 | | The Daily Reckoning | Wednesday, December 21, 2011 |
- The Great Correction Holiday Sale — Economic disaster for just $29 trillion!
- Is this one of the most controversial documents in America right now?
- Plus, Bill Bonner on Keynesian geniuses, immigrant workers, soggy economies and more...
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|  | | | | Let the Depression Burn Itself Out | | A Wish for the Best Gift the US Could Receive | | |  | | Bill Bonner | Reckoning today from Baltimore, Maryland...
The year is winding down. The sun is low in the sky. There soon won’t be anything left of 2011.
The Dow put in a good performance yesterday — up more than 300 points when we last looked. Housing starts were at a 19-month high...which caused investors to think recovery is right around the corner.
Christmas is coming too.
But at least we know what we want for Christmas — a depression...a merry little depression.
Paul Krugman says we already have one:
“It’s time to start calling the current situation what it is: a depression.”
We should be so lucky!
The nice thing about a depression is that it cures a depression. Stocks collapse. Businesses go broke. Speculators jump from tall buildings. Wages fall. Prices drop. Interest rates sink. And then, with the cost of assets, labor and credit at rock-bottom levels, the scrap dealers, recyclers and entrepreneurs get to work. They pick up the pieces, dust them off, and find ways to make them productive again.
Some years ago, forestry experts realized that trying to prevent or put out forest fires was not always a good thing. Forest fires are natural events. Lightning hit dry tinder. It burnt off the underbrush, laying down valuable ash. The forest was cleared...and fertilized...and ready for new growth.
Today, most foresters believe it is better to protect lives and property, but otherwise let forest fires burn themselves out.
Like forest fires, depressions seem to be natural occurrences. Few people like to see them coming. They call the feds. Within minutes the smoke jumpers are out of their planes...and the feds are on the scene with their water cannons and water bombs.
As we saw a few days ago, the feds put $29 trillion to work fighting the Great Correction. If money were water, they flooded the world with a Lake Erie of liquidity. And what did they get for it? One very soggy economy.
The Crash of ’21 was followed by the Depression of ’20-’21. In terms of lost GDP, it was about the same as the decline of 2008-2009. But in terms of prices it was much worse. Prices fell as much as 18% in a single year. Unemployment approximately doubled. The stock market collapsed 50% and industrial production fell 30%.
Instead of throwing cold water on the depression fire, the government actually poured oil on it. It did exactly the opposite of what our government does today. It did not respond with a program of counter-cyclical spending. It cut spending. According to the Keynesian geniuses of our time — including the aforementioned Nobel Prize winner, Krugman — they made the situation worse.
But it worked! The Great Correction has been smoldering for 5 years. It will probably go on for at least another 5 years...maybe 10 or 15. But the depression that began in January 1920 was over by July of 1921 — just 18 months later. Soon, the economy was booming again.
Why? A depression cleans up mistakes. It burns off bad debt. It lays down a thick blanket of mineral-rich cinders, providing the perfect bed for planting new businesses and hiring new workers.
Oh Santa...give us a real depression in 2012!
Of course, that’s not going to happen. Why?
For one thing, the US has been taken over by zombies. The half-dead, flesh-eating monsters dominate our major industries — finance, health, education and defense. The health care system is supposed to be run by private enterprise. It’s supposed to be free and dynamic, responding to market pressures and adapting to consumer demand. Our colleague, Porter Stansberry, says it has been corrupted. As you can see for yourself, it is degenerate...and zombified:
Think about the new prescription drug benefit — 2003’s Medicare Modernization Act. The law provided public funding for both public and private prescription drug benefits. (IBM, for example, estimated it would save $400 million over 10 years on retiree benefits thanks to the law.) At the same time, the law banned the federal government from negotiating with pharmaceutical companies. In summary, the law basically requires the federal government to pay for the prescription drugs of just about anyone over the age of 65 and requires the government to pay full retail prices.
There are now around 25 million beneficiaries of this law (not including the pharmaceutical companies). The average annual benefit is currently about $1,500. The total cost of the legislation over the next decade is expected to be around $1 trillion. This represents the largest expansion of Medicare in the history of the US.
The benefit was approved by a Republican-dominated Congress, in a midnight vote. Louisiana Republican Billy Tauzin, then chairman of the Committee on Energy and Commerce, which oversees the pharmaceutical industry, organized the vote. Two months later, Tauzin resigned his seat and took a job paying $2.5 million per year as a lobbyist for the Pharmaceutical Research and Manufacturers of America. The pharmaceutical industry continues to spend $100 million per year on campaign contributions and lobbying.
Americans are left paying the world’s highest prices for drugs. Worse, we have extended the entitlement sentiment into the one area of the economy where personal responsibility is crucial. For most people, good health can be achieved by maintaining a disciplined diet and simple exercise. Offering free pills in lieu of such steps will only further the serious problem of diabetes and obesity we face.
And remember... this law was passed by Republicans and signed into law by a Republican president. Porter has more in today’s guest essay, below...
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| | The Daily Reckoning Presents | | The Corruption of America | | |  | | Porter Stansberry | The numbers tell us America is in decline... if not outright collapse.
I say “the numbers tell us” because I’ve become very sensitive to the impact this kind of statement has on people. When I warned about the impending bankruptcy of General Motors in 2006 and 2007, readers actually blamed me for the company’s problems — as if my warnings to the public were the real problem, rather than GM’s $400 billion in debt.
The claim was absurd. But the resentment my work engendered was real.
So please... before you read this column, which makes several arresting claims about the future of our country... understand I am only writing about the facts as I find them today. I am only drawing conclusions based on the situation as it stands. I am not saying that these conditions can’t improve. Or that they won’t improve.
The truth is; I am optimistic. I believe our country is heading into a crisis. But I also believe that... sooner or later... Americans will make the right choices and put our country back on sound footing.
Please pay careful attention to the data I cite. And please send me corrections to the facts. I will happily publish any correction that can be substantiated. But please don’t send me threats, accusations against my character, or baseless claims about my lack of patriotism. If I didn’t love our country, none of these facts would bother me. I wouldn’t have bothered writing this column.
I know this is a politically charged and emotional issue. My conclusions will not be easy for most readers to accept. Likewise, many of the things I am about to say will challenge folks to re- examine what they believe about their country. The facts about America today tell a painful story about a country in a steep decline, beset by problems of its own making.
I am speaking out now because I believe someone must. And I have the resources to do it. I am sharing these ideas because I know we have arrived at the moment of a long-brewing crisis.
Our political leaders, our business leaders, and our cultural leaders have made a series of catastrophic choices. The result has been a long decline in America’s standard of living.
For decades, we have papered over these problems with massive amounts of borrowing. But now, our debts total close to 400% of GDP, and America is the world’s largest borrower (after being the world’s largest creditor only 40 years ago)... And the holes in our society can no longer be hidden...
We’ve reached the point where we will have to fix what lies at the heart of America’s decline... or be satisfied with a vastly lower standard of living in the future.
How do I know? How do I statistically define the decline of America?
The broadest measure of national wealth is per-capita gross domestic product (GDP). Economists use this figure to judge standards of living around the world. It shows the value of the country’s annual production divided by the number of its citizens. No, the production isn’t actually divided among all the citizens, but this measure provides us with a fair benchmark to compare different economies around the world. Likewise, this measure shows the growth (or the decline) in wealth in societies across time.
So... is America growing richer or poorer based on per-capita GDP? Seems like a simple enough question, doesn’t it? Is our economy growing faster than our population? Are we, as individuals, becoming more affluent? Or is the pie, measured on a per-person basis, growing smaller?
This is the most fundamental measure of the success or the failure of any political system or culture. Are the legal and social rules we live under aiding our economic development or holding us back? What do the numbers say?
Unfortunately, it’s a harder question to answer than it should be. The problem is; we don’t have a sound currency with which to measure GDP through time. Until 1971, the U.S. dollar was defined as a certain amount of gold. And the price of gold was fixed by international agreement. It didn’t actually begin to trade freely until 1975. Therefore, the value of the U.S. dollar (and thus the value of U.S. production, which is measured in dollars) was manipulated higher for many years.
Even today, our government’s nominal GDP figures are greatly influenced by inflation. The influence of inflation is particularly pernicious in GDP studies. You see, inflation, which actually reduces our standard of living, drives up the amount of nominal GDP. So it creates the appearance of a wealthier country... while the nation is actually getting poorer.
The only real way to accurately measure per-capita GDP is to build our own model. The need to build our own tools tells you something important — the government doesn’t want anyone to know the answer to this question. It could easily publish data far more accurate than the indexes it puts out. But government doesn’t want anyone to know. And it wants to be able to say “those aren’t the real data” when studies like ours produce bad news.
So pay attention to how we built our charts. You can see for yourself that our data are far more accurate than the government’s figures. Our data are based on the real purchasing power of the currency, not the nominal numbers, which are completely meaningless in the real world.
The question we are trying to answer is: What would per-capita GDP numbers look like, if we used a real-world currency, like gold, or a basket of commodity prices, instead of the paper-based U.S. dollar? What would the figures be if we measured GDP in sound money instead of the government’s funny money?
Here’s how we figured it out. We took the government numbers for nominal GDP and measured them first against commodity prices, and later (after it began to trade freely) gold. We used a standard commodity index (the CRB) up to 1975 and gold post-1975. The result of this analysis shows you the real trend in U.S. per-capita GDP, as measured on a real-world purchasing power basis.
Our analysis shows you what’s actually happened to our real standard of living. The results, we suspect, will surprise even the most bearish among you.
America is in a steep decline.
Americans Are Getting Poorer — Fast |
Let me anticipate the “official” criticism of our study. Many people will claim that our numbers aren’t “real.” They will say that we “mined” the data to produce a chart that showed a steep decline.
That’s simply not so. All we’ve done is convert the government’s nominal GDP stats into a fixed currency value that’s based on real- world purchasing power. The fact is, our data are far more accurate than the government’s because they represent the real-world experience. That’s why our data are far more closely correlated to other real-world studies of wealth in America.
Consider, for example, annual sales of automobiles. Auto sales peaked in 1985 (11 million) and have been declining at a fairly steady rate since 1999. In 2009, Americans bought just 5.4 million passenger cars. As a result, the median age of a registered vehicle in the U.S. is almost 10 years.
Our data shows that real per-capita wealth peaked in the late 1960s. Guess when we find the absolutely lowest median age of the U.S. fleet? In 1969. At the end of the 1960s, the median age of all the cars on the road in the U.S. was only 5.1 years. Even as recently as 1990, the median age was only 6.5 years.
Rich people buy new cars. Poor people do not.
Most important, our data “proves” something I know many of you have felt or perceived for many years. You’ve seen the decline of your neighborhoods. You’ve gone years without being able to earn more money in your job. Or you’ve seen your purchasing power decrease to the point where you’re now substituting lower-quality products on your grocery list for the brand-name products you used to buy.
You can see how much harder it is on your children to find good jobs, to buy good housing or a new car. As a result, few people under the age of 40 have the same kind of “life story” as their parents.
And because they can’t “make it,” many have decided to “fake it.” The average college student now graduates with $24,000 in debt... and by his late 20s has racked up more than $6,000 in credit card debt. Meanwhile, median earnings for Americans aged 25-34 equals $34,000-$38,000. (Source: Demos.org, “The Economic State of Young America,” November 2011.)
Can you imagine starting your life out as an adult with a personal debt-to-income level at close to 100%? What does this say about the state of our economy? What does this say about the state of our culture?
It’s not only the young that are having trouble in America. It is also the old.
Debt levels among households headed by people older than 62 have been rising for two decades. The average mortgage size for this population is now $71,000 — five times larger than it was in 1987 (adjusted for inflation), according to William Apgar of Harvard’s Joint Center for Housing Studies.
Older Americans are also more reliant on credit card debt than ever before... credit card debt. From 1992 through 2007 (which is the latest data available) older Americans took on credit card debt at a faster pace than the population as a whole. According to USA Today, lower- and middle-income Americans aged 65 and older now carry an average of more than $10,000 in credit card debt, up 26% since only 2005.
Given average interest rates of 20% for these debts, it’s a fair bet that these obligations will never be repaid. But they will have a terrible impact on the standard of living of these older Americans.
What in the heck is going on? Don’t Americans pay off their mortgages before they retire? Don’t they work hard during their careers, save, and invest, so they can move to Florida and spend their retirement in comfort?
Older Americans living with credit card debt! This doesn’t sound like America, does it? Or maybe it does.
My bet is that most folks know that something has gone terribly wrong with America. It’s not easy to figure out how all of this happened... but you know from your own experiences that these numbers aren’t wrong. It might not be pleasant to think about... but these figures paint a sad but accurate picture: America is not the country it was 40 years ago. These changes are warping our economy, politics, and culture.
I can’t possibly analyze all the factors that have led to this decline. But I want to document the growth of graft in politics. I want to demonstrate — with real facts and examples — how public company leadership has deteriorated. And I want to document some of the things that are occurring in the broader society, all of which I believe are linked to this fundamental decline in our standard of living.
You see, I believe the decline of our country is primarily a decline of our culture.
We have lost our sense of honor, humility, and the dedication to personal responsibility that, for more than 200 years, made our country the greatest hope for mankind. I want to detail some of the factors that gave rise to the current entitlement society. We have become a country of people who believe their well-being is someone else’s responsibility.
I’ve labeled these problems: The Corruption of America.
These problems manifest themselves in different ways across institutions in all parts of our society. But at their root, they are simply facets of the same stone. They are all part of the same essential problem.
The corruption of America isn’t happening in one part of our country... or in one type of institution. It is happening across the landscape of our society, in almost every institution. It’s a kind of moral decay... a kind of greed... a kind of desperate grasp for power... And it’s destroying our nation.
| The Ethos of ‘Getting Yours’ |
Americans know, in their bones, that something terrible is happening. Maybe you can’t articulate it. Maybe you don’t have the statistics to understand exactly what’s going on. But my bet is, you think about it a lot.
For me, a poignant moment of recognition came this month.
Bloomberg news published an article based on confidential sources about how Henry Paulson, the former CEO of Goldman Sachs and the Republican U.S. Treasury secretary during the financial crisis, held a secret meeting with the top 20 hedge-fund managers in New York City in late July 2008. This was about two weeks after he testified to Congress that Fannie Mae and Freddie Mac were “well-capitalized.”
I knew for a fact that what Paulson told Congress wasn’t true. I wrote my entire June 2008 newsletter detailing exactly why Fannie and Freddie certainly had billions in losses that they had not yet revealed to investors — $500 billion in losses, at least. There was no question in my mind, both companies were insolvent — “zeros,” as I explained.
And yet, in front of Congress, the U.S. Treasury secretary was saying exactly the opposite. Either I was a liar... or he was.
Then... only a few days later... what did Paulson tell those hedge- fund managers?
He told them the same thing I had written in my newsletter. He told them the opposite of what he’d said publicly to Congress. He told these billionaire investors that Fannie and Freddie were a disaster... They would require an enormous, multibillion-dollar bailout... The U.S. government would have to take them over... And their shareholders would be completely wiped out.
Here you had a high-government official, explicitly lying to Congress (and by extension, the general public), while giving the real facts to a group of people who represented the financial interests of the world’s wealthiest folks. The story didn’t come to the public’s attention for two years.
This was the most outrageous example of graft and corruption I have ever seen. Certainly it involves more billions of dollars in misappropriated value than any other similar story I can recall. These managers had the risk-free ability to make tens of billions of dollars, if not hundreds of billions, by using derivatives to capitalize on what they knew was the imminent collapse of the world’s largest mortgage bank. Who picked up the tab? You know perfectly well. It was you and me, the taxpayers.
(One of the investment managers present at this meeting was Steve Rattner, who by that point was already deeply involved in another bit of graft, his efforts to bribe New York state pension-fund managers for large investments into his hedge fund, from which he earned perhaps as much as $100 million. He later settled the charges for a mere $10 million shortly after Andrew Cuomo was elected governor of New York.)
The Bloomberg story... about a crooked Treasury secretary handing a room full of crooked billionaires inside information worth billions of dollars... hardly caused a ripple. As far as I know, no actions are being planned against Henry Paulson or any of the hedge-fund managers involved. No other major media outlet picked up the story. I saw nothing about it from the Department of Justice or the Securities and Exchange Commission.
What does that say about our country when even the most egregious kind of corruption — involving hundreds of billions of dollars — is simply ignored?
It seems like everyone in our country has lost his moral bearing, from the highest government officials and senior corporate leaders all the way down to schoolteachers and local community leaders. The ethos of my fellow Americans seems to have changed from one of personal integrity and responsibility to “getting yours” — the all- out attempt, by any means possible, to get the most amount of benefits with the least amount of work.
You can see this in everything from the lowering of school standards (revising the SAT) to the widespread use of performance-enhancing drugs in professional, college, and high school sports. Cheating has become a way of life in America.
I have an idea about how this happened... about the root cause of this kind of corruption and why it was inevitable, given some of the basic facts regarding how we’ve organized our government and our corporations.
Let me show you the numbers — the hard facts — behind what’s happened to our country...
Regards,
Porter Stansberry
for The Daily Reckoning
Editor’s note: This essay is excerpted from one of the most controversial documents in America right now...the December 2011 issue of Stansberry’s Investment Advisory. To access the full issue — where Porter walks readers through the facts behind the rampant and blatant corruption that has us on the brink of an economic crisis — click here. It’s the most important document you’ll read in the next year...and it’s completely, 100% free. Warning: Do not read this if you are easily offended.
To read the rest of this article, click here.
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| | | | | | Now back to Bill, with the rest of today’s reckoning... | | | | | Bill Bonner | “Feliz Navidad!” they said, driving off in their pick-up.
This part of the nation is being taken over by Spanish-speaking immigrants from Latin America.
Last weekend, we needed help putting up a fence. So we called Francisco...a friend of a friend.
“How many people do you want?” he asked.
We settled on three. They arrived at 8 AM. They declined our offer of coffee and donuts. Instead, they set to work and kept at it all day, except for a very brief break for lunch. It was cold. But they also declined our offer of a chair in front of the fire in the kitchen. They preferred to sit on a log outside and eat their sandwiches in the open air.
They worked Saturday and Sunday. Rarely pausing. Rarely talking.
“Where are you from?” they asked us.
“From right here...” we replied.
They looked puzzled.
“But how come you speak Spanish?” they wanted to know.
What is odd about these immigrants is that they keep to themselves. Francisco has been in the US for 10 years. Yet he barely speaks any English. The others spoke little English too. They have their own churches. Their own shops. Their own communities.
When the sun went down on Sunday, we settled up. We paid $817 in cash. About $15 an hour/hombre.
Regards,
Bill Bonner
for The Daily Reckoning
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