An Exploded Bubble Can’t Be Reflated

'Committee to Save the World' Fails Twice!

It was 10 years ago this month that Time magazine gave us the Committee to Save the World:

Looking proud, confident...Alan Greenspan, Robert Rubin and Larry Summers proposed to save the world from the Asian debt crisis... They should have left well enough alone. Because of them, we now have a crisis that is far worse.

But the longer the rally goes on, the more people think it is permanent. They think the crisis is over already.

Last week, the Dow took baby steps...but mostly up the stairs. On Friday, the index rose another 28 points. Oil held steady at $72. The dollar rose a little, to $1.39 per euro. Gold was the big loser - down $21, but still in the mid-$900 range.

When the baby finally gets to the top of the steps, the poor lil' fella will fall backwards... and bounce all the way to the bottom.

Why? C'mon, dear reader, you're not paying attention. We have explained why many times. But the more we explain it, the more it doesn't seem to be true. Stocks should be going down; but they're not. And the more they don't, the more people think they never will. Feelings change. The naked fear of the crash period yields to a calmer, more 'reasonable' outlook...where people think 'this isn't so bad'... 'we can live with this'... 'we'll muddle through; we'll be all right.'

Thus does a dangerous complacency take over. Like the Donner Party, when the first snow flakes fell:

"The mountains are so pretty when it snows," they said to each other. And while they were admiring the view, the passes filled with drifts.

"Six Flags" is broke, says the news report from the weekend. Las Vegas casinos are going broke too.

Foreclosures are still rising; they're expected to top 3 million this year.

The unemployment rate in the US 9.4% - officially; it will be over 10% by the end of the year.

Global trade is collapsing - with exports from all the major exporting nations down by double digits. Exports are even going down in the US. Remember how the dollar's decline was supposed to be a good thing, because it made US exports more competitive. But with global trade declining, US manufacturers - along with everyone else - are finding it harder to sell on the world market.

Why all this bad news?

Because, once a bubble has exploded, it can't be reflated. The feds can put out new money and credit - but it goes somewhere else.

What blew up in '07-'08 was the bubble machine itself...the compressor that the Committee to Save the World built. It pumped up property prices. With rising property prices, consumers had so much credit that almost every investment seemed like a good one. In China, they built factories to make geegaws... In the US they built malls to sell them. Americans would buy anything!

Naturally, many of the financial decisions from this period proved to be bad ones. And now they're being sorted out. Investments are being written down, written off...and good riddance! Consumers are sorting out their own balance sheets too - cutting spending and paying down debt.

Until these things are sorted out, there will be no real boom on Wall Street.

Ray Dalio explained it to Barron's two months ago:

"It is very clear to me that we are in a D-process...different than a recession... Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. "

The D-process is a long process. It takes time to sort things. Just imagine how long it takes to pay off debt...or it takes for GM to become a profitable business again...or how long it takes Six Flags to find a new business model. These things don't happen overnight. Fortunately, you still have time to act...to protect your investments...

And while they are happening, people - who have no experience with the D-Process - think they see 'green shoots'...or think another bull market is beginning...or think the feds have fixed the problems. Time after time, they come back into the investment market...time after time they lose money. And then, eventually, they make peace with the D-
Process and put their affairs in order. Then, and only then, can a new cycle begin.

The New York Times reports that Mr. Tim Geithner is defending the stimulus program wherever he goes.

The Washington Post reports that Larry Summers is doing the same thing.

Isn't it interesting, dear reader? There were very few people who understood what was happening during the bubble years. Neither Summers nor Geithner was among them. Summers was one of the original members of Time magazine's 'Committee to Save the World.' Along with Alan Greenspan and Robert Rubin, Summers saved the world from the Asian debt crisis. That was 10 years ago this month.

Of course, the three didn't really save the world - they set it up for a much bigger catastrophe. In the meantime, Summers went on to a disastrous interlude in academia. Robert Rubin went to Citigroup, where he pushed the bank in the wrong direction - towards dangerous derivatives. When the debt bombs blew up, Rubin was then pushed out of the firm. And Alan Greenspan went on to manage the Fed in an almost unimaginably clumsy way - practically single-handedly bringing about the biggest bubble in world economic history.

But now, there's a new Committee to Save the World. Summers is back. And he's joined by Bernanke and Geithner. What a great committee! Innocents and insiders... who neither saw any evil, heard none, nor spoke none. The three were deaf, dumb, and blind to the biggest bubble in all time.

But now they are taking the lead in fixing the problems they never saw. How?

With stimulus! A $100 billion here. A $100 billion there. They've put at risk an amount of money nearly three times as great as America's expenses in World War II.

They bail out a bank in North Carolina. They take over an auto company in Detroit.

Hey, what about the casinos? Aren't you going to bail them out too?

What makes these three fellows think that this will make Americans richer? More prosperous? Or more secure? Has this sort of meddling ever actually made people better off? They should follow Ray Dalio's advice and read about similar crises in history. Can you make those crises go away by spending trillions? If so, there's no evidence of it in the histories we read. Not in the Great Depression. Not in the Latin debt crisis. Not in the Japanese experience.

And what about this time? The evidence we see tells us that the underlying economy is getting worse, not better. In addition to the figures cited above, there are the inflation rates. Inflation in America and Britain is coming down...to around 2%. In Europe it has already fallen into negative territory...with rates heading to minus 1%.

Meanwhile, oil is over $70 this morning - 7 times higher than it was when Larry Summers, et al, saved the world the first time. Gold is nearly 4 times higher.

In other words, the feds' easy money is not reaching the consumer and not stimulating the consumer economy. Consumption is down...and with it, business earnings are down too.

"Dow 1 million," says our old friend Jim Rogers. The feds' phony money can stimulate speculation, he points out. But it can't stimulate real growth.

This second 'Committee to Save the World' is destined to end like the first one - in disgrace and disaster. It will try to cure one disaster by creating a worse one.

Bill Bonner
for The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Related Articles:

• Capitalism Always Takes an Economy Where it Ought to Be
• Two Ways to Deleverage an Economy
• Feds Say Don’t Worry About the Depression
• Can a Consumer Economy Boom If Consumers Have Less Money?
• Obama Considers New Job Tax Credit