, surveying the sky, looking over the machinery, and giving the day's order of work to his assembling crew. Natalio, his right-hand man, is carrying a square-edged shovel and will be working on the irrigation canals or asequias, directing water into fields and pastures. Up in Compuel, a small crew (Martin and his 18-year-old son Gabriel) has spent the night along the road they are repairing. And now that we are at Gualfin, a construction crew also assembles.

We are building a one-bedroom house in Pucarilla, the small fertile valley an hour's drive to the east. Several people have told us that in Argentina the 'patron' does not normally work with gauchos. Instead, he gives instruction to the farm manager - the capataz - but has no direct contract with the gauchos themselves. But Bill insists on sharing their burdens.

After the first day, I wasn't sure he was going to make it. He came back, after 10 hours, so tired he could barely shuffle in the door. He said he couldn't raise his right arm or bend his left leg. He was not used to lifting 100-pound rocks or carrying 120-lb bags of cement. At least, not at this altitude. But now he is getting accustomed to it. And the workers are getting used to him.

First to arrive in the morning is Jose the mason, plump and quick, who lives closest. Next comes Javier, with his characteristically slow and deliberate tread and solemn expression. He is Jorge's nephew and the dogs greet him with joyfully, with silent leaps. Pedro, who works full-time for the finca and is also a mason, comes along briskly, wearing his leather apron. And then the young men, the changos, Bartolo and Aleji, hurry in. They are two of Natalio's nine children and walk an hour to get here along the Compuel road. This week, the crew includes another chango, Cristian, who lives with his mother in the far reaches of Compuel. He is staying with Jorge and his wife Maria. And finally, Maria adds to the animation of the scene, dispensing greetings and advice while she bustles about organizing her household, our own, and the life of the parish. If it is a Friday, she will be leading the camina de la cruz up the hill behind the chapel, with a short and well-considered remarks at every station.

The construction crew loads up at eight AM in one or two trucks, depending on the temperature and material to be transported. Temperature, because if it is too cold, everyone has to ride inside for the one-hour drive across the campo. A strict hierarchy is observed. If Jorge comes along, he sits in front with Bill or drives one of the trucks. Next in priority are older workers like Pedro, and Javier, who though only 30, drives the backhoe and the tractors. He is also next in line as capataz. Jules and Edward, sons of the dueno, also get a seat inside. Everyone else hops into the truck bed. Today is cold but sunny and not windy, so one truck, loaded up and with Jose and the changos in the truck bed, heads off to the jobsite.

Trip to Molinos

On Friday night, Bill and I took a weekend trip to the little town of Molinos. We set off on the "new" road there -- new only in the sense that it was created three months ago to replace the old road that washed out with the rains. It avoids the now swollen and impassable river at Amaicha, one of the fincas near us. Otherwise, this new road is so riven with cortadas cut by water that it seems as old as time. We jigged and jogged for two hours getting there and even more hours coming back on Saturday afternoon - when the truck was loaded to the gills with a barrel of diesel fuel, two propane tanks, two containers of engine oil, two iron beds, two wooden benches and various pieces of hardware.

Molinos is a tiny town situated along its river, in a valley wrapped in layers of steep, high mountains. As we drove there Friday evening, the late afternoon light lay on the mountain slopes in patches, as gently as pools of still water. The mountains, the sky and the light were uncharacteristically soft, as if the whole landscape partook of the fertile promise of the green resurgence fed by the recent rains. We drove along the spines of the sandy, rocky hills descending from our valley of Gualfin into gullies between immense walls of red composite stone, where the stubborn algarrobas with their twisting trunks and spreading canopies of feathery leaves offer shade to herds of goats. We passed not a soul for an hour and a half, when suddenly the Friday pick-up truck run from Molinos appeared, crowded with students going home from the colegio at Molinos to Taquil and Gualfin for the weekend. We had to back up to allow them to pass. And we saw a guaypo, a ground bird with a plump partridge body, a long slender neck and a tiny head topped by a spray of feathers. It was scurrying along the ground, seemingly unaware of a fox the color of desert sand totting silently after it.

By the time we got to Molinos, it was dark and we were relieved to see the points of light shining out from the houses and streetlights. We passed a little public housing development as we drove into town; perched on the side of the hill above these ungainly little boxes was a shrine -- the Virgin of the Valley watching over her faithful ones. The Virgen del Valle is an Indian version of Mary, who appeared in the Calchaqui Valley in the 17th century. She is a straight-backed bronze-skinned maiden, with long black hair and high cheek bones, wearing silver earrings and full length robe of white embroidered satin under a sky-blue satin cape.

Our hotel, Hacienda de Molinos, is across from the little church of San Pedro, built in the 16th and 19th centuries. Its slender twin domes were dimly silhouetted against the mountains in the failing light.

The hotel is in the former house of the Spanish colonial governors of the province of Salta. Like the church it is modest in scale, a one-story hacienda around a series of courtyards. An immense molle tree dominates the middle of the first courtyard, and there is a simple formal garden of lavender and white roses in the more private courtyard where we had our room. The place was restored with consideration for its original use; every beam, gallery post, door and window is either original or hand-made in Molinos. Right around the corner is the workshop where the pieces were made.

Dinner at the Hacienda

The purpose of our trip was dinner with one of our neighbors. One of them we met by accident at the Salta airport when we arrived; he thought he might know us and explained that he was suffering from amnesia after a car accident. "And it's not a joke!" he added, taking me by the arm. He was walking with two canes. He was meeting his mother, who also coincidentally walked with a cane, and who had just arrived from Holland. He is Dutch and came to Argentina as a very young man-he is now 42 - the scion of an aristocratic Dutch family. He stood out immediately in the Salta airport: very tall, very thin, blond, with a strong Dutch nose in a fine-featured face, and unlike anyone we have met in Salta or Buenos Aires, dresses like an English squire in corduroy trousers and a tweed jacket.

The dinner was a chance for us to get to know each other. (When you have spent a month in Gualfin, you are eager to meet your neighbors. )

We had a delightful dinner. Other friends had been invited. We had drinks in a little sitting room with a warm fire . It was very interesting, because working fireplaces are a rarity here, as we have found at Gualfin. In the course of the evening, we learned about how our Dutch friend had come to Argentina, how he farms, his family and his original points of view about a multitude of subjects.

He came first to Buenos Aires province, where he bought a farm. Ten years ago, he sold it and bought a huge ranch - some 30,000 acres - including thousands of acres of rich bottomland farm along the Molinos River. To get to there, now that the river has flooded, you either drive for an hour or take the short route: wade across the hip-deep rushing river holding your pants over your head.

He paid only $250,000 for the farm, buying wisely during one of Argentina's financial crises. He's a methodical farmer and his place is a model of agronomical calculation- he knows exactly how much it costs to pump a liter of water out of the aquifer under the hills to water the rich land below. When Bill went to visit him the next day (taking the wading route), he was sitting in a chair on his porch, surveying the fields with his binoculars. He hates littering. He saw one of his laborers drop a plastic bottle and ordered him to go pick it up. Presumably he also uses his binoculars to keep up with the work on the farm, as he can't get around easily with a cane.

There's a slightly melancholy side to this lively and eccentric personality. At least, after he has been drinking. He went over a cliff on the cuesta road about six months ago, having unwisely allowed the young woman accompanying him to drive. Rather hesitantly, I asked him what had happened to her. "Oh," said he, "she went skiing two weeks later." It was a grisly accident. No-one saw them at first, since the cliff dropped straight down 150 feet. His driver, coming along the cuesta and expecting to meet them later, sighted the wrecked truck. A rescue crew carried him out on a board made for a much shorter person. The driver's assistant tried to hold his head during the two-hour drive to Salta along the jolting road. He said he kept thinking he would faint but unfortunately never did.

One of his friends, who joined us for dinner, was a Daily Reckoning reader. Originally from Alabama and descended from an old Virginia family from along the James River, he has lived in Salta for 30 years, where naturally he is known as Don Juan. And not just in name, we gathered. He has two grown daughters from his marriage and a two-year-old "natural" child from one of many girlfriends (as he described it). He is one of Jan's most intimate cronies. Later, we went to visit his fabulous house - the only castle in Northern Argentina - but I will have to tell you about that some other time.

All in all, we had a stimulating dinner with good conversation, good local fare and good wine from Cafayate.

And back at the ranch...

Not that Gualfin is dull. In fact, in some aspects it is rather alarming. As our local manager said after out interview on Sunday morning with the directora of the escuelita: "Pequeno pueblo, infierno grande." (Small town, big hell.)

The big hell last year was the menace of an insurrection of the local farmer, which Bill seems to have put down firmly, by agreeing to all their demands. This year, the alarm bells were ringing in the local school.

I went to see the two school teachers. One has been there for 26 years. The other for 18 years. They work together. They live in the unheated school together. They have no transportation, so they spend weekends and most holidays together too. They have no friends in the area. There are just the two of the middle of nowhere...with no television, no new books, no magazines or newspapers, with 20-30 children to take care of.

And from what we have been told, they have not spoken to each other in 15 years.

A cupola rises at Pucarilla

Meanwhile, the casita project, the main reason for our two-month sojourn at Gualfin, is coming along well despite its complex design. It is a stone and adobe structure with an intersecting double-vaulted ceiling on two sides and a central dome in the middle. Bill says it is a miniature version of a great cathedral in Europe, but he doesn't know which one. His ambitious architectural tour de force is being built (without formal plans, need I add) by himself, Jules and Edward, Pedro and Jose the masons, three sons of Natalio aged 21 to 16, and Hugo the bricklayer and his helper Omar.

The casita is set in Pucarilla, a valley tucked into a group of low hills on the Gualfin side and a high cerro on the other separating us from the neighboring finca of Pucara.

The valley is planted in alfalfa and vineyards, walnuts and quinoa. A few abandoned houses and orchards give it the feeling of a lost paradise. One of the houses is inhabited during the week by Nolberto Casimiro, the regador or waterer.

Pucarilla means little fortress in the language of the Hualfin Indians - reputedly the last Indian tribe in Argentina to be vanquished by the Spanish. Up the river about an hour's ride is an Indian fortress, where you can find pottery shards and the remains of stone edging around hillside terraces.

Maybe that is why this place appeals to Bill. It is a refuge...a last-ditch holdout for diehards and lost causes. It is literally the end of the road...

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 "Great Correction v/s Great Blundering Reflation"


Apr 23, 2012

Bill, I enjoy your style of explanation and many time fooled into reading write ups by others like Mr. Asad Dossani. With due respect, I would prefer that he writes under a seperate section and not passing off his write up to be those of yours. His articles also seem to published under the same section, "Daily Recokoning by Bill Bonner


priti kodikal

Apr 20, 2012

imaginative writing ,brings to life the entire landscape and feel of wondrous longing to be there in argintina.
would love to see photographs too.
good luck

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