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The Daily Reckoning | Thursday, December 8, 2011 What happens when the economy stops growing? Why now is the perfect time to invest in silver... Plus, Bill Bonner on screwing up the economy while you can, and plenty more... ------------------------------------------------------- 4 Times More Oil Than The Bakken? North Dakota’s booming Bakken oil reserve has created plenty of overnight millionaires. But now a revolutionary new technique — created right here in the US — could produce up to 4 times as much oil as the Bakken... And potentially mint an even bigger wave of millionaires in the process... So what exactly is it? Just Click Here Now For The Full Story.   When Consumers Stop Consuming Depending on Growth in the “New” Era   Bill Bonner Reckoning today from Baltimore, Maryland... Dow up 46 yesterday...gold bouncing around. Not much change, in other words. Nobody can figure out what is happening in Europe. Investors wait...and watch. In America, the news has been good and bad. The good news was that unemployment was not as bad as it had been. But the bad news was that the good news was largely fraudulent. John Crudele in The New York Post: Finally, there seemed to be good news about the economy. The nation’s unemployment rate dropped to 8.6 percent in November from 9 percent the previous month. If you added in the 1,096,000 people who wanted a job last month but were too discouraged to look for work, the jobless rate would have been closer to 8.8 percent. And a drop from 9.0 percent to 8.8 percent would have been statistically insignificant given the size of the survey upon which the US Labor Department bases its figures. And if you then added in the people who are so disheartened that they haven’t searched for work over this past year, the unemployment rate would have jumped to... actually, there isn’t any figure for that last one. If a person told the Labor Department surveyors that he was so bummed about the job market that he hadn’t looked for work in a year, he would officially become a non-person. He wouldn’t be counted anywhere in the monthly labor tally. Poof! — this worker doesn’t exist. In ordinary times, this slight might be understandable since people like that would be considered lazy, unemployable, worthless bums. But this is a different era. Yes, dear reader, it’s a different era. But how different is it? We’re beginning to think it is very different. Not that this is really a New Era. On the contrary, it’s more like an old era. Instead, the era we just left was the odd one. What do we mean by that? Well, we’re just figuring it out. But something very big has changed. The obvious part is that growth is stalled. Households aren’t making money or spending it the way they used to. And anything that depended on more growth is in trouble. But wait again. Here’s a report from Bloomberg: US consumer borrowing rose in October to the highest level in two years, propelled by gains in non-revolving debt like auto and student loans. Credit increased by $7.65 billion to $2.46 trillion, the most since October 2009, Federal Reserve figures showed today in Washington. The advance was in line with the median forecast of economists surveyed by Bloomberg News that projected a $7 billion gain. The data indicate consumers are relying more on credit to sustain spending as income gains fail to keep up with inflation and home prices drop. At the same time, increasing employment may be making Americans more willing to take on more debt heading into the holiday shopping season. “It’s hard to determine whether spending on credit is a sign of optimism or a sign of distress, but just anecdotally we feel there is the beginning of tentative feelings of comfort in taking on slightly more debt,” said Dana Saporta, a US economist at Credit Suisse in New York. Consumer borrowing, nonetheless, has shrunk relative to its size before the recession. Household debt in the US is currently at about $13 trillion, compared with $14 trillion in 2008, Wells Fargo & Co. (WFC) Chief Executive Officer John Stumpf said yesterday during a conference hosted by Goldman Sachs Group. “As I spend time with our consumer lending divisions and out in the public with customers, people are paying debt down,” the leader of the fourth-largest US bank by assets said. While the “pool of consumer loans will shrink,” auto loans “will be a growth area” along with student loans, he said. Whew. For a moment we thought we might be wrong about it. We thought we might still be in the era we thought we’d left...and that consumers were still spending just like it was 2007. If so, they’ll soon have to relive 2008, too. And we don’t think they’ll want to do that. That’s the thing about living on credit. Eventually, it runs out. Then you have to live on what you actually earn. And since you earn less than you were spending, your spending goes down...and so does the whole economy that depended on it. A few days ago, we promised to explain something important. It’s so important that we forgot to explain it...or what it was that we were supposed to explain. But it’s coming back to us. The gist of it is that it might have been fine for the feds to screw up the economy when the getting was good. Now that it isn’t good, the burden of ‘mistakes,’ zombies, bailouts and regulations is no longer bearable. If you have an economy that is growing at 5% a year...you can get away with almost anything. You want a program that pays people to do nothing? One that takes able-bodied young men and teaches them about gender issues? One that sends out a swarm of agents to harass the people and eat out their substance? Okay...as long as house prices are rising at 10% per year...Most people will go along. But what about when the economy stops growing? Then, all those costs that rolled off the citizen’s back previously begin to hit him in the face. The poor guy doesn’t know what is going on. But he doesn’t like it. He begins to call into radio talk shows with comments such as this (heard this morning, driving to work) from Danny from North Carolina: “Somethin’s definitely wrong with this great country. I mean, I been working my tail off for 30 years. And what do I have to show for it? Nothing. I’ve got a mortgage on my house that is about as much as the house is worth. I’ve got another year’s worth of payments left on my truck. And it’s hard to find any work that will keep the bills paid. “And while I’m struggling...those damned rich people are livin’ high on the hog. It’s not right. And that’s what government is supposed to do something about. It’s supposed to make sure we all get a fair shake...and that we all come out okay. All of us. Not just the 1%.”   External Advertisement ‘Social Security is about to be cut BY HALF. Medicare too!’ This analyst warned the world about the great real estate bust and credit crisis in 2007. Is he right? View his new FREE video and judge for yourself. Warning: Content may be too disturbing for some viewers. Click here to watch the new uncensored video. The Daily Reckoning Presents Buy Silver...Now!   Matt Badiali Silver is an amazing metal...which is why it’s likely to soar over the coming years... You see, silver has more than 10,000 uses. It’s one of the world’s best conductors of heat and electricity. Inventors filed more patents on silver uses than any other precious metal in the world. And when silver is used for most industrial and technological purposes, it is used up forever... It simply costs too much to try to recycle the tiny bit of silver from every cell phone or casino chip. I’m not saying industry is going to use up all the world’s silver. That simply can’t happen. But scarcity is a real issue. Our rapid consumption of silver leaves very little to meet any uptick in demand from investors. A spike in interest will send prices spiraling higher... Here’s a breakdown of the silver market. The table below shows the percentage of the total amount of silver consumed by each category over the past four years... As you can see from the table above, only 12% of the silver supplied to the market made it to bullion in 2010. That means only a little more than 100 million ounces of silver became bullion for the entire investing world. That’s a tiny fraction to sop up all the investment interest in the world. Of that silver, about 43 million ounces went to exchange-traded funds like the iShares Silver Trust (SLV) and the Sprott Physical Silver Trust (PSLV). That means you could buy all the extra silver bullion for about $2 billion. We could buy all the surplus silver bullion from the last four years for about $10 billion. That’s the same as the market value of the iShares Silver Trust today. If you wanted to build another silver fund, you couldn’t. There just isn’t enough silver bullion out there to fill the order. Even trying to amass that much physical silver would send the silver price soaring. It’s a simple market fact... When there is more demand than supply, it drives the price up. And the economic problems confronting Europe and the United States have increased interest in precious metals... Silver gained a colossal 174% from August 2010 to April 2011. In May 2011, however, the price collapsed 31% in just four weeks. The bull market simply ran up too far, too fast... and the decline wiped out many highly leveraged silver traders. The big money is tiptoeing back into silver. Last month, commodity trading advisors, pool operators, and hedge funds — the “big money” — weren’t interested in silver AT ALL... But as they move back into the market, silver prices could soar. Let me show you what I’m talking about... Jason Goepfert created SentimenTrader, a service that tracks investor sentiment toward various asset classes. According to Jason, silver just bounced off its most pessimistic reading in four years. The so-called “commitment of non-commercial traders” hit 10,352. That’s incredibly low. The last time sentiment numbers were that low was in August 2007. Six months later, the price of silver was 59% higher. It rose from $12 per ounce to $19 per ounce. I went all the way back to 2002 and found that silver sentiment bottomed near 10,000 six times... On average, the price of silver rose 33% in the next six months and 54% over the next year. This chart shows the last four times it bottomed... Here’s how the silver price performed after each of the last four times silver sentiment bottomed out... The best return came after Bottom No. 2, which coincided with the US banking/credit crisis. Silver soared an eye-popping 405%, including its parabolic rise in 2010. As those numbers indicate, silver is one of the most volatile assets in the world. Over the last year, silver has seen massive price swings, including an 81% rally and two 30% drops. That forced many traders to liquidate their silver holdings in order to meet emergency short-term requirements. (Plus, the debacle at commodity broker MF Global has scared many folks out of the market.) But the long-term drivers of gold and silver’s uptrends are still in place. Enormous and growing Asian economies like China and India are getting richer...and they have deep cultural affinities for precious metals. Plus, the Western world has lived way beyond its means for a long time...the debts and liabilities it has taken on can only be paid back with devalued, debased money. This is bullish for “real money” assets like gold and silver. With sentiment so negative toward silver (and just beginning to turn back up), it’s a great time to take a position in this long-term bull market. If gold and silver prices are nearly certain to rise over the next few years (and probably rise dramatically), the simplest way to play that trend is to buy bullion...real, hold-in-your-hand silver coins. And I recommend everyone do just that... Buy some silver and store it away. Regards, Matt Badiali, for The Daily Reckoning P.S. If you’ve already built your bullion position...there’s another way to ride this trend to much larger gains than bullion is likely to offer. I just completed a full report on the opportunity. I wouldn’t be surprised to see every dollar you invest in this opportunity turn into $10 or more. Get the details here.   What to Do Now that Government Retirement Is Going Broke... The government “safety net” has officially begun to shrink. Protect yourself — and find out how to collect regular income checks from the “other” gov’t-backed “retirement program” — in this shocking new presentation. Details here.   And now back to Bill with more thoughts...   Bill Bonner We’ll have to continue our series of a “New Theory of Government” tomorrow...after we’ve had a chance to think through the next installment. Right now, we’re thinking about how the economy has changed in a fundamental way. We grew up with growth. We’re used to growth. We expect it. And we have institutions — government and private — that depend on it. No? Think about all that debt. The average OECD country has a debt-to- GDP ratio of about 300%. The only reason all that debt exists is because growth rates were high and people assumed debtors would “work their way” out of it. That’s why lenders put up money for government — as well as household — borrowers. Because everybody knows you can’t pay off that much debt on a stagnant income. Almost every major government is now not only deeply in debt, it’s going even further in debt. Japan has about $10 trillion of debt, for example, and adds about $500 billion every year. The US has $15 trillion in debt and adds about $1.5 trillion a year. If you’re adding debt, you’re running a deficit. But in order to pay down debt, you’ve got to run a surplus. So, to get from a $1.5 trillion deficit to a $1.5 trillion surplus, the US would have cut out 85% of its spending. No chance of that. Even if it just wanted to break even, it would have to cut out far more than the politicians would ever permit. No, dear reader...growth is the only answer. Or bankruptcy. Only once in history has a country been able to work its way out of a debt over 250% of GDP. That was Britain in the 19th century. Of course, Britain had some very unique advantages. It was the world’s leading empire — and gaining ground. After the Napoleonic Wars it was able to vastly cut its military budget...without giving up control of its colonies. And it benefited from the single biggest innovation in human history — the introduction of coal- and later oil-fired machinery. Britain did it in the context of the biggest growth spurt in history. But how will it do this time? It has a debt to GDP ratio approaching 500%. And, for now...no growth. And Japan hasn’t had any growth in 20 years. Its GDP is nominally lower today than it was in 1991. How will it pay its debt? Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com More on a New Theory of Government... By the Numbers: A Closer Look at the Real Wealth of US A New Theory of Government... Brazil Quietly Scraps its Tax on Foreign Investment China Still Finding Ways to Gain Wider Renminbi Distribution Did the Jobless Rate Really Fall? The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. 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