Depressions Take Time

Everything is working out just like we thought it would. The stock market is performing as expected. The economy is on track. Even the politicians are doing what they thought they would.

Let’s begin with the stimulus/bailout/boondoggle/BS plan. As anticipated, it has failed. That is, the economy is getting worse, not better. It has failed the test set for it by its own creators. Back when the Obama Team was arguing for a big bailout bill, it warned that without a bailout, unemployment would rise above 8% in 2009. ‘Pass this bill today,’ said Ben Bernanke, or words to that effect, ‘or there may not be a tomorrow for the US economy.’

Congress dutifully bent its back to the task of adding boondoggles to the bill and then okayed the measure. And here we are, in the middle of 2009, and the unemployment rate is already at 9.4%.

Even at the time, it was obvious that the hacks in the administration had no idea what was going on. They were just guessing about the economy and taking advantage of the situation to pass out more money that taxpayers hadn’t even earned yet.

As predicted, the spending didn’t make the situation better; if anything, it probably made it worse – by delaying the process of destruction, and hence retarding the process of creative reconstruction too.

We recall our other forecast too: when the bailout doesn’t work, they’ll pass another one. And so, in yesterday’s New York Times, there is David Leonhardt urging the pols to even bigger acts of absurdity:

“The economy really may need more help,” he says.

Yes, it will need more help. Especially if it keeps getting the kind of help it’s been getting.

The stock market is acting more or less as we thought it would too. The big bounce began on the 9th of March. It’s been almost four months now…and the bounce should be getting near its peak…and beginning to fall again. Just look at a chart of the Dow since March. You’ll see exactly that. Like a cannonball, it went up…and now it seems to be arching over for its fall to the ground.

As stocks roll over, the economic news rolls over too.

Yesterday’s issue of USA Today featured a report that said small businesses are going broke faster than expected. Small businesses are supposed to be the survivors. Like mammals in the Ice Age, they replace the dinosaurs. In a recession, big, costly, inflexible companies are supposed to get hit the hardest…leaving niches for small, nimble, low-cost competitors to slip into. These small businesses establish toeholds during the recession…hire people…and then scale up to the peak of commerce when the boom comes.

But this time it’s different. Small businesses are collapsing along with big ones. In April, for example, more than small 8,000 businesses went broke and filed for Chapter 11.

In addition to the business bankruptcies are the personal bankruptcies. According to the Los Angeles Times, the rate of personal bankruptcy is soaring in Southern California.

In April, according to David Rosenberg at Gluskin Sheff, the feds added $121 million (at an annual rate) in total stimulus to the consumer economy – including tax reduction and increased benefits. In May, the total stimulus rose to $163 million. How come so many bankruptcies when the feds were giving away so much money?

The answer, says Rosenberg, is that consumers didn’t spend the money; they saved it. Consumer spending rose just $1 billion April – despite $121 billion of stimulus. In May it rose $25 billion – despite a ‘stimulus’ 6 times that amount.

Meanwhile, the saving rate, which had been only 0.2% in March of 2008 exploded to nearly 7% in May 2009.

No consumer spending, no sales. No sales, no revenues. No revenues…no one can stay in business.

No small businesses. No new jobs. No new jobs, no economic recovery.

No economic recovery and the meddlers are back on the Hill asking for more power and money.

No surprise there.

Depressions take time. Bankruptcy rates don’t rise overnight. First, it takes businesses a while to realize their sales are falling. At first, they think it might be a fluke. Then, they talk to friends and read the papers. And then, the next month confirms the story.

Then, it takes time for them to react. They have to figure out where they can make cuts. Typically, this involves layoffs and job losses. Employees who will be let go need to be identified. Then, they actually have to be sent home.

Then, the employee collects benefits. He looks for another job. He draws down savings. It takes time for him to react too. He watches. He notices that it is hard to find another job. He realizes his resources are running out. He begins to cut back. Unnecessary expenses are eliminated. Then, he broadens his definition of ‘unnecessary.’ Finally, he lacks the money for the essentials. The mortgage goes unpaid. Credit card deadlines are missed. This provokes an inevitable response – warnings, more warnings, official action, and finally…defaults, foreclosures and bankruptcy filings.

We came back to Paris last night to celebrate our 25th wedding anniversary. It wasn’t much of a celebration…just a simple dinner for two in a simple restaurant in the old Palais Royale.

It was a hot day in Paris. We sat outside in the galleries of the old palace. Near to us was another couple. Middle aged, they seemed like people who were getting together for the first time, not a couple who had been married for a long time. The man reminded us of John Malkovich. The woman? She was not an especially attractive woman, with straight gray/black hair cut as short as a man’s. They held hands. They looked into each other’s eyes. They seemed to be making plans for a happy future.

When you’ve been married for a long time, on the other hand, you have to wonder if your happiness is not more past tense than future. You can recall the happy times you spent together…how the children were when they were little…how much fun you had when you were poor and starting out in life…and all you went through together to get to where you are now. But when you look ahead, your weary eyes fail. You may feel as though you’ve said all you had to say – and agreed to disagree. You may feel as though the grand adventure of your lives has peaked out – like a bull market – with nothing but the downward slope left for you. You may feel that the great mystery of coupling has been revealed. Getting to know someone and getting together…even fusing your flesh, blood and spirit to form fully new human beings…is there anything left to discover? Are there more surprises coming?

Inevitably, the conversation turned towards the sovereign state of South Carolina. The poor state has a jackass for a governor. Mark Sanford has become a laughingstock for the entire nation. Not because he had an illicit dalliance and lied about it – who can honestly say he hasn’t done that? – but because he is a cad. And the worst kind of cad – the kind who pretends to be sensitive and caring.

He’s found true love, he says, with an Argentine beauty. But rather than dump his wife and fly to his heartthrob…he dumps the love of his life and tells his wife that he will try to fall back in love with her. The bonehead betrays them all – his wife, his lover…and love itself. He’s even given romance a bad name. Meeting a woman who looks like Penelope Cruz on a dance floor in South America has an undeniable romantic appeal. When the story broke, there must have been hundreds of lonely middle-aged men in America booking their tickets and looking forward to tango. The Mark and Maria affair might have made the history books of star-crossed love, along with Tristan and Iseult, Antony and Cleopatra, Brad and Jennifer. But now, a week later, we know what kind of man Mark really is. Cancel the tickets. Any man who falls in love from now will feel like a sap.

As for us, we’ve been saps all our lives. Eventually, we’ll head for the romance of Buenos Aires too. But we’ll take our main squeeze with us, just to see what happens next.

Until tomorrow,

Bill Bonner

The Daily Reckoning