Why True Prosperity Doesn't Come from a Printing Press

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Ooooh…

Bad, bad day yesterday. Municipal bonds took a big hit. California is going broke. The Dow finished down 178 points. Gold up $30.

Did you pay attention to our “Crash Alert” flag, dear reader? Hope so. This market is dangerous. Because it is built on a lie – that EZ money from the Fed’s printing press will cause stocks to rise, interest rates to go down, and the economy to revive.

It ain’t gonna happen.

Never in history has it worked that way. Ben Bernanke maintains that what he is doing is merely an extension of normal monetary policy. It’s not. It’s a daredevil maneuver in which the Fed funds about 100% of the US government’s borrowing needs over the next 8 months.

Will it do any good? It could cause a speculative boom in the stock market. Or a speculative bubble in commodities…or emerging markets…or anything else.

But real, genuine, honest-to-God prosperity? By just printing up money?

Nope. Not possible. It’s not that easy.

The risk is that investors may connect the dots. Let’s see… Stocks haven’t made them any money in 10 years. Yields are still down around 2% – so they can’t expect any decent returns from that quarter. And stocks are still expensive – with P/Es close to 20.

So, what can investors expect? Will P/Es go up? We can’t think of any reason why they should. Will stock prices rise? Again, they can do what they want…but we can’t think of any good reason for them to go up.

On the other hand, we can think of several good reasons for them to go down. The best one is this: that’s what markets do. They go from peak to valley…and back to peak. This one was at a record peak in 2000 and then another record peak in 2007…and still no valley. Stocks never got to be as cheap as you would expect at a major bottom. So, unless something has changed…that valley still lies ahead.

And wouldn’t it be just like Mr. Market to bring it on now? Investors are creeping cautiously back into the stock market. They took huge losses in ’07-’09. Their houses are down 30%…and still sinking. Many have lost their jobs. They have retirement ahead of them. And they haven’t saved enough money. So, they’re hoping to make some money now.

Meanwhile, the feds are hoping that this big $600 billion inflow of new money lifts stock prices. This is supposed to make people feel richer. Then they act richer…and then, like magic, they ARE richer.

But if the feds want stocks to go up, they should buy stocks, not bonds. When they buy bonds the money goes into the banking system. Does it end up long the US stock market? Or does it end up betting on gold or cotton or Indian stocks?

No one knows. But there is no guarantee that the feds’ gamble will raise stock prices. On the other hand, wouldn’t it be a cruel and obnoxious thing for Mr. Market to hit them all now with a major bear market?

Yes it would. Will he do it? We don’t know. But it’s a risk. Stay out of stocks. Buy gold on dips. Be happy.

And more thoughts…

What’s this? The US government was set up to protect the liberties of its citizens. Here’s the latest police bulletin from Zombieland:

CHAPPAQUA, NY (AP) – Some parents in a New York City suburb are upset because a local politician called police on two 13-year-old boys for selling cupcakes and other baked goods without a permit.

The Journal News in Westchester County reported Monday that New Castle Councilman Michael Wolfensohn had called police last month on the boys.

Andrew DeMarchis and Kevin Graff had a brisk business selling cupcakes, cookies, brownies and Rice Krispie treats in a Chappaqua (CHAP’-uh- kwah) park.Kevin’s mother, Laura Graff, says the teens are “good kids” who were scared by the police call. She said Monday they haven’t set up shop anywhere since.

*** Back to Venezuela. Yesterday, we noted that old Hugo is promising to give investors guaranteed returns from government owned industries (including those recently expropriated from private owners).

Well, if you want to make a lot of money by investing in foreign markets you should put your money where blood flows in the streets. And maybe Venezuela is getting close. It is the most mismanaged economy in the Western hemisphere – with the possible exceptions of Haiti and Cuba. In the past 12 years, it has exported nearly half a trillion dollars’ worth of oil. Yet, by all indications, the Venezuelan economy is falling apart.

Chavez has not been able to deliver on his promises. Key indicators – poverty rate, literacy, etc. – have generally improved, but not as much as in Mexico and other Latin American countries. And expropriations and continued rabble-rousing has scared off foreign investment.

Voters seemed to turn against Chavez in last month’s legislative elections, so the man has turned on the heat. More expropriations. More threatening rhetoric. More nonsensical policies.

We have not followed prices on the Venezuelan stock market, but brave investors might want to have a look.

*** Hey, if Hugo Chavez can guarantee investment returns, why not the US government?

It’s coming, dear reader.

Once again, we are grateful for the opportunity to see in real time such spectacularly stupid things as must make the gods weep. Or laugh.

When governments become desperate for money, they take it wherever they can get it. It’s probably just a matter of time before they begin to eye the American retirement system. They’ve been living on “excess” Social Security contributions for many years. That is, people paid more into the system than they got out of it. Until this year. Now the system is in deficit.

So, they’re bound to look at 401(k) and other retirement programs.

It was reported in the press that there was a proposal to seize these private retirement plans. Not so. But on October 7th, Teresa Ghilarducci, a professor at the New School for Social Research in New York, proposed to Congress that they introduce a program where workers could “swap their 401(k) assets…for a Guaranteed Retirement Account…that would be composed of the equivalent of government bonds that pay a 3% real return.”

How about that? A guaranteed return of 3%. Wait, is that AFTER inflation? Hmmm. Yep. That’s what the proposal calls for.

Another crackpot idea…but just wait. The feds will pitch it as a solution to the problem of negative returns in 401 k plans. After inflation, deflation, maybe even hyperinflation, and a bear market…these GUARANTEED returns will sound like a good deal. A guaranteed 3% ain’t bad.

This is, effectively, what Argentina did. It nationalized private pension plans to protect retirees! Could the US do it too? You bet.

Regards,

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.
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