The gold price
This Time It's Different - 23 April 2009
Sixty years of consumer credit just crashed into a genuine depression...
BY OUR RECKONING, writes Bill Bonner in his Daily Reckoning, this is not a recession...this is a depression.
In a recession, the bull market formula still works. It just needs a little time to rest...catch its breath...work off inventories...and rebuild cash accounts.
But in a depression, the formula stops working.
The basic formula that drove the US economy for the last 60 years has been the expansion of consumer spending. At first, that spending was healthy spending. People had built up savings during the war. In the Eisenhower years, they were ready to get back to work in the consumer economy, get married, have children, and spend money.
America was then the world’s leading lender...leading exporter...leading manufacturer...and leading everything else, too. Gradually though, having so many advantages caught up to the United States of America. By the 1970s, the Nixon administration thought it could do away with the gold backing for the currency. By the '80s, the United States slipped from being a net creditor to being a net debtor to the rest of the world. By the '90s, American consumers were spending more than they made...and by the '00s they had given up saving all together – depending on the savings of poor people in China and elsewhere in order to continue living beyond their means.
Each time this system was faced with a recessionary correction, at least in the last 25 years, the feds tried to stimulate consumer spending with easier credit. And each time, consumers took the bait and got hooked on more debt. That’s why the financial industry expanded so much. It sold more and more debt in more and more grotesque and amazing ways.
This time is different. This time the feds have responded with zero interest rates...and $13 trillion worth of bailouts and boondoggles. But the old magic doesn’t seem to work anymore. This time, the formula no longer works. Consumers already have too much stuff – and no way to pay for it all. They have no choice; they have to cut back. This is not a pause in the long cycle of increasing consumption, debt and speculation. It is a reversal of the cycle, with less consumption and less debt meaning more savings, not less.
Hence this is a depression. If left alone, this cycle will see falling asset prices, falling bond prices and rising savings for many years. Stocks should sell down to levels where they are attractive again – at average price-to-earning ratios of 8...7...or even 6 and below. And with dividend yields above 5% per year.
Of course, when that happens people will have lost interest in stocks. The financial magazines will have pronounced the stock market “dead” and Jim Cramer will have been booted off the air.
By that time, the economy will have been restructured too. There will be less retail space. Many malls will have gone broke. Living standards in America and Britain will have gone down. And many of the people in the financial industry will be doing what they ought to have been doing all along – taking lunch counter orders.
BY OUR RECKONING, writes Bill Bonner in his Daily Reckoning, this is not a recession...this is a depression.
In a recession, the bull market formula still works. It just needs a little time to rest...catch its breath...work off inventories...and rebuild cash accounts.
But in a depression, the formula stops working.
The basic formula that drove the US economy for the last 60 years has been the expansion of consumer spending. At first, that spending was healthy spending. People had built up savings during the war. In the Eisenhower years, they were ready to get back to work in the consumer economy, get married, have children, and spend money.
America was then the world’s leading lender...leading exporter...leading manufacturer...and leading everything else, too. Gradually though, having so many advantages caught up to the United States of America. By the 1970s, the Nixon administration thought it could do away with the gold backing for the currency. By the '80s, the United States slipped from being a net creditor to being a net debtor to the rest of the world. By the '90s, American consumers were spending more than they made...and by the '00s they had given up saving all together – depending on the savings of poor people in China and elsewhere in order to continue living beyond their means.
Each time this system was faced with a recessionary correction, at least in the last 25 years, the feds tried to stimulate consumer spending with easier credit. And each time, consumers took the bait and got hooked on more debt. That’s why the financial industry expanded so much. It sold more and more debt in more and more grotesque and amazing ways.
This time is different. This time the feds have responded with zero interest rates...and $13 trillion worth of bailouts and boondoggles. But the old magic doesn’t seem to work anymore. This time, the formula no longer works. Consumers already have too much stuff – and no way to pay for it all. They have no choice; they have to cut back. This is not a pause in the long cycle of increasing consumption, debt and speculation. It is a reversal of the cycle, with less consumption and less debt meaning more savings, not less.
Hence this is a depression. If left alone, this cycle will see falling asset prices, falling bond prices and rising savings for many years. Stocks should sell down to levels where they are attractive again – at average price-to-earning ratios of 8...7...or even 6 and below. And with dividend yields above 5% per year.
Of course, when that happens people will have lost interest in stocks. The financial magazines will have pronounced the stock market “dead” and Jim Cramer will have been booted off the air.
By that time, the economy will have been restructured too. There will be less retail space. Many malls will have gone broke. Living standards in America and Britain will have gone down. And many of the people in the financial industry will be doing what they ought to have been doing all along – taking lunch counter orders.
Bill Bonner, 23 Apr '09
Bill Bonner is founder and owner of Agora Inc., one of America's largest consumer newsletter publishers. Editor of free The Daily Reckoning email – now read by more than 500,000 worldwide – he is also the author of three best-selling investment books, most recently Mobs, Messiahs & Markets (John Wiley, 2007).
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