The global bubble is deflating

Sep 21, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

"Cor-ROO-ption! Cor-ROO-ption! Cor-ROO-ption!"

It only took a couple of minutes to realize that our taxi driver had lost his mind.

"You can't trust anybody in Buenos Aires. Not the government. Not the police. Not the taxis."

Especially not the taxis.

Back to our race across Buenos Aires in a minute. We pause briefly just to check in on the markets. The Dow fell 290 points on Friday, a disappointing day ....and potentially very worrisome for the Fed. Failing to raise rates as promised might have prevented a crash on Thursday. But it did nothing to keep prices from falling on Friday.

As Richard Duncan keeps pointing out, it is excess liquidity that has driven up the stock market for the last 7 years. But that excess is disappearing. Chinese stocks are already down 42% from their high. More importantly, Chinese imports have been falling at a 13% rate this year. Instead of pushing the world economy by expanding consumption of raw materials and re-investing its gains in US assets, China is now a drag. This leaves the commodity exporters with lower sales, high debts, and staggering currencies. And it leaves the US with consumer price inflation at near record lows.

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Nobody wants the Fed to tighten. And probably nobody less than the Chinese whose already shaky economic model will be in real trouble when the Fed finally raises interest rates. The Chinese model depends on selling things to foreigners who don't have the money to buy them. The purchases have to be made on credit. As interest rates rise, credit becomes more expensive and China's sales go down.

As China's imports go down, prices fall, world trade declines and the world enters a recession. The global bubble is deflating.

The Fed won't raise rates under these conditions. Not this year. Instead, at the first sign of real panic, it will ease credit.

Meanwhile, our taxi driver had picked us up at the ferry, after we came back to the city from Uruguay. He spoke Spanish with what sounded like a Russian accent. His hair was curly and bushy...and stuck out on both sides of his head. His face was thin and long. His eyes were wild.

And he was driving through the middle of town in a rickety old taxi - a tiny Chevrolet, a model never sold in the US - at 70 mph, weaving through traffic dangerously.

He looked like the sort of man who might have assassinated the Archduke Ferdinand. But it was our life we were worrying about now. He was crazy, but he must have some survival instinct, we thought; otherwise, he wouldn't still be on the road.

"I have a Ph.D. in micro chemistry. And look at me...driving a taxi. On Sunday! Cor-ROO-ption!

"Everything is corrupt in this country. Everything. That's why 97% of the people live in poverty."

"Ninety-seven percent seems like a lot," we ventured.

"More than that!"

We looked out the window. The part of town we were rocketing through must be where the 3% who were not living in poverty. They all looked well-fed. Well-dressed, too. Women wore the highest heels we have ever seen, maybe 9 inches high...with a 4 inch platform under the fall of the foot. These heels are supposed to make women look taller and sleeker, but we were so curious about the physics of them we scarcely notice the women wearing them. Almost all the young women of Buenos Aires are walking on stilts!

It was a beautiful spring day in the city. The sun was shining. Trees were in bloom - some in bright red...some bright yellow...and some had what looked like large cotton balls hanging from their limbs. There was even one tree we saw which, improbably, had a mixture of purple and white flowers.

The sidewalks were full - mostly with young people, often couples out pushing strollers and baby carriages. Jugglers performed on streetcorners, stepping out in front of traffic at stoplights...then hastily trying to cadge some tips before the light changed. In the parks, artisans set up their stands - hundreds of them - offering everything from honey to silver bracelets to picture frames made out of cactus.

We are most familiar with the Palermo section of town. There, shops and restaurants change so quickly it is hard to keep up. We get used to going to a coffee shop for breakfast. Then, when we come back 6 months later, it's turned into a boutique selling shoes. It reminds us a little of Venice Beach, CA. The buildings are rarely more than 2 or 3 stories. Many are graceful and grand reminders of a more prosperous city 100 years ago. Many have since been transformed into gritty storefronts, apartment houses, restaurants...or even hotels. Rarely does this sort of conversion improve a building; most often, it ruins it. But the experimentation and innovation continues and we're often happily surprised that, on the 3rd or 4th try, the result is quirky and interesting.

Our driver dodged a pick-up truck and pulled up to our hotel. He thought for a second and then announced...

"That will be 280 pesos."

"What? It's normally only 100 pesos."

"But I'm not working on a meter."

"What are you working on?"

"It's 280 pesos. Besides it's Sunday."

"I'll give you 150."

"Okay. It's all corrupt, anyway."

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, just reconfirm your Free subscription to the Daily Reckoning...

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

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