probably becoming clear to them that the economy is not going back to
normal any time soon.
Yesterday, the Dow lost another 131 points. Another big day down and it
will be in the 7,000-range. Oil sank too � down to $62. The dollar, bonds,
and gold stayed about where they were.
Economists are still talking about an "exit strategy." But in view of what is
actually going on in the economy, they'll probably want to stay on this
highway a lot longer. This is the long road to ruin, of course. It may be fatal,
but it is not � yet � unpopular.
Broadly, what is happening is exactly what should be happening.
The stock market rally is getting old...and may have already peaked out. The
consumer is running out of time, money and credit. He has no choice but to
cut back. Savings rates are rising fast � from zero to about 5% of disposable
income.
Naturally, businesses are finding it hard to make sales. Earnings are
collapsing...stock dividends are down sharply...
...and of course, businesses try to cut expenses by lightening up on their
payroll.
When the correction began, it was led by losses in the financial sector.
Those losses led to cutbacks throughout the economy. Now, it's the
cutbacks that are leading to financial losses. The economy followed the
markets; now the markets follow the economy. Investors are realizing
that their favorite companies will find it hard to prosper in this new
economic environment.
"US consumers fall behind on loans at record pace," says a Reuters
headline. Delinquencies are going up on a wide range of household debt.
Debtors have never had such a hard time keeping up with payments. Credit
card delinquencies, for example, are running at 6.6%.
Well...duh.
And no wonder "banks get stingy on credit," as reported in the USA Today.
"Despite massive government efforts to bolster the credit market, banks are
pulling back severely on card lending," begins the front-page article.
Once again, we see the feds' plans failing. They give trillions to the
bankers; the bankers cut back on consumer credit. And why shouldn't
they? They can see what the rest of us see � the consumer can't keep up
with the debt he's got already.
"Consumers aren't going to be able to save the U.S. economy this time,"
The Richebacher Letter's Rob Parenteau reminds us.
"Total U.S. retail sales have rolled back to levels we haven't seen since
2005. Imagine if every single retail shop opened in the last three years shut
down overnight. It's already that bad.
"A lot of people, from Wall Street to Washington, have a great deal invested
in you believing we can reverse that trend. But, in actuality, the freeze in
consumer spending and the consumer economy could actually take many
more years to thaw."
(For more from Rob on the consumer spending debacle � and to learn about
the move you can make that can give you back double any further downturn in
consumer sales � see .)
At least, the consumer has wised up. He's sick of debt. He's seen where that
road leads. What he wants is to get out of debt...to be free...to be safe.
It's the government that remains stuck in deep illusion... The feds know that
it was too much credit that got consumers into trouble. Their solution? Give
them more credit! The banks are issuing fewer credit cards than they did last year � 38%
fewer. They're pushing credit limits down too � the average limit on a new
card is down 3% so far this year.
Instead of passing money on to customers, the banks are using the feds' free
cash to build up their own reserves...raise their salaries...and pass out
bonuses. Makes sense. What else could they do with it?
More news, from The 5 Min. Forecast:
"Great news," writes Ian Mathias in today's issue of The 5.
"The Federal Reserve will retain it's
right to operate in secrecy.
"'Thank God for Rule 16!'"
"Late yesterday, the Senate majority put the kibosh on a last hour provision
in the 2010 spending bill that would audit the Fed. Not because it's a bad
idea to audit the Fed… but because of the arcane Rule 16, which prohibits
policy legislation from being added to spending bills. (The kind of 'rule'
that's only evoked when the majority gets uncomfortable.)
"'The Federal Reserve will create and disburse trillions of dollars in
response to our current financial crisis,' said Sen. Jim DeMint, who
spearheaded the failed audit addition. 'Americans across the nation,
regardless of their opinion on the bailout, want to know where the money
has gone.' Under his proposed plan, the Government Accountability Office
would take a look into the Fed's discount window lending, various funding
'facilities,' bank bailouts and agreements with foreign players.
"Shame on Mr. DeMint for such an outrageous request. Down-to-the-wire
appropriations should be reserved for truly exigent causes…like protecting
the makers of wooden arrows designed for use by children. Why bother
wasting the time of the GAO with a simple audit of the most unaccountable
monetary body in the world?
You can watch Mr. DeMint get what's coming to him here.
Ron Paul's bill � that other shameful attempt to audit the Fed � now has 249
co-sponsors in the house. Wonder what brand of parliamentary fine print
Barney Frank or Nancy Pelosi might summon to quash this one.
Find more details on Ron Paul's bill � that other shameful attempt to audit
the Fed � here.
Wanna make sure you get The 5 � in its entirety � sent to your inbox, every
Monday through Friday? You can…by becoming a subscriber to one of
Agora Financial's paid publications, such as Penny Stock Fortunes. Their
latest special report details the easiest way to make money in this market �
by focusing on stocks most investors overlook. Read all about it here.
And back to Bill, with more thoughts:
"Uighurs are beasts" shout crowds of Han Chinese in the remote northwest
of the country. Uighurs are the Moslem minority. Han Chinese are the
majority. And, judging from the photos, the Han want to kill the Uighurs.
One thing smart people always do is to underestimate the power of
foolishness. It is wild and reckless to stir up a race war. But that doesn't
stop people from doing it. Any kind of war is a blow to reason and
civilization. But that hasn't made war unpopular, even among the most
reasonable and civilized people on the planet.
It was within the lifetimes of many people reading this Daily Reckoning that
the most advanced countries on earth began a war of annihilation. At the
beginning of the 20th century, high culture and science were dominated by
Germans. German musicians and composers...German poets and
writers...German mathematicians, physicists, painters, philosophers � even
the German economy was a world leader, second in output only to the
United States of America.
Then, the Germans went off their heads � along with the Italians, the
Russians, the Japanese...and many others.
But the Han have it right. The Uighurs are beasts from time to time. So are
the Han...the Teutons...the Anglo-Saxons...and all the tribes on earth.
Occasionally, for no apparent reason, the masks and restraints of civilization
give way to mobs...and the old beast starts howling at the moon.
It happens in markets too. What is a bubble, if not a wild and reckless
thing? A kind of madness? A mass illusion...a foolishness, in which people
leave reason and civilization behind?
What if the United States had to pay its debt in gold?
In the old days, before the monetary reforms of the 20th century...notably,
Richard Nixon's unilateral decision to renege on America's promise to pay
its bills in gold...countries had to settle up with each other in the yellow
metal. The system worked well; it was reliable; it prevented bubbles.
Edward Chancellor explains:
"A country had to pay for its imports or foreign investments with money
gained from a surplus on trade. If more money was sent abroad than had
been earned through exports, then gold would be packed onto ships to
discharge foreign creditors. A declining stock of bullion would induce the
central bank to raise interest rates in order to attract gold from abroad.
Rising rates would produce a credit contraction, unemployment and general
economic misery. The typical nineteenth century was severe, but short-
lived."
Then came the improvements. And the Great Depression. And now we are
faced with another one.
Governments are fighting this one...just as they did the last one...but with
much more money. The cost is in the trillions � most of it in the form of
public debt. How will these debts be paid? We all expect that they will
ultimately be eased by inflation � in full or in part. But suppose the feds had
to pay up in real money?
Colleague Simone Wapler compared government debt to government gold.
The United States has gold worth about $241 billion, she reports. Its official
national debt is $11.5 trillion. That gives it a debt/gold ratio of 48 �
meaning; the feds have 48 times as much debt as gold.
Britain is even worse. Prime Minister, then Chancellor, Gordon Brown sold
much of England's gold at the worse possible moment � about 10 years ago.
This leaves the island with only $9 billion worth of gold compared to $1,274
billion of government debt � a ratio of 1 to 139. But Japan is the worst of all.
It has $23 billion worth of gold and $7.3 trillion of government debt, for a
ratio of 1 to 323. (Of course, Japan has vast holdings of dollars too!)
What nation has the best gold/debt ratio? Switzerland. It has only twice
as much in government debt as it has in gold.
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