Replace Private Spending with Public Spending

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Poor Adolf Merckle. The tycoon must have been down to his last billion or so. He was “broken” by the credit crunch, says the Financial Times. He wrote a farewell note and stepped in front of the 7:38 Express on its way to Munich.

As far as we know, the worldwide meltdown has claimed as much as $30 trillion dollars, according to one figure we saw, but relatively few lives. That makes it a comedy…not a tragedy.

Too bad for Herr Merckle. He didn’t appreciate the humour of it.

Yesterday was a bad day for investors. They are all expecting a recovery. Instead, the patient got sicker…the Dow fell 245 points. Oil slipped down nearly $6. And gold? Et tu AU? Yes, gold fell too – down $24.

So, here is a good place to take up our guesswork about what is going on in the world’s markets and what we should expect.

It all seemed too simple, a few days ago. It was. Too simple, that is.

The world’s markets have begun a major correction. The world’s governments – led by the United States – are determined to stop it. They want people to spend like there was no tomorrow. But people are acting like every day is tomorrow. Instead of spending, they are beginning to save.

Then comes news that vacancies in malls are at a 10-year high. Malls are places where consumers buy stuff. The days of stuff-lust are over. Ergo, less retail space is needed.

But if they buy less stuff, fewer people are needed to sell stuff…to make stuff…to move stuff…to count stuff and so forth.

“Pink slips pile higher,” reports the Associated Press. Employers cut nearly 700,000 jobs in December. The total for last year, when the final counts are made, is expected to be about 2.4 million. But the job losses have barely begun. It was only at the end of 2008 that most businesses realized they were in trouble. The real job losses will come this year.

The unemployment rate in November was about 6.7%. In December, it was said to be around 7%. If you put into the number all the people who have given up looking for work, the figure would go to about 12%. But even that will seem like full employment after the tsunami of job cuts hits this year.

Since so many Americans live without substantial reserves – savings – the pressure on Misters Obama and Bernanke to ‘do something’ will increase. What can they do? Spend money.

“US deficit set for post-war record,” reports the Financial Times. Reports today tell us that Obama says deficits will go “over $1 trillion.” One estimate put it at $1.2 trillion for ’09. We’ve seen others at $1.5 and even $2 trillion.

What they are trying to do is two things: replace private spending with public spending…and cause consumer prices to rise.

But replacing private spending with public spending, alone, is a task that would have staggered Hercules. In the past, the U.S. consumer could be counted on as the planet’s chump of last resort. He didn’t have any money. Still, when an economy slumped, he nevertheless kept spending – buying on credit. Gradually, the whole world economy came to rely on him. But now he’s stopped borrowing; in the last 12 months net consumer lending has collapsed. With neither more income nor more credit he has had to stop buying. And without buying from the U.S. consumer, the world economy is dying in a ditch.

Of course, U.S. rescue teams are on the scene. But if the U.S. government is going to save American households, it practically has to save every gadget maker in China…every call center in India…every rubber plantation in Malaysia…all the wine makers in Bordeaux – all the industries and jobs that relied on U.S. consumers. Otherwise, prices fall.

Even the United States can’t afford a bailout of this magnitude. Trillion-dollar deficits won’t be enough. Martin Wolf, in the FT, quotes a report from Levy Economics – “even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years.”

With rising unemployment the pressure to ‘do something’ grows. And the feds redouble their efforts. And this is where we find the basic logic our forecast:

In the fight against the global financial illness, the feds can’t cure the patient. All they can do is to deliver larger and larger doses of their quack medicine – until the patient dies.

*** A few days ago, this seemed so obvious, we worried that it was too obvious. Mr. Market doesn’t reward people for doing the too-obvious thing. He sets them up. Then he destroys them. He always seems to find a way.

The Barron’s survey told us that Wall Street’s strategists all believe stocks will go up in ’09. The only question is how much. The bulls think they’ll go up and keep going up. The bears think they’ll go up…and then go back down again.

And currently, there’s more money on the sidelines – waiting – than there is in the game. U.S. money market funds now exceed the amount in equity funds, for the first time in 15 years. According to the dominant view, this money is just itching to get back in the game and score a major victory. Battered in ’08…it wants to get even in ’09. This attitude, we hasten to point out, is not what you find at the end of a bear market…it’s what you find at the beginning of one. People still think that they will make money in stocks – it’s just a matter of time! And how much!

Will Mr. Market give these people what they expect? Or what they deserve?

We don’t know, but we see two possibilities:

The first is that there is no significant rally. Instead of going up, a torrent of bad financial news washes stocks further downstream in the first quarter. There, they will stay for the next 5, 10, or 15 years…until they give up all hope of ever making any money in the stock market.

The second possibility is that stocks do rally…strongly enough that that money now on the sidelines comes back in – just in time to get wiped out by the next major leg downwards.

*** If we were in an earlier phase of the imperial cycle – such as we were in 1920 – we would ride out the bust…liquidate the mistakes…and bounce back stronger than ever.

But this is 2009…not 1920. The empire is now old and tired. It has been burdened with so many fixes, rules, privileges and safety nets it cannot compete in many key industries. It is also heavily in debt…and running a trade deficit and a public deficit that sink it further into debt each day.

At this stage, Americans do not boldly face the future…they want protection from it. And so the feds flex every flabby muscle trying to hold it back. Of course, no one can stop the future. Birds gotta fly. Fish gotta swim. And the future’s gotta happen.

All the feds can do is to make it happen in a different way. Almost certainly a worse way. More tomorrow…as we keep thinking…

*** We also promised, yesterday, to tell you how you could escape… Americans already have a huge burden of private debt. Now, their government is adding an even huger new burden of public debt. How are you going to get out of this stalag of debt? What will happen to it? What effect will it have on your investments?

Hmmm….our answers will have to wait another 24 hours…we’re out of time for today.

*** This year marks the 50th anniversary of Cuba’s revolution. How things change! As a note in the Financial Times reminds us, a half century ago a young lawyer took charge in Havana while an old general ruled in Washington. Now a young lawyer takes charge in Washington while an old general tries to hold on in Havana.

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. Sounds like we need a good old fashioned war to get people spending again.

    Nothing makes people stop saving like the lack of a future!

    Unpopular Truth
    January 9, 2009
    Reply
  2. Good call! Well, except for the death part, but something I didn’t consider thats for sure

    Reply
  3. huh?. war gets people to spend?. you are clearly oblivious to the horrendous destruction of wealth that war will bring first. its a no brainer, wipe out the excess wealth a)by lowering the standard of living which is artificially bloated by artificial credit b)lower the std of living by force and death.

    Reply
  4. Pravin, I’m pretty certain that Unpopular was being sarcastic.

    Reply
  5. War makes the masses poorer, but by contrast the elite get richer as the price of the ‘human commodity’ goes down. The elite can now buy women and drudge workers for the cost of a plate of food.

    It all depends who you are – or – who you THINK you are.

    Reply
  6. War…..Banksters love it….makes more money for them ….using money created out of thin air…..puts countries into debt(usury)….well those who subscribe to the Western Banking scam……with deals, it appears, made with the leeches by the compromised Leaders of many countries/ of most countries, it appears, who are involved with the IMF & World Bank…..or the Subsidiaries 10 times removed operating out of thru Tax havens thenback into Countries to look legal/respectable……Prof Joseph Stiglitz (has web site) & John Perkins are not the only lads to speak out…..about the Federal Reserve System . It appears to be It the the biggest Ponzi scheme of all. Only most who sail in it would deny….they appear deluded/naive/fearsome/brainwashed….’cause they earn thousands/ millions/billions of $’s from the scam. Only the money is “thin air” stuff….fiat currency .
    We have seen the pack of cards fold & Leaders being told by the Banksters to give them money to prop up the system……& they do & the public owe this money to the Banksters. The advice Governments get from the Feds……Bank of England (private company) & the Fed Res of US (private) & many other countries who sail in the Fed System……it is akin to the Fox in charge of the Hen house …..only a in this case billions lives are at risk . One could say that their advice would have to be flawed & one could not help thinking that these faceless Foxes/Wolves need to be outed & publicly exposed.
    And that includes the Banksters & the Government faceless nutters who agree to this system that has seen many Leaders slaughteredover the centuries for their on going pursuit of continued control of the Money system & their Empires. Appears a mighty Religious Leader 2000 odd years go was another victim of the money changers/Religious Leaders…….but not discussed much…..ever wondered why usury is not preached against in the Churches?……not preached when I was going thru the brainwashing bit as a child & certainly not as an adult. One recently asked full on Chrisitan folk who are Leaders in their Church….about USURY & they asked…..what is that. Whoops. So sad….young folk need to be aware/taught of the Foxes & Wolves in the Finance scam called Banking Industry. Ask Dorothy (Wiz of Oz) Follow the yellow brick road…..where did she end up talking to at the end of the road. And the Banking System appears to supported by the Legal (Admiralty) System…..(all those who sail in her!)….well that’s a living I suppose

    Reply
  7. correction please…..the sentence that reads..

    And that includes the Banksters & the Government faceless nutters who agree to this system that has seen many Leaders slaughteredover the centuries for their on going pursuit of continued control of the Money system & their Empires.

    should read….

    And that includes the Bankster & the Goverment faceless nutters who agree to this system that has seen many Leaders murdered, over the centuries, for their efforts to make changes to the usury system……& take away the Banksters control of the money supply. We have seen Presidents & Leaders taken out by….Jackals (aka John Perkins description)……paid murderers. Appears that is the game.

    Reply

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