Depression II: The Horror



02/11/09 London, England DEPRESSION II …The Horror…coming soon to theatres near you!

“It’s gone deep. It’s gotten worse,” said the president.

We’ve seen so many shock and horror movies over the years. We recognize the dialog. But this is no Hollywood thriller. This is real life.


It is like a Netscape News story:

“WASHINGTON (AP) – On a single day filled with staggering sums, the Obama administration, Federal Reserve and Senate attacked the deepening economic crisis Tuesday with actions that could throw as much as $3 trillion more in government and private funds into the fight against frozen credit markets and rising joblessness.

“…Wall Street investors sent stocks plunging, objecting that new rescue details from the government were too sparse. The Dow Jones industrials dropped 382 points.

“…shortly after Senate passage of an $838 billion emergency economic stimulus bill cleared the way for talks with the House… Separately, Treasury Secretary Timothy Geithner outlined plans for spending much of the $350 billion in financial bailout money recently cleared by Congress, and the Federal Reserve announced it would commit up to $1 trillion to make loans more widely available to consumers.”

GM said it was cutting 10,000 jobs…and reducing executives’ pay.

Fannie and Freddie are likely to need $200 billion more to stay in business, say regulators.

And Tim Geithner’s new bank bailout program may cost $2 trillion.

Meanwhile, practically every business and every family in America is looking for ways to cut costs. Unfortunately, one person’s cost-cutting is another person’s income. So, incomes are going down too. Then, people have to cut costs even more.

“Let’s not mince words…this looks an awful lot like the beginning of the second Great Depression,” says Nobel-prize winning economist Paul Krugman.

Paul Krugman is wrong about a great many things; but he’s right about this. This is not a recession. It’s a depression.

What’s the difference? Some economists say a depression takes 10% off the GDP. Some say it is a recession that persists for more than a year. Most have no clue.

The real difference is this: a recession is a pause in an otherwise healthy economy. A depression, on the other hand, is when the economy drops dead. There’s no point in putting on the wires or strapping on the inhaler, there has been too much brain damage already. The best you could hope to do is to keep the body alive. But it would be a vegetable. Better to let it go…quickly.

But we’re not giving advice to the Obama team. So far, they haven’t asked. Instead, they’ve got the defibrillators in their hands.

“TARP II” is how the International Herald Tribune defines Geithner’s new program. Bold in scale. Vague in detail. Geithner says he hopes to bring in private money to fund the bailout. How? We can’t imagine. It’s one thing for government to try to revive a corpse with public (mostly imaginary) money. It’s quite another for private investors to waste their own time and money. ‘What’s in it for me?’ they’re likely to answer. And if there were anything in it for them, they’d already be investing in it. It’s not as if there aren’t plenty of opportunities on the Big Board. The financial sector is down 2/3rds to 3/4s from its high. Anyone who thinks there’s money to be made can take his chances.

Instead of buying, investors are selling. Just look at what happened to the Dow yesterday. They’re selling because they think there could be a lot more pain and suffering still to come in the banking sector – and in the economy at large. And they’re right.

Nouriel Roubini, who has become a celebrity thanks to his Daily Reckoning-s**** warnings, says the losses will reach $3.6 trillion. We don’t know what the ultimate figure will be, but it is bound to be a big number. This depression is just beginning. So far, we have only had the shock in the financial industry. The real damage will come in the economy…which is only now reacting to the financial losses.

Just wait until we get deeper into this film…that’s when the real blood and gore will come.

*** “This strategy will not work,” writes Haag Sherman in Barrons. “Asset values will continue to decline, regardless of how much money the government borrows, even it if borrows printed money from the Fed. And in that case, the government risks another, more calamitous crisis – a run on US Treasury securities.”

Treasuries are going down. Everyone wonders why. Is it because fear is easing…or increasing? On the one hand, spreads between private debt and federal debt are narrowing. This signals an increase in confidence. Investors are less panicky than they were a few weeks ago. Despite Obama’s “catastrophe” talk, they seem to think we’ll muddle through somehow.

So, they figure that they can leave the safety of U.S. Treasuries and venture out where they might be able to earn some money. With 10-year yields at only 3%, investors need to look elsewhere to get any income. Now, they appear to be at least poking their heads up above the trench walls.

On the other hand, there is probably a growing fear that the feds’ efforts to create ‘positive inflation’ will blow their heads off. The feds are certainly putting a lot of cash and credit into the system. At some point, the crunch will reach its natural end and then all this unnatural cash will produce a stimulating effect. That is, people will be motivated to get rid of it. When that happens – if not before – you’ll see the ‘run on U.S. Treasury securities’ that Sherman mentions, along with a run on other forms of U.S. paper, notably the dollar.

For the time being, we are still in the process of ‘price discovery.’ Last year, investors suddenly realized that debtors couldn’t pay their bills…that assets weren’t worth what people paid for them…that collateral was declining in price, making many erstwhile valuable credits worthless…and that revenue streams were not sufficient to maintain whole sectors of industry and commerce. They panicked. That is why these episodes were called “panics” in the 19th century. Nobody knows which assets are good…and which are bad…. or who’s solvent and who’s not…or which businesses can survive and which can’t. Everyone tries to hold onto to what he’s got…trusting no one and nothing…until the market has time to discover proper prices for things in the new post-bubble era.

In the 19th century…up to the Panic of 1921…this all happened fairly quickly. And then the economy got up off the ground, dusted itself off, and went on its way.

But since the Hoover Administration, the meddlers have intervened. Now, they try to stop the process of price discovery…by keeping zombie businesses alive…by loaning money to brain-damaged industries…and nursing the cadavers and corpses with trillions in taxpayers’ money.

Mr. Sherman continues…

“…the US government’s balance sheet looks increasingly like that of a Third World country. America’s debt-to-GDP ratio is more than 100%, including the nationalized debt of the two mortgage giants Fannie Mae and Freddie Mac. Budget deficits of $1 trillion are projected for years to come. Worse yet, America’s pension and medical obligations to the baby-boom generation and those that follow are estimated to be considerably more than $50 trillion.

“As the US government prints more money to address the crises, investors will realize that are being repaid in a much diminished currency. For the moment, foreign investors have remained relatively firm. But, at some point, foreign and domestic investors will consider the US government’s terrible fiscal position, and they will start dumping debt.”

*** That may happen next week. It may happen years from now. Remember, there are always back-eddies and countercurrents – even in the biggest flood. We’ve had a rebound, but it has been very slight. In the ’30s stocks rallied six times – more than 20% each time – before finally beginning a new bull market. And several times, investors thought the crisis was over…only to see it hit again, harder.

Our advice: stay in investments that you will not want to sell in the next ten years. What kind of investments are those? They’re investments with income and/or capital that is reliable. Forests. Down-market retailers. Apartment houses with good tenants. Farms, ranches providing foodstuffs at good prices. Basic service industries with decent revenues. Nothing fancy. The world is moving away from fancy. You want to be the low-cost provider of whatever goods or services people need.

And of course, stay in gold. Our favorite yellow metal will prove to be one of the safest bets for a store of wealth in this topsy-turvy economy. Yesterday, while Wall Street was sinking on the news of Geithner’s stimulus plan, investors flocked to their safe haven: gold. After dipping a bit on Monday, gold for April delivery jumped $21.40 to settle at $914.20 an ounce.

As we’ve pointed out many times, during a period of economic turmoil, investors increasingly turn to gold as a buffer against market volatility. We don’t know about you, but we have the sneaking suspicion that this ‘volatility’ in the markets is here to stay, at least in the foreseeable future. And in turn, gold will have a lot higher to go.

*** Oh no! The greatest central banker of our time…is going…going…Gono! Reports in the Financial Times this morning tell us that Gideon Gono has been replaced in a “power sharing” move by a fellow named Tendai Biti.

Poor Mr. Biti has his work cut out for him. His predecessor made a mess of Zimbabwe’s economy. But Mr. Biti looks like just the man to correct it. He apparently has no training in economics. That’s a definite plus. The paper describes him as a “44-year old lawyer [who] was a student leader active on human rights issues.”

Good luck.

Until tomorrow,

Bill Bonner
The Daily Reckoning

__________________

At the end of the day you´re another day older, and that´s all you can say for the life of the poor. It´s a struggle, it´s a war…

I' m gonna make him an offert that he can't refuse! (Marlon Brando)

capullo ,cuan poses algo en ingles traduixo y mos enterarem tots

1920s (Decade)

* During World War I, federal spending grows three times larger than tax collections. When the government cuts back spending to balance the budget in 1920, a severe recession results. However, the war economy invested heavily in the manufacturing sector, and the next decade will see an explosion of productivity... although only for certain sectors of the economy.

* An average of 600 banks fail each year.

* Organized labor declines throughout the decade. The United Mine Workers Union will see its membership fall from 500,000 in 1920 to 75,000 in 1928. The American Federation of Labor would fall from 5.1 million in 1920 to 3.4 million in 1929.

* Over the decade, about 1,200 mergers will swallow up more than 6,000 previously independent companies; by 1929, only 200 corporations will control over half of all American industry.

* By the end of the decade, the bottom 80 percent of all income-earners will be removed from the tax rolls completely. Taxes on the rich will fall throughout the decade.
* By 1929, the richest 1 percent will own 40 percent of the nation's wealth. The bottom 93 percent will have experienced a 4 percent drop in real disposable per-capita income between 1923 and 1929.

* Individual worker productivity rises an astonishing 43 percent from 1919 to 1929. But the rewards are being funneled to the top: the number of people reporting half-million dollar incomes grows from 156 to 1,489 between 1920 and 1929, a phenomenal rise compared to other decades. But that is still less than 1 percent of all income-earners.

1922

* The conservative Supreme Court strikes down federal child labor legislation.

1923

* President Warren Harding dies in office. Calvin Coolidge, becomes president. Coolidge is no less committed to laissez-faire and a non-interventionist government.
* Supreme Court nullifies minimum wage for women in District of Columbia.

1924

* The stock market begins its spectacular rise. Bears little relation to the rest of the economy.

1925

* The top tax rate is lowered to 25 percent - the lowest top rate in the eight decades since World War I.

1928

* Between May 1928 and September 1929, the average prices of stocks will rise 40 percent. The boom is largely artificial.

1929

* Herbert Hoover becomes President.

* Annual per-capita income is $750. More than half of all Americans are living below a minimum subsistence level.

* Backlog of business inventories grows three times larger than the year before.

* Recession begins in August, two months before the stock market crash. During this two month period, production will decline at an annual rate of 20 percent, wholesale prices at 7.5 percent, and personal income at 5 percent.

* Stock market crash begins October 24. Investors call October 29 Black Tuesday. Losses for the month will total $16 billion, an astronomical sum in those days.

1930

* By February, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Treasury Secretary Andrew Mellon announces that the Fed will stand by as the market works itself out: 'Liquidate labor, liquidate real estate... values will be adjusted, and enterprising people will pick up the wreck from less-competent people'.

* The Smoot-Hawley Tariff passes on June 17. With imports forming only 6 percent of the GNP, the 40 percent tariffs work out to an effective tax of only 2.4 percent per citizen. Even this is compensated for by the fact that American businesses are no longer investing in Europe, but keeping their money stateside. The consensus of modern economists is that the tariff made only a minor contribution to the Great Depression in the U.S., but a major one in Europe.

* Supreme Court rules that the monopoly U.S. Steel does not violate anti-trust laws as long as competition exists, no matter how negligible.

* The GNP falls 9.4 percent from the year before. The unemployment rate climbs from 3.2 to 8.7 percent.

1931

* No major legislation is passed addressing the Depression.

* The GNP falls another 8.5 percent; unemployment rises to 15.9 percent.

1932

* This and the next year are the worst years of the Great Depression. For 1932, GNP falls a record 13.4 percent; unemployment rises to 23.6 percent.

* Industrial stocks have lost 80 percent of their value since 1930.

* 10,000 banks have failed since 1929, or 40 percent of the 1929 total.

* GNP has also fallen 31 percent since 1929.

* Over 13 million Americans have lost their jobs since 1929.

* International trade has fallen by two-thirds since 1929.

Congress passes the Federal Home Loan Bank Act and the Glass-Steagall Act of 1932.

* Top tax rate is raised from 25 to 63 percent.

* Popular opinion considers Hoover's measures too little too late. Franklin Roosevelt easily defeats Hoover in the fall election. Democrats win control of Congress.

1933

* Roosevelt inaugurated; begins 'First 100 Days'; of intensive legislative activity.

* A third banking panic occurs in March. Roosevelt declares a Bank Holiday; closes financial institutions to stop a run on banks.

* Alarmed by Roosevelt's plan to redistribute wealth from the rich to the poor, a group of millionaire businessmen, led by the Du Pont and J.P. Morgan empires, plans to overthrow Roosevelt with a military coup and install a fascist government modelled after Mussolini's regime in Italy. The businessmen try to recruit General Smedley Butler, promising him an army of 500,000, unlimited financial backing and generous media spin control. The plot is foiled when Butler reports it to Congress.

* Congress authorizes creation of the Agricultural Adjustment Administration, the Civilian Conservation Corps, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Emergency Relief Administration, the National Recovery Administration, the Public Works Administration and the Tennessee Valley Authority.

* Congress passes the Emergency Banking Bill, the Glass-Steagall Act of 1933, the Farm Credit Act, the National Industrial Recovery Act and the Truth-in-Securities Act.
* Roosevelt does much to redistribute wealth from the rich to the poor, but is concerned with a balanced budget. He later rejects Keynes' advice to begin heavy deficit spending.

* The free fall of the GNP is significantly slowed; it dips only 2.1 percent this year. Unemployment rises slightly, to 24.9 percent.

1934

* Congress authorizes creation of the Federal Communications Commission, the National Mediation Board and the Securities and Exchange Commission.

* The economy turns around: GNP rises 7.7 percent, and unemployment falls to 21.7 percent. A long road to recovery begins.

* Sweden becomes the first nation to recover fully from the Great Depression. It has followed a policy of Keynesian deficit spending.

1935

* The Supreme Court declares the National Recovery Administration to be unconstitutional.

* Congress authorizes creation of the Works Progress Administration, the National Labor Relations Board and the Rural Electrification Administration.

* Congress passes the Banking Act of 1935, the Emergency Relief Appropriation Act, the National Labor Relations Act, and the Social Security Act.

* Economic recovery continues: the GNP grows another 8.1 percent, and unemployment falls to 20.1 percent.

1936

* Top tax rate raised to 79 percent.

* Economic recovery continues: GNP grows a record 14.1 percent; unemployment falls to 16.9 percent.

1937

* The Supreme Court declares the National Labor Relations Board to be unconstitutional.

* Roosevelt seeks to enlarge and therefore liberalize the Supreme Court. This attempt not only fails, but outrages the public.
* Economists attribute economic growth so far to heavy government spending that is somewhat deficit. Roosevelt, however, fears an unbalanced budget and cuts spending for 1937. That summer, the nation plunges into another recession. Despite this, the yearly GNP rises 5.0 percent, and unemployment falls to 14.3 percent.

1938

* No major New Deal legislation is passed after this date, due to Roosevelt's weakened political power.

* The year-long recession makes itself felt: the GNP falls 4.5 percent, and unemployment rises to 19.0 percent.

1939

* The United States will begin emerging from the Depression as it borrows and spends $1 billion to build its armed forces. From 1939 to 1941, when the Japanese attack Pearl Harbor, U.S. manufacturing will have shot up a phenomenal 50 percent!

* The Depression is ending worldwide as nations prepare for the coming hostilities.

Roosevelt began relatively modest deficit spending that arrested the slide of the economy and resulted in some astonishing growth numbers. (Roosevelt's average growth of 5.2 percent during the Great Depression is even higher than Reagan's 3.7 percent growth during his so-called 'Seven Fat Years!') When 1936 saw a phenomenal record of 14 percent growth, Roosevelt eased back on the deficit spending, worried about balancing the budget. But this only caused the economy to slip back into a recession in 1938.

* World War II starts with Hitler's invasion of Poland.

1945

* Although the war is the largest tragedy in human history, the United States emerges as the world's only economic superpower. Deficit spending has resulted in a national debt 123 percent the size of the GDP. By contrast, in 1994, the $4.7 trillion national debt will be only 70 percent of the GDP!

* The top tax rate is 91 percent. It will stay at least 88 percent until 1963, when it is lowered to 70 percent. During this time, America will experience the greatest economic boom it had ever known until that time.

The above timeline has been complied by Steve Kangas from the Resurgence Magazine.

Que ajco de pojt!

Muy bueno este punto, muy burbuja.info

the meddlers have intervened. Now, they try to stop the process of price discovery…by keeping zombie businesses alive…by loaning money to brain-damaged industries…and nursing the cadavers and corpses with trillions in taxpayers’ money.

Traduzco:

Los "meddlers" (supongo que se referirá a los intermediarios, en tono despectivo, algo así como los busca-broncas) han intervenido. Ahora, intentan parar el proceso de descubrimiento de precios... manteniendo las empresas zombies vivas... prestando dinero a industrias en coma... y atendiendo a los cadáveres y cuerpos con trillones provenientes de los contribuyentes.