Moving towards a sick economy - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 27 May 2010
Moving towards a sick economy A  A  A

Paris, France

Hey, is this a great recovery...or what?

Stocks fell again yesterday. The Dow went down 69 points, closing below 10,000. Gold rose $15...closing above $1,200.

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The two are still $8,800 apart. But give them time. They've been working their way closer for the last ten years. They'll get there...

Single family house prices fell for the 6th month in a row, reports the Washington Post.

And get this: "Private pay shrinks to historic lows as government payouts rise," says USA Today.

This is the big story. As a share of personal income, never before has the private sector contributed so little. Thank god for the government. Without those checks from the feds, we'd all be broke.

The story as told by USA Today:

"Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

"At the same time, government-provided benefits - from Social Security, unemployment insurance, food stamps and other programs - rose to a record high during the first three months of 2010.

"Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.

"The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says. "

That's the trouble isn't it? The feds don't really have any money. They don't make anything. They don't create any wealth. So they can only send us checks by taking the money from us - one way or another.

And that, dear reader, is the story of the most important trend of our time. The feds are taking a bigger and bigger share of the economy. And the bigger the share they get, the less the rest of it is worth. Because an economy run by politicians and bureaucrats is not a healthy economy. It's a sick limps along. It wheezes and coughs. And if the trend towards more and more federal control continues...the economy finally dies.

If you want the government to take care of you, said Jefferson, and "you will soon want bread." He didn't say it exactly that way. We improved it.

The feds don't make decisions on the basis of fair play and rational economic choices. Instead, they're political choices - such as bailing out the big banks because they are said to be "too big to fail," or bailing out the big auto companies because they employ too many voters, or bailing out the mortgage industry because too many people would lose their houses if the mortgage industry were allowed to go where it should.

Even in the best of times, an investment is a risky thing. Sometimes it will produce a positive return (above the real cost of funds). Sometimes it won't.

Imagine what happens when decisions are made by functionaries, political appointees and GS12s? Capital is then allocated to the wrong projects for the wrong reasons...which result in the wrong outcomes.

Bad economic decisions produce bad economic results. Bad economic results lower the value of capital assets...and make almost everyone in the economy poorer.

We say "almost everyone," because the government's employees, lobbyists, and contractors are in a class apart. They are the ruling party and its apparatchiks. While everyone else gets poorer, they get richer.

*** "Tax increases. Spending cuts.' That's the name of the game in Europe.

The OECD is calling for them. The IMF is requiring them. Politicians are promising them.

Just yesterday, Italy came forward with $30 billion worth of spending cuts.

Reading the paper, you might think Europe's leaders have the matter under control. Every day seems to bring fresh promises. But remember, these are the same people who failed to keep within Europe's fiscal targets 57% of the time - even when the going was good.

How will they do with their backs against the wall? Better, most likely. But not good enough. The euro-feds will make plenty of gestures. But in the end, it just won't make sense for people to give up present benefits in order to respect promises made by a generation of spendthrift politicians to a ruthless bunch of speculating bankers. The political left, which is leading the opposition to Ďausterity' measures, will become more and more attractive to more and more voters. It will be harder and harder to cut spending.

This will force governments in the direction of least resistance.

They will "print money...go bust...and go to war," says Marc Faber. "We are doomed."

*** Oil is still spilling into the Gulf of Mexico at an unknown rate.

"Plug the damn hole," says the nation's chief executive to his aides. Why does he bother? His aides don't know anything about plugging oil leaks under the ocean. And those people who do know something about it have been unable to fix the leak.

Mr. Obama is not only America's president. He also presides over the biggest single user of oil in the world - the US military. The pentagon uses twice as much oil as the entire nation of Ireland. It sends soldiers in oil-burning airplanes to places of no apparent importance where they drive around in oil-burning machines for no apparent reason.

Naturally, oil becomes not just another commodity, but a strategic commodity...worth fighting for. Then, foreign wars use up the oil they were expected to protect.

But geo-politics is far beyond our understanding...and even farther out of our range of interest. We will just observe that the law of diminishing returns applies to just about everything. The farther offshore the roughnecks go... the deeper the sea and the higher the waves...the more the costs, the greater the risks and the lower the marginal returns. The return from Deepwater Horizon must be starkly negative...

The farther afield US armies go, too, the greater the costs, the higher the risks, and the lower the marginal returns.

"Why not just buy oil on the open market?"

Well, it's clear you don't know anything about geo-politics either, dear reader...don't you know that our enemies might try to cut us off from vital oil supplies? That's why Germany and Japan lost WWII! We were able to cut of their fuel...

"But weren't Germany and Japan fighting for access to oil? Didn't their politicians say they had to invade Poland...and the protect their vital supplies?"

No...they were aggressors. They were bad people...

"But if they hadn't been the aggressors they wouldn't have been bad people, right?"

That's right...

"Then, we wouldn't have cut off their access to oil!"

Oh, never mind. You'll never understand geo-politics, will you?

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

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.

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1 Responses to "Moving towards a sick economy"

Hardik Patwa

May 27, 2010

Well, i have been reading bill bonner's articles for quite sometime. Well, i think he sees bearish sentiments all around and that's it.
But, the market is not correcting that much and neither the country is going to dogs.
I do not know from where he brings only the bearish news of the economy when timothy geithner is not showing signs of bearishness.
I am going ahead and investing in the market. Now, a new rally is going to start.
And if market does correct then it would be my loss. Everybody has to take some risks.
Bonner himself might not be making money and not letting others do so.

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