More Disasters, Please!

Jun 16, 2011

Baltimore, Maryland

Whoa. Tuesday's gains had disappeared before traders coffee had gone cold yesterday morning. The Dow ended the day down 173 points...signalling what looks like a 7th straight week of losses. Stay tuned.

Oil ended the down at $95. The dollar went up.

The trouble with the financial catastrophe of '07-'09 was that there wasn't enough of it.

"What recovery?" asks TIME magazine this week.

There is no recovery. Of course, you knew that, dear reader.

But what no one seems to know is 'why'. So we'd like to make a small contribution to the intellectual life of the economics profession and the popular understanding of the events before, during and after the crisis of '07-'09. That is, we'd like to explain.

How come the economy is so listless? How come there are so few jobs? How come house prices are falling?

We'll tell you. Because the dopes running economic policy didn't give catastrophe a chance! Instead of letting disaster wipe out all the bad investments, bad investors, bad bankers, and bad businesses, the feds pumped in money to keep them going. Well, guess what. They're still going!

Four years after the crack up in the US sub-prime debt market, there is still no sign that things are getting back to 'normal.' Growth rates are low or negative - 1.8%, 0.5% and minus 3.5% in the US, Britain and Japan, respectively. Decent jobs are hard to find. Household earnings and balance sheets are sinking.

The only positive thing that can be said is that we dodged a worse disaster. In Japan, for instance, economist Richard Koo credits financial officials. Through 20 years of on-again, off-again deflation, they avoided a big loss in GDP loss and kept everyone working. Yes, stocks and real estate fell 80%...but by bailing out big business and the banks, catastrophe was averted.

Then, in '08-'09, it was the West's turn to duck. Says former US Treasury Secretary Laurence Summers: "We averted Depression in 2008/2009 by acting decisively." In America, Ben Bernanke, Barack Obama, Tim Geithner and everybody else rushed to save the economy, just as the Japanese had done before them. Bernanke warned Congress that if they didn't pass the TARP legislation immediately, "we might not have an economy on Monday."

He should have shut up.

Then, he levered the Fed's balance sheet so that it acted like a dike. The floodwaters passed; the US economy was spared.

In Europe, Britain bailed out its banks. Europe rushed money to Ireland, Spain and Portugal. And Ireland guaranteed every Mick and Paddy's savings.
These efforts too were successful. Every economy in Europe is still afloat. Barely.

"Traditionally, the US economy has recovered robustly from recession," continues Mr. Summers in the Financial Times on Monday, "...within a couple of years after the only two deep recessions of the post first world war period, the economy grew in the range of 6% or more - that seems inconceivable today."

We're not even close. Since the crisis, growth in the US has averaged less than 1% a year. Properly adjusted for inflation and population growth, per capita GDP has declined and is now almost certainly negative by more than 2%. This explains why millions of people remain jobless 2 years after the recession supposedly ended. Ten million fewer people have jobs now than 5 years ago. The official unemployment rate is back over 9%, with 25 million who lack full time work.

And while Americans' earnings slip, so do their balance sheets. The Fed's latest dose of QE medicine revived the stock market, but not the housing market, which is where most people have most of their money. The latest figures show house prices off by 40% in real terms, and still falling.

In Britain, according to one estimate published in the Financial Times this week, the typical middle-class working household will be 720 pounds worse off in real terms in 2012 than in 2009.

Japan, meanwhile, is in such a funk it looks like it may never get out. And Europe is still bailing out the bankers whose loans hurt everyone but themselves.

In all four economies, the rescue strategy is basically the same. Look at the European situation, for example. Greece has just been downgraded; default (as predicted here at the Daily Reckoning) now appears unavoidable. But here's the good news: default also could be catastrophic.

Who's the Greeks' major creditor? The European Central Bank. As of the end of the first quarter, Greece had borrowed 90 billion euros from the ECB. Against this, the ECB has all of 5.3 billion euros in capital. In other words, if the Greek debt loses just 6% of its value, Europe's central bank is underwater.

But wait, it gets worse. The Europeans have used the ECB as a small town uses a landfill. Everything gets dumped there. In addition to the Greek debt, the ECB holds dubious paper from 17 member central banks, totaling some $1.9 trillion of assets. Against these assets, the ECB lends to Ireland, Portugal, Spain and other needy states, taking their paper in return. If the debtors don't make their payments, the ECB's 'assets' lose their value and the ECB will go broke. The next critical challenge comes in July, when Greece will need more money. Commentators, economists, and meddlers have already warned that if the Greeks aren't taken care of, there will be a disaster.

Great! Avoiding disaster didn't work. Let's try another approach.

"The contagious impact on the rest of South Europe and Ireland would, as [Mr. Trichet] has said, be all too similar to the aftermath of the Lehman collapse," writes John Plender.

So, the ECB will lend in order to keep Greece, and itself, in business. But by lending more, it doesn't improve the quality of its credits; au contraire, it makes them even worse.

The Japanese are in the same general predicament. There, the government must borrow to meet its expenses. At 210% of GDP, it no longer has a hope of 'growing its way out of debt.' Instead, the best it can hope for is to grow its way deeper into debt for as long as possible.

Likewise, in America the critical moment comes in August. That is when the statutory debt limit will be breached. Ben Bernanke has already issued another warning. If members of Congress don't get their act together and allow the federal government to borrow more, all hell could break loose.

Based on these facts, we have a modest insight: perhaps its time to let the calamity happen. There are a couple several brick walls approaching. Let's aim for one of them and see what happens.

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*** The Greeks are demonstrating. The Chinese are rioting. And now the Brits are organizing a big kvetch too. The English press reports:

More than a million public sector workers will take strike action in the autumn unless the ministers pull back from its proposed pension changes, it was claimed.

The leader of the country's largest public sector union said 1.2 million local authority and health service workers were "on the road to industrial action".

*** Talk about disasters! The Pentagon continues its efforts to bankrupt the country. Judicial Watch reports:
Bundled in chunks of $100 bills, the cash was sent from the U.S. to Iraq in turboprop military cargo planes known as C-130 Hercules. About $2.4 billion fit in each aircraft and 21 flights made trips, transporting a total of $12 billion in American currency to Iraq by 2004.

For years federal audits have determined that more than half the money cannot be accounted for but there seemed to be some hope that some of the funds could be retrieved. However, this week the Special Inspector General for Iraq Reconstruction (Stuart Bowen) essentially confirmed that $6.6 billion in cash was likely stolen and may never be recovered.

Bowen referred to it as "the largest theft of funds in national history," in a newspaper report that points out the missing money is enough to run a major public school district for an entire year. The story also says that the mystery is a growing embarrassment to the Pentagon, which has long asserted that it could track the cash if given the time to do it.

This is simply the latest of many reports documenting the pervasive fraud and waste in Iraq reconstruction efforts, which have received more than $100 billion from U.S. taxpayers. In the last few years Inspector General audits have exposed the sordid details of costly projects that never got completed or are rife with excessive delays and shoddy work.

*** Don't get us wrong. Here at the Daily Reckoning we're not opposed to paying people to kill other people. We just like to get our money's worth. We like to be sure that the people we're paying to kill are worth the outlay. Otherwise, we feels like chumps. Or worse. Murderous chumps.

As near as we can tell, the last time we got a decent return on our money was in WWII.

"US military operations in Libya hit spending rate of $2 million a day," reports the FT.

What do we get for that? Beats us. But then, what do we get from any of the pseudo-wars we're now fighting? Leon Panetta says there are 1,000 al-Qaeda in Iraq. What? US troops out-number them 50 to 1. In Afghanistan, intelligence reports put the number of al-Qaeda at "no more than 100." What? We outnumber them 1,000 to one. These wars must be the biggest losers in military history!

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

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6 Responses to "More Disasters, Please!"


Jun 17, 2011

respected Bill,

The $'s transfer to Iraq is huge you are talking of $12 billion...and official reported transfer which will continue from US to Pakistan is said to be $29 billion remaining $6 billion pakistan yet to recieve and thats till 2014...




Jun 16, 2011

These views are anarchistic.........there would be catastrophe all around and must be prevented at all refer to Paul Krugman.
Perhaps interested parties want this to happen so they can just step in and scrape up assets for a song



Jun 16, 2011



Commore Suresh Bhandoola

Jun 16, 2011

The US presence in Iraq (minimal now)and in Afghanistan keeps men and women of the armed forces in jobs without which the nos. of unemployed would increase considerably. Find more places to intervene and keep up the good work!!!!!



Jun 16, 2011

I read your article regularly. I agree with the scenario presented by you and also assume that all central bankers are aware of these scenarios but still they are doing this. Hopefully, they are doing it in search of hope. But what if the US, fighting in all oil rich countries have plans to take control of oil production in most of these countries and get rid of the debt by selling it in high prices. They may not intend to do this nw but after sometime this may become a necessity for them to save their economy. Do let me know your views on this.


Agnel Pereira

Jun 16, 2011

Oh my! Such disasters round the corner! Bankruptcy for the central banks - in US, Europe, Japan and can happen to the emerging China too (if the US & Europe default)!? Is India and Brazil safe?

Central banks are known as the lenders of last resort,
but now they appear to be the borrowers of every sort!

What is the outcome for the common man? and what options? Once again, are Brazil and India safer? Are precious metals only bets? Are corporate bonds (guaranteed by governments) dangerous?
Bill can you highlight please for the benefit of small people?!

Thanks for your forthright views.

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