This crisis has a long way to go - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 20 May 2010
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Beijing, China

The primary trend is down...

Stocks fell again yesterday. The Dow lost 66 points.

The big shakeout was in the gold market - with a fall of $21.

It is unusual for gold to fall more (proportionately) than stocks. So, what's the gold market trying to tell us? And why didn't it mention it before?

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As forecast, rates of delinquency and foreclosure are hitting new records. One of every 10 American homeowners is in trouble.

Unemployment shows little sign of improvement, with hundreds of thousands of new college grads joining the jobless this month.

And now this: prices are falling at the retail level too:

The New York Times:

"Consumer prices fell in April for the first time since early last year, and inflation rose at its slowest rate since the 1960s, a new government report said.

"Energy prices led the decline, falling by 1.4 percent in April, the Labor Department said.

"Consumer prices over all fell in April by 0.1 percent, the Labor Department said in its monthly report on Wednesday. The decline was the first since March 2009. Prices rose by 0.1 percent in March 2010.

"The downturn was led by a decline in energy prices, especially for gasoline and natural gas, the report said. Energy prices fell by 1.4 percent in April, the department said.

"Food prices rose 0.2 percent, mostly because of higher costs for meat, poultry, fish and eggs.

"But without the volatile prices for food and energy, the core index for consumer prices remained flat, as they did in March. Over the 12-month period that ended in April, the core index rose 0.9 percent, which economists said was the lowest it has been since the 1960s. "

Everything is going down. Stocks. Commodities. Real Estate. China.

What happened to the recovery? Is it taking a breather? Is it just 'fragile,' as most economists believe?

No. It hasn't slowed down. It isn't fragile. It just doesn't exist.

Paul Volcker:

"Any thoughts that participants in the financial community might have had that conditions were returning to normal should by now be shattered," he said. "We are left with some very large questions: questions of understanding what happened, questions of what to do about it, and ultimately questions of political possibilities."

No return to normal. No recovery. No inflation.

But before you get too comfortable with falling prices, remember that they can rise suddenly.

Dear readers will recall our Daily Reckoning position in the inflation/deflation debate. Asked whether we are headed towards inflation or deflation, we reply: 'Yes!'

Pressed to give a more helpful response, we elaborate:

'We will have both inflation and deflation. Probably in reverse order. Prices will fall as the private sector de-leverages. But they will eventually rise, as the public sector both leverages itself with debt and then monetizes the debt by creating more dollars.'

We are still in the early stages of what is to be a long period of restructuring and re-adjustment - a Great Correction. So far, the private sector has begun paying down and destroying debt. And the public sector has begun to increase its debt and destroy its own credit. Falling prices tell us that the private sector de-leveraging is continuing...and that the public has not yet lost faith in the government's money. That will come.

Paul Volcker also said that "time is running out" to save US finances. You can't go on a spree, spending trillions of dollars you don't have, and not suffer the consequences eventually. Unless action is taken quickly, says Volcker, it will be too late.

The Wall Street Journal reports that state pension funds may already need a $1 trillion bailout.

Europe just initiated the biggest bailout to date - almost $1 trillion to bail out Greece, and spare mainly French banks from taking the losses they deserve.

But Greece is in no worse shape than the US deficits are about the same. So is total debt, when you include the debt of Fannie Mae and other enterprises for whose debt the feds are now responsible. And how about funding those debts? Turns out, as a proportion of GDP, America's funding requirements for this year are actually 50% greater than the Greeks.

One day, investors, householders and lenders will lose confidence in the full faith and credit of the United States government. Then, even in a slumpy economy, inflation will return. People will rush to get rid of their dollars. Prices will rise, fast.

This crisis has a long way to go...

*** Last night, we got in a cab and went over to a restaurant near the Peoples' Bank of China and the old city gate. We ate outside, on a rooftop terrace, looking out over the city.

We were struck by awe and wonder. In the space of two decades, Beijing has turned into one of the world's biggest, most dynamic, and most appealing cities.

It is 4 times New York. And five times LA.

But we measure everything against Baltimore...and compared to Charm City...well...nothing is quite like Baltimore. And it's probably better that way...

Beijing is striking in many ways.

Coming out of the Grand Hyatt, we hopped in a cab and were immediately stuck in a traffic jam. In front of us was a Mercedes Maybach. We have only seen one of these cars before - in Germany. They are such expensive automobiles you rarely see them. And yet, we realized that there was not just one of them in front of us. There was one behind us too. It was as if we had blundered into a government motorcade...stuck between the president of Russia and the president of Dubai (if Dubai had a president).

But this was just an ordinary street scene. And all around were other black, luxury automobiles.

In the shopping mall under the hotel you can find any luxury brand you want. Hermes, Louis Vuitton, Gucci. And you can find dozens of fancy shopping malls in Beijing. Maybe hundreds of them. Looking out on the city lights from our restaurant terrace, we could see the town stretching out for miles in every direction. Office towers, hotels, and apartment buildings - high rise, low rise, in between rise - north, east, south and west.

At first, we thought the center of town had probably been the site of huge government-directed investment projects. We expected the rest of the city to be miserable and poor - like the slums of Buenos Aires or 'the projects' in Baltimore. Not at all. Everywhere you look you see new buildings...construction cranes...bridges and overpasses...new restaurants...new shops...

When was the last time they built an important new building in Baltimore? We can't remember. Maybe it was the Ravens' football stadium. There have been a few piddly structures erected around the harbor. But most of the building stopped with the harbor renewal projects of the '80s and '90s.

Even in New York, a new building rises from time to time. But the city hasn't changed much since the '20s. It has already been built up and built out.

America is what it is...and what it has been. Now, it is trying to hold onto its place...while China shoulders its way up to the bar.

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

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1 Responses to "This crisis has a long way to go"

ramaraom3

May 20, 2010

the eggheads of the world must get together, discuss the the great crisis in public with people who carry credibility in the marketplace, demand steps to put in place urgent regulatory measures for acountability in super financial institutions, rating agencies, auditing firms et al. a crisis this large must be used to lay the foundations of a new order. not for nitpicking. no use trying to point fingers at the wrongdoers. they will gangup and retaliate. think of the future.

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