A Worldwide Bubble in Everything

The depression deepens.

"These are not layoffs...they're permanent job losses," said Barry Ritholtz yesterday morning in his presentation at the Agora Financial Investment Symposium in Vancouver. "These people are not going back to work anytime soon."

That is the difference between a recession and a depression. In a recession people get laid off...and then they are called back to work when things go back to normal. But in a depression, they are let go permanently. They exhaust their unemployment benefits and become desperate. They must find new employment in new industries. Because things cannot go back to normal; normal is played out.

"In the period, 2001 -2007," our old friend Mark Faber reminded us in his speech on Tuesday, "the Fed managed to do something that had never before been done - create a worldwide bubble in just about everything. Stocks, bonds, art, oil, housing - you name it; it went up. The only thing that didn't go up was the dollar."

How did the Fed pull off such a remarkable achievement?

Stimulus!

After a half a century of stimulus - with credit, inflation and the money supply growing faster and faster - the Fed put the pedal to the metal following the nano-recession of 2001. It dropped interest rates to just 1% - well below the rate of consumer price inflation - and kept them there until an expansion had been going on for three years.

Stimulus stimulates. By 2007, the world economy was taking curves far too fast. As we guessed, the stimulus didn't stimulate nearly as well as the meddlers had hoped. Instead of increasing real output in the US, it lured Americans to spend and speculate...and drove Chinese entrepreneurs to put up new factories in order to give them something to buy. In America, debt grew 5 times faster than GDP; for each dollar of extra income, Americans added $5.50 to their debt. In China, manufacturing capacity grew faster than ever.

Whole industrial cities, the size of New York or Chicago, were added to the map - in a matter of just a few months.

Now the world has too many factories...and too many consumers with no money to consume with.

[Unfortunately, the economy has been depending on consumers as the number one driver...and now that consumers aren't consuming - what's going to push the economy forward? Read Rob Parenteau's latest report for the full scoop. Get it here.]

You've heard us tell this tale many times. You'd probably like us to get on with it...and tell you how it turns out. Instead, we keep looking back.

"Bubbles had been localized in the past," Marc explained. "A bubble in one area drew investment from another area. In one market, prices soared. In another they slumped. Overall, things didn't change much."

But a worldwide bubble in everything is something new. And it caused something else that is new - a worldwide crash. We have been ducking explosions and stepping over the debris for the last two years.

[If you weren't able to catch Dr. Faber's speech at this year's conference, don't worry - you can still get all the advice and insights available to the attendees...without leaving the comfort of your own home. Find out how you can get the full recordings of all the main session presentations by clicking here.]

More news, from the Agora Financial Investment Symposium in Vancouver:

"'Loss of purchasing power AND a devaluing dollar is going to invite inflation into our economy. So the dollar won't buy as much as it used to, and the dollars you have will be eaten away by inflation,' so said our currency counselor, Chuck Butler in his presentation at the Symposium yesterday.

"Everyone seems to agree that inflation will plague the United States eventually - when exactly that will happen is still up in the air. So what do you do to protect yourself from this impending threat? According to Chuck, 'You need to diversify out of the dollar.'

"Chuck advises us to think of diversification as an insurance policy. He recommends the allocation of different amounts in your portfolio. '20% allocations in currencies, 20% in metals - maybe foreign real estate. Anything to get you out of the dollar.'

[You can hear Chuck's speech - in it's entirety. If fact, you can hear all of the main session presentations in the complete AF Symposium audio set, on sale at a significant discount. Get yours here.]

"Also presenting yesterday was frequent DR contributor James Kunstler. Like most presenters here at the Symposium, Kunstler acknowledged the fact that most attendees are curious about the current economic situation the United States faces right now and what's in store for the long-term.

"'The most striking thing about the current situation,' said Kunstler, 'is our inability to construct a coherent consensus on what is happening to us and what we are going to do about it.'

"'One of the consequences [of the credit and consumption bubble] is that we are now no longer able to generate that "something for nothing" wealth that came out of the frauds. And now we can't use our revolving debt economy. Now we have to pay for what we do out of the "accounts receivable".'

"Kunstler warned that the way Americans think about oil and energy has to change.

"'China is going around the world making special arrangements with oil producers,' he said. 'So a lot of oil is going to come of the oil futures market and be earmarked for China. That is going to change the way the oil markets work.'


"Kunstler appeared again at the 'Whiskey Bar', a rough and tumble discussion sponsored by our sister publication, Whiskey & Gunpowder. On the panel was James Kunstler, Whiskey & Gunpowder's Gary Gibson, Breakthrough Technology Alert's Patrick Cox, Barry Ritholtz, Capital & Crisis' Chris Mayer, Doug Casey, Outstanding Investment's Byron King and The Rude Awakening's Eric Fry, who moderated the panel.


"Sparks were flying - partly due to the free booze, and partly due to the wide variety of opinions and views on what is happening in today's economy. Case in point: Doug Casey and Barry Ritholtz on government regulation vs. the free market. Says Casey: 'The whole system is rotten from top to bottom. The whole system has gone rotten - and don't look to the Republican Party for help or answers. We wouldn't have any of these problems if the market ruled.'

"'We've never had a textbook free market, and we never will,' Barry responded. 'This government has been corrupt, and always will be that way. But the thing is, people keep voting these guys into office. The first step is total transparency - but will we ever get that?'


"After the Whiskey Bar ended, staff members headed to the Pan Pacific Hotel for a 'roast and toast' of our own Bill Bonner, in celebration of the 10th anniversary of The Daily Reckoning. We will get into the 'Evening of Reckoning' more in this Saturday's weekend edition of the DR.

"Today's line-up will not disappoint. We are going to hear presentations from Resource Trader Alert's Alan Knuckman, Doug Casey, Outstanding Investments' Byron King...and more! We will be back tomorrow with a full report."

[If heading to Vancouver for the Symposium was just not in the cards for you this year, don't worry - we are recording all of the main session presentations and putting them in both CD and MP3 format. And until Monday, July 27th at midnight, you can get these audio recordings at a significant discount...get yours now.]

And back to Bill, with more thoughts...

One of the biggest and most obvious consequences of this worldwide bubble is unemployment. Even Ben Bernanke says that joblessness could be a problem for years. What to do about it? More stimulus!

"The (Fed) believes that a highly accommodative stance of monetary policy will be appropriate for an extended period," he said on Tuesday.

Will this new stimulus succeed? Will the depression end soon?

'No' is the right answer. Instead, it must run its course. It must eliminate plus capacity and reduce excess debt. Until that is done, the job picture will get worse, not better.

Just look at what is happening in state and local governments. The LA Times:

"If the budget deal crafted by Governor Schwarzenegger and top legislative leaders is passed by the legislature and survives the inevitable court challenges, California will undergo perhaps the biggest down scaling of government in its history."

Downscaling government means fewer state-level jobs. Fewer people drawing salaries from the government means more people looking for work elsewhere. But they will not find it in the blown-up industries and zombie companies of 2009. They will have to wait...and wait...and wait...

In the race to downscale, California faces swift competition. All over America...and in much of the English-speaking world...governments are forced to cut back.

Just look at what is happening in Ireland. Here, we turn to The Telegraph in London:

"Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

"A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

"No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base."