Here's some good and bad news...

May 5, 2015

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Diary,

Today, we have bad news and good news.

The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.

The bad news: it will be much worse than that.

Yesterday, the Dow rose another 43 points. Gold seems to be working its way back to the $1,200 level where it feels most comfortable.

"A long depression" has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.

--- Advertisement ---
A Little Thought Can Take Your Small Caps A Long Way...

Small caps can be difficult to decode if you don't spend time studying them... and that is not an easy thing to do for regular investors.

But for the past 7 years, we at Equitymaster have been researching small caps...

And through our research reports, our subscribers got to know about some really exciting small caps that gave them good returns over a period of time.

Yes! Returns like months 250% in 2 years and 1 month, 139% in 7 months, 288% in 2 years and 5 months have been achieved by our subscribers just by going through and giving a little thought to those reports.

They have benefited and so can you...

Click here to see how just 10% of your portfolio could brighten your returns...

------------------------------


First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the US. As we've described many times, as people get older, they change. They stop producing and begin consuming. They are no longer the dynamic innovators and eager early adapters of their youth; they become the old dogs who won't learn new tricks. Nor are they the green and growing timber of a healthy economy; instead, they become dead wood.

There's nothing wrong with growing old. There's nothing wrong with dying either, at least from a philosophical point of view. But it's not going to increase auto sales or boost incomes - except for the undertakers.

Second, most large economies are deeply in debt. The increase in debt levels began after WWII and sped up after the money system changed in 1968-71. By 2007, US consumers reached what was probably "peak debt." That is, they couldn't continue to borrow and spend as they had for the previous half a century. Most of their debt was mortgage debt, and the price of housing was falling.

The feds reacted, as they always do, inappropriately. They tried to cure a debt problem with more debt. But consumers were both unwilling and unable to borrow. Their incomes and their collateral were going down. This left corporations and government to aim only their own toes. Central banks created more money and credit - trillions of it. But since the household sector wasn't borrowing, the money went into financial assets and zombie government spending. Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.

Third, the developed economies have been zombified. The US, for example, is down at number 46 on the World Bank's list of places where it is easiest to start a new business. Paperwork. Expenses. Regulation. High taxes. High labor rates. Entrenched competition with aging, loyal customers.

Leading industries -- heavily controlled and regulated, including defense, education, health and finance - are practically arms of the government. All are protected with high barriers to entry and low expectations. Competition is barely tolerated. Innovation is discouraged. Mistakes are forgiven and reimbursed.

Meanwhile, the masses are encouraged to become zombies too, with generous rewards for those who 1) do nothing, 2) pretend to work or 3) prevent other people from doing anything. After all the zombies, cronies, and connivers get their money, there is little left for the productive economy.

Typically, these problems -- too much debt, too many zombies, and too many old people - lead to financial crises. Then, they are 'solved' by either inflation or depression. And the solution begins when markets crack.

Markets never go up forever. They go up and down. They breathe in and out. And after sucking in air for the last 30 years, US financial assets are ready to exhale. Bill Gross:

    When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.
When that happens, problems begin to take care of themselves, in one of two ways.

A quick, sharp depression wipes out the value of credit claims. Borrowers go broke. Bonds expire worthless. Companies declare bankruptcy. The whole capital structure tends to get marked down as debts are written off and financial assets of all kinds lose their value.

Or, under pressure, the feds print money. Debts are diminished as the currency loses its value. The zombies' still get money, but it is worth less. Inflation adjustments cannot keep up with high rates of inflation. Pensions, prices and promises fade.

Either way, the slate is wiped clean and a new cycle can begin.

But what rag will clean the slate now?

More tomorrow...

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

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Get 'India's Big Government' at Just Rs 199 Now October 18, 2017
Vivek's latest book is now available at a rare discount. Grab a copy now.
Our Plan to Save the Ranch October 18, 2017
How to increase fertility in the kingdom of cows.
Nobody Honks in Bali - Lessons for Indian Tourism October 17, 2017
Things India can learn to promote tourism from this small island.
We Rode Out... Unarmed October 17, 2017
Money is the tape measure for the carpenter economy.

Equitymaster requests your view! Post a comment on "Here's some good and bad news...". Click here!