How to Prolong an Inevitable Free-Market Correction


Last week came and went. As near as we could tell, nothing was settled. The trends in motion stayed in motion… No end in sight.

On Friday, Americans were still convinced that they were never going broke. The Europeans were still squabbling about how they were going to keep from going broke. And the Japanese were telling each other that going broke wouldn’t be so bad.

For the United States of America, the road to hell has never been so smooth. The country has been borrowing its way to ruin for many years. But now, the skids are greased. The wheels are oiled. Strap on your seat belt. Whee!

Lenders practically insist that the US government take their money. Reuters reports:

The US government may ask investors to pay for the privilege and safety of holding short-term debt issued by its Treasury Department.

In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of US government debt in the face of global insecurity, might have to pay a premium for it.

Doing so would allow the US government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.

Remarkably, Wall Street is asking to be able to pay a premium for US debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.

“It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible,” according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for US government securities.

On Tuesday, the nonpartisan Congressional Budget Office said the United States was headed for a fourth straight year of $1 trillion- plus budget deficits, a condition that Republicans want to use as ammunition to hammer President Barack Obama’s spending record in the November voting.

Debt is still rising. At some point, it has to stop. Then, the feds go broke.


Because they are all living on borrowed time and borrowed money, only paying current expenses – including the interest on past borrowing – by borrowing more and more money. When the borrowing stops, they will no longer be able to pay their bills. And when that happens, their bonds will drop in value – fast. Governments will go broke. So will all the people who depend on the feds and their IOUs. Banks. Insurance companies. Retirees. Investors. The defence industry. The education industry. The healthcare industry.

Will this be a bad thing? Not necessarily. What has to happen sometime might as well happen now; get it over with. The longer debt builds up, unchecked, the more debt there is to liquidate when the end comes. Better for the end to come sooner, rather than later, in other words. If the end were allowed to come, we’d soon be at the beginning again.

But if there was one theme that ran through all the “Capitalism in Crisis” essays it was this: the end must be prevented, at all costs. Capitalism is inherently unstable, the writers agreed. Governments must use their power to keep it from going nuts. Otherwise, it may put an end to things.

We disagree. Markets – free markets – are meant to be unstable. They are meant to crack-up from time to time. And thank God they do. Otherwise, we’d be stuck forever with zombie industries and dead end investments. Every once in a while, capitalism throws a tantrum. But so what? Crises, breakdowns, crashes, washouts, liquidations – they’re just fast and efficient ways to get rid of the zombies.

And it’s not just developed countries that are subject to the temper fits of capitalism. Even China – a country still run by people who call themselves communists – is subject to capitalism’s mood swings.

Here’s a report from Bloomberg:

China’s economy is headed for a “hard landing” this year as weaker demand overseas chokes off exports, said Gary Shilling, who correctly forecast the US recession that began in December 2007.

A Chinese government report yesterday showed that export orders fell last month even as manufacturing expanded. The Shanghai Composite Index (SHCOMP) dropped 1.1 percent yesterday as stronger manufacturing boosted concern that the world’s second-largest economy will decelerate further as the government refrains from loosening monetary policy to tame inflation and curb property prices.

“They slammed on the brakes,” Shilling, president of A. Gary Shilling & Co., a Springfield, New Jersey-based consultancy firm, said at the Bloomberg Link China Conference in New York yesterday. “Transition is not easy because they are geared up to exports.”

China’s economy expanded 10.4 percent annually in the past 10 years, five times the pace of the US, as the government boosted spending on roads and bridges and manufacturers exported everything from toys to socks. Shilling defines a hard landing as a growth rate below 6 percent.

The economy grew at a 9.2 percent rate in 2011 and its expansion will slow to 8.5 percent this year, according to economists’ estimates compiled by Bloomberg.

Shilling, 74, has been calling for a hard landing in China since at least a year ago, advising clients to sell copper and the Australian dollar as a play on the downturn.

Shilling forecast the US recession in 2007 and warned investors a year earlier that residential real estate was a bubble about to burst. As the Standard & Poor’s 500 index fell [to] a more-than 12- year low in March 2009, he said that higher unemployment would curb consumer spending, leading to “weaker stocks.” The gauge has since rallied 96 percent.

Nobody can be right all the time. Even here at The Daily Reckoning, our timing is occasionally off – by a year or two. After all, we figured the US stock index, the Dow, would be down to 6,000 by now. We thought the post-crisis bounce would have come to an end years ago. Instead, the Dow is over 12,000…and still bouncing along.

But give it time!


Bill Bonner
for The 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

Latest posts by Bill Bonner (see all)


Leave a Reply

Be the First to Comment!

Notify of

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to