Sooner or later, the US economy will shake...

May 19, 2015

- By Bill Bonner

Bill Bonner
Medellin, Colombia

Dear Diary,

This is the first time we've been in Colombia. Greener, more mountainous, richer, newer, more flowery - it is many things we didn't expect.

We've seen a lot of press on Medellin - It is supposed to be lively. It is "springtime all year round." It is beautiful. It is safe.

We haven't been here long enough to know if those things are true. All we know so far is that it is so modern, so big and so wealthy that we are a bit disappointed. Maybe the charm and authentic poverty are on the other side of town...we don't know.

We'll let you know if we find out anything more.

Yesterday, stocks continued their climb, with a 26-point step for the Dow. Bonds continued to sell off. We have our eye on the bond market. It has been going up for 32 years. And while prices have gone to the highest levels ever recorded, so has the volume of credit. It is as if the world couldn't get enough debt. It got to be like heroin. The more the world economy took; the more it wanted. And the bigger the dose needed to get a buzz on.

After the 2008 credit crisis, however, it has been as if the major economies were immune to the stuff. The Fed, the Bank of Japan, and now the European Central Bank are peddling it on the street corners. In the largest quantities ever. But nothing much happens. At least, not in the real economy.

Sooner or later (a phrase we can't seem to avoid) the whole economy is bound to get the shakes. But we don't know when ‘sooner or later' will come.

If it comes now, however, it will a source of great satisfaction here at the Diary. "Finally," we will say, to no one in particular... "We knew it couldn't last!"

Of course, there's an alternative explanation for falling bond prices. Bonds should go down when the economy recovers. Businesses should begin to borrow for expansion. They will bid for credit...driving up yields and driving down bond prices. This would be a healthy end to an epic bull market in bonds. A robust economy would allow central banks to let rates rise back to normal as growth returns and debts are paid down.

But that is not what is happening. And it won't happen. Junkies rarely go out and get a job...and gradually ‘taper off' the habit. No, they have to crash...to hit bottom...to sink into such misery that that they have no choice but to give it up.

And now central banks are committed to QE and ZIRP forever. They have created an economy that is addicted to them. It will have to be smashed to smithereens before the feds change their policies.

Consumer confidence is falling. Sales are down. The US economy shows only a faint hint of growth. Container shipping down. Trucking down...

Oh, but what about the big boost the economy was supposed to get from lower oil prices? What happened to that?

Didn't happen. Americans didn't spend their energy savings. With household incomes down 10% in the last 15 years, they're just not feeling very expansive. And now, the price of oil is going back up. It's recovered about half the loss it took last fall.

That leaves Fed money printing just as impotent as it has been for the last 6 years. The Fed prints money. It goes to the banks...who spare it out to their favorite Wall Street gamblers. The real economy remains as flat and dull as a joint session of Congress.

And the markets shudder...

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1 Responses to "Sooner or later, the US economy will shake..."

AB Pereira

May 21, 2015

Points are well taken. Have been reading it for a while from you guys. US missed out on a golden opportunity. With so much money printed (not just by US, but also others like EU, Japan etc), if it had made just one key regulation on the usage of it, by now these big nations/groups would have lead a massive global recovery. That is, restrict investment in stock markets to 25% (or lesser) and mandate usage upto 75% in new businesses or revival of existing businesses by granting loans to them at low rates. This would have also created more employment, put more money in the hands of people, who would have started to consume, or repay their debts to these same banks (reducing defaults), and consumption led recovery is the only hope for the globe.
Same results could have been achieved by letting some big banks like Citi collapse (in 2008) but use the printed money to protect small depositors - say up to $100k. This may have affected the stock markets in the short term, but in the long run, stock markets would have robustly grown on the strength of a clean and strong economy.
Is this route likely to be followed? I guess, no. that will not help the selfish and greedy politicians and their cronies in the Financial Sector who want to make a quick buck - who cares if economy dies?

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