[Roccland]

Too Big to Bail
Courtomer, France
Friday, September 26, 2008

<snip>


The Daily Reckoning PRESENTS: In listening to the myriad of U.S. lawmakers this past week, it's pretty clear to see that panic has officially set in…and it ain't budging. But with all these meddlers and world-improvers about, we're convinced it's only going to get worse. Bill Bonner explains…

TOO BIG TO BAIL
by Bill Bonner

<snip>

***For the last 15 years, the U.S. money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. As a result, the USA now has more financial obligations than assets. **It is, effectively, broke.** Nevertheless, the debit side of its ledgers grow heavier and heavier. This year's US government deficit will add about half a trillion. The US trade deficit is about $700 billion. The U.S. bailout plan will probably cost at least $1 trillion more.***

*****Where will the government get that kind of money? There are only two possibilities - one honest and depressing, the other corrupt and alarming.** Whether it borrows the money, or prints it up, the world enjoys no net increase in financial resources. Borrowing takes resources from projects that might have been worthwhile and diverts them to the losers. Interest rates rise, as a consequence of the extra borrowing; higher rates generally worsen the economic picture. And while the U.S. borrows, long term, at almost 5%, it lends at barely 2%. It's like a bank that has gotten its business model badly mixed up. The more it borrows and lends, the faster it goes broke.***

***If, on the other hand, it merely prints the money - or if it creates it "out of thin air," to use Lord Keynes' handy phrase - the results are even worse. Inflating the money supply with new currency, a la Argentina or Zimbabwe, wipes out debts. **But it destroys faith in the dollar and brings down the whole world's money system.*****

Sooner or later, this is just what will probably happen. Not because capitalism doesn't work - but because it does. Capitalism is doing just what it should do - it is separating fools from their money. But the fools vote. ***After a big bubble, there are more fools than sages…and, in the United States of America, more debtors than creditors. Sooner or later, Americans will realize that they are better off destroying their own money than preserving it…and that they would prefer to stiff their creditors rather than pay their bills. **That is when deflation will gives way to inflation…and the world's post-'71 dollar-based money system comes to an end.*****

Daily Reckoning

I have always maintained hyperinflation...destroy dollar...new currency (Amero).

[Don35]

So then, how does gold react to all that?

[Cashmere]

Agreed - it's always been hyperinflation. The govs response to recession and depression will <i>always</i> be to inject funny money. Anything to keep the patient alive a little longer. Just stretch him out a year or so. Let him die on someone else's watch.


Gold goes through the roof, and then is confiscated, in that order.

[Roccland]

Gold goes through the roof, and then is confiscated, in that order.

precisely why one needs to be very attentive to the tea leaves.

a small window will open between $10,000 gold and confiscation.

will you climb through?

[BigTex]

Rising wages precede hyperinflation.

I don't see wages rising.

Increasing the money supply in the middle of a credit contraction is not inflationary. Ask the Japanese.

I don't pretend to understand any of this, but the U.S. inflation rate didn't really come down following the 1970s until the U.S. started running up huge deficits. Does that make sense? No. Is that what happened? Yes.

Just because something SHOULD happen doesn't mean it WILL happen.

Gold will continue to rise in a deflationary environment, though, just because it's gold. That's what is happening right now. Prices for everything but food are falling and gold is rising.

[roccman]

Well tex go tell my power generating clients who cannot build power plants that steel and concrete are not rising and it is only their big mac that is rising in price.

As energy rises in price so will everything else.

[BigTex]

Well tex go tell my power generating clients who cannot build power plants that steel and concrete are not rising and it is only their big mac that is rising in price. As energy rises in price so will everything else.

I am not saying that prices are not rising, what I am saying is that the rising prices are causing economic activity NOT to occur, as opposed to occurring, but with devalued dollars.

In your example, you are talking about power plants that are NOT getting built, as opposed to power plants getting built with high costs passed on to the end user.

As energy prices rise, it will destroy economic activity as everything gets more expensive to make, but people don't have any more money to spend. That's the problem with credit drying up--it just accelerates this process.

Rising prices only work if wages are rising as well, otherwise you're just talking about demand destruction leading to deflation, which is what we are witnessing now.

This is not my opinion, it's just what we are witnessing.

[threadbear]

Rising wages precede hyperinflation. I don't see wages rising. Increasing the money supply in the middle of a credit contraction is not inflationary. Ask the Japanese.
I don't pretend to understand any of this, but the U.S. inflation rate didn't really come down following the 1970s until the U.S. started running up huge deficits. Does that make sense? No. Is that what happened? Yes. Just because something SHOULD happen doesn't mean it WILL happen.
Gold will continue to rise in a deflationary environment, though, just because it's gold. That's what is happening right now. Prices for everything but food are falling and gold is rising.

Very high inflation, not hyper inflation. Agreed. Depressed prices of assets, but increasing prices of everyday items, as the devalued currency has to purchase oil, from OUTSIDE the country. The cost of doing business, due to contraction of credit, increases, it doesn't decrease. This puts upward pressure on prices in supermarket, etc...

Look for prices of housing, boats, cars, property to fall 50% while the cost of everything else doubles in the next year.

[threadbear]

Rising prices only work if wages are rising as well, otherwise you're just talking about demand destruction leading to deflation, which is what we are witnessing now.
.

What you have to look at is how fast the dollar is devaluing against demand destruction. Graphing it out, which will be on a steeper slope? Oil is key here. But wages being held in check, keeps the currency somewhat anchored and "should" prevent a hyper inflationary spiral. But it's uncharted territory. It's sort of like the Depression, but also has aspects that resemble the collapse of Japan's economy in the late eighties. Then there is also the 1907 comparison. But history never really repeats, it just rhymes, so we are all bound to be surprised by how this shakes out.

[BigTex]

One of the key distinctions between today and the 1970s is the power of labor unions.

In the 1970s, labor unions still had enough members and clout to demand higher wages as the price of fuel and other items was rising. Today, however, many of those high paying union jobs are gone and the ones that remain have far less bargaining power over wages.

I think that the best precedent for what we are seeing right now in the U.S. is probably Great Britain heading into World War I. I believe that was the last time that a world reserve currency got destroyed as part of the end stages of empire decline.

But I wholeheartedly agree that this set of economic/political/resource calamities is unlikely to be like any we've seen before. In the past, we've always had cheap oil waiting on the other side of any economic problems we had to face. We won't have that this time around.

[perdition79]

***After a big bubble, there are more fools than sages…and, in the United States of America, more debtors than creditors. Sooner or later, Americans will realize that they are better off destroying their own money than preserving it…and that they would prefer to stiff their creditors rather than pay their bills. **That is when deflation will gives way to inflation…and the world's post-'71 dollar-based money system comes to an end.*****

I couldn't agree more. Discussing the bailout at work a week ago, my belief was that the only recourse Americans have to fight the enslavement Washington calls a bailout would be to completely give up on repaying debts, and take out the Dollar quickly. Erase debt by means of universal default.

I'm surprised more in the mainstream media haven't discussed this concept more, given that it is the simplest solution, even if it would result in the complete destruction of the status quo.

[BigTex]

Anyone interested in the topic ought to read up on the 2005 changes to the bankruptcy laws.

That was one of the most effective pre-crisis screw jobs you will ever see.