Back to the future

As promised, today, we enter the time that hasn’t come yet: the point where the poor camel’s back gives way.

Hmmm… yesterday, the Fed confirmed that it would withdraw another $10trn of quantitative easing (QE). Stocks fell 114 on the Dow. Gold dropped $17.

What to make of it?

You’ll recall that as long as ZIRP (zero interest rate policy) continues, the feds are draining more and more resources from the future. They encourage people to borrow – by dangling near-zero interest rates in front of them.

The debt must be serviced and retired, of course, from future earnings, reducing the amounts available for current wants and needs. Thus is the future placed in debt bondage to satisfy the desires of the here and now.

The whole world is in on it. With total global debt of $100trn, even if the world could set aside $5trn a year, it would take about 30 years to pay off the debt (including interest at ‘normal rates’).

But the world cannot set aside $5trn a year. It can’t even stumble along at break-even. Instead, it needs an additional $5 trn worth of borrowed money net, annually, just to stay at current level s of unemployment, asset prices, consumption and interest rates!

In other words, today, instead of paying down the past debt, we borrow more from the future just to stay in the same place.

The question on the table yesterday: how much future is left?


Bill Bonner on markets, economics & the madness of crowds

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We didn’t have an answer. Today, we tackle an easier question: what will the future look like when it comes. We refer, of course, to that part of the future when the you-know-what hits the fan.

As we began to explain two days ago, the typical result of asset inflation is asset deflation. That much is guaranteed. And it could begin any day. US stocks were the main beneficiaries of the credit bubble. They will, most likely, be the main victims when the credit bubble bursts. Then, the record highs of the recent past will be matched by record lows.

Nature loves symmetry. That’s just the way it is. What goes up must come down. Booms in margin debt, stock buybacks, junk bond issuance, and stock and bond prices will all be followed by terrible busts.

That is as it should be. It is natural. It is healthy. The junk is flushed out, the bad decisions and mistakes are cleansed, economic life can go on. A new boom can begin.

Of course, a real recovery would moderate the bust. Higher sales, higher incomes, higher profits – all contribute to the kind of growth that makes debt less of a burden.

Do we have a real recovery? The official statistics tell us that we have the weakest recovery since the Fed began instigating them. A closer look at the figures, however, tells us that there is no recovery at all.

Auto sales, house sales, household incomes – all are either flat or falling.

You have heard, of course, that the unemployment level has fallen to 6.7%. You have also heard, we suppose, that much of the drop is attributed to older people who have simply retired.

But it isn’t true. Instead of retiring, old people have held onto their jobs like drowning men clutching to their life preservers. The numbers tell the tale. The age group that has contributed most to the falling participation rate is the group in the prime earning years, 25 to 54.

Older workers, over 55, on the other hand, have actually increased their participation in the labour pool. They added 3% to the labour force, while the younger group subtracted 4.7%.

Why would older people want to keep working? The obvious answer is that they don’t have enough money to retire.

Young people, meanwhile, need to work. There is no question of retirement. But they can’t find jobs. In other words, the data used to prove that the economy is well and truly recovering proves just the opposite. And here’s something more: the failure to bring a real recovery is the only thing that allows the bubble to continue expanding.

More on this important point tomorrow…

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