Yesterday was another exciting day on Wall Street. The Dow rose 131 points...and gold shot up $25 to a new record, $1043.
Investors must be pondering the future.
What will the future look like? No one knows. But investors thought they saw things they liked.
For one thing, there was the Federal Reserve governor from New York, who told the world that there was no risk of a rate hike anytime soon. Bill Dudley knows which way the wind is blowing. He said the Fed would hold money policy loose "indefinitely."
Indefinitely is otherwise known as "as long as it takes."
But as long as it takes for what? Ah...as long as it takes until the economy appears strong again.
How long will that be? Ah...maybe longer than anyone realizes.
Yesterday, we were calculating how long it would take to get the jobless number back down to '90s levels...that is, around 5%. There are now about 131 million jobs in the United States...and about 15 million people who would like a job but can't find one. Meanwhile, population growth adds about 1.5 million new workers every year. That means the economy has to grow at 1% (in real terms) just to stay even with population growth. Currently, the economy is going in the wrong direction - backwards. It's losing jobs...maybe 3 million this year...and maybe another 2 million or so before it finally stabilizes (who knows?)...for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.
Let's suppose, by some miracle, the economy turns around...and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half - 1.5 million - gradually reduce unemployment. Now, let's get out the calculator...20 million divided by 1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!
But what if the economy doesn't grow at 3% per year? Ooooh...that's the problem, isn't it? All the feds - and practically all other economists too - are projecting a return to normal. They expect a 'recovery.' But what if there never is a recovery?
Heck, yesterday, the central bank of Australia said it was so sure that everything was going well it raised its key lending rate by 25 basis points.
"Canberra says risk of serious retraction over," The Financial Times reports.
But they get a lot of sunshine down under. Possibly, the heads of the Reserve Bank of Australia got a little too much of it yesterday. Australia is also a supplier of natural resources to China; possibly, the sun burnt bankers failed to notice that China is a bubble.
Or maybe they failed to notice that China's biggest customer is broke.
Right under The Financial Times' article about Australia is the following headline:
"No sign of credit revival for US households."
"The latest data from the Federal Reserve show consumer credit declined at an annual rate of 10.4% in July - the fastest rate since the crisis began two years ago."
Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.
Another headline in The Financial Times tells us, "Holiday sales [are] set to fall."
Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?
Perhaps China is focusing more sales on the domestic market; we don't doubt it. But you don't refocus the world's second or third largest economy in 12 months. It takes years. And you don't get this kind of rebirth without some kind of suffering. The big, old oak tree has to fall down before the sapling can take its place. And when the oak falls - it makes one helluva mess.
Bill Bonner
for The Daily Reckoning Australia
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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 prozak on 8 October 2009:
Totally agree. There appears to be some tragic disconnect when it comes to australia.
Sure the gov. was in a great position with debt before all this happened so less issues than USA, UK etc.... and even total debt including consumers was still only 3rd worst in the world per capita - behind the USA and UK.
I believe all the hype around australia is irrational.
It has done well recently but the currency will not survive if the aussie bubble bursts on the scale that the rest of the world has just gone through. The scale of capital withdrawal will be phenomenal.
The RBA will then be faced with fighting massive inflation (i.e currency depreciation) and the destruction of asset (house prices) values when no one can pay 15% interest rates. OR letting inflation run rampant in the hope of supporting nominal asset prices. Either way australia will be in dire trouble.
If you have a god... pray to them that the aussie bubble does not burst.
Comment by christina on 9 October 2009:
In Australia, the newspapers online show the top 10 most viewed stories each day. And every day, the top 10 most viewed stories are either about sport or sex. Like some film star or model whose dress fell off a bit and showed some boob, or which footy player is changing footy clubs, and who won a sports etc. You can check it out yourself. Nobody seems to care about the economy, they think they have outsmarted the world. I feel so sorry for them when the bubble bursts
Comment by Pete on 9 October 2009:
Right on Christina.
And it shows why some of the worst economic policies may still get voted in - because a large portion of the population have other things to think about, or are not financially educated.
Add to that the fact that you often have to read between the lines of financial and business articles anyway, means that a financially educated and aware Australia is an impossibility.
Comment by Dan on 9 October 2009:
The media is fake, Christina (as I am sure you know). Stories, personalities and opinions are manufactured to catch your gaze, to generate advertising revenue. News is created from nothing (or usually press releases) wherever required, and it's become such an art that telling fact from fiction is almost impossible. Have you ever been misquoted by a reporter? If so, you'll know what I mean.
I get to work with people from every social level and, to be honest, they are all worried about the economy, interest rates, the dollar and so on, each to his or her own ability. But sadly, they are by and large completely misled about everything (economy, sex, and sport). They rarely venture beyond the homepage of their favourite webmail service when reading news. When has ninemsn ever informed you of anything worthwhile? No links to independent critical analysis, ever!
Thing is, though, that people subconsciously know that it's all garbage. Financial news is only interesting when it's true. The rest of the time it's meaningless and aimless jargon. Who wants to read it? Better off reading 'plastic surgery disasters' and looking at photos of ugly celebrities.