So Many Things to Correct… So Little Time.

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Citigroup said it was letting 50,000 people go. How much will those people spend this Christmas?

USA Today says, “Americans are digging to save money.” They’re digging into their budgets… exhuming every expense they can. And they’re digging into their attics too – selling “stuff” they no longer need.

Most people say they are cutting back on restaurants, travel, and luxuries, the paper reports. Instead, they’re staying at home and renting movies for entertainment.

Here in London, we went out to a restaurant last night and found it almost empty. “Where are the customers?” we asked the waiter, thinking we were too early. “Oh… it’s this financial mess… nobody wants to come out to a restaurant any more.”

eBay says the average family has about $3,200 worth of stuff it doesn’t need. People are getting it out… cleaning it up… and shipping it off. In return, they get what they need – cash.

Readers with a weakness for economics will see in both of these examples a dismal herald. They announce a collapse of consumer demand. Not only are people spending less… but even when they do shop, they’re buying more second hand stuff… stuff that comes from closets and attics – not from China.

So what? Well… if they’re not buying new stuff there’s no need to make new stuff… or sell new stuff…

“Fewer spots on the sales floor,” this Christmas season, announced one headline. Fewer spots on the assembly line too. And fewer paying spots anywhere.

And if nobody wants to buy new stuff, the companies that make and sell new stuff are going to be in a world of hurt. Which is why the stock market is collapsing. The Dow fell another 223 points yesterday.

Oil fell yesterday too – down below $55. If you’re not making stuff, you don’t need so much energy to make it and ship it… And if you’re not buying stuff, you don’t need so much gasoline to get to the mall.

Oh! Bama! Where is thy bounce! We’re getting tired of waiting.

But hold on… settle down… relax. Breathe deeply. Take it easy.

After demand collapses, supply collapses. Yes, dear reader, it’s all part of Nature’s plan. In the beginning, there is The Bubble. Then, the bubble pops. Then, people look around and take fright. They realize they’ve got to stop spending. So, demand collapses. Then, stocks collapse too. And asset prices fall too – especially for speculative assets. As orders and asset prices tumble… merchants and manufacturers cut back too. Jobs are lost. And then, with less income… demand collapses some more.

But then, eventually, the bubble is completely flattened. Weak companies have gone out of business. Good companies are holding on, but producing less. Many retail shops have closed. Many malls have gone out of business. Supplies of goods and services have fallen as far as they’re going to fall. Then, with supplies tight, prices begin to rise again.

The whole process takes time. There are millions of mistakes in need of correction. Each one has to be marked down, written off, worked out, and forgotten. We still have to see the show trials. And the perp walks. And the kvetching… the complaining… the whining… the wimpering. The bailouts and the payoffs… The bottles of whiskey and the loaded revolvers. It’s all still ahead!

Dow 5,000…

10% – 15% unemployment…

Another 20% off house prices…

There’s a lot of ruin left to go…

*** Sunday afternoon, we sat down in the large leather chair in front of the fire. Its arms were shiny and worn… much lighter in color than the rest of the brown chair.

Immediately, we felt wiser. Then, a blindingly bright flash of insight seem to come out of nowhere. Suddenly, we saw into the dark heart of the beast itself – and peered into its soul. And then, we watched in horror. In our mind’s eye we saw images of recession… depression… despair… desperation… and finally upheaval… in which the whole system… the world’s dollar-based money system… came crashing down.

Yes, dear reader. We are a proud heir to Dr. Kurt Richebächer. Not of his weighty intellectual career in economics. We are heir to his chair. After he died, his estate sold us his chair. We keep the Dr. Kurt Richebächer chair in our library. Sitting in it this weekend, we thought we saw the whole financial crisis more clearly.

“The only cure for a bubble is to prevent it from developing.” said Kurt Richebächer.

In other words, you can’t cure a bubble by cutting interest rates, easing bank lending requirements, running bigger government deficits, sending out ‘rebate’ checks, buying up Wall Street’s stupid mistakes, or bailing out sinking businesses. You can’t cure a bubble by reflating it. You can’t cure a bubble at all. You have to let it pop… and then go about your business. Get it over with quickly; that’s the best you can do.

Think that will happen? Where have you been, dear reader? Out of Blackberry range?

No, the feds are at work – with their patches, their rescues, their bamboozles and their swindles.

In our brief moment of clarity, induced by the Richebächer chair, we saw what was coming – the biggest financial bailout of history. It will be like WWII, without Betty Grable… like the New Deal without the wheelchair – and like nothing we’ve ever seen.

Saving America from free-market capitalism will become the Great National Project of the Obama years. Deficits will top $1 trillion… maybe $2 trillion. Brain dead businesses will be kept alive. Whole industries that should be allowed to go broke will be protected. Towns, states, and colleges that should go bust will be propped up. There will also be a huge building boom – in infrastructure. Bridges, trains, highways…

… it may be time to buy cement companies!

The bailouts are just money down the drain. As for the bridges, who knows whether they are worth the money? But this massive program will achieve its real purpose – distracting and diverting Americans from their loss of wealth.

*** If Olympic medals were given for consumer spending, Americans would have won the gold, silver and bronze every year for the last 20. But now, Americans may become champion savers. Savings could rise to maybe 10% of GDP.

What will happen to all this money? It will be lent to the government. (About which… we will have more to say tomorrow.)

So do you see, dear reader, how the new financial system will work? Instead of squandering their money – as Americans have done for the last 20 years – now, the government will squander it for them.

*** Here comes the Era of Conspicuous Thrift. Yes, you heard it here first.

“No more fancy pants,” is a headline at the New York Times. The gist of the accompanying article is that even expensive restaurants are now trying to look cheap. People who still have money to spend don’t want to spend it… and when they do spend it, they don’t want to look like they are spending it. So restaurants are putting on de po’ bo’… that is, they’re acting poor. Gone are the sumptuous drapes… gone are the plush carpets and marble tables… gone are the fancy pant waiters.

“Luxury is a dirty word,” said one of the designers.

Don’t get us wrong. People always look for ways to feel superior to their fellows. In the bubble years, they did so by spending wildly… trying to outdo each other with the extravagance of their purchases and the sans soucis of their budgeting. Young Wall Street pros… or rap musicians… would go out to a fancy restaurant and order a big bottle of Cristal – just to show off.

But styles change. Now, people are showing off by NOT spending money. Sound unbelievable? Well, maybe. But our guess is that people are going to find more subtle… and less expensive… ways to wink at each other. Heavy spending is going the way of heavy drinking. It will be seen as vulgar.

*** And today, we add to our short list of the world’s greatest inventions. So far, we have only three inventions that have been unequivocally great boons to mankind – crispy duck (as it is prepared here in London’s China Town)… the beret… and the semi-colon. All three are such marvelous innovations that they seem to be almost divinely inspired.

Today, we add one more – the bicycle. Despite the skinned knees and broken necks, the bicycle has done more for mankind than any other transportation device. In fact, we feel we must apologize to the bicycle for not adding it to our list sooner. Millions and millions of people depend on the bicycle to get around. Millions more may soon take it up…

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

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Comments

  1. Unemployment at 6% ? A far more educated guess would put this at 15% to 25%. Wait for GMH to fail and you will see a net fall of 3 million interlaced jobs disappear from related industries. This is the tip of the Iceberg, just you wait for people to return to work after the Christmas break to find they do not have a job. This unwinding of financial hot air will make 1929 look like a Disneyland holiday. This is going to get 100 times more ugly before we see any light at the end of a protracted endless long journey into the economic abyss.

    PS, If the US Fed bails out everyone then who is going to bail out the Fed? Oh its going around in circles! How large can a Bubble get?

    Woody Wilson
    November 19, 2008
    Reply

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