"Wall Street, central bankers, economists, politicians - and most investors too - are betting on a soft landing," said a friend from New York. "A slowdown in world growth has taken the pressure off commodity prices. Slower growth will help keep inflation down, generally. And as long as inflation is no problem, the Fed doesn't have to raise rates - which will keep the slowdown from hitting too hard."
Monday's International Herald Tribune echoed the good news:
"World economies catch US malaise...pain of slowdown spreads far and wide, threatening businesses and growth."
The world was growing at about a 5% rate in 2007. It's expected to slip below 4% next year, with the U.S. economy at less than 1% growth. Since the U.S. population grows by more than 1% per year, this means a lower standard of living for the average person - at least in theory.
Of course, Americans need to accept a lower standard of living anyway. They've been living beyond their means for a long time; now they need to live beneath their means to correct the situation. In an economy dominated by consumer spending, this practically guarantees a long period of sluggish growth or recession - no matter what.
But it would be a lot easier to correct the mistakes of the past in a growing economy. Rising incomes would give consumers more room to cut back without too much suffering. Cutting back on falling incomes, on the other hand, is doubly painful.
A correction is unavoidable. The question for us, here at The Daily Reckoning, is: what kind of correction it will be? Will higher prices reduce the value of the dollar - reducing Americans' incomes, savings and their burden of debt? Or will recession reduce their incomes and the value of their assets?
Whenever we have posed those questions in the past, the answer we have always given was: yes - Americans will get hit both by the jabs of inflation and the haymaker of deflation. So far, that is exactly what has happened. Prices are rising while asset values and incomes are falling. The average consumer is staggered by the blows.
The latest inflation figures show consumer prices rising at 5.6%. And the latest figures for producer prices show them going up at nearly 10%.
What is remarkable is that even with these numbers staring them in the face, investors still buy 10-year Treasury notes yielding less than 4%. Typically, bond investors are the most sophisticated investors. They're looking at the global growth figures and believe that inflation rates will go down too. Average Americans may expect rising prices for food and fuel. But investors seem to have no worries on that score. You'd think they'd want at least enough yield to protect their capital. But at present rates, an investor in a 10-year Treasury will lose about 1.6% per year. Apparently, he regards that as a small price to pay for protection from falling asset prices.
Oil has already fallen from $147 down to $112. Gold dropped below $800. And with a sluggish world economy, there will be little push from labor rates, he reasons. Bond investors are betting that inflation rates will go back to where they were a couple of years ago - around 2%.
They may be right. But to us, it looks like a bad wager. Where is the margin of safety? What if inflation moderates to an annual rate of 2%? The long bond investor - were he to hold to maturity - would still make only 2.4% on his money. On the other hand, if he is wrong and inflation stays above 4.4%, he earns nothing. If it goes higher, he could be wiped out in a matter of weeks. We're just guessing here...but the odds that sometime in the next 30 years inflation will rush up above 6%..or 7%...or 10%...are probably greater than the odds that you'll be able to collect 4.4% for 3 decades and come out a winner.
We're looking at the big picture...trying to see the large trends before they're history. We've never quite mastered the art of seeing things before they happen, but we're still squinting, trying to do it...
What we see coming, one way or another, is a fall in living standards. It can happen in one of two ways: either people lose their jobs and their incomes in a deflationary slump, or inflation makes their incomes and savings worth less.
So far, "both" has been the right answer. Our guess is that it will continue to be the right answer.
Monday, we saw a big drop in the Dow, more than 200 points. Worldwide, equities have lost about 17%.
More evidence of the slowdown appeared in Atlanta - where unemployment has hit a 16-year high - and in Southern California, where luxury houses in San Diego and Los Angeles haven't fallen so much in 10 years.
Even more telling, bank lending has jelled to the point that the money supply is no longer increasing at the pace it had been. Until April, it was running at about 20% per year. Then, suddenly, the river dried up. Currently, the money MZM (a measure of the money supply) is only increasing at a 5% rate.
These circumstances have changed the headlines. Inflation is no longer making the news; now deflation is the story every paper tells. Inflation is yesterday's news. Deflation is today's.
For tomorrow's headlines...we'll have to wait a day...
*** Joe Biden. We don't follow politics. Money is our beat. But even through our green eyeshades...and across the broad Atlantic...it looks to us as though Obama has made a mistake.
The problem for Obama is that he has gotten his frauds mixed up. His message to the American public was that he was a breath of fresh air...a new man...for a new day...with a new program - "change," he promises. Of course, it was all humbug; but after so many years of Bushes, Cheneys, Rumsfelds, change seems like a good idea to many voters.
But now that Obama has practically got the keys to the White House in his hands, he thinks he needs to reassure voters that he won't change things too much. So he's turned to the old hack, Biden, to signal to the nation that in an Obama administration things will go on as they did before.
The trouble for Obama is that voters are likely to get the message. And they're likely to think that if it's change they want they'll be better off with McCain. The Republican candidate is a hack too, but he has the reputation for being unreliable. We know he's capable of change. He's already changed many of his positions in order to pander to the right wing of the Republican party. Once he no longer needs them, he's likely to change back.
*** Central bankers got together in Jackson Hole, Wyoming over the weekend. As we reported yesterday, the confab was disturbed when an uppity Brit dared to say the obvious - that the Greenspan Fed had erred.
But the champagne flowed and soon salved over the abrasions. When it was over, the bankers were of one mind again. All we know is that the financial world is one "enormous uncertainty," said one them.
It has been a year since the credit crisis began. By the look of things, it is far from over. JP Morgan, for example, said it was going to take an $800 million loss from its preferred shares in Fannie Mae and Freddie Mac.
More bad news is coming...
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:
- U.S. Recession: Is the End Nigh?
- Consumer Price Inflation is What Everyone is Counting On
- The Country is Going into a Recession with its Finances in the Worst Shape Ever
- Barack Obama is a Strong Favourite to Win the Presidency
- Why the Correction is Winning the Fight Against Fed Stimulus
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by watcher7 on 30 August 2008:
Sarah Palin & Dan Qualye
Historical rhymes may suggest when the yet-future 'big'correction will occur. The post below, including old posted material, suggests that 1987-1990 is a ripe rhyme for 2007-2010. Sarah Palin choice as McCain's VP adds to the 'rhyme'". Dow Jones top in 2009/10? - but then history repeats until it doesn't.
Politics and Economic-Demographic Shift
"The shift of America's centre of gravity, both demographic and economic, from the Northeast to the Southwest, was one of the most important changes of modern times.
"The economic-demographic shift brought changes in political power and philosophy. Since the mid-1960s, all America's elected presidents have come from the South and West: Johnson and Bush from Texas, Nixon and Reagan from California, carter from Georgia, and Clinton from Arkansas. The only Northerner, Ford, was never elected, (it is arguably that Bush was not a genuine Texan, but he claimed to be, in itself significant..." (Paul Johnson, A History of the American People, (London: Weidenfeld & Nicolson, 1997), pp.764-65).
Since the above book was published George W. Bush, from Texas, is included in the list.
George Bush Snr. was a Congressman from Texas from 1967-71.
Therefore in this article where you are from is governed by the area of a person's 'political' experience before running for President.
So in the case of Barack Obama, while he was born in Hawaii, the West, he is considered from the North as he is the junior Senator from Illinios.
Elected-President Former State
Lyndon Johnson Senator Texas
Richard Nixon Senator California
Jimmy Carter Governor Georgia
Ronald Reagan Governor California
George Bush, Snr. Representative Texas
Bill Clinton Governor Arkansas
George Bush Governor Texas
John McCain Republican candidate for President to fulfill precedent?
"Peter Hart, a Democratic pollster, suggests that McCain, nearing 72, "will look older and older" if he is matched against the youthful Obama. But he also notes that in 1988, when Democrats put forward Michael Dukakis as the "change" candidate of the younger generation, George H.W. Bush won by offering "stability in a time of transition"" (David S. Broder, "The Formidable McCain", washingtonpost.com, February 7, 2008).
"In July 1988, Michael Dukakis was hailed as a Democratic hero with a 17-percentage-point lead over George H.W. Bush; four months later, he was a loser..." (Nicholas D. Kristof, "Who Is More Electable?" nytimes.com, February 7, 2008).
The dollar's strength from mid-1988 to the November presidential election helped George Bush win the election. The present mid-2008 rally may continue and help John McCain win the 2008 presidential election.
John McCain, the present senior senator representing Arizona, would be following in the footsteps of former Senators Lyndon Johnson and Richard Nixon if he was elected President. He would also be following in the footsteps of George Bush, Snr., as a former Representative, becoming President.
George Bush Snr. and John McCain were former naval aviators; both were shot down in war and both were awarded the Distinguished Flying Cross.
Inexperienced Vice-Presidents
"[Sarah] Palin is the second woman to be chosen as a major-party nominee for vice president. The first, then-Representative Geraldine Ferraro of New York, was nominated by the Democrats in 1984.
"One Democrat drew an analogy to another vice presidential pick. Palin is a "more astounding and puzzling choice than the selection of Dan Quayle in 1998," Nick Allard, a Democratic strategist, said in a statement. Former Indiana Senator Quayle, then 41, came under attack for his lack of experience after being selected by then-Vice President George H.W. Bush.
""John McCain put the former mayor of a town of 9,000 with zero foreign policy experience a heartbeat away from the presidency," Adrianne Marsh, a spokeswoman for Democratic Party nominee Barack Obama, said in a statement" (Ken Fireman and Lorraine Woellert, "Alaska Governor Palin Picked as McCain Running Mate", bloomberg.com, August 29, 2008).
Comment by watcher7 on 30 August 2008:
Hurricane update to “1920s - 2000s”
First section to introduce it
Recessions and 'Bombs' at the beginning
The terror attack on September 16, 1920 in the heart of the financial district of New York, in a recession, when more than 30 people were killed and hundreds injured by a horse-drawn-wagon-bomb, corresponds to the terror attack of September 11, 2001 in the heart of the financial district of New York, in a recession, when more than 2,600 were killed by commercial-airline-bombs. Housing booms followed peaking in 1925 and 2005 respectfully.
Hurricanes
Hurricanes also in Florida 1928 and New Orleans 2005 (cp. Lake Okeechobee/dike failure and Lake Pontchartrain/levee failure; etc.,).
"The immense horror of Katrina is all too familiar to the people who live along Lake Okeechobee in Florida, especially those who were alive during the great storm of 1928, before hurricanes even had names. That hurricane may have caused the highest number of black people killed in a single day in the history of the United States, at least before Katrina" (Buzzle Staff and Agencies, The Deadly History of Hurricanes and Lessons That Must Be Learned, buzzle.com, September 9, 2005).
To watch: double hurricanes 1926 and 1928 'hitting Florida and double hurricanes 'hitting' Louisiana 2005 and 2008? Hurricane Gustav to complete the double?
"The damage from the storm was immense; few buildings in Miami or Miami Beach were left intact. The toll for the storm was $100 million in 1926 dollars, just over $2 billion in 2005 dollars. It is estimated that if an identical storm hit in the year 2005, with modern development and prices, the storm would have caused $140–157 billion in damage. After the hurricane, the Great Depression started in South Florida, slowing recovery" (1926 Miami Hurricane, wikipedia). According to the same criteria Katrina caused $81 billion.
Comment by mike on 1 September 2008:
....obama and biden...cello and bagpipes.....mccain and palin...triangle and cymbols....obama and biden each accompanied by orchestras of 10,000 or more....mccain and palin each accompanied by bands of much much less....when the cello concerto begins, CNN turns off the microphones to the orchestra, to sabotage a great performance while when mccain gets up onto his little stage, CNN amplifies his small band....but does big oil own CNN...i wonder...CNN phone poll numbers show a close race...among land-line users on saturday evenings....what about everyone else??...i'll bet republican insiders know the truth that mccain is the loser here....i'll bet the real numbers show a landslide for obama....i'll bet mccain picked palin because everyone else he asked....declined...they don't want their political careers dragged down for nothing...have you noticed all the famous democrats standing behind obama...have you noticed the abscence of famous republicans standing near mccain...i wonder about those corrupt oil men in alaska that palin stood up to....they were probably local independant oil men....unconnected to the BIG oil men like haliburton and the bushes who want to grab hold of all the oil in alaska as well as iraq and offshore....plus iran , the gulf etc etc.....the world!!!...and those computerized election voting kiosks....owned and operated by ....guess who???...oil..as in BIG oil...with a BIG hat and lots of cattle too....i shouldn't wonder....
Comment by Mireille on 9 September 2008:
In response to Mike, you are so right. all the love seems to go toward Obama. Artists don't want to be associated with or their work associated with McCain. McCain gets to say NOTHING, yet reap tons of applause and coverage for a 'job well done'. His VP gets time out for initiation into the 'secret society', and nothing's really said about that. I tell you, money really can buy only so much. Money can't buy THIS election. Not this time.