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The Greater Depression

By: Bill Bonner, Dan Denning & Doug Casey, The Daily Reckoning

-- Posted Tuesday, 6 June 2006 | Digg This ArticleDigg It!

  • Unwelcome inflation...central banks display touches of “Volckerismo”...
  • The lifeblood of the financial markets is drying out...asset prices are going down no matter what we do...
  • Plenty of lookers, but few takers in the housing; London; this moment in June...and more!



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Oh my...666...the mark of the beast is on us today. It is the 6th day of the 6th month of the 6th year of the 3rd millennium.

We don’t know what this portends, but yesterday Ben Bernanke slouched over to Congress. He must have worn lifts. For somehow, he managed to remind the world of old Paul Volcker. We remember when the giant Paul walked the earth over at the Fed. It was a different world back then, with consumer prices rising at double-digit rates and interest rates over 15%. But Volcker stood up and did what a Fed chief is supposed to d he stopped inflation.

Even recently, speaking to an audience that included an intrepid reporter for The Daily Reckoning, Volcker said he was surprised the country had gotten away with such a long period of credit expansion...without setting off a new round of consumer price inflation. He wondered out loud how it came about and when it might end. But he, like the rest of us, had no sure answer.

And now cometh his successor, Ben. Speaking in public yesterday, the former head of Princeton’s economics department sounded if not like an inflation fighter, like an inflation taunter. Inflation, he said, was “unwelcome.” Not exactly inflation-fighting words, but it was enough to lead investors to fear that another 0.25% rate increase was coming. Stocks sold off, taking the Dow down by nearly 200 points.

Meanwhile, the European Central Bank seems to have found a touch of Volckerismo, too. “ECB rate hike done deal,” says AFP.

“Golden age of liquidity is drying up,” adds the International Herald Tribune.

”It turns out that it is not just money that makes the world go round. To cash, add credit and related financial instruments. That equals liquidity, the lifeblood of financial markets from Helsinki to Hong Kong.

“Liquidity surged in the past decade, fueled by relaxed monetary policies of central banks, globalization, new technologies and such exotic financial instruments as derivatives. They in turn drove down interest rates and bond yields and encouraged investors to pump more money into riskier assets, propelling stock markets.”

But now...

“The era of under-priced capital in constant supply is ending,” adds David Roche, a financial strategist in London.

Our guess is that we will see the results of this fundamental shift toward tighter money over the next decade or two. We also guess that trying to fight this trend by selecting stocks carefully will be like flossing your teeth before the battle of the Little Big Horn.

If we are right, asset prices are going down no matter how much financial hygiene you practice. And it will mean, among other things, fewer Fed chiefs on the cover of Time magazine and fewer U.S. Treasury secretaries from Goldman Sachs. Speculation will cease to pay. In fact, maybe our next U.S. Treasury secretary will come from the legal profession, where he will have made his reputation in Chapters seven and 11.

It was cheap money, as well, that fueled America’s property bubble. Now, that bubble seems to be losing gas.

From Las Vegas comes news that takes our breath away. There were 2,992 houses for resale in the city in 2004. The following year there were 10,493. And this year, there are 17,121 - far more than five times as many as there were two years ago.

Including new houses, there are some 20,000 dwellings for sale in Las Vegas right now. And they are still putting them up, with hundreds of new projects still being built out and more than 500 sales offices open for business.

Meanwhile, over to the right, on the Florida coast, comes news from our own family sources that real estate is getting hard to sell.

We recall a realtor quoted in the New York Times only a year ag

"South Florida,” he said, “is working off of a totally new economic model than any of us have ever experienced in the past." Explaining how limited supply and unlimited demand would create a situation in which prices rose forever.

Many people thought so, but now it looks as though this economic model was not so different after all.

“Yes...we missed the top,” reported our source yesterday. “Now, we’re definitely on the downhill slope. We reduced the price twice already. We’re getting plenty of lookers, but no takers. Basically, we’ll sell for whatever we can get at this point, even less than we paid two years ago.”

And thus we see, dear reader, something interesting. Inflation may be ‘unwelcome” in the dewy eyes of the economics professor who now rules the Fed, but the lack of it is terrifying to the wide open peepers of Speculation Nation.

“In a nutshell,” explained Joseph Quinlan, chief market strategist at Banc of America Capital Management, “the era of easy and abundant global liquidity is coming to an end – a change in the global monetary backdrop that usually inflicts pain on those asset classes highly dependent on easy money.”

But all of America is now highly dependent on easy money. The U.S. government relies upon it to pay for its bread and circuses. Wall Street needs it to keep stock and bond prices elevated. The lumpen need it, too; their house prices will fall without it. And when housing falls, the whole kit and kaboodle comes down with it. The U.S. economy will be in recession within six months.

We suspect that is it Hank Paulson’s job to let the Fed chief know.

[Ed. Note: The easy money era is coming to an end...and at this very moment, as foreign investors slow down their buying of new U.S. debt, the already existing debt is suddenly coming due - creating a "perfect storm" behind the dollar-dumping mega-trend ahead. Find out how to protect yourself against this collapse here:

Portfolio Protection

Now for news from The Rude Awakening...


Dan Denning, reporting from Melbourne, Australia:

"Coincidentally, no country stands to benefit more from clean-coal technologies than the United States. We've got a 250-year supply of the stuff. Surely, we'll figure out an effective – and clean – way to use it."

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening:

The Newest Old Thing, Part II


And more thoughts from The Big Smoke...

*** After George W. Bush, what next? Hilary? Al? Jeb?

As time goes by, the Law of Limp decrees that more and more voters will go lame. Government takes two steps forward...and only one backward. Government hiring, spending, boondoggles, wars, giveaways, and promises hit the lumpen in the knees. Gradually, fewer and fewer of them can stand up straight. Instead, they are propped up by money they didn’t earn and fed with food they neither grew nor paid for. And finally, the government itself comes to resemble these limping patriots - unable to stand on its own two feet.

H.L. Mencken describes it in a different way: "As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart's desire at last and the White House will be adorned by a downright moron."

*** How ‘bout that gold market? Gold went up again yesterday to $648. Darn! We would have liked something more definitive...a correction below $600, at least. Now we are uncertain. Is the correction over? Is this as low as gold will go? Or was this just a stepping-stone toward a much more severe correction, perhaps below $500? We wish we could tell you.

*** We decided to walk to work today. Finally, the weather has turned delightful. The sun has shone for the last two days; we hasten to take advantage of it.

At 7:00 a.m., London is stirring from its bedclothes. Delivery trucks flash their lights and off load their barrels of beer and cases of bangers. Shopkeepers roll out their awnings and bring out their chairs and tables.

Men and women set off for work, and soon the sidewalks and roadways are full. There go the joggers, practically knocking you down as they huff and puff along the river-walk. Be careful crossing the road; the traffic comes at you from the wrong direction. Then, if the cars and trucks miss you, don’t relax. You’re still fat game for the bicycles; they sneak up behind you silently.

We watched the mad tumult as we crossed Westminster Bridge. All the people whom death had left undone: A man reading the paper in the back of a Mercedes driven by a black chauffeur. A woman driving her son to school...he, dressed in his school uniform. A slick, silver-haired gent in an Italian suit, driving a slick, silver BMW. Two workmen in a truck with a wheelbarrow on the back. And on the sidewalk, swarms of businessmen wearing the same black suit and carrying the same black satchel. Young women in their business suits, all with their briefcases, their portfolios, their backpacks.

All of them on their way to work...all of them schlepping, scheming, scraping to get ahead.

How can we compete with these people? How can our one little head outsmart so many thick ones? How can one person know more than 1,000? How can the solitary thoughts of one man - you, dear reader - be worth more than the combined pensées of millions? But isn’t that the idea? To get ahead of them? To figure out something they have not? To see something they have missed?

Or, maybe we should just try to blend in? We will go into a shop and say, “we want a suit just like the one everyone else is wearing.” We will call a stockbroker and tell him, “Just buy for me what everyone else is buying.” How easy it would be! We could even go into a restaurant and not have to bother looking at the menu: “Just give us what the rest of the customers are eating.”

No one could complain about that. After all, we would just be doing what everyone else does. No court of law would condemn us. No newspapers would mock us. No mother-in-law would complain.

But what glory would there be in that? What profit? What satisfaction? No, dear reader, whether we are headed for comfort or ruin, we prefer to go there in our way...on our own two legs.

The Daily Reckoning PRESENTS: We recently asked DR readers what they thought a second Great Depression would be like for the average American...and today, International Speculator’s Doug Casey chimes in with his two cents. Read on...

by Doug Casey

It’s been said that if you spend 15 minutes a year thinking about the economy, you’re wasting 13 minutes. That’s generally true. But as an amateur historian, I can’t help myself. And I’m forced to believe that this is a time when the subject is worth some real thought.

My view is that the longest, and certainly most important, trend in history is the ascent of man. I have little doubt that it will not only continue, but accelerate. But that doesn’t mean there won’t be nasty setbacks along the way. As I have said before, possibly the best definition of a depression is a period when most people’s standard of living drops significantly. You can also define it as a period when distortions in the economy and misallocations of capital are liquidated. The distortions are almost always the result of government intervention in the economy, through things like taxes, regulation and currency inflation.

Those are the factors that caused the unpleasantness that began in 1929. Since the government is exponentially more powerful and invasive today than it was in either the 1920s or the 1970s, I expect the consequences will be much worse this time around. Things could have come unglued, and almost did, back in the 1970s. I don’t see how we’ll dodge the bullet this time. Although that’s not really a good analogy, in that, for reasons we don’t have time to explore in depth, a depression is probably inevitable this time.

The only serious question in my mind is whether it will be essentially deflationary in nature, as it was the case in the U.S. in the 1930s, or inflationary like in Germany in the 1920s. My guess is the latter because the government is so much more powerful today. Or it could actually be both at once, in different sectors of the economy.


Inflation could drive interest rates to 20%. This would collapse the bond and real estate markets, wiping out trillions of dollars of purchasing power - which is deflationary. Meanwhile, that same inflation doubles the cost of food and fuel. In other words, the opposite of what we’ve mostly had for the last generation, when we had “good” inflation in stocks, bonds and property, but stable or dropping prices in “cost of living” items. This time the pattern could reverse, which would be a nightmare for most people.

And as people become more focused on speculation in a generally futile attempt to stay ahead of financial chaos, they inevitably divert effort from economic production. Which will decrease the general standard of living even more.

The situation isn’t made easier by the possibility that we’re facing Peak Oil - the start of a secular decline in world oil production. Or the fact that Americans, both individually and collectively, are deeply in debt and living on the kindness of strangers. The problem with debt is that it artificially increases our standard of living. But when we pay it off, especially with interest, it reduces our standard of living in a very real way.

Wrap this economic environment around the so-called War on Terror, which is rapidly morphing into the War on Islam, which could easily turn into World War III, and you’re looking at the perfect storm. The odds of a major conflagration are very high, and it’s not being adequately discounted. If Bush starts a war against Iran, or if another incident like that of 9/11 occurs, or even if the trend of the last five years accelerates, the U.S. is going to be locked down like one of its numerous new federal penitentiaries. And that will be accompanied, and compounded, by mass hysteria among Boobus americanus.

At that point, your investment portfolio will be among your lesser concerns. People forget that, in every country and time, there’s a standard distribution of sociopaths and misdirected losers. In normal times, they seem like normal people. But when the time is right, they show their colors, and they love to get jobs with the government, where they can lord it over their betters.

You may be asking yourself: Is the Greater Depression really inevitable? How bad will it be? Is there another side to the argument? Can it be avoided?

I suppose it’s not absolutely inevitable. Perhaps friendly aliens will land on the roof of the White House and present the government with a magic technology that can undo all the damage it’s done. But we live in a world of cause and effect where actions have consequences. That being the case, I expect truly serious financial and economic trouble. And the government will make it vastly worse by trying to “do something” instead of recognizing itself as the cause and backing off. I don’t see any way out.

How bad will it be? In historical terms, the last depression was relatively short and mild. The longest depression on record was the Dark Ages. Residents of the old USSR and Mao’s China suffered through a depression that lasted decades. I’m not predicting it will be that bad, if only because the U.S. has basically much sounder traditions and institutions and vastly more accumulated capital. But it’s hard to overestimate how serious this could be. I sometimes joke that it will likely be worse than even I think it will be.

Getting back to whether it’s truly inevitable, it’s a question of degree. The recession of the late 1970s and early 1980s involved a terrible stock market, 15% inflation with interest rates to match, 10% unemployment and a near war with the USSR. But the country not only hung together, it went on to a tremendous rebound. My guess is, however, that the last 20 years of good times will later be viewed as an economic Indian Summer before a harsh winter.

The good news, of course, is that no matter what the economic conditions, technology - which is the mainspring of human progress - will keep advancing. And many individuals will continue innovating, saving and improving conditions for themselves and their associates. Also, it’s entirely possible to go through even the worst of times and not get hurt. Indeed to profit from them. If the price of a house you want now but can’t afford falls 75% (as outrageous as that may sound at the moment) while your own investments in the high-quality gold stocks we follow in our International Speculator quadruple, you’re much better off. That house now really only costs you one-sixteenth of what it did before. Of course it’s a problem for the guy who has to sell his house... but I always prefer to look at the bright side of the equation. There’s time now to structure your affairs so that you’re on the right side of the trade.

Keep your eyes peeled for signs that indicate it’s about to get ugly. One obvious indicator to watch is how the price of gold is running. Gold is the only financial asset left in the world that’s either safe or cheap. It’s also under owned and largely unrecognized, which is why the smart money has been moving into it.

Then there’s the CPI itself - although I don’t think it’s very accurate, in that all the adjustments, exclusions, weightings and what-nots the government has insinuated into it over the years makes the CPI as much of a floating abstraction as the dollar itself. It’s funny how the government plays with figures for fear of hurting confidence. They believe the economy rests mainly on confidence, which, ironically, in today’s world, is true. Unfortunately, confidence can blow away like a pile of feathers in a windstorm - and we have a class-5 hurricane coming. If the economy were sound and people for some reason lost confidence, the currency and the banks would be unhurt, and the next day things would go back to normal. But that’s not the world we live in. So, higher CPI numbers are another thing that could destroy confidence and supercharge the gold price. They’re coming.

Higher interest rates, which we’re already seeing, will inevitably burst the real estate bubble, which is floating on a sea of mostly adjustable-rate debt, a lot of it interest-only or even with negative amortization. Higher rates will also crush bonds and probably stocks. And they’ll devastate the economy since everybody is deeply in debt. However, I feel the Fed will keep short-term rates - which are really the only ones they control - as low as possible for as long as possible. For one thing, they don’t want a recession, which this time could snowball into the Greater Depression. For another, my guess is that they want to gradually depreciate the dollar against other currencies, in part to decrease the chronic, massive trade deficit. And because increasing the number of dollars makes people think they’re richer than they really are, it can stimulate some additional spending...but these days that spending is mostly done on credit, so it is only illusionary.

The biggest single problem, however, is that there are trillions of U.S. dollars outside of the U.S. Unlike Americans, foreigners have no reason to hold them. And at some point very soon, perhaps when the Fed finally hits the wall on its ability to raise rates, these overseas dollars are going to start flooding back home, while the products and titles to real wealth flow out of America.

Therefore, when the trade deficit starts turning around - which most people will think is a good thing - that will be the real tip-off the game is over. Trillions coming back to the U.S. will skyrocket long-term interest rates and inflation. The dollar will go into freefall.

But although I think these are the things to watch, to my way of thinking it makes no sense to wait until the stampede starts to try to get out the door. If you haven’t done so already, take advantage of the current correction in gold to begin repositioning your portfolio for what’s next.


Doug Casey
for The Daily Reckoning

Editor’s Note: Doug Casey is the author of Crisis Investing, which was #1 on the New York Times Best-Seller list for 26 weeks. He is also editor and publisher of the International Speculator, one of the nation's most established and highly respected publications on gold, silver and other natural resource investments.

For information on the International Speculator, click here:

International Speculator

Do you like pictures? Well, we've posted a few from Empire of Debt: The movie...

Empire of Debt Slideshow

-- Posted Tuesday, 6 June 2006 | Digg This Article

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