Bill Bonner: better dead than alive
By
Bill Bonner May 08, 2009
Print this article
The gods are laughing at us, we're sure of it. They're wondering where we think we're getting the money to pay for all these rescue efforts. We're wondering too. More than that – they're wondering why we bother. The Bubble Epoque was grotesque and absurd. Why try to revive it?
When Ronald Reagan moved into the White House, total US debt equalled 168% of GDP. The next 27 years took the total to 370% – a further $27trn of debt. And now, the economic system that created so many heavy balls and such long chains is in the recovery room – looked after by quacks and prayed for by most of the world. As a way for people to improve our lot in life, the economic model of the Bubble Period was as ineffective as a bad banker. You can reduce it to a few simple sentences: encourage people to spend. When they run out of money, encourage them to borrow. When they tire of borrowing and spending, lend them more at lower rates.
This 'have your cake and eat it too' school of financial success had an obvious flaw. People noticed it when the correction began. They went to their cupboards and found nothing there. Homeowners – who had borrowed heavily against their houses – found their equity had disappeared. Capitalists found they had no capital. Workers lost their work. And this year, governments' tax receipts are collapsing too. In the US, they're down 14% in the first half of this fiscal year. Expenses, meanwhile, are exploding. This leads to a conundrum. Governments must borrow on a Herculean scale – but from whom? The US is expected to float a record $2trn in IOUs for 2009 – about 15% of GDP. If the downturn persists, as it has in Japan, we could see the US national debt rise to Japanese levels – close to 200% of GDP.
Here in London the numbers are smaller, but the maths is similar. The government has projected $175bn deficits over the next two years. But this might be just the beginning. If deficits continue at this rate, Britain too could find itself back in the 1950s – after two world wars, with public debt at two times GDP.
What justifies such sacrifices? In time of war, citizens collect scrap iron, sell their jewellery, and buy bonds – anything to help pay for bullets and keep the Huns at bay. But now they clamp on even bigger balls and longer chains than ever before – and for what? Taking flowers to the recovery room, they look in on their weary friend. "He supported us all," says an anxious relative. "We must do all we can to save him." 'Pull the plug,' is our advice.
Of course, in his prime, the bubble model was fun – laughing, singing, spending – a grasshopper on stilts! And there were all those friendly ants in Asia ready to lend him money. At the peak, the USA had net borrowing of some $2bn a day. But now, take America's anticipated deficit and divide it by 365. You get a figure of nearly $6bn a day. Even at his peak, the old bug didn't bring in that kind of money. And now, the foreigners are in recession too. They've got their own aches and pains to cure. So, how will the US finance the biggest deficit of all time?
How has Japan done it? Japan's economy has been locked up for 19 years. It financed its confinement itself – drawing on the savings of a remarkably long-suffering population. Stimulus packages came and went. On average, they cost about 3% of GDP per year. The biggest came in 1998 at a price of 6% of GDP. Financing this long period of house arrest was easy – Japan began the period with a savings rate of 14% of GDP. America, on the other hand, began with a savings rate of zero. More recently, the savings rate has been reported as high as 5% – as middle-aged people desperately squirrel away a few nuts for a long winter retirement. The gods can add it up. Even if every dollar of US savings is tossed down the public hole, it will still be two-thirds empty.
Anticipating the problem, the Fed has already leapt into the hole itself. It offers 'quantitative easing' – offering to buy the government's bonds itself. Of course, the Fed has no real money. It must 'create' money specifically to make the purchase. It's the latest miracle treatment, say the quacks in charge. If the Fed creates enough new money, it will offset the losses caused by the downturn. With his system back in balance, the patient will get up and begin to bugaloo. Happy days will be here again. The whole world seems to believe it. Stocks are rising. Ben Bernanke this week said the US economy would recover before the end of the year. The convalescence may be long, he continued, with his vision apparently restored, but it will be steady.
How the gods must howl! "In the Bubble Epoque people tried to get something for nothing... Imagine, they thought they could get rich by borrowing money and spending it. Have you ever heard of something so ridiculous? Ha ha... Now, they think they can get rich by spending money that doesn't even exist."
"But that's not the half of it," one of them is sure to remark. "They're spending themselves into the poorhouse (the gods still believe we have poorhouses) trying to revive the very goofball system that ruined them. Ha ha. Ha ha."
• To read Bill's daily thoughts, sign up to The Right Side free email at
www.morefrombill.co.uk
Published in
Economics
| More
articles
by
Bill Bonner
Related articles
-
By John Stepek, Nov 12, 2009
-
By Matthew Lynn, Nov 06, 2009
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.
