Asians were Saving More than Enough for the Whole World

Winter is here. The little squirrels look to their hoard of nuts to see them through the cold times. But what's this? The sorry squirrels of North America hunt around...where are the nuts? Uh oh...they forgot to put any away!

U.S. consumers enter a recession in the worst shape ever. It's a richer world than it was in the '30s. There's no danger of starving. We don't imagine that people will have to stand in line to get a bowl of soup. But when it comes to money...never have so many people owed so much to so many. And when the creditors try to collect - there's going to be Hell to pay.

On Friday, the Dow fell another 59 points... ending a very depressing week for stock market investors.

"What is going on?" investors ask themselves. "Many investors will begin the week asking whether they need to add worries about an equity bear market to their fears of economic recession," explains the International Herald Tribune .

Nobody knows anything... so let us help the clueless investor: Yes. Worry about a bear market. Because it is almost surely here.

The Russell 200 Index, a gauge of mainly smaller U.S. companies, is already down more than 20%. The mid-cap FTSE 250 in Britain is down more than 20%. And the Japanese index - the Nikkei 225 - is down 24% since its high in July. The S&P 500 is only off 16% - but it's catching up.

From California, we learn that the jobless rate has jumped to over 6%. Oh, those poor little squirrels. Nothing in the nut-bin. And now, the nuts on the ground seem to have disappeared.

You'll recall the argument we entertained a couple of years ago. "The boom is a fraud; it's making people poorer," said we. "No, it's real... people are getting richer," said our opponents. Something grand and barely comprehensible had happened, they claimed. People had gotten so smart that the old rules no longer applied. You no longer needed to save, for example, because modern information technology and sophisticated financial instruments could provide growth and protection without savings. Besides, the Asians were saving more than enough for the whole world... and, as for a rainy day, what are credit cards for?

Well, now this New Era is being tested. Now we're going to find out who was right.

But why pretend? We already know the answer. We were right; our opponents were wrong. New Eras don't come along very often, not in economics. Bet against them and you are almost sure to win.

Why? Because the rules don't change. It's the circumstances that change - in ways the rules dictate... Which brings us back to the nuts and the squirrels.

The rules tell us that if you spend more than you earn you must get poorer. The difference between spendings and earnings is subtracted from your net worth. While the spending spree was going on, it didn't seem to most Americans that they were really getting poorer. They thought they were getting richer, mainly because their houses were going up in price.

But there is nothing like a hanging to focus a man's attention. Last year, house prices went down about 10%. Suddenly, the average homeowner finds himself dangling at the end of a rope... and the last five years flash before him with crushing clarity: He sees that he spent too much. He sees that he bought more house than he could afford. He sees that his earnings have actually gone down in real terms... while his cost of living has gone up. In short, he sees that he's been had.

Even newspaper columnists are beginning to get the picture. Americans need to "get back to saving rather than leveraging assets in a phony consumption boom," writes Roger Cohen in the International Herald Tribune.

Naturally, this insight is making its way onto the political stage. A few weeks ago, the war in Iraq was Americans' number one concern. Now, "It's the economy, stupid." The trouble is, the economy is something that neither the candidates, nor the man who currently lays his head on the White House pillow, know anything about. President Bush is pushing a plan to give the country a "shot in the arm" - at a cost of $150 billion. If Congress would just get behind this thing, he says, we could have rebate checks in the mail in just a few weeks.

Our president misses the point. He, like all the White House hopefuls, wants to keep the phony boom alive - in the worst possible way, by providing more "stimulus" to consumers... that is, by helping them spend even more money they haven't got on things they don't really need. What this perverse economy really needs is not a shot in the arm, but a shot in the head.

Meanwhile, Mitt Romney is proposing a $20 billion bailout of Detroit - as if what Motown, smack dab in the richest auto market in the world, needed all along was more money.

And Rudolph Guiliani, asked in October whether he thought a recession might be coming, reminded listeners that he still believes in the promise of the New Era. What with America's modern, sophisticated market - and the freedom to do any damned thing it wants - "the sky's the limit."

Well, yes... the sky's the limit. Whether you are building something up... or blowing it up.

Bill Bonner
The Daily Reckoning Australia

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