The economy might collapse, so what? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 17 June 2010
The economy might collapse, so what? A  A  A

Baltimore, Maryland

Stocks were flat yesterday. Gold fell $3.

The news was mixed.

The big debate is between those who think the authorities are being too tight and those who think they are being too loose. Broadly, Europeans are on one side. Americans are on the other. The Europeans are tightening up. The Americans are letting rip. They're both wrong, as far as we're concerned.

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It's all nonsense. Just goes to prove our dictum that people come to think what they must think when they must think it. The Euro-feds can't afford to think they can loosen up. Their lenders have already laid down the law: 'Keep spending like the Greeks and we'll hit you with Greek-style interest rates.'

Just a few weeks ago the Greeks were forced to pay 16% interest. At that rate, borrowing is out of the question. You're effectively cut off. Because the more you borrow, the higher your interest rate. Soon, you run out of money.

As Nouriel Roubini put it, 'austerity is not optional.' Since it's not an option, but a necessity, there's no point in thinking anything else. You might like to spend more money, but you know you can't get away with it.

The US doesn't have to think about austerity. Not yet, at any rate. They've got the whole world ready to lend them money. 'Here, take a drink of rice wine,' say the Chinese. 'Here is some champagne,' say the Europeans. 'And here's a bottle of whiskey,' say the jokers in the back of the room.

It is only a matter of time before Americans fall down.

Not so, say the Keynesians - led by Paul Krugman and Martin Wolf. They say it's just a matter of managing the situation. Enjoy the party. You can pull yourself together later.

"The best policy is to put together measures that sustain strong growth in demand in the short run," writes Wolf in yesterday's Financial Times, "while constraining the huge deficits in the long run. It's like walking and chewing gum at the same time. Why should that be so hard?"

Meanwhile, Richard Koo probably knows more about this sort of economy than anyone. He's lived with it in Japan for the last 20 years. So, what does Koo think?

He says you can forget about a quick recovery. Japan has been hoping for a quick recovery for the last 20 years. It's been following the Krugman-Wolf approach - stimulating demand with fiscal policy. That is, it spends more than it collects in taxes, counting on the extra government spending to light a fire under the private sector.

But that won't happen, says Koo. The private sector won't start spending again until it has finished de-leveraging. Paying off debts takes a long time - especially when the government keeps bailing you out. So prepare for a long slump in the private sector economy.

So far, so good. But then Koo takes the classic Keynesian line. Like Krugman and Wolf, he believes the government should replace private spending with spending of its own.

It sounds logical enough. At least if you don't think about it too much. An economy is the sum of spending and investing. If the private sector goes into a funk and stops spending and investing, the economy shrinks. So why shouldn't the government step in and help out a bit?

Koo thinks so. Krugman, who won a Nobel Prize in economics, thinks so. Wolf, who heads up the worlds' most influential financial journal, thinks so.

Well, count on us, dear reader. We don't think so.

A real economy is much too complex for such simpleminded management. It is an organic system that delivers to people what they want (markets give them what they deserve). An economy doesn't necessarily correspond to what academic economists think it should be...or necessarily do what they think it ought to do...or sit still long enough so they can tell what the hell it is doing.

A real economy has a mind of its own. It doesn't care about their GDP growth rates. Whether people lose their jobs or not is not its problem. And it certainly doesn't intend to help politicians get re-elected.

Sometimes people want to spend. Sometimes they want to save. Keynes identified this "propensity to save," as though it were an unpardonable sin. If the people won't spend, we'll spend for them, he said...or words to that effect. But why shouldn't people be allowed to save money rather than spend it?

'Because the economy might collapse,' says the Krugman-Wolf-Koo crowd.

'So what?' answers the Daily Reckoning. (More on this tomorrow...)

*** Florida was hot. By day, the streets were deserted. Floridians must be like zombies; they only come out at night.

We wondered how the local property market was doing.

"It depends," was the answer we got from a knowledgeable local. "Prices are down. And they're still going down. But it's hard to generalize. Some of these expensive places are not much different than they were before the crisis. Prices are high. But they're not selling. You usually have to give a buyer a big incentive to buy if you want to close a big deal.

"So it really depends on how motivated sellers are. Probably most places around here are down about 50% from their peaks. A lot of this stuff was built just at the wrong time - in '05 and '06. It got sold at the peak with mortgages that were 100% and more. These buyers are hurting. They know they can only get about half the price they paid. But since they didn't put up any money, it's all a little abstract. What really counts is cash-flow. The banks work with them to keep the payments low. But eventually, the debt either has to be restructured or the buyers default. Then the condos are foreclosed and put back on the market...which drives down prices even further.

"Smart investors are now finding some good situations. You can buy cheap units, finance them, and pay your all costs. But you have to buy well. And you need a motivated seller."

"A lot of people here are waiting for the market to come back. Florida property has been going up every since the end of WWII. People are conditioned to think it always goes up. But there's so much inventory - ready, and potential - that it doesn't seem likely that there will be a general uplift in prices any time soon. In fact, there may never again be a real boom in Florida property. Everyone who was going to get a place down here may have already gotten one. There are other states with low taxes. And the idea of retiring to Florida may be out-of-fashion by the time the inventory is worked off."

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 "The economy might collapse, so what?"

Anil Kumar

Jun 17, 2010

Respected Mr. Bill Booner,
I am continously reading your post news letter from 15 days. I feel that you r very negative on world economy specialley for USA ,but the financial market like stock / commodity is not showing any crack down. Could you change your view if the world market did not come in correction mode & make new high.
I see several times when so many economist positive on economy of any market but market goes in upward bias and when so many economist are optimist about economy than market come in down word bias.
Could you please share about in regard above my view in your next news letter.

Eagerly waiting for your view.
with best regards
Anil Kumar

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