“You see, dear reader, we do not believe in the perfectibility of man and his institutions. Instead, we see material progress. Man’s machines and inventions get better. But man himself? He is what he always has been… prey to sin and folly… prone to error… and ready for a good time,” wrote Bill Bonner in a recent column. Bonner is the founder and president of Agora Publishing and the principal author of the daily financial column The Daily Reckoning. He is the co-author of The New York Times bestsellers Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, Financial Reckoning Day Fallout: Surviving Today’s Global Depression and The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble.
In this interview, Bonner speaks with DNA Money’s Vivek Kaul and
Sachin Mampatta on fiscal deficits, central banks, gonoism, and that thing called gold.
How has the world changed in the year and a half since we last met?
The real crisis hit in September of 2008. In November, it was still going down. And the stock markets went down till March 9, 2009. And how has the world changed? Well it hasn’t changed as much as I thought it would because there hasn’t been any resolution of the crisis situation. The liquidity crisis was caused by the huge build-up of debt in the private sector, mostly in America and Britain. And that debt has not been resolved. There is more debt now than there was then, but now it is government debt. The government has added a lot to that debt.
Any surprises?
The surprise for me has been the slowness with which this crisis is unfolding. The mistake people make now is to think that it is over, that the crisis was a liquidity crisis, which was cured, solved by the governments that introduced a lot of liquidity, beginning at the end of 2008. The problem was not liquidity at all, wasn’t the fact that you couldn’t borrow money. You couldn’t borrow money because people owed too much money. And the debt is still there. The problem is still there, hasn’t been solved. It was misidentified, and mistreated. So that rather than do things or allow the crisis to continue to express itself fully, authorities all over the world reacted in the same way, that is, by making more credit available to the market, which already had too much credit. And the effect of this was to delay and to retard the development of this crisis. And we are waiting to see what happens next.
What about the way the stock markets have rebounded?
One thing that is surprising is that the rebound in the stock market has been so strong. Not in terms of level. If you look at the rebound that happened in 1929, for example, stocks went up about the same amount... they went up about 50%. Now they are up about 70%, which is a bit stronger. But they have been up for much longer. The bounce after 1929 was for about five months and this has gone for a year now, which is extraordinary. And it’s also true that we have never seen so much money and credit applied to a rescue effort.
What about the rescue efforts the world over?
Tim Geithner (the US treasury secretary) said, we are just going to do what works. We are going to try stuff and see what works. And if it works, then we are going to go with it. But you can’t deal with the economy that way. You need a theory. Economies take too long, much too long, years, to react, and when they do, you don’t know why they did what they did anyway. So really what they are doing is following a theory. The theory they are following is the same theory they have been following for the last 50 years, and it is fundamentally wrong. You can’t really increase consumer spending forever, you can increase it for a while and you can encourage it for a while and then you end up with these people in the private sector as you have today, people who have too much debt. You can’t really expect Americans to increase consumer spending now. Their real incomes are going down. They have been going down for a long time. There is no prospect of their incomes going up because they have 10% employment and among men between the age of 30 and 55 or so, the effective unemployment rate is really 20% because men have been particularly hard hit. The sectors like manufacturing and construction are male-dominated and those are the ones that have been hit hard. So we have a situation in which the idea of increasing consumption in the US and Britain is totally ridiculous.
Yet it is the idea behind the theory now being usedby the central banks in the US and in Britain. That theory was also tried very well in Japan with no decent results whatsoever and yet nothing has been learnt. Same mistakes are being made. Nobody knows what will happen but we can assume more or less correctly same results will happen as happened in Japan when they increased the support to the market. What they got was a zombie market. They got banks which needed to go broke, but did not because government supported them. And they got companies that needed to go broke, needed to collapse, needed to fail, needed to default. None of that happened because the Japanese were supporting them with rates so low that you almost couldn’t go bankrupt. You couldn’t go bankrupt as you can borrow money at 0%, you can effectively do that for a long time. And that has happened in Japan and they have had 20 years of this kind of zombie growth. To me that’s what happens when you apply the wrong theory to a certain set of circumstances similar to Japanese circumstances.
The last time you said the US had a new economic theory and it was Gonoism. Are they practicing it?
Are they? Not quite. Not yet. Gonoism refers to the central banker Gideon Gono of Zimbabwe. His solution to economic problems of Zimbabwe was to just print more and more Zimbabwean dollars. And he wasn’t the first to do that. It’s been done several times, but very, very rarely in advanced economies. In fact, the case people mostly look at is the case of Germany. And there was this guy named called Havenstein, head of the central bank (Rudolf E A Havenstein was the president of the Reichsbank or the German central bank, during the hyperinflation of 1921-1923). He was a smart guy trying his best but couldn’t understand why the economy was not responding. Germany back then had the same situation that is there now in the US and Japan, which was they had falling prices. He said, well, prices are falling, I better print up some money. So he did print up some money. He printed up a lot of money. And then the economy kept collapsing and so he printed up more money. And it was an honest smart reaction but he misunderstood what was really going on because when you have an economy which is in deflation, which is fundamentally deflating, like the US is, people don’t want to spend money. So the velocity of money declines very, very rapidly and you get to a situation the government can put in more monetary reserves but you don’t get higher prices. So they say, well, no inflation problem, so we put in more monetary reserves. They continue doing that.
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