Government Counterfeiting

Government Counterfeiting
by Bill Bonner
London, England
The important news:
Yesterday, both the Bank of England and the European Central Bank announced moves to
boost the economy. They're both falling in line behind Mr. Bernanke, who is "pulling out all the
stops" in order to avoid a deep depression. Both the BoE and the ECB are going to take up forms of
QE - quantitative easing - in which the banks buy government debt directly.
Don't try QE at home, dear reader; you'll be arrested for counterfeiting. QE so closely resembles
old-fashioned printing press money that you couldn't tell them apart in a police line up. Both
are ways to increase the supply of money...which, according to theory, leads to consumer price
inflation.
The Dow fell 102 points yesterday too. The bear market rally has gone on for nearly 9 weeks. It's
probably ready for a rest...and maybe a pullback. We doubt it's over though. There is still far too
much money and far too many suckers who have not been pulled back into the stock market. The
next leg down of this bear market will have to wait - most likely.
Another ominous thing that happened yesterday was that bond yields increased. The yield on
the 10-year Treasury note - at 3.3% - is more than a full percent above its low. The yield on the 30year bond is at 4.26%.
These yields are still very low. But they seem to be moving higher. They are ominous because at
some point in the future we expect all Hell to break loose in the bond market. The slippage we're
seeing now in bond prices (when prices go down, yields go up) may or may not be an early
warning.
But we probably have a few new readers of The Daily Reckoning...let us backtrack in order to bring
them into the picture.
We begin by going back half a century. America emerged the world's biggest, strongest, most
innovative and dynamic economy after WWII. Then, it went from strength to strength...to
weakness. Gradually, Americans turned their attention away from production and towards
consumption. And gradually, America's most profitable businesses shifted from making things to
financing them. That's why GM created GMAC...and why GE staked its future on GE Finance. And
it's why the center of American economic power moved from the manufacturing hinterlands of
Detroit and Cleveland...to the financial centers on the coast...notably the big one in Lower
Manhattan.
The financial sector boomed by supplying credit. Americans borrowed. And so, their debt increased.
From being the world's leading creditors in the '50s and '60s...they became the world's leading
debtors in the '80s and '90s. Gradually, the consumer economy required more and more debt to
produce an extra unit of output. Debtors had to borrow not only to buy...but also to pay back, or pay
the interest on, previous borrowings.
In the Eisenhower years, it took only an extra $1.50 or so of debt to spur an extra dollar's worth of
GDP. By the end of the century, the cost had risen to over $4...and then to $6 a few years later. Total
debt, which had been about 150% of GDP before Ronald Reagan took office, shot up to 370%
in the final years of G.W. Bush.
By the late '90s and early 21st century, the American economy had entered the Bubble Epoque. The
financial industry - aided and abetted by the Fed - was providing so much 'liquidity' it was causing
asset prices to bubble up everywhere. Of course, bubbles always blow up - without exception. And
when the dot.com bubble exploded in 2000, at first, we thought that was the end of the Bubble
Era. Little did we realize, the biggest bubbles were still to come. Then came the bubbles in
housing, art, emerging markets, oil, and commodities. All blew up. But the biggest bubble of all the bubble in credit - blew up too, bringing the Bubble Epoque to a close. Capitalism giveth.
Capitalism taketh away. The process of what Schumpeter called "creative destruction" continues.
We are now in the post-bubble era. The financial industry has been bombed out. It can no longer
create bubbles. Governments all over the world are propping up the walls...and shoring up the
foundations. But the Bubble Epoque can't be revived.
Is that the end of the story? Not at all. The feds' efforts to stop the progress of capitalism will have
some spectacular consequences. The fireworks will start when the bond market cracks...sending
yields through the roof. And that's all we have to say about it today...stay tuned.
Now, over to Addison, who gives us the full scoop on the bank stress test:
"Nothing like peeling a band aid off slowly," writes Addison in today's issue of The 5 Min.
Forecast. "The Treasury concluded their painstaking six week stress late yesterday and announced
(gasp) that 19 American banks under stress need to raise $75 billion if they plan to stay in business.
"Ten of the 19 banks under TARP "protection" will be REQUIRED by the U.S. government to raise
capital. They include: Bank of America, Citi, PNC, Fifth Third, GMAC, Wells Fargo and a couple
more. Notably absent are JP Morgan and Goldman Sachs.
"The best part: Under the government's 'worst case' stress test, the 19 banks stand to lose another
$600 billion... an amount large enough to require at least a few bankruptcies and or nationalizations.
"What's the 'worst case' according to Timothy Geithner? 10.3% unemployment, a GDP contraction
of 3.3% for the year and another 22% fall in housing prices.
"Heh, that's it? That's not far off our best-case scenario. In fact, with a modicum of imagination it's
not hard to envision much worse.
"The Bureau of (be)Labor(ed) Statistics says 539,000 Americans lost their jobs in April. That's a
horrendous number, but still below the 600,000 forecast earlier in the week. And it's actually the
best jobs number since October."
"The official unemployment rate still fell in line with Wall Street estimates. At 8.9% it's a 25-year
high and just a hair below the 1975 peak of 9%.
"Since the beginning of 2008, 5.7 million Americans have lost their jobs. A record 6.3 million
people are currently filing for unemployment benefits."
Addison writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick
and dirty analysis of daily economic and financial developments - in five minutes or less. It's a free
service available only to subscribers of Agora Financial's paid publications, such as the Hulbert #1
Performing Investment Letter, Outstanding Investments.
And more thoughts from Bill in London:
One of the reasons people believe the "worst is behind us" is because the Chinese economy seems
to be growing.
This from the Financial Times:
"Perhaps more than any major economy, China is showing signs of improvement, writes Geoff
Dyer. Indicators suggest that the economy began to recover in March with industrial production
rising 8.3 per cent from 2.8 per cent in January-February.
"But could it all be a bit of false hope? Could we, in fact, be misinterpreting a temporary
stimulus-induced economic pick-me-up as an actual sustainable recovery?"
China says it is growing. But if it were really growing it would be using more fuel and more
electricity. Instead, industrial demand for gasoil, used by factories and commercial plants, fell
12.6% in the first quarter.
Our old friend Sean Corrigan, chief investment strategist over at Diapason Commodities, also
points out that electricity generation has been going down too. The last seven months' power output
has been 8.5% below that of a year ago.
Another old friend, Jim Rogers, believes China - along with commodities - is still the best place for
your money. He may be right. But we don't speak Chinese...and we fear the Chinese market
may be subject to more risks than is popularly understood.
One of the risks we think is especially understated for China is the risk of central planning.
Investors tend to favor China - over, say, India - because they think the Chinese government - even
in the hands of communists - is capable of guiding the economy to prosperity. That is, in China's
case, they believe central planning is a plus and pay a premium for it. But central planning is always
a mistake as near as we can tell. It is only not a problem when it is carried out so clumsily that it is
ineffective.
"China's head honchos tout a rosier future for the 'Red Dragon' economy than seems possible," says
The Richebächer Letter's Rob Parenteau. "Over 15,000 factories in the Chinese provinces of
Shenzhen, Guangzhou, or Dongguan have already shut down... with many more slated to close over
the months ahead.
"It's an epidemic that's happening all across Asia, though you might not be hearing about the
full scale of their meltdown on the evening news.
'Half of China's toy factories have shut down. In fact, at least 67,000 factories overall closed in the
last six months of 2008. With another 60,000 factories in the Wen Zhou Province alone about to
shut down.
"As many as 27 million Chinese are already out of work - with 20 million of them streaming out of
the cities and back to the abandoned farms of the Chinese countryside."
Keep reading Rob's full report and learn about two simple moves to protect yourself. One takes
about five minutes to set up and, in one play, gives you a proxy hedge against the entire Asian
downturn. The other is a key "super shield" against a new collapse in Asian currencies. Get all the
information here.
Remember the 1980s? Then, too, investors were willing to pay a premium for central
planning. Then, it was Japan that was doing the planning. Investors sold U.S. stocks - on the theory
that the United States couldn't get its act together - and bought Japanese stocks, because MITI, the
Japanese bureaucracy in charge of economic planning, was supposed to be doing such a fine job of
guiding the country to eternal success. It didn't seem to bother them that this same agency had
advised Japanese carmakers to stay at home and not try to penetrate the U.S. auto market.
Of course, in 1989, the Japanese market...and its economy...cracked. Then, the Japanese turned their
central planning skills to the task of avoiding the kind of creative destruction that capitalism had in
store for them. In this they were more successful - preventing the necessary restructuring for the
next 20 years. Brain dead banks were kept alive. Zombie companies remained in business. And an
amount of money equal to more than an entire year's total output of all the Japanese people
was spent in futile 'stimulus' efforts. Today, Japanese stocks are still selling for 75% less than
they were in 1989. Japanese property, too, is only worth about a quarter of what it was worth at the
top of the boom.
Keep reading for today's essay...