 | | The Daily Reckoning | Thursday, August 4, 2011 | - Markets welcome the debt ceiling resolution... with stormy tumult,
- How many of these currencies went kaput during your lifetime?
- Plus, Bill Bonner on economies in reverse and topsy-turvey hallways...
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America 2012...Wall Street in Ashes...Main Street in Ruins...
Here's SIX ways to protect yourself and profit from the biggest lies DC, Wall Street, the Fed and your banker are telling today...Click Here To Find Out How >> |  | | | | | | Debt Ceiling Storm | | US breeches 100% mark within minutes of agreement |  | | Joel Bowman | Joel Bowman, reporting from Limerick, Ireland...
"We've been checking the weather constantly," reported the groom, "but we're getting conflicting reports. The BBC says it should be fine [on the wedding day], but the Irish press is forecasting rain. I don't know if that's BBC optimism or Irish pessimism."
"Could be Irish realism," your editor offered. More on that below, but first, a look at the world of finance...
Markets in the US barely managed to come up for air yesterday after spending eight straight days underwater. The major indexes posted a rounding error-sized gain before collapsing again in early trading today. The Dow plunged over 1% out of the gate this morning, before continued its southward trajectory. Last we checked it was off more than 2.2%, taking losses over the past month to 7.5%. The S&P 500 and the Nasdaq have trended similarly, the former now down over 2% for the year, the latter off 1.3% over the same period.
What's going on? What does Mr. Market know today that he was not aware of a week ago, or a month ago? Ahh... if only we knew! Mr. Market works in funny ways... though not always the "ha-ha" funny investors enjoy. Something we're relatively sure of is that these things don't usually move in smooth, predictable paths. Straight lines are for geometry classes, not stock markets. That in mind, Mr. Market might feel a short term, counter-trend advance is in order, something to sort out the shorts. We could be wrong, of course... and the whole thing could go to Hell tomorrow.
The papers tell us that this morning's fall is in response to another poor showing in the US jobs market. But this is hardly news. The US hasn't posted a weekly jobless claims number below 400,000 since early April. The current four-week rolling average stands at 407,000... give or take. And now we see that US GDP growth has "stalled out" for the year. Various estimates -- including from the government's own figure-fudging factory -- indicate the economy slipped behind the 2% annual growth rate during the first two quarters of this year. Two per cent is about the rate many economists agree is required to keep pace with population growth. Some recovery, eh?
Within moments of agreeing to raise the much-ballyhooed debt ceiling -- a self-congratulatory, Congressional back-slapping moment covered in these pages yesterday -- borrowing by the United States officially topped 100% of GDP. Gross debt shot up $238 billion on Tuesday, Treasury figures showed, as the politicos scrambled to fill the hole left by some of Secretary Timothy Geithner's "extraordinary measures" to keep the lights on while the two parties were jockeying for position in that all-unimportant debt ceiling debate.
The Associated Press provides some details:
"[The] new borrowing took total public debt to $14.58 trillion, over end-2010 GDP of $14.53 trillion, putting the United States in a league with highly indebted countries like Italy and Belgium.
"Public debt subject to the official debt limit -- a slightly tighter definition -- was $14.53 trillion as of the end of Tuesday, rising from the previous official cap of $14.29 trillion a day earlier.
"The official limit was hiked $400 billion on Tuesday and will be increased in stages over the next 18 months."
The fed's latest borrowing places the United States alongside a dubious cast of spendthrift ne'erdowells who's debt to GDP ratio now exceeds 100%. The list includes, according to figures provided by the International Monetary Fund, Japan (229 percent), Greece (152 percent), Jamaica (137 percent), Lebanon (134 percent), Italy (120 percent), Ireland (114 percent) and Iceland (103 percent).
The latest batch of non-recovery figures were probably not what Mr. Geithner had in mind when he penned his Welcome to the Recovery article in the New York Times exactly one year and two days ago.
"The economic rescue package that President Obama put in place was essential to turning the economy around," Geithner gushed in that unfortunate piece. "The combined effect of government actions taken over the past two years — the stimulus package, the stress tests and recapitalization of the banks, the restructuring of the American car industry and the many steps taken by the Federal Reserve — were extremely effective in stopping the freefall and restarting the economy."
We invite the reader to take a look around and to judge for himself or herself just how effective the administration's oft-lauded measures have proved... or not proved.
Such is the tattered state of the United States balance sheet that it has managed even to draw the scrutiny of the ratings agencies, typically the very last observers to any financial crime scene. On Tuesday, Moody's warned the US government that it needed to stabilize its debt to GDP ratio at 73% by 2015 "to ensure that the long-run fiscal trajectory remains compatible with a AAA rating."
What do you think the chance of that is, Fellow Reckoner? The odds of a sunny wedding day in Ireland? Maybe less.
We arrived at the Church of St. Creabhnaith Annakissa, here in Limerick, about an hour before the bride. The old stone building appeared grey against the brilliant, green rolling hills to its sides and off in the distance. A cemetery out back stood well tended with flowers on the graves of O'Boyles, O'Sheas Moyles and the like. The sky overhead appeared ominous; the color of the old church stones.
After a quiet, contemplative walk around the grounds, we were ushered inside for the ceremony. Catholics don't like to rush their services. Your editor spent twelve years in a Catholic school as a child, so he was well prepared. Others had no idea what they were in for. A group of Americans to our right -- at least one of them a Southern Baptist, another indifferent altogether -- had never sat through a ceremony so long.
The grooms party looked suitably dapper in their kilts (the groom being Scottish) and the bridesmaids, in matching satin dresses and holding roses which filled the space with the aroma of spring, were outshone only by the glowing bride herself.
First came the Liturgy of the Word, then a reading from the Book of Tobit: "Now you will feel no rain, for each of you will be shelter to the other... "
Next the Responsorial Psalm and a reading from the first letter of St. Paul to the Corinthians:
"If I speak in the tongues of men and of angles, but have not love, I am only a resounding gong or a clanging cymbal... "
Then came the Gospel Acclamation... the lightings of candles... marriage rites... Prayers of the Faithful... Liturgy of the Eucharist... and plenty more we can't now recall.
Outside, the guests gathered in groups and remarked on what a touching ceremony it had been. The organist's voice was angelic, all agreed, and the bride and groom made a fantastic couple. The whole scene was so peaceful. We could have spent the whole afternoon outside in the lush countryside, drifting from group to group. Then, before long, a member of the groom's party tapped us on the elbow and whispered, "Better be getting back to the reception, aye, looks like itsa gonna rain any moment now... "
Two minutes later, the new husband and wife safely in their car and on the road back to town, a light mist began to fall gently on the crowd...
| | | | | | | | | | | | The Daily Reckoning Presents | | A Thousand Pictures Is Worth One Word | | |  | | Jeff Clark | In spite of constant headlines about debts and deficits, most Americans don't really believe the U.S. dollar will collapse. From knowledgeable investors who study the markets to those seemingly too busy to worry about such things, most dismiss the idea of the dollar actually going to zero.
History has a message for us: No fiat currency has lasted forever.
Eventually, they all fail.
BMG BullionBars recently published a poster featuring pictures of numerous currencies that have gone bust. Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof!
You might suspect this happened only to third world countries. You'd be wrong. There was no discrimination as to the size or perceived stability of a nation's economy; if the leaders abused their currency, the country paid the price.
As you scroll through the currencies below, you'll see some long-ago casualties. What's shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you've been born.
So what's the one word for the "thousand pictures" below? Worthless.
 | | Yugoslavia -- 10 billion dinar, 1993 |  | | Zaire -- 5 million zaires, 1992 |  | | Venezuela -- 10,000 bolívares, 2002 |  | | Ukraine -- 10,000 karbovantsiv, 1995 |  | | Turkey -- 5 million lira, 1997 |  | | Russia -- 10,000 rubles, 1992 |  | | Romania -- 50,000 lei, 2001 |  | | Central Bank of China -- 10,000 CGU, 1947 |  | | Peru -- 100,000 intis, 1989 |  | | Nicaragua -- 10 million córdobas, 1990 |  | | Hungary -- 10 million pengo, 1945 |  | | Greece -- 25,000 drachmas, 1943 |  | | Germany -- 1 billion mark, 1923 |  | | Georgia -- 1 million laris, 1994 |  | | France -- 5 livres, 1793 |  | | Chile -- 10,000 pesos, 1975 |  | | Brazil -- 500 cruzeiros reais, 1993 |  | | Bosnia -- 100 million dinar, 1993 |  | | Bolivia -- 5 million pesos bolivianos, 1985 |  | | Belarus -- 100,000 rubles, 1996 |  | | Argentina -- 10,000 pesos argentinos, 1985 |  | | Angola -- 500,000 kwanzas reajustados, 1995 |  | Zimbabwe -- 100 trillion dollars, 2006
| So, will a similar fate befall the U.S. dollar? The common denominator that led to the downfall of each currency above was the two big Ds: Debts and Deficits.
With that in mind, consider the following:
Morgan Stanley reported in 2009 that there's "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt, including the present value of future liabilities like Social Security and Medicare, now exceeds GDP by more than 400%.
Investment legend Marc Faber reports that once a country's payments on debt exceed 30% of tax revenue, the currency is "done for." On our current path, analyst Michael Murphy projects we'll hit that figure by October.
Peter Bernholz, the leading expert on hyperinflation, states unequivocally that "hyperinflation is caused by government budget deficits." This year's U.S. budget deficit will end up being $1.5 trillion, an amount never before seen in history.
Since the Federal Reserve's creation in 1913, the dollar has lost 95% of its purchasing power. Our government leaders clearly don't know how -- or don't wish -- to keep the currency strong.
Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the possibility of the greenback being added to the above list grows every day. And this will lead to serious and painful consequences in our standard of living. While money is only one of many problems we'll have to deal with, you can protect your assets with the one currency that can't be debased, devalued, or destroyed by irresponsible leaders.
Don't be the investor who dismisses this message from history. Use gold (and silver) as your savings vehicle. Any excuse you have now will be meaningless and irrelevant when we enter that fateful period. Make sure you own enough precious metals to make a difference in your portfolio.
Because when it comes to money, worthless is not a fun word.
Regards,
Jeff Clark,
for The Daily Reckoning
P.S. Owning physical gold is good protection from the sinking value of the U.S. dollar; investing in the right gold miners can yield even higher returns. BIG GOLD focuses on the larger miners that have strong profit potential, and will help you build your wealth. Give it a ninety-day risk-free trial. Details here.
| | | | | | And now over to Bill Bonner with the rest of today's Reckoning
from Paris, France... | | A Good Debtor | | A "let it be" approach to the ongoing economic correction. |  | | Bill Bonner | We're spending the month of August out in the country. This is the house where most of the children grew up -- a huge, stone, shambling place, built in the 16th or 17th century and rebuilt at the end of the 19th. The floors are like roller coasters. The ceilings sway like an old mare's back. The plumbing snorts and gurgles.
What fun to be back! More below...
Meanwhile, in the world of money, life goes on. It has its ups and downs, too, just like our hallway. And we are now in one of its down phases. Stocks have fallen for 8 of the last 9 sessions...with a small rise in the Dow yesterday to break the trend.
This long stretch of losses should give rise to a bounce back in the short-run. But a long stretch of losses is still what the stock market needs. Somehow, it has to get from where it is down to where it should be. Stocks should be cheaper. Markets go up and down. It started down more than 10 years ago. But it has never completed its rendezvous with the bottom. The bottom for this bear market -- the one that began in January 2000 -- is probably down around 5,000 on the Dow. So, we have a long way to go...and probably a long time to get there.
Yesterday, the Dow rose 29 points. But gold shot up $21.
Gold is amazing; it's up 18% in 2011. And now the emerging market central banks are loading up. They've got plenty of paper money already -- mostly dollars. But they're no dopes. They've read the history books. They know what happens when economies get in trouble....and they know what happens to paper money too. They read the papers too. They know what a fix the advanced economies -- particularly the USA -- are in. And they know too that leading, respected economists -- such as Ken Rogoff at Harvard...not just clowns like Paul Krugman -- are recommending higher levels of sustained inflation in order to reduce American and European debt.
South Korea, for example, just bought 25 tonnes of the yellow metal -- more than a billion dollars worth. This was its first purchase of gold in 13 years. We doubt that it will be its last.
Gold follows power. Gold follows wealth. Right now, emerging economies have very little gold. Makes sense. They were too poor to afford it. But now, they are getting rich and the advanced economies are getting poor. What happens next is inevitable -- gold will emigrate...from the old rich countries to the new rich countries.
Who can blame it? The latest news shows the US economy is practically dead in the water. GDP growth per capita has stalled. Consumer spending dropped for the first time in almost 2 years. And layoffs rose 60% last month.
The Wall Street Journal has more on the employment front:
U.S. businesses hired modestly in July, while service-sector growth slowed and factory orders weakened, sapping an economy already in a deep rut.
U.S. private-sector payrolls rose by 114,000 last month, according to a report Wednesday by payroll firm Automatic Data Processing Inc. and forecaster Macroeconomic Advisers.
One thing we're beginning to realize is that when an economy goes into a correction, everything seems to go into reverse.
In a healthy, growing economy, consumer sales go up...but business profits often go down. Why? Because costs rise, particularly the cost of labor. Raw materials costs go up too. And competition increases, squeezing margins.
But when the economy goes into a correction, sales go down...but business profits can still go up. Businesses cut labor costs aggressively. They become more efficient, desperately trying to make and conserve cash. The time for expansion is over.
Are they worth more? No. They're worth less. Because as the correction continues, margins go back to normal...but sales do not. Today's stock prices rest largely on profit reports, which have misled investors into believing all is well. But all is not well. This is a correction...a Great Correction...and in a correction, asset prices go down.
Here's another thing that goes into reverse. Stimulus measures. In a healthy economy, lower rates and/or more government spending will cause the economy to pick up speed. Businesses will borrow to expand. Consumers will borrow to spend.
But in a correction, stimulus measures don't work at all -- or work in reverse. Businesses borrow only to build up cash hoards. Consumers borrow only to pay off old debt with new debt. The problem in a correction is debt (and all the bad decisions associated with it). Stimulus spending adds debt. The situation gets worse, not better.
And of course, government finances go into reverse too. In a healthy economy, tax revenues rise with GDP and social welfare spending declines (fewer people need unemployment comp or food stamps, for example). Then, when the correction comes tax revenues fall...while more people stand in line to get 'benefits.'
And then, it gets worse. Because, as governments run deficits to try to combat the slump, more bad things happen. Debt rises compared to GDP. This makes government debt less attractive to investors, so they have to pay higher real rates to borrow...and they have to borrow more! Plus, as the total amount of debt rises, the debt itself weighs the economy down...slowing GDP growth even further.
Yes, dear reader...when a correction comes...everything goes bad.
But we're happy, optimistic, forward-looking people. We're not going to get too gloomy about it.
In fact, in the spirit of civic generosity we offer some insight and advice to policymakers everywhere.
When a correction comes, let it be. Let it happen. Let the correction
do its work as fast as possible. Let bad investors suffer losses.
Let bad banks and bad businesses fail. Let bad debt die...
And remember, a good debtor is one who reneges on debt he can't pay...not one who borrows more.
And more thoughts...
"Welcome back," said Damien, seconds after we drove up.
The house has been sitting empty for 6 months. Damien, a part-time gardener, has been keeping an eye on things. He had just mowed the lawn and opened a few shutters. The place didn't look bad.
Damien had gone to the hospital recently to have his prostate examined. They found nothing wrong with it. So, Damien was in a good mood.
"Let's have a drink to celebrate your return," he proposed. Gardeners -- at least French gardeners -- are always ready to sit down with a glass of alcohol. So, we got out a bottle of whisky and drew up a couple of chairs to an outside table.
"What's new," we asked.
"New? Nothing really. Nothing ever changes here."
Then, after a couple more glasses...
"You know that Mr. Blanchard got remarried? You remember him. He sells cheese at the market. His wife committed suicide a few years ago. It was very sad. They have small children. I don't know what got into her. But they found her in the river.
"Then, I noticed Mr. Blanchard hanging out with that English woman. I don't know what she was doing here. But the English are funny. They come to France and get divorced. I think it's the strain of living in a foreign country. Or maybe it's because they only have each other to talk to. You know, they are semi-retired or something. They dream of leaving their jobs and troubles in England and coming to France, where the weather is better and the prices are lower. And so they come. And they bring their troubles with them.
"The weather is better here. But the pound went down and so now it's more expensive for them here. And they are isolated. They only talk to each other...and I guess they get bored. So, one of them eventually gets sick of it and goes back to England. And the other one stays here and doesn't know what to do with himself...or herself.
"Well, I noticed Mr. Blanchard getting very friendly with this English woman. She's a nice looking woman, too. And then she was with him behind the table, selling cheese at the open air market. And they'd go behind the truck and I heard them giggling.
"Well, they got married. And they seem very happy together. I hope it works out. He deserves a break."
Regards,
Bill Bonner,
for The Daily Reckoning
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