A 21st Century Depression

By Bill Bonner

The inflation/deflation debate is hot… It crackles and pops like a pine fire. But it gives off little helpful light. Abe Lincoln may have read by the light of an open fire. But when tried it, we singed our eyebrows. It made us suspicious of Old Abe; maybe he wasn’t quite as truthful as he pretended to be. Later, we realized he was a mountebank. But that’s another story…

Today, we light a candle and try to interpret the shadows on the wall…

Yesterday, the Dow fell 81 points. Gold dropped $5 to $1009.

Will the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency in a time of deflationary trouble?

According to the papers, the feds have already done it. “Fed says recovery underway,” says a headline from yesterday’s press.

Another headline tells us that the feds are considering how and when to ease themselves out of their interventions. But what would the economy look like after they stopped meddling? Just look at auto sales. People bought cars when the feds bribed them to do so. When the bribes stopped, so did car sales. Now, the clunker program has ended and spiders are busy building their webs in showrooms again. Sales fell 38% from August to September…to a 28-year low.

House sales too have been goosed up by the feds’ tax credits. According to an estimate we reported yesterday, 350,000 new house sales since January were assisted by federal intervention – about 80% of the total. What will happen when this program ends in November? Hey…let’s guess…uh…housing sales will fall, right?

And speculators are worried about what will happen when the feds stop their intervention in the financial industry, scheduled for December. Thanks to taxpayer money, the bankers were spared the consequences of their own stupidity. Instead, taxpayers will pay for their mistakes. No one is particularly upset about it. The taxpayers don’t know what is going on. And bankers are happy to continue living in the style to which they have become accustomed. Reuters reports:

“You wouldn’t know it by his pay stubs, but Jiang Jianqing heads the world’s largest bank.

“Jiang, chairman of Industrial and Commercial Bank of China, made just $234,700 in 2008. That’s less than 2 percent of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth-largest bank, JPMorgan Chase & Co.

“The contrast illustrates the massive differences in pay among the CEOs of the world’s top banks. The compensation of the CEOs of the largest US banks towers above what’s paid to banking chiefs in other parts of the world, according to a Reuters analysis of pay at the 18 biggest banks by market value.

“The United States is home to four of the nine largest banks in the world – JPMorgan, Bank of America Corp, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs.

“China, for example, boasts three of the world’s four biggest banks, yet the leaders of those banks – Industrial and Commercial Bank of China, China Construction Bank Corp and Bank of China – are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per year.”

If America’s make-believe capitalists want to pay their CEOs exorbitant wages, that’s their business. A pox on all of them. But in come the feds…and now we’re all paying the price. And if the program ends in December, as scheduled, we’ll get to see how far the economy without taxpayers’ money in the gas tank. Let’s see…it comes to a complete stop?

But no matter how malign and imbecilic the feds are, the public is rooting for them. People think Bernanke has avoided a ‘Second Great Depression,’ and that the government has rescued the economy. Now they see nothing but clear highway ahead…perhaps with a little bump from time to time.

What’s ahead? We don’t know. Neither does anyone else. There is no precedent. Never before has a major central bank reacted so recklessly to a market correction. Never before has the monetary based exploded so violently. Never before have so many people with so many bills to pay had to face such a downturn.

But amid all the confusion, uncertainty and noise…your editor is calmly, cheerfully and confidently awaiting a depression. Yes, dear reader, we don’t know what markets will do. We don’t know how much gold will sell for next year…or what the actual GDP will be. But when we look at the shadows…we have a strong hunch that we are entering a depression…and that we won’t get out of it soon.

That said, we caution readers not to expect soup lines or people selling apples on the street corners. This is a depression a la 21st century. A depression with iPhones and Twitter. This is NOT your grandfather’s depression. Keep reading…

It’s not your grandfather’s depression, but it has many elements that your grandfather would recognize. This from David Rosenberg:

“Frugality theme is secular, not just cyclical.”

With so much noise…and so many distortions…it’s hard to tell what is really going on…and impossible to know how the markets will react. Still, there are some patterns that make sense. After a long period of credit growth, credit is now shrinking. At least in the private sector. And that is not likely to change. Well, it’s not likely to change unless the Fed goes nuclear. If they push the hyperinflation button, the whole picture changes radically and immediately. But that’s not likely to happen any time soon…so let’s ignore it for the present.

What we have before us now is a consumer economy where the consumer is cutting back. Despite the odd shadow shapes on the wall, that means a slowdown in hiring, business revenues and real prices…and tax revenues.

New York says its budget deficit will grow to $3 billion. And over on the sunny West Coast, California is selling $8.8 billion in notes to try to close its deficit.

Apartment rents in New York City are falling. Credit card defaults hit a new record. And The Wall Street Journal says that holiday jobs in the retail sector are likely to be scarce.

Not to mention the wave of mortgage loan defaults that is headed our way – and is already in progress.

Another thing you’d expect is a decline in America’s relative economic power and political influence. Richard Duncan, along with your editor, has been following the story. Bloomberg reports:

“US budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of The Dollar Crisis.

“The US has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.

“In The Dollar Crisis, first published in 2003, Duncan argued that persistent current account deficits by the US were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession.

“‘The bad news is at the end of a 10-year period we’re still not going to have fixed the problem,’ Duncan said in an interview in Hong Kong yesterday. ‘Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where there may be irreparable damage. A kind of ‘Fall of Rome’ scenario.’”

Fall of Rome? Hey, Addison Wiggin and your editor wrote the book on the fall of Rome idea. Empire of Debt, we called it. It was such a hit that the publisher asked us for a new edition…which was released this summer.

Richard Duncan, with Bloomberg on lead guitar, was singing our song:

“The federal budget deficit will total $1.6 trillion this year, while combined shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office.

“The US has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of US debt has propped up the dollar and allowed a credit-fueled spending boom by the nation’s consumers, according to Duncan.

“US workers are now likely to face declining wages and that may create a political backlash against free-trade policies, he said. The nation’s jobless rate jumped to a 26-year high of 9.7 percent in August, while wages logged a 2.6 percent increase from the previous year.

“As unemployment remains above 10 percent well into the foreseeable future, it won’t be long before Americans start voting for protectionism,” Duncan said. “That’s going to be bad because protectionism will mean world trade will diminish and will overall reduce global prosperity.”

Once the US debt burden becomes too large and the government can no longer sell debt to the public the Federal Reserve will likely step in and monetize it, resulting in high levels of inflation, he concluded.