Double Depression

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The sun is shining. The sky is clear. The weather is warm.

What a great day for a meltdown!

Dow down another 519 points yesterday. Gold zooming towards $1,800…in fact, reports this morning tell us it has passed the $1,800 mark. And the 10-year T-note yield slipping down close to 2%.

Are we at Armageddon, yet?

“You don’t know how pleased I am to live this long,” said our mother, whose 90th birthday party will be celebrated in 3 weeks. “I will see two major depressions during my lifetime.”

Years ago, we guessed that the price of gold and the price of the Dow would converge. We also guessed that they would meet around 3,000.

It seemed crazy when we first suggested it. Then, the price of gold was only around $500 an ounce, while the Dow was over 10,000…and still going up. That put the Dow to gold ratio at about 20 to 1…way down from the peak at 43 to 1 set at the end of the ‘90s.

We said the ratio would go to one-to-one. One ounce of gold would be equal in value to the 30 Dow stocks… just like it was, very briefly, at the end of the ‘70s. When would it happen? We didn’t know. But it would feel “like Armageddon” when it happened.

Well, now it doesn’t seem so crazy. In order to get down to a bear market low, the Dow needs to be cut in half…and more. All we need is another two weeks like the last one.

The price of gold could easily double from here too. In fact, it won’t match its 1980 high – properly adjusted for inflation – until it is back near $3,000. And this time, it should go much higher. Whatever problem gold signaled back in the late ‘70s is worse today. Much more debt. More willingness on the part of the feds to “monetize” debt. More wobbly economies run by wobbly economists.

The real problem is debt. It’s been building up for more than half a century – thanks to encouragement from the same officialdom in whose hands the problem now rests.

The feds think…or thought…they could deal with this slowdown the same way they dealt with every other post-war recession – by adding more and easier credit. That is, by increasing the amount of debt in the system.

They tried direct spending – fiscal stimulus. They tried re-flating the banks. They put the key lending rate at zero. And now Bernanke says he’ll leave it there for two more years! They even tried money printing – their QE I and QE II programs.

Nothing has worked. Fewer people have jobs today than when the crisis began. Real incomes are going down. House prices are going down. The US has the lowest percentage of people gainfully employed ever recorded. The rich may be getting richer…but the poor are getting poorer, faster than ever. And real, private sector, per capita GDP is still going down.

Bernanke once joked that if he ever got in such a situation he would know what to do: he would drop money from helicopters.

Time to warm up the helicopters!

But the feds are beginning to realize that it is not enough to offer more cash and credit; they have to do something about the debt. At least, we think they’re beginning to realize it. Several top economists have appeared in the papers recently arguing in favor of actual debt liquidation as well as more stimulus.

Both Nouriel Roubini and Ken Rogoff have written to support debt restructuring (reduction) initiatives. And even dodos such as Thomas L. Friedman have finally realized that debt is a problem.

“All this debt blew up in 2008…” he writes… “and that led to the second problem: Homeowners, firms, banks and governments are all now “de-leveraging” or trying to – meaning that they are saving more, shopping less, paying off debts and trying to dig out from mortgages that are under water.”

Typical. He gets confused. You can’t dig out when you’re underwater. You drown. But at least he’s beginning to understand what is going on. And since he is the last man on earth to understand anything…it is likely that even the feds are catching on.

So what? Well, you’ll begin to hear more about debt reduction as well as stimulus measures. They’ll get the banks to write down mortgages, for example, in exchange for more cash from the government. This is classic political legerdemain. Debt doesn’t go away. Ever. It has to be reckoned with. Moving mortgage losses to the government pushes the government further underwater. That will have to be reckoned with too.

But not today, dear reader. Lenders are still buying US debt. As the Dow goes down, gold and bonds go up. The 10-year note is nearing a record high… This allows gives US authorities a lot of rope. They don’t have to cut US spending. They can still bailout whoever they please. They can borrow…borrow…borrow…spend, spend, spend…until Daddy takes the T-bird away!

Then, they can use all that rope to hang themselves.

And more thoughts…

Open source unemployment.

Here is a very serious thought. As far as we know few people have written about it. Few have even thought about it. And no one has figured out what it means. But it could mean that the whole nature of the economy…and how we measure it…will have to change. More immediately, it is another cigarette for the wheezing Middle Class.

The seed was planted by a headline from the Wall Street Journal. We didn’t read the article. But we noticed the headline.

“Porn industry profits down,” or something like that.

Hmmm…. surely, the demand had not decreased. We began to think about why the porn industry might be less profitable.

We’ll take a guess – open source technology. It’s now so cheap and easy to make and distribute dirty pictures that the profit must have gone a little limp. An amateur with an I-phone or a $100 filming aparatus can make a fairly clear movie. He can send it over the internet at no cost. So, the recipient can view it in the privacy of his home for nothing…or almost nothing.

This is very different from the old days. You needed a whole crew to make a film of any sort…and expensive cameras, lights – all sorts of things. Then, when you had made the film, you put it on a reel and sent it all over the country…to physical theatres in dingy parts of town, where people drove in their automobiles to buy tickets and watch smut. Lots of middle class jobs involved.

In the old days, the enterprise consumed large expenditures of energy – human and mechanical – to produce what was recorded as an increase in GDP and considered an increase in living standards. Energy = GDP = Standard of living = jobs.

Now, very little energy is expended. Very little money is spent. No increase in GDP is recorded. Nor is there any measurable increase in standards of living. And jobs have been eliminated (no film crews, no drivers, no gasoline sold, no theatres built, no popcorn sold, no carpets cleaned). From an economic standpoint, the switch over to internet-based porn looks like a net loss. And yet, the pleasure of the viewer is as great or greater than ever. The clients are getting the same bang, so to speak, for many fewer bucks.

Now, imagine this same principle applied to, say, warfare. The US spends trillions on defense. This is great – or so it seems – from an economic point-of-view. Lots of jobs making big ships and big tanks and big airplanes. Lots of energy used moving them around. Lots of money spent. Lots of support personnel and profits in the contractors’ pockets. Lots of bribes (campaign contributions) for Congress too.

But now imagine that, say, China figures it will challenge the US empire in a different way. Let us imagine that it spends just a little bit and figures out a way to scramble communications. Its signals crossed, the US battleship runs aground. The US airplane bombs the wrong city. The tank gets lost, runs out of fuel…and is abandoned.

This is a purely hypothetical example, but it is how things work. Old imperial forces get fat and stupid. They are always ready to fight the last war! New challengers have to figure out new techniques and try new technology.

But if it were to work out this way, communications technology would have done to the defense industry what it has done to books and pornography. It will have de-materialized it. Fewer jobs. Less energy. Less money. Fewer resources. Again, you get the same bang…with many fewer GDP bucks.

Already, terroristas have noticed. Here’s an article about how new open source communications technology is being used by England’s rioters:

Lots of the activity going on in London is based on open source warfare precepts. Much more going on here than a simple riot or looting. It’s a learning lab. Communicating via BlackBerry instant-message technology that the police have struggled to monitor, as well as by social networking sites like Facebook and Twitter, they repeatedly signaled fresh target areas to those caught up in the mayhem. They coupled their grasp of digital technology with the ability to race through London’s clogged traffic on bicycles and mopeds, creating what amounted to flying squads that switched from one scene to another in the London districts of Hackney, Lewisham, Clapham, Peckham, Croydon, Woolwich and Enfield, among others – and even, late on Monday night, at least minor outbreaks in the mainly upscale neighborhood of Notting Hill and parts of Camden. NYTimes.

When property can be so easily vandalized, the benefit of owning it goes down. Asset prices fall. Lower asset prices make building and investing less attractive.

But that’s what Open Source does. It lowers the value of traditional capital – theatres/bookstores/battleships and so forth. And it kills jobs and wipes out GDP.

The new economy may yield the same pleasures…the same quality of life…more or less. But it may also produce a nightmare: very high unemployment for a very long time. Here’s Jeff Jarvis at the Huffington Post and on the case:

We’re not going to have a jobless recovery. We’re going to have a jobless future.

Holding out blind hope for the magical appearance of new jobs and the reappearance of growth in the economy is a fool’s faith. Politicians who think that merely chanting the incantation “jobs, jobs, jobs” will bring them and the economy back are fooling us if not themselves. When at least a tenth of Americans are out of work, for Wall Street to get momentarily giddy at the creation of 117k jobs is cognitive dissonance at its best. No one can make jobs out of thin air. Jobs will not come back. A few new jobs reappearing won’t fix anything.

Our new economy is shrinking because technology leads to efficiency over growth. That is the notion I want to explore now.

Pick an industry: newspapers, say. Untold thousands of jobs have been destroyed and they will not come back . Yes, new jobs will be created by entrepreneurs – that is precisely why I teach entrepreneurial journalism. But in the net, the news industry – make that the news ecosystem – will employ fewer people in companies. There will still be news but it will be far more efficient, thanks to the internet.

Take retail. Borders. Circuit City. Sharper Image. KB Toys. CompUSA. Dead. Every main street and every mall has empty stores that are not going to be filled. Buying things locally for immediate gratification will be a premium service because it is far more efficient – in terms of inventory cost, real estate, staffing – to consolidate and fulfill merchandise at a distance. Wal-Mart isn’t killing retailing. Amazon is. Transparent pricing online will reduce prices and profitability yet more. Retail will be more efficient.

The housing market has imploded and is not likely to reinflate for a long time to come. So the market for new homes will not recover and construction jobs will not come back.

Regards,

Bill Bonner
For Daily Reckoning Australia

Bill Bonner

Bill Bonner

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.
Bill Bonner

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Comments

  1. Amen Brother !

    Reply
  2. Bill, your “Open Source UNemployment” is uncannily prescient. You are probably the first one to so clearly describe what is going wrong in our modern lifestyles. Oh, how I wish you were wrong!

    Janice Lemon
    August 12, 2011
    Reply
  3. A scary insight. I’d love to hear your thoughts on what professions will thrive in this new world dis-order. What professions thrived during the depression? other than brweries and distillers!

    Reply
  4. Yup,,,, scarey hah? Answers/ideas anyone? Our youth are inheriting a complex and fickle world. What future for our children?

    Reply
  5. Replace Thomas L. Friedman with Michael Pascoe

    Reply
  6. I am really worried about the future of my future grand-children and their children and their grand-children.
    What can I do?

    Reply
  7. Open Source Unemployment?!
    A bit on the weaker side, no?

    Reply

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