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When Zombies Attack
[Bill Bonner] 07/03/09 London, England
Big news yesterday:
"Jobs report dashes hopes on recovery," says the International Herald Tribune this morning.
Oh?
Yes, dear reader...once again, we're right and they're wrong!
You'll recall from yesterday, the feds said that their monster stimulus program would hold unemployment below 8% in 2009. The year's not half over and the rate is already 9.5%.
Then, they said the numbers were getting better each month - inevitably leading to a recovery by the end of the year. They predicted a loss of 365,000 jobs in June - considerably fewer than in May. Instead, the figures - even after they had beaten them up - said 467,000 jobs had gone, which was considerably more than May's figure. The important thing is that the trend that economists thought they were watching - which was leading to a recovery - has been broken. Instead of fewer job losses, we have more.
Ha ha...we laugh at them. We mock them. We turn up our noses to show our contempt. We turn our backs and point to our...oh, never mind...
But wait a minute. What are we saying? Hold the self-satisfied congratulations, please.
Yes, we were right: there ain't no green shoots. But we're not vain and stupid enough to think we know what is actually going on. Only morons think they know what is going on. And the more sure they are â€" the bigger dopes they are.
Where, exactly, is this economy headed? How is it going to get there? When?
Damned if we know. (And damned if we don't!)
Okay, now...shush...now that we've thrown the jealous gods off our case...we whisper to you: well, we actually DO have an idea of where this economy is going...which we will reveal to you, dear reader, in hushed tones, little by little. For starters, you have to realize: this is a depression. It is not a recession. In a recession, an economy gets a cold and has to take a little bed-rest. In a depression, an economy drops dead. Businesses go broke. The whole structure of the economy changes as the corpses are dragged away and new enterprises take their places.
Economists were 100,000 off on their jobless predictions because they still don't really understand what is going on. We knew the predictions of a recovery were dumb. This is a depression - meaning, it is a major change of direction...not merely a pause in an otherwise healthy economy. After more than half a century of debt expansion, debt is contracting. Businesses, households, investors and the government need to adjust. And that takes time - a lot more than the 20 months of recession we've had so far.
It would happen a lot faster of course, if the feds weren't fighting it every step of the way.
"Rise of the Zombies," is a headline in today's Financial Times. It tells a familiar and predictable story: the feds have propped up businesses coast-to-coast. Instead of being allowed to fail, they are kept alive by the government...and continue to take resources that could be redirected to more promising competitors.
But don't bother telling the feds that. They don't care. The old, worn out zombie businesses still make campaign contributions and employ voters. The businesses of tomorrow don't. The present votes. The future does not.
Investors are wondering if the forecasters know what they are talking about.
"Stock markets disoriented by the uncertainties of the recovery..." says an awkward headline in today's French financial news.
The Dow itself lost 212 points yesterday. Oil fell to $66. Even gold dropped $10 as people fled back to the only asset they know they can count on - the U.S. dollar. Or more precisely, U.S. debt denominated in U.S. dollars.
Come Hell or high water, the Treasury will come through. When it's time to pay the coupons, they'll have the cash. You can count on it.
But what you can't count on is how much that cash will really be worth. And there lies the great trap for the lumpen investoriat. The lumpen, as you know, get their investment ideas from TV and the newspapers. The poor rubes are the last to buy in a boom and the last to sell in a bust. A day late and a dollar short, they always get the worst deals. When the papers tell them there's a recovery - they believe it. When the Fed chief tells them to use adjustable rate mortgages...the silly clumps do it. When a governor of a Federal Reserve banks urges them to "go out and buy an SUV" they head for the dealers.
But thank God for these patsies. Without them, where would we get candy? And where would the U.S. government get its trillions?
The lumpen - along with the sophisticated fund managers who pretend to know what they are doing - are financing the biggest government-borrowing spree in the history of mankind. You don't have to dig too deeply to figure out why that won't work. Financing a little spree of borrowing may turn out well; financing a big one is asking for trouble. Each dollar you lend weakens the borrower's balance sheet. By the time he has gotten to the 12 trillionth dollar...you might as well be throwing the money down a well.
And thank God for Arnold Schwarzenegger. What an entertainer! He had it all. Money. A good wife from a bad family. A nice hairdo. And what did he do? He gave up a promising career in the motion picture business to launch himself into the slimy world of politics.
And now the poor man is groveling. Begging. Imploring the banks to take his state's IOUs. He says they are "rock solid." California is the world's 6th largest economy. But it was a world-beater when it came to debt-based bubble illusions. And now its economy is falling apart. Economists can lie about the inflation rate. They can fudge the GDP. They can torture the unemployment numbers. But when the revenues come in, all they can do is count them up. And revenues are falling. Especially tax revenues.
The feds and the states are losing income. When businesses lose revenue they cut back expenses. But governments - at least those that are modern popular democracies - find that they need to increase spending. They have more people asking for help. And they have programs that become automatically more expensive - such as unemployment benefits - when the economy softens.
Let's see. Expenses down, income up = happiness.
Expenses up, income down = misery.
See how simple it is?
When Zombies Attack was originally published in The Daily Reckoning, a free e-letter offering daily perspective on the global economy and how to prosper in the face of uncertainty.
About the authorAbout The Daily Reckoning: Now in its 10th anniversary year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. In short, The Daily Reckoning shows how to live well even in uncertain times. Published daily in six countries and three languages, each issue delivers a feature-length article and a guest essay from leading thinkers and columnists. Sign up free by visiting http://www.dailyreckoning.com
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