Have We Done This Before?
- Details
- Published on Monday, 06 August 2012 19:56
- Written by Bill Bonner, Founder and President, Agora Inc.
- Hits: 339
We've been here already. And we know what comes next. As long as Bernanke wants to be our hero, rough times are ahead.
Déjà vu is a French expression that means... well, you know what it means.
For our purposes, we will use it to refer to the slumpy economy... and to the feds' response. We've seen it all before.
Dans la merde is another French expression... that refers to where you end up when the feds undertake to fix it.
But the Dow shot up 217 points on Friday. Gold went up $18 per ounce. How to explain it?
With Europe on the brink of a blowup (where it's been for years)... China's economy slowing down dangerously... and much of the rest of the world already in recession, you'd expect that investors would think twice before buying more stocks.
After all, what are stocks? They're shares in real businesses. When those businesses do well, the shareholders should do well. But businesses don't usually do well in a recession.
Investors, however, seem to be following a different line of thinking. They are responding to two entirely different hypotheses:
- The economy is doing well. That was the news in the latest unemployment report. Therefore, it makes sense to own stocks and gold. As the economy improves, more people will borrow and spend. As they do so, interest rates and consumer prices will rise. Businesses will do better as their sales rise. Higher inflation rates will cause gold to go up, too.
- The economy is not doing well. And the worse it does, the more pressure builds on central bankers to "do something." What can they do? Only add more cash and credit. More liquidity will send both stocks and gold up.
Now, you will look at these two hypotheses and think that you have discovered a sure thing, no? An interesting proposition, right? Either the economy is doing well. Or not. Either way, stocks are going up!
Win-win. Right?
Wrong!
How about a third hypothesis? In this one, the world is sliding into recession. Britain and Europe are already there. Japan is almost there. The U.S. is trailing, but not by much.
Recession is what should happen. The developed economies are still in a Great Correction. And the effects of massive doses of new credit... cheaper money... and a big increase in the world's money supply (central bank assets have doubled since 2008)... are wearing off.
Once again, the private sector is trying to correct its mistakes -- shucking off bad debt however it can. People are being more careful with their money -- which is why sales fall and unemployment rises.
Nothing new about this, either.
And nothing really new about the feds' reaction. Here's Murray Rothbard, describing the Federal Reserve's response after the Crash of 1929:
If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history [but repeated after 2008] the Federal Reserve moved in during the week of the crash... the final week of October... and in that brief period added almost $300 million to the reserves of the nation's banks. During that week, the Federal Reserve doubled its holding of government securities.
Then, as now, the big increase in money supply produced something that looked like a recovery. Rothbard continues:
By mid-November, the great stock break was over, and the market, falsely stimulated by artificial credit, began to move upward again.
In our current episode, stocks have recovered from their 2008-2009 crash. Banks, teetering on the brink of collapse, were saved, too -- as the Fed let it be known that it would do "whatever it takes" to spare them from the consequences of their own mistakes.
And the leaders of the rescue, especially Ben Bernanke, are hailed as heroes... having saved civilization. The 1930s had its heroes, too. The first was President Hoover, who had engineered rescue efforts following the Great Crash. Rothbard again:
President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on Dec. 5, he hailed the nation's good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence and had made capital more abundant by reducing interest rates.
But we know that the heroes of the 1930s had not really saved the financial system from a day of reckoning; they merely postponed it... and stretched it out.
The depression of 1920-1921 was more severe than the current crisis, in terms of economic contraction and price deflation, but it was over within 24 months, during which time, the feds made no rescue attempts.
The washout after October 1929 probably would have been short and violent, too. Instead, the feds came to the rescue and turned it into a 20-year marathon.
That's our third hypothesis: Déjà vu all over again, with more intervention but no real recovery. Instead, the day of reckoning will be pushed into the future... and the whole correction process will be turned into a long, painful episode of little growth, high unemployment and periodic financial crises.
And here's an additional forecast: Ben Bernanke will not want to relive the 1930s. He will not want that déjà vu experience. When the U.S. economy is dans la merde, he will give it more cash and credit... so that it is even further up to its neck!
Other Related Sources: