The Austerity Contagion


In the sushi again…just like we said!

The US stock market managed a weak rally yesterday. The Dow rose 56 points. Gold fell, closing the day below $1,200.

This morning, stocks are generally going down again all over the world.

Why does everything seem to be going down? Because it’s a Great Correction, what else?

The correction is doing its work. The feds tried to stop it with trillions in loans, guarantees, and ‘stimulus’ spending. They failed. Over the last three weeks we have had confirmation after confirmation – the recovery ain’t happening. Unemployment is getting worse. Prices are falling – even the price of labor. The banks don’t lend and the people don’t spend.

Cities and states are running out of money. Households are going broke. And the stock market looks like it wants to roll over and die.

Is that a great correction, or what?

Dear readers who are hoping to get rich on gold are probably going to have to wait. We’ve entered a period of gentle de-leveraging – at least that’s what it looks like today. Until we get some real crises – or better yet, some real inflation – gold will probably drift downwards.

Not that we’re worried about it. Ben Bernanke has added more to the nation’s monetary base than all the Fed chairmen that came before him combined – including Alan Greenspan. But don’t have any illusions. It can take a long time for this monetary inflation to turn into the kind of inflation that sends the price of gold soaring. And a lot can happen along the way.

But for now, businesses are reducing their debt. Households are reducing their debt. Even government is cutting back.


Rich nations will reduce their primary budget deficits, excluding interest payments, by 1.6 percentage points next year, the most since the Organization for Economic Cooperation and Development began keeping records in 1970, according to JPMorgan Chase & Co. economists. The budget squeeze will lop 0.9 percentage point off growth in 2011.

Greece is on target to cut its deficit in half. Europe, generally, is making a big effort to trim deficits and keep debt from getting out of control. They’ve all been rapped on the knuckles. They all know what happens when you let debt get away from you.

But people come to think what they need to think when they need to think it. And right now, the US government doesn’t need to think that debt is such a bad thing. It can borrow at low rates – almost indefinitely. In fact, US treasury yields are falling…it’s getting cheaper and cheaper for the US to bankrupt itself.

Which is what makes us think we have entered a period of gentle, pernicious de-leveraging.

The rest of the world is saving. What happens to the savings? The savers can thank the USA for taking them off their hands. While the rest of the world saves, the US is still borrowing…helping the world get rid of its surplus savings. In effect, the US government is now playing Japan’s role in its long, tired saga of de-leveraging. We guessed that the US would follow Japan into a long, slow, soft slump. Okay…we were 10 years too early! But now, it seems to be happening.

In Japan, the government helpfully absorbed household savings for 20 years. This allowed the people to de-leverage while the government kept spending. Now, the US is absorbing much of the world’s savings…allowing the rest of the world to put its balance sheets in order, while the US government keeps ‘stimulating.’

In the end, both programs are absurd. The savings disappear in boondoggles and bailouts. And the stimulus doesn’t stimulate anything but more government spending. But it suits the egos of the economists who imagine they are saving the world.

An economy can go on like this – softly, gently destroying savings…quietly bankrupting the government – for many, many years. That could be what is coming now.

But wait. The US Senate refused to extend unemployment benefits. Even in the US, Republicans are talking about ‘austerity.’ Paul Krugman is hopping mad, referring to a coalition of the “heartless, the clueless and the confused” that is refusing to go along with his ‘spend, spend, spend’ agenda. All of a sudden, the Americans seem to be catching the ‘austerity’ bug, too. Uh oh…this could be a disaster for everyone. If everyone saves, who will use their savings? Who will spend? Who will keep the wheels of commerce turning? Who will keep the lights on in the malls and the grills hot in the restaurants?

What will happen if all the grasshoppers suddenly become ants…and all of them go on a rampage of financial prudence? Wouldn’t it cause a new economic Dark Age for the whole world?

Nah, don’t worry about it. In the first place, governments are not reducing their debts. They are just moderating the rate at which they add to them. In the second place, there’s plenty of demand coming on line from the emerging economies. And in the third place, the world has too much debt; getting rid of it would be no bad thing – even if it occasioned a difficult period of adjustment.

More importantly, the feds are zombies. The fewer resources they take the better off we are.

And more thoughts…

Isn’t China going to power the world economy out of its funk? It’s still growing at double-digit rates, isn’t it?


Reuters reports:

China’s property market is beginning a collapse that will hit the banking system, Harvard University economics Kenneth Rogoff told Bloomberg Television.

Property transactions have dropped and prices are stagnating in the wake of steps in recent months by the central government to cool the market.

XuShaoshi, minister of land and resources, said at the weekend that he expected prices to start falling within a few months.

“You’re starting to see that collapse in property and it’s going to hit the banking system,” Rogoff, a former chief economist at the International Monetary Fund, told the agency.

Not everyone agrees. Because home owners must make a downpayment of at least 20 percent and many pay entirely in cash, there is relatively little leverage in the Chinese property market.

“Despite the importance of the property sector in the economy, we believe that the deflating of this bubble should have only a limited impact on the real economy and the banking system,” Nomura’s chief China economist, Sun Mingchun, said in a report.

The Chinese-language 21st Century Business Herald newspaper on Tuesday quoted a real estate association official as saying government tightening measures were yielding initial results.

But prices in Tier-1 cities such as Beijing and Shanghai had not yet declined, he said, so officials needed to step up implementation of the measures, which include higher down payments, the end of mortgage rate discounts, curbs on purchases of multiple homes and restrictions on lending to developers.

And this from Bloomberg

China’s auto sales grew at a slower pace in June and a services- industry index slid to a 15-month low, adding to signs that the economy leading the world recovery is cooling.

Passenger-car purchases rose 10.9 percent from a year earlier, down from May’s 25 percent gain, the China Automotive Technology & Research Center said today. The services-industry measure fell to 55.6 from 56.4, HSBC Holdings Plc and Markit Economics said in an e-mailed statement.

Today’s data adds to weaker numbers in June for manufacturing indexes and a second measure of the services industry after the government cracked down on property speculation and as the effects of stimulus measures fade. A slowing economy could lead officials to delay returning to pre-crisis policies.

“It looks like growth will slow to 8 percent in the fourth quarter of this year with risks on the downside,” said Paul Cavey, an economist with Macquarie Securities Ltd. in Hong Kong. “The government will be worried” at that point and may loosen policies, he added.

China may turn out to be a drag on the world economy, stay tuned.


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

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