Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Fed Forever Blowing Bubbles

Politics / Central Banks May 23, 2009 - 08:16 AM GMT

By: LewRockwell


Best Financial Markets Analysis ArticleBill Bonner writes: Yesterday…we ventured into “Bubble World.”

“What’s going on? When will this be over? How bad do you think it will get? What can we do to turn this around?”

Members of Congress have the same questions the rest of us have. They read the same claptrap in the newspapers. They hear the same balderdash explanations from economists and federal officials. They’re wondering what is really going on.

Not that we know. But they asked us anyway.

We report to you today from the banks of the Potomac. Our old friend, Congressman Ron Paul, organized an off-the-record discussion with several other members of Congress. The subject was the financial meltdown…and the bailout. We were there to talk, of course, but we were more interested in listening.

“You don’t understand,” said a Senate functionary we met later, “these people live in Bubble World. They’re protected from the real world by their staffs and by the system itself. You imagine that they would know what is going on. But they don’t. They know less than we do. And they’ll be the last to find out. They are so busy meeting constituents…dealing with donors…working out deals with their political parties and supporters…and feeling like big shots…they don’t really have any time to study the issues. So they count on staff and party committees to tell them what to say, how to vote…and what to think.”

Waiting in the corridor of the Cannon building, two men in grey suits walked by…we overheard this conversation:

“Did you vote ‘no’ on that last resolution? You we’re supposed to vote ‘yes.’”

“I thought I was supposed to vote ‘yes’ to cutting off the argument…as far as I’m concerned we’ve heard enough about Nancy’s problem with the CIA…”

“But that wasn’t about cutting off the debate, that was just technical…about allowing them to modify the previous vote…”

“What are you talking about?”

“I don’t know…I didn’t think it had anything to do with stopping all this gabbing about Nancy and the CIA…”

We take it for granted that members of Congress often don’t know what they are talking about. But it is shocking to realize that they often don’t know what they are voting on either. And neither do the voters.

The Economist reports, for example, that the measures put before California voters in a recent plebiscite were challenged…not by the courts, but by a grammarian. She claimed they worded it in such a way that it was impossible for a reasonably intelligent person to understand what they were supposed to mean.

Since the meeting was “off-the-record,” we can’t tell you who was there or what they said. We can only report what we had to say.

“Look…economies…and empires…go in cycles,” we began. We thought we ought to start with the basics, since we didn’t know what they thought.

“Growth…maturity…then, decline. That’s just the way it is. So in order to get an idea of what lies ahead you have to figure out where you are in the cycle.

“You never know for sure, but there are tell-tale signs. The credit cycle, for example, has been on an upswing in the US since the Great Depression. First, there was in-store consumer credit as early as the ’20s. There was some mortgage credit…and some margin credit for investors too. But during the ’30s, the financial strain was so great that most people regretted their debt and paid it down. Or they defaulted.

“You could get a mortgage back then if you put 50% down…and paid it off in full in 3 to 5 years. And then Franklin Roosevelt set up the FHA…along with Fannie Mae. And pretty soon, you could borrow 80% of the house price and pay it off over 15 years.

“Major credit cards – MasterCard and Visa – didn’t become widely used until the ’60s. And then, credit began to rise more steeply. Total debt had been about 150% of GDP in the ’50s and ’60s…but it rose quickly after the ’80s. By the 2000s, you could get a mortgage for 110% of your house price – an inflated price at that. And you could take 30 years to pay it off.

“As for credit cards, hardly a day passed when you didn’t get a new one in the mail…usually with a higher debt limit. Debt rose…and rose…and rose…up to 350% of GDP. And finally, the whole debt bubble blew up.

“You have to remember that the US economy – in fact, much of the whole world economy – came to rely on more and more debt as a way to expand. At first, a fellow could borrow $1.50…he’d spend it and invest it…and it would lead to an increase in GDP of $1. But, as time when by it took more and more debt to produce more GDP. The fellow would borrow a $1.50…but then, part of it would have to be used to pay the interest on what he borrowed before. Eventually, it was taking more than $6 to produce a single ounce of GDP.

“You can see that this won’t work for long. GDP is like national income. You can’t have debt increasing 6 times faster than income – at least not for long.

“But remember, the US economy depended on this debt-fueled growth. Without the extra credit, the economy would slip back…which is what is happening now.

“We’ve reached a turning point. The financial industry has blown itself up. It realized that all those credits it had, from people who didn’t have the cashflow to repay their debts, weren’t worth what they were supposed to be worth. We’re now on the downhill slope of the credit cycle…and most likely, the imperial cycle too.

“What everyone wants to know is how long it will take before we have a genuine recovery. And then, everyone…everyone…seems to think that the government can stir up new growth by pushing more debt onto the public…this time, public debt. And get this…the feds are now adding debt to the system at a rate four times greater than the previous record.

“They…you…are running a budget deficit of $1.8 trillion this year. Could be higher. How much in extra GDP do you get from all that extra debt? Well, that’s a good question…because GDP is now going backwards. The latest numbers show output going down at a 6% rate in the US. And that’s one of the world’s better rates. Exporters – notably Germany and Japan – are doing much worse. GDP is falling 14% in Germany. It’s going down at a 15% rate in Japan.

“So, the feds are adding trillions in new credit (debt) and getting no GDP growth from it – zero…zilch…nada. In other words debt is growing infinitely faster than GDP.

“How long can this keep going? No one knows. But one thing we do know is that the economy is not going to start up again and deliver good, old-fashioned, healthy growth. We’re in the process of deleveraging. That is, we’re on the downside of a credit cycle. We’re getting rid of debt, not adding to it.”

If we’d had today’s newspaper in front of us, we would have pointed at the headlines.

“Recession Turns Malls Into Ghost Towns,” says the Wall Street Journal. Malls are emptying out because they were built for a world that no longer exists. They were built for a world where people increased their debt and their consumer spending far faster than they increased their real incomes. Now that people are cutting back on spending – in order to reduce their levels of debt – they can no longer afford to go to the mall. As a business or an investment, malls have got to be bad places for your money.

“The private sector is not going to take on more debt,” we continued our explanation. “People know it doesn’t pay. And they’ve got too much already. The private sector is not going to begin a new growth period until they’ve paid off, worked out, defaulted on, or shirked a lot of their present debt load. We’ve estimated that they need to get rid of about $20 trillion worth. And that’s going to take time. And a lot of painful decisions by a lot of people. Bad business, investment and spending decisions need to be recognized…and fixed. Debt needs to be reduced.

“And that’s why this downturn is not going to end tomorrow.”

If we’d had the mall example in front of us, we could have explained that a mall represents a kind of bubble-era investment that now needs to be restructured. After America’s industrial age was over, the country found itself with empty factories and warehouses. They were mostly written off and destroyed. Some were converted – into lofts and shopping malls. Now that the retail age is over, we’ll have to find new uses for malls too.

“This is going to take time,” we told them…and then we took a break to listen…and eat some shrimp.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007).

Copyright © 2009 Bill Bonner

    © 2009 Copyright - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in