»The Daily Reckoning by Bill Borner

Did the communications revolution do any good?
10 JUNE 2011

Baltimore, Maryland

Mr. Market must be looking at the bond market the way an IMF chief eyes a chambermaid....

But first, let's look at what happened yesterday...
Finally, a day when the Dow did not go down. Instead, it went up 75 points.

Otherwise, oil rose above $100...the 10-year T-note yield rose to 299 basis points...and gold gained $4.

A mixed, inconclusive day, in other words.

But trying to keep up with the trends is a waste of time anyway. You get whipsawed and beaten up.

Better to get ahead of the trend. Which ain't easy. Because you've got to figure out which direction the trend is headed.

So....dear reader....what's going on?

We asked you first!

Here's a letter from one of our Family Office members:
(1) If we redefined GDP to EXCLUDE all government spending, because it is all "recycled" earnings of the private sector, how does the whole question of recovery vs. recession/depression look? I suspect this is one way to reconcile the fact that the financial community says we are in recovery, but Main Street says the opposite. Seems like a good topic for the Daily Reckoning.

(2) If all financial reporting were referenced to gold, rather than USD, how does the picture look? (Actually I know the general answer to this one; the economy looks AWFUL, and housing is back to pre-1990 levels.) I find it interesting that all the financial asset managers I've talked to REALLY don't like it when I ask "how is your performance relative to gold?"
As to the first question, the answer is simple. Take out the feds - who are redistributing wealth, not creating it - and US GDP growth was about zero for the last decade.

There. That's a trend. Here we are in the 21st century. With all that technology. And all that money. And all those sophisticated Wall Street geniuses allocating capital like nobody's business. And what do we get? Growth at about the same rate as during the Middle Ages.

Remember how the latest communications technology was supposed to speed up growth? How could you have forgotten? Back in the 90s it was taken for granted that faster, better communications would make people smarter, more efficient and more productive.

It was widely believed that the old ways of creating wealth - by saving, learning, investing - were obsolete. Because you didn't need savings. You could build on knowledge!

No more trial and error. Mistakes were soooo 20th century!

That's what they said.

We knew it was nonsense. Imagine Napoleon's starving, freezing troops...trapped in Russia. Those that didn't freeze to death were shot to pieces by the Russkies. Imagine giving them the blueprint to a nuclear bomb. Or even the designs for an aeroplane. Or, give them Ipad! What good would it have done them? None!

Every bit of information that is not useful is a burden.

But most people didn't see it that way. They thought the communications revolution would speed up the rate of GDP growth and make us all rich.

It didn't happen that way. The decade following the communications revolution was dry, desolate, and barren. Take out the feds' redistributed loot and the private sector registered approximately no growth at all.

It was a complete bust. A failure. A flop.

Go figure.

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*** Poor Jefferson. He learned Indian languages. He studied plants. He was a superb architect. He kept up a lively correspondence with hundreds of people. He invented things.

But think what he could have accomplished if he had had email!

And Shakespeare...with all those plays and sonnets. How much better they would have been if he had had a Wikipedia to check his facts!

Diderot laboring on his Encyclopedia...Gibbon on his Decline and Fall...Euclid with his funny triangles. What a pity! If they'd only had internet they would have been so productive.

The communications revolution was a dud. Except for the communications industry. The latest reports tell us that American children are now spending 13 hours a day with electronic devices. They are watching TV, texting, phoning, interneting, or otherwise engaged with something that runs on electricity.

What do you think? Are they smarter? Are they more productive? Do they know more?

Ha ha.....

We don't think so. More likely, they are wasting their time. The communications revolution is part of the reason real GDP growth stopped in 2000. Like TV, electronic communications may be a net negative to civilization.

*** Here's another thought for you.

In answer to the other part of our reader's question, if you were to adjust prices to gold you would discover that everything is down...and down sharply.

Housing has lost about 87% of its value (we're doing this in our head).

Stocks are down about 80%.

Bonds are down too...but not quite as much.

Oil? About even.

The last decade has been a time of deflation. Everything has gone down in gold terms. Gold is real money. So, in terms of real money...everything else is losing value.

What would cause that?

Maybe the US really is following in Japan's footsteps. After a big boom, we have a big bust. The bust in Japan has already lasted 20 years. Ours has lasted only 10. But maybe it will go on for 10 more.

Well, here's where it gets interesting. Remember what a piece of work Mr. Market is? By nature, he aims to do as much damage to investors as possible. That's why he got them all in stocks by 1999...and gave them 10 years of nothing.

What would he do now to cause the maximum losses?

It's hard to know. Everyone we know expects higher inflation rates. And yet, actions speak louder than words. For 30 years bonds have gone up as inflation rates have come down. And now, look at the aforementioned yield on Treasury debt. Lend money to the feds for 10 years and you get only 299 basis points of interest. And this despite the fact that the feds themselves reported CPI of more than 5% in the first quarter of this year!

Mr. Market must be looking at the bond market the way an IMF chief eyes a chambermaid.

But wait. He's in no hurry. Right now, there are a lot of people who expect higher inflation. They know how it works. The Fed increases the base money supply. It's just a matter of time before inflation rates rise, right?

If we were Mr. Market, we'd take our time. We'd let the Great Correction continue to grind down inflation expectations. We'd let the 10-year yield fall again...perhaps further than anyone expects. Maybe we'd take a whack at gold too...just to make our point.

Then, maybe 10 years from now, when the inflation watchers have finally put down their field glasses...and the Johnny-come-lately gold buyers had given up...

...then, we'd smash them all.

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