Downscaling of the Global Economy

Not much time to write this morning; we're on our way up to the Andes to check on our cattle and our cabbages. If things get really bad, we may have to live off the fat of the land up there. Trouble is, there's not much fat on that land. More on that...below...

(By the way...we'll be out of email range for the next few days...will write again on Monday.)

In the meantime, let's keep it simple.

After a big boom, you get a big bust. That's what we are seeing now.

And there is no evidence anywhere in the historical record that the financial authorities can stop it. They can hold it off - for a while. They can distort it. They can possibly divert it. They can make it worse. But there is no evidence that they can make it better.

Losses are losses. Mistakes are mistakes. They don't go away when government throws money at them. They can be moved around...shifted from the people who deserve them to, say, the innocent householder. But somehow...some time...someone has to write them off and work them out. That's the basic plot of almost every financial story you read in the paper and see on the news every day - the deleveraging...the unwinding...the downscaling of the world economy.

Almost every business is reporting worse results than last year. An exception is the pawnshops - they say business is running 50% ahead of 2007. Another exception is Apple, whose iPhone has boosted profits 26%.

Everyone else is singing the blues. Stocks are down all over the world. More money has been lost than in '29 - much more.

Yesterday, the Dow dropped 231 points, following a strong showing on Monday. Oil slid further - to $72, and then below $70 overnight. The dollar rose to $1.30 euros. And gold dropped another $16 - to $773.

If you lend money to the U.S. government for 91 days you will be earning only about 1% annually. Still, there's a rush to do it. Money is pouring into money market funds.

Most likely, there will be a big rally in the stock market - as there was in '29. It lasted about six months and took prices back to shouting distance from their highs. But it was a sucker rally. In April of '30, stock prices collapsed again. And then the economy fell apart.

These things take time, dear reader. Businessmen are only now beginning to realize that they need to cut back - fast. They cancel orders for new equipment, new projects, and new employees. Then, after they've stopped the new spending, they look around the shop to see what else they can cut. And then they see that middle-aged Baby Boomer drinking coffee. He's tired. He's already thinking about retirement. And he costs a fortune.

'Get rid of the guy,' they say to themselves. Then, they say it to the poor employee.

The "Boomer Bust" will make it very hard for this economy to recover, says the Wall Street Journal. The boomers led the boom. Now, they're going to lead the bust. They're going to be forced to cut back on spending. In fact, they're going to cut back so much they're going to make thrift popular again. Fashionable. Almost hip.

But if the boomers don't spend...who will?

That's the other half of the story. Paul Krugman and other economists are urging Congress to "spend baby, spend," as TIME magazine puts it.

Word in today's news is that the feds will spend more than $700 billion bailing out the banks.

New York says its faces a $13.5 billion budget gap. Over on the other coast, California says it has a big gap to fill too.

Meanwhile, Congress is taking up another "stimulus" package...said to be worth $300 billion, even before it gets decked out.

And then, there's this headline: "Fed to provide up to $540 billion to aid money funds."

"The US deficit is set to soar," continues TIME.

So, the pols are beginning to do what they do best - squander money. And now they can do it under the cover provided by one of the most popular economists of the 20th century: John Maynard Keynes. Now, they're not just greasy politicians handing out stolen goods. Now, they're providing the necessary "stimulus" to an ailing economy!

*** Money is pouring into the gold coin market. Apparently, dealers can't keep up with the demand. Of course, financial analysts tend to view the gold coin market as a place for nuts and kooks. "If the world really does fall apart, you'd be better off buying ammunition," said one analyst. But it depends on how apart the world falls. If commerce were still done peaceably, gold coins would be a good thing to have in your pocket. But, he's right; when things really fall apart, you'd be better off packing heat than Krugerrands.

But we're not worried about that kind of world - it is too wild and too unpredictable.

*** But luckily the market is getting back to normal - right?

"It's only normal if you enjoy 800-1,000-point swings in a matter of one or two days," says our intrepid correspondent, Byron King.

"Really, this is not a bear market. It's a great white shark market. This is a Jaws market. Rallies are nothing more than churning chum in the water. It's as if you were to dip your toe in and get your foot bitten off. Swim at your own risk.

"So let's remember the beaches of Amity. Is there any reason to stay in the water when a mean, hungry shark is out there? In the same vein, is there any reason to stay in the market right now? Would you be better off just selling out and converting it all to cash? Why turn yourself into shark bait, right? But still, if you sell out now, it will be for a low price. Lower than in the past, that's for sure.

"Then again, if you buy stock, it will also be for low prices. Certainly, almost every share of stock on every exchange is selling at lower prices than in the past. But what about the future? If you can buy low now, is it possible that you might be able to buy even lower in the future?

"Oh, man. What I would not give for a copy of The New York Times Sunday business section from about next March. And I sure wish that the government people and big bankers of the world were half as good at their jobs as the likes of Roy Scheider and Robert Shaw were at killing monsters of the deep. Only in the movies, I guess."

*** "Bill, do you realize that one of your neighbors up there produces one of Argentina's finest wines?" asked a friend last night.

We bought a bottle from Tacuil and had it with dinner. It was a very interesting wine...a mixture of Malbec and Cabernet grapes, we were told. Produced at high altitude.

What a relief! We can roast our own cows, eat our own beef, with cabbage on the side, and wash the whole meal down with the fruit of our neighbor's vines.

So we're not going to worry. We'll be all right. Even if it doesn't blow over...

"But you know," said another dinner companion, "that's why I like it here in Argentina. Because I think this world is getting more and more dangerous. Did you read today's paper? It says Pakistan is on the verge of anarchy. The Taliban is going across the border and operating in Pakistan just like they do in Afghanistan. They took over a bus and killed everybody. They blow up police stations. They could take over the country. Of course, I wouldn't care who runs Pakistan, but it's a nuclear country.

"Down here, at least you feel like you can live well without worrying too much about these things. We have plenty of sunlight. We have plenty of water and food. We even have very good wine."

Feeling tempted to leave it all and head to Argentina? You're in luck...our friends at Agora Travel are headed to the "Europe of South America" from November 5-20. While there, they will be exploring real-estate and lifestyle values that will astound you.

*** A Dear Reader currently living in Buenos Aires sends this comment: "My cab driver here (and in Caracas) understands and cares more about currencies and inflation than all my friends in the states combined."

Interesting...

Until tomorrow,

Bill Bonner
The Daily Reckoning Australia

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