12/11/09 Dakar, Senegal - Nothing is quite as disagreeable as a neighbor who has made a lot of money by not following your advice. After 9 months of 'recovery' they are all around us. They think they have perfected the art of bubble riding.
Here on the back page, we alert investors. We wag our fingers and shake our heads. Little good it does. We might as well warn surfers about an approaching storm. They don't head for cover; they rush to the beach, hoping it's not too late to catch a big one.
As of this week, investors are still making money. Almost everything has outperformed cash over the last 9 months. Stocks, commodities, gold - you name it. This wouldn't be happening were it not for the government. The feds are making waves from Malibu to Manila. 'Don't worry about the depression,' they tell us; 'we're on the case.' That, of course, is what we're worried about.
Instead of allowing things to settle down, the feds are doing all they can to keep them stirred up. Amid the foam and splash, nobody knows what is really going on. For example, they've driven the yield on cash down to near zero. What's a borrower to think? Why are interest rates so low? Are there so many trillions in idle savings that he can have them for nothing?
Investors don't know whether they are coming or going either. They're buying S&P stocks at more than 80 times earnings, while people who know what they are doing - the insiders - dump 82 shares for every one they purchase.
And in the economy, last Friday, came a puzzling report from America. According to the feds, unemployment dropped by 0.2% last month. That leaves only 15 million without work. Another report tells us that each job created by US government stimulus costs $246,000. What were they hiring, bankers?
While the feds muddy the waters, the de-leveraging of the American consumer continues. Consumer credit fell in the US in October, for the 9th month in a row. As long as consumers are cutting back there is no way a real recovery can begin.
What to make of it all? We turn to a ghost for an explanation. Friedrich Hayek described a similar situation 76 years ago:
There can...be little doubt that ...a deflation process is going on...Central Banks, particularly in the United States, have been making earlier and are more far-reaching efforts than have ever been undertaken before to combat the depression by a policy of credit expansion - with the result that the depression has lasted longer and has become more severe than any preceding one.
...all conceivable means have been used to prevent the readjustment from taking place; and one of those means , which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about...
He could have been describing Japan's 20-year depression, too. So far, we have no evidence that the authorities can improve a depression. All we know is that they can stretch it out.
A real recovery is a process of discovery: it begins in misery and ends in prosperity. Investors figure out what their boom-era investments are really worth. Businessmen figure out how to turn a profit in a new environment. Households learn how to match their incomes against their expenses in a world where credit is less forthcoming and jobs are harder to find. Needless to say, the faster these discoveries are made, the better.
But the first thing people realize is that they have been idiots. Then, they call for the government to prove it isn't so. In Britain, the government has spent about $8,000 per family to bail out the banking sector. As a result, we don't get to discover what the bankers would do if they were forced to seek honest employment. Nor do we discover what the poor taxpayers would have done with that $8,000 if it hadn't been forcibly transferred to the City.
Likewise, what we want to know about an insurance company is how well it holds up under pressure. But when the feds rushed in to save AIG they corrupted the facts. Then, in the US alone, there were Bear Stearns, Citigroup, Washington Mutual, General Motors, Chrysler, Fannie Mae and Freddie Mac, not to mention the small fry. Our curiosity remains unsatisfied; what kind of world would it be if they had gotten what they deserved?
Alas, the feds have created a world of darkness and depression. No one knows anything. And what they think they see clearly is often a mirage. Employers don't know whether to hire or fire. Consumers are blind too; they don't know whether things are getting better or worse. Finally, government even pokes its own eyes out. Relying on 'funny money' to cover its deficits, it has no idea how far it can go before it falls off a cliff.