US economy, US trade deficit, money supply,

The US economy: why is no-one panicking?

16.02.2006

by Bill Bonner

Our Most Popular Articles

This genius investor does dizzying levels of research to uncover...Half Price Shares!

Over time, things that once mattered don’t matter much anymore – until they matter again. What do I mean by that? In the early 1980s, you could buy a nice apartment in central London for $200,000. That was before the dollar headed down against sterling and before London property soared. When the dollar fell after 1985, investors were alarmed – but after the initial panic, Americans got used to it. Now, with the dollar worth only about half as many pounds as it was worth 25 years ago, no one worries about it. It doesn’t seem to matter.

US trade deficit hits new record

Now we hear that the US trade deficit hit a new record last year – $763.6bn. Once such news would have caused panic. But in 2007, it barely sent a ripple across the world’s great pool of liquidity. Markets shrugged. Who cares? People have got used to huge trade deficits – like a pair of old slippers, or an old spouse. Yes, they get a little wider every year. But that just makes them more comfortable, doesn’t it? But the comfort comes at a price. The less we care about things, the more we have to care about. Had investors panicked on news of last year’s trade deficit, they wouldn’t have so much to panic about this year. Today, the trade deficit is $47bn higher. And still they don’t panic.

Another thing they no longer panic about is the money supply figures. A little blip up used to send the bond market into fits of hysteria. Investors (the so-called ‘bond vigilantes’) would rush to dump their bonds, sending yields upwards. Higher yields chilled economic activity, which had the effect of reducing both money supply increases and consumer-price inflation. Problem solved.

But who pays any attention to money supply numbers any more? No one.
It’s forgotten; considered irrelevant. But because it doesn’t seem to matter anymore, it matters more than ever.

All over the world, traditional measures of money are growing two to three times faster than the economies they supply. New forms of money – supplied by the financial intermediaries – are growing even faster. And as long as no one panics, the cause for panic grows. All this unchecked new money makes each unit of old money a little shakier. And when investors finally do decide to worry about it, they’ll have a lot more to worry about than they did in the 1980s.

High levels of debt become normal

Take family finances. The average Briton has debt equal to 1.4 times his income – or a total of £1.3trn worth. Last year, 17,000 homes were repossessed and currently 400 people go broke every day. One estimate suggested that more than half the nation would be out of cash less than three weeks after losing a job. It wasn’t always so. As recently as the 1980s, people still cared about how much debt they carried. As bills mounted, bill-payers reacted. They cut spending. They increased savings. The problem corrected itself. Less spending led to less debt.

But what people took for absurd in a more level-headed era, they now take for granted. Last week, we reported on the latest US government budget. We remember when Republican politicians would get worked up over a budget deficit. They felt it was irresponsible to spend more than you took in. Deficits were considered a burden upon taxpayers and a threat to the dollar. Now a Republican president proposes the biggest deficits, budgets and national debts in history – and every pet political hack in Washington, Republican and Democrat, purrs with cool contentment: ‘Deficits don’t matter’.

Investors less bothered about high prices

People used to worry about paying too much for stocks, too. A quarter century ago, you could buy almost any stock listed in New York or London for less than ten times earnings. Now, you struggle to find one on less than 20 times earnings. When the price of shares still mattered, investors bridled as shares rose. They didn’t want to be saddled with over-priced shares. But the longer shares rose without serious interruption, the less high prices mattered. People stopped worrying about prices falling; instead, they couldn’t stop thinking about them going up.

The less bothered investors were about high prices, the greater the threat those high prices posed. As long as investors worried about high prices, prices couldn’t rise very high, because the shares got sold off as they rose. When investors stopped worrying, on the other hand, the shares just kept rising. And now investors have much more cause for concern. There is a lot more to lose when the Dow is at 12,000 than when it was only at 1,200.

But when nothing bad happens for a very long time, people come to assume that nothing bad ever will. It is as if they lived in a small apartment with a leak in the gas line. The slow hiss of the gas worries them at first. But as long as nothing blows up, they get used to it. Finally, ‘it’s no problem,’ they say to themselves…

… and light up a cigarette.

FREE! For all our latest advice on making profitable investments, claim your 3-week FREE trial of the MoneyWeek website and magazine now.

FREE! MoneyWeek’s daily investment email. A quick, useful and entertaining round-up of the latest investment news, sent to your inbox first thing every morning.To sign up to our “Money Morning” email for FREE, just click here.