Downfall of the American Consumer

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Angela Merkel to Eastern Europe: Drop Dead!

You remember that famous cover story of the New York Daily News? New York was nearly bankrupt in 1975. The city asked the feds for a bailout. To his everlasting credit, Gerald Ford had the backbone to just say ‘no.’

Had he given the city a bailout, Ford might have won his race against Carter. He believes that that headline cost him the New York vote…and the election. Then again, had he given New York a bailout…the city might be more like Detroit.

The kindness of strangers is one of life’s delights, but once you begin to count on getting something for nothing you are on the road to Hell. At least, that is our view here at The Daily Reckoning.

Welfare ruined the lives of millions of people. (More on that…below…)

Easy credit – coming largely from the Fed and the kindness of strangers in Asia – ruined the American consumer.

Bailouts, handouts, bribes and giveaways threaten to sink whole industries.

And now the whole world economy will be ruined by printing press currency – something-for-nothing money coming from the central banks.

But that will take time…maybe years. For the moment, we are enjoying the show…

Europe is plagued by debt too – just like the United States. Individual households are generally in better shape than those in America, but governments tend to have more debt than the United States. And in the fringe countries of Europe – Ireland, Spain, Greece, Italy, Poland, and the Ukraine – consumers borrowed far too much money to buy houses. Unemployment is soaring to 15% of the workforce in Spain. Irish banks are going under. And in Eastern Europe, the problems are worse. Typically, a man who wanted to buy a house found that he got a better interest rate if he took out a mortgage in euros than in his home currency. In Poland, for example, many homeowners must now make their mortgage payments in euros, while they earn their money in zlotys. As the financial crisis developed, the zloty fell against the stronger euro, by half. This leaves the Polish householder paying twice as much on his mortgage.

Not surprisingly, consumers are in trouble…so are the banks than lent them money…and so are the countries where they live. Nine of these nations – an Eastern European bloc – got together and asked the European governing council for help. They said they needed $380 billion to get through this crisis. Angela Merkel, speaking for the French and Germans, said no. She might have mentioned, too, that they had already spent $380 billion recapitalizing Europe’s banks.

In America, the government is more accommodating. It is spending trillions to try to bailout the entire global economy. And by the look of things…it is failing.

O! Bama! Where is thy bounce? The whole world needs it.

The Dow did not bounce much yesterday. It was up only 31 points. A disappointing showing. Usually, you can count on a healthy bounce after a big drop, such as stocks got on Monday. But this market has been short on bounces. After Obama got elected, we expected a big bounce. Instead, there was a feeble ricochet of about 15%…and then, stocks headed down again. In the United States, they’ve lost 20% so far this year.

And the more the government tries to pump up the ball, the flatter it seems to get.

HSBC said it was cutting 6,100 jobs…closing offices all over America…and trying to earn back the $10 billion it lost in the US consumer finance business.

AIG is getting another $30+ billion – after burning through the last $133 billion. ‘Can’t let this insurance giant go under,’ say the pundits, “or the whole insurance business will go down.’

AIG was “irresponsible,” said Ben Bernanke in his little chat with Congress yesterday. He said they made speculative bets that they shouldn’t have made.

But what did he expect? The Fed – under the leadership of Alan Greenspan – threw the biggest financial party in world history. What did they expect the pros to do…stay home and watch TV?

And now the IMF says the global banking system needs another $500 billion. The real figure is probably two to three times that amount. But who knows? We’re still in a period of aggressive price discovery. Until we find out what’s in their vaults…and what it is worth…we won’t know how much it will cost to save them.

Ford and GM sales have been cut in half – sales fell to a 27-year low in February. Blockbuster is eyeing Chapter 11. And skilled immigrants are leaving the US.

*** Obama has, of course, announced his $3.6 trillion budget…and all that goes with it. Including a $1.7 trillion deficit. But his estimates were based on a recovery in the last part of this year. That seems increasingly unlikely. Our guess: the deficit will go over $2 trillion.

Congress has hunched over the numbers. The solemn chicanery of federal budgeting is underway, in other words, as politicians pretend to weigh the merits of the spending plan…

Of course, they are spending other peoples’ money…and none forgets it. The idea is not to reduce spending, and certainly not to return it to its rightful owners, but to make sure it goes to the groups most important for re-election. Besides so much of this money is borrowed from future generations…and foreigners…and who-knows-whom…it is like money from Heaven.

As any system of government matures, more and more people are able to get a purchase on it. It could be a tax break…a licensing requirement that keeps out competitors…a tariff…a subsidy…a job…free food or a welfare check. And as more and more people get something from the government, more and more have a stake in making sure the government stays in business. This phenomenon contributes to the stability of the institution in the short run…in the long run, it guarantees its failure. For each little hustle is a cost…like a leech on the back of a water buffalo. The animal may be strong and fit; but put enough leeches on him and he’ll wither like a dried up grape.

Of course, after a while, the beast begins to stagger and people notice something is wrong. Then, the reformers come out…promising change. But change is just what people don’t want and just what the system won’t permit. There are too many leeches – and the leeches vote.

Obama’s new budget is the biggest bag of leeches to come along since the Roosevelt Administration. We have not seen it in detail. But from what we’ve gathered from the press reports, it has something in it for almost every bloodsucker.

The raw numbers are breathtaking. Whereas the feds have taken about 21% of the nation’s income in recent years, now they’re going to take 28%. The deficit alone will equal more than 12% of total GDP.

Put the feds together with state and local hacks, altogether they will consume 40% of the nation’s total output. Whoa…that’s put it close to the levels of such free-market bastions as Zimbabwe and Algeria, both with 43% of spending done by government…and Hugo Chavez’s Venezuela, where the government spends 41% of GDP.

By contrast, in France, that socialistic, bureaucrat-saturated country with the croissants, 53% of GDP is spent by the government. But wait…in France healthcare is a government industry and so is the passenger train system. In America, 17% of GDP is spent on healthcare. As for the passenger trains…forget it…in America, we scarcely have any. So, if you add the 17% spent on private healthcare to the 40% you actually get a total higher than that of France. Ooh la la…the age of big government is back!

Who pays?

Ah…that’s an interesting subject in itself. Obama says he’s going to soak the rich. But the rich are already pretty well marinated. Reagan’s tax cuts freed them to earn more money – and pay more taxes. Now, the top 5% pays 60% of the costs of government. The bottom 40% pay no taxes at all. They get all government ‘services’…which is to say their boondoggles…for free.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

P.S. Obviously, the cost of the bailouts is going to be passed on to the taxpayers – lucky you.

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.
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Comments

  1. My guess is that GM will seek a Government protected Section 11 on Monday. I’m not an expert on US regulations but in most countries a business cannot legally continue to trade IF the auditor says that business are no longer a “going concern” (as defined in the accounting standards). Government protection will allow trading to continue. GM creditors, stockholders, bond holders and some pension schemes will be liquidated.

    Coffee Addict
    March 6, 2009
    Reply
  2. If GM Directors wish to aviod personal liability – my first guess on their bankruptcy timing should not be too far wrong. There is a bit of talk on mises.org on this but no one makes the necessary linkage between the “going concern” issue and the prohition on “insolvent trading”.

    Getting a “going concern” audit qualification doesn’t necessarily lead to bankruptcy. It does however put the directors on notice to explain why they should continue trading, particularly if they have insufficent resources to pay bills over the next 12 months. The qualification also destroys balance sheet valuations and assumptions that presume the company is a going concern.

    Lawyers for secured creditors WILL argue that the GM directors are disadvantaging them in relation to other creditors by continuing to trade. GM directors may be peronally liable for such losses. The only was out for the directors would be for the Government to underwrite the personal liability now being derived … me thinks. (If it happened in Australia the directors would be criminally liable as well.)

    Coffee Addict
    March 9, 2009
    Reply
  3. From
    http://slowsmile.hypocrisy.com/

    The Farmer and the Dead Donkey Raffle
    Posted by slowsmile on March 5, 2009

    Young Thomas, clever and bright, bought a donkey from a farmer for $100. The farmer agreed to deliver the donkey the next day. The next day the farmer drove up and said, “Sorry Thomas, but I have some bad news, the donkey died.”

    Thomas replied, “Well, then just give me my money back.”

    The farmer said, “I can’t do that. I went and spent the money already.”

    Thomas said, “OK, then, just bring me the dead donkey.”

    The farmer asked, “What are you going to do with a dead donkey?

    Thomas said, “I’m going to raffle him off.”

    The farmer said “You can’t raffle off a dead donkey!”

    Thomas said, “Sure I can. Watch me. I just won’t tell anybody he’s dead.”

    A month later, the farmer met up with Thomas and asked, “What happened with that dead donkey?”

    Thomas boasted, “I raffled him off! — I sold 500 tickets at two dollars a piece and made a nice profit of $898.00.”

    The farmer said, “didn’t anyone complain?’

    Thomas said, “Just the guy who won. So I gave him his two dollars back.”
    The farmer shook his head in amazement, and walked away.

    A year later, Thomas comes running into the farmer’s yard, out of breath and looking frightened.

    “You must help me hide!” cries Thomas.

    The farmer asks, “Why? What’s wrong?”

    Thomas explained, “I went all over the village, hiring people to sell raffle tickets for the same dead donkey, and then those people hired other people to go to other villages and sell raffle tickets for the same dead donkey, and now there are thousands of raffles taking place all over the kingdom. Millions of people and pension funds bought my raffle tickets, but the donkey started to stink and everybody found out it was dead, so now they want their raffle ticket money back!”

    The farmer suggested, “Just pay back the money, Thomas.”

    “I can’t!” Thomas moaned. “I spent it all on bonuses for my raffle salespeople, and private jets, and huge mansions, and an opulent lifestyle to which we, in the raffle ticket business, have become accustomed. Not only that, I borrowed against my raffle ticket earnings 35 fold, so now I OWE 35 TIMES the money I actually earned!”

    The farmer thought a moment, and then smiled. “Don’t worry, Thomas. I know what to do.”

    Thomas asked, “What can possibly be done?”

    The farmer answered, “Your raffle operation is the biggest business in all the land. It’s too big to fail. The King will bail you out, for the good of all his loyal subjects.”

    And with that, Thomas beseeched the King for billions of dollars to create the R.T.R.P. (Raffle Ticket Relief Program) to buy back all the worthless raffle tickets. Everybody thought that would be the end of it, but it turns out the King didn’t have enough money to bail out the Raffle ticket holders, so he issued official “Raffle Bonds” to borrow money from other lands.

    Everybody thought THAT would be the end of it, except when the rulers of other lands figured out their lent money was being spent on dead donkey raffle tickets, they stopped lending it. So the King decided to just print the money to buy back the dead donkey raffle tickets.

    Everybody thought THAT would be the end of it, until it turns out that printing money causes each individual dollar to be worth much less, so prices for goods and services rose enormously throughout the kingdom. The King decided to issue a new paper currency denominated at 1/10th the face value of the old dollars, and forced everyone to exchange their old money for new money so prices would come down to normal again.

    Everybody thought THAT would be the end of it, until the same thing happened with the new currency, so the people rose up and toppled the King with torches and pitchforks, and installed a new ruling government with a new currency backed by gold.

    And THEN they all lived happily ever after.

    Reply

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