Solution to economic crisis: Let it be

Sep 8, 2010

Baltimore, Maryland

Let it be, let it be, let it be, let it be...
Simple words of wisdom - let it be

The Dow lost 107 points on its first day of trading after Labor Day. Gold rose to within $3 of its all-time high.

What do you make of it, dear reader?

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Watch the bonds....we could be seeing the first crack in the bond market. But it seems too early to us. It seems more likely that the bond market will stretch this out...bringing more and more hapless investors on board before finally sinking.

Everything takes longer than you expect. Yes, we expect a bond market crash. But it's not like Mr. Market to give us what we expect when we expect it. It's too simple. Too logical. Too obvious. Instead, he toys with us...he leads us down the primrose path...he plays out some line before reeling us in.

How do you like that fellow? What a nasty piece of work! Or, is Mr. Market just nature's way of offering instruction? When he delivers a lesson, you don't forget it!

The longer you invest the older you get. You may get wiser too. Frankly, we'd rather be younger and stupider, if we had the choice. But we don't. So we'll take what we can get.

What we make of it is that the long slog through the correction is continuing. We can expect lower stock prices. And we can expect that the price of money will go up; meaning, you'll be able to buy more assets and other stuff with less money.

Gold is the best money. Gold is going up.

But wait a minute...we know what you're thinking. You're thinking that the Daily Reckoning has been rather silent on gold for the last few months... In fact, didn't we say we thought it most likely that gold would cool its heels until this downward thrust in stocks, banks, houses and other assets is completed?

Yes, we did say something like that. And we still can't think of any good reason why it shouldn't be so. But so far, it ain't so. Gold is going up. It seems ready to set new records. So we won't quibble with it.

We're a bit agnostic about gold now. We think you should own a lot of it. But it's not under-priced. Don't expect to make a lot of money as it reverts to the mean; it's already at the mean.

Most likely gold will become much, much more expensive...but that is only because the real value of other currencies will collapse. So better to hold gold than dollars - which is what we've been saying all along. And what other people seem to be thinking too.

Still, we wouldn't speculate too heavily on gold. Not just yet. We still have this river to cross. You want to be fairly light and buoyant - free of of risky of overhead - when the time comes to swim across. A lot of your friends and neighbors will wash up. You don't want that to happen to you.

Speaking of crossing that river...we finally read something intelligent on the subject in - would you believe it - the New York Times. We thought the Times had given up saying anything intelligent. When it signed Thomas Friedman to give opinions on politics and Paul Krugman to give opinions on economics, we figured the Times was finished as a serious journal.

But there it was in yesterday's paper:

"To revive housing market, some say let is crash," is the headline.

The reporter gives an unusually clear picture of the situation:

"The unexpectedly deep plunge in US home sales this summer will probably require the US government to choose between future homeowners and current ones, a predicament officials had been eager to avoid."

Present homeowners want to boost the value of their main asset. Future homeowners would like to buy their next asset on the cheap.

But the feds are always caught in the middle. And they almost always take the part of the present. If they hadn't stepped in back in the fall of 2008, future investors might have gotten much better deals on their stocks. Future bankers would have found the debris of the last bubble cleared away by now. Future businessmen would have found the landscape freer of debt, with future consumers much more ready to buy things.

But then, the future doesn't vote or give campaign contributions. No Michigan politician represents future auto companies. They represent the Big Three. Nor do they carry the hopes and desires of future autoworkers with them into the House every day. Un un...instead, their mobile phones have the phone numbers of the present autoworker union chiefs.

Government is fundamentally a reactionary institution...always looking out for the here and now. But let's not get distracted...

How do you solve a slump in the real estate market? Easy. You let Fannie and Freddie get what they've got coming. You let it happen. Prices collapse. Better yet, raise interest rates and kick Fannie and Freddie on the way down. Then, houses are cheap...people are ready to buy again...and a whole new cycle can begin.

How do you stop a bear market in stocks? You don't. You let it happen...and look forward to the bargains you'll find at the bottom.

How do you revive an economy that is in recession? You push it into depression. The bad debt gets flushed out. Businesses that aren't competitive...or that have too much debt or too many fixed costs (GM, for example) go broke. Their assets are bought up at pennies on the dollar.

New automakers take their places. Banks go bust too - and depositors decide to be more careful next time.

The present suffers, but the future benefits.

What's the cure for a depression? A depression, of course! Let it be...let it be...let it be...let it be. Simple words of wisdom...let it be....eeee!

*** Yes, dear reader, it looks to us as though the welfare state is kaput. Because it depends on the future to support it. And guess what, there is no future...

Ha ha...

Remember the Population Bomb of the '70s? If we're not mistaken that was Paul Erhlich's dire, neo-Malthusian warning. There were soon going to be more people than the world could support.

Well, the population bomb turned out to be a dud. And now, in the developed world, the really explosive danger is not too many people, but too few people. It's blowing up the social welfare systems put in place in the early and mid-20th century.

"By 2050," writes Giulio Meotti in the Wall Street Journal, "60% of Italians will have no brothers, no sisters, no cousins, no aunts, no uncles."

Gee, wonder what the weddings, funerals, family reunions and estate battles will be like. You may want to fight over dad's bank account, but who will you fight with?

According to Meotti, Italy is approaching the point of no return. Once you get to a certain level, there aren't enough fertile young people to replace the population that is retired and aging.

"According to demographic forecasts, it is highly unlikely that the number of people under 20 will ever again exceed the number of people over 60," he writes.

Italians are committing social suicide, he says, disappearing by choice.

What happens to the social welfare state when the number of people who are meant to be supported becomes larger and larger...while the number of people who are meant to be supporting them becomes smaller and smaller? We don't know. But we're going to find out.

Italy and Japan are leading the world in the race to self-extermination. Others are coming along. But the financial problems caused by too many old people are ubiquitous. France was paralyzed by strikes yesterday because the government threatened to raise the retirement age from 60 to 62. Sacre bleu! Most likely, people will work 'til 70 before the welfare state finally dies.

*** Last week in Paris was a wonderful, awful time. Left on our own, we saw old friends. We dined at sidewalk cafes in neighborhoods we had never seen before. And on the weekend, we did something we hadn't done in years - nothing. We walked the streets and enjoyed the low, warm sun of late summer.

But a pall hung over the week too. We were on death watch. A friend and colleague was dying. She was only in her '30s...young and beautiful, with two small children. It didn't seem possible. Not in this age of medical miracles. But one course of treatment had not stopped the cancer. Neither did the second. Or the third. No one wanted to believe it was happening...least of all, the patient herself...not until the end drew close.

We went to see her in the hospital. She had lost all her hair and much weight. But her face never looked better...with skin so clear and fine, it looked as though he was already among the angels.

"What do you think," she asked? "Did I do something wrong? How come this is happening to me?"

What could we say?

"I don't know... things happen. We don't know why."

"It would be so much easier to be a believer [in the Eternal Life...]... I'd like to think I was going to Heaven..."

"What do we know? Maybe it's true. Why not believe?"

Where she was headed, we don't know. But she left this world yesterday.

Let it be. Let it be.


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

Disclaimer: 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 "Solution to economic crisis: Let it be"

sunilkumar tejwani

Sep 8, 2010

Dear Sir,

compliments & greeting:

I fully agree (cent percent) with your views. Re surrection possible only after death. Hence it would have been wiser to allow all reckless organizations to die natural death. But what Fed & the U.S government have collectively done is suicidal.
But what can be said in a country where Wall Street fat cats are the pet friends of the powers that be. White house & wall street are inseparable. That is obvvious.

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