What happens when the Feds
run out of dogs?
 Two
Ways to Deleverage an Economy
Bill Bonner
Provided as a courtesy
of Agora Publishing & The
Daily Reckoning
Jun 10, 2009
Betting against deleveraging
is probably not a smart thing to do. Not until it's over,
which is not until the leverage built up in the bubble era has
been removed. And with total debt levels at 370% of GDP,
and the government adding even more debt, we're a long way from
there.
But what do you do, dear reader?
Buy Treasuries in anticipation of another crash in stocks? Or
mortgage your house, long-term fixed-rate, in anticipation of
fed-caused inflation?
Ah, there's the tough question.
We know where the dumb money is, but where's
the smart money? Jeff Clark says it's short stocks. But there's
some very smart money that is betting that the government will
turn this around. They're putting their money on inflation,
or even hyperinflation. Our old friend, Marc Faber, for example,
says he is sure the United States is headed for hyperinflation.
If so, shorting stocks may not be such a shrewd move. Stocks
could soar too - as investors try to buy anything and everything
that didn't have dollar signs on it.
You see, there are two ways
to deleverage an economy.
The obvious way is the traditional,
honest way - in which people actually try to pay their debts.
This causes the problems we see as falling asset prices, bankruptcies,
joblessness and the other hallmarks of a Great Depression.
But the feds have their hearts
set on preventing a depression. And they're doing it the only
way they can, by the old 'hair of the dog' technique.
The economy suffers from too much debt - so they're going
to give it more! Much more. The whole pooch! The whole kennel!
Then, they round up every stray mongrel in town. What happens
when they run out of dogs? Well, that's a discussion for
another day.
We have had many laughs following
the feds and their war against capitalism. They're gambling an
amount nearly equal to the entire U.S. GDP to try to prevent
people from getting what they have coming. In the process, they're
almost certain to make a mess of things.
The smart money is betting
that they fail to stop deleveraging. But the very smart money
is betting that they create a new, worse problem - inflation,
maybe hyper-inflation. Inflation reduces the real value of debt,
but in a perverse and unpredictable way. Debtors don't pay their
bills; savers pay them. Inflation - like bailouts - rewards the
least responsible players, those who have gotten themselves
heavily in debt, and punishes those who have done the
'right' thing. As Germany saw in the '20s, it de-stabilizes the
whole society, leading to extremely unwelcome outcomes.
Jun 10, 2009
Bill Bonner
email: DR@dailyreckoning.com
website: The
Daily Reckoning
Bill Bonner
is the founder and editor of The Daily Reckoning.
Bill's book,
Mobs,
Messiahs and Markets: Surviving the Public Spectacle in Finance and
Politics, is a must-read.
He is also the
author, with Addison Wiggin, of The Wall Street Journal best seller
Financial
Reckoning Day:
Surviving the Soft Depression of the 21st Century (John Wiley
& Sons).
In Bonner and
Wiggin's follow-up book, Empire
of Debt:
The Rise of an Epic Financial Crisis, they wield their sardonic
brand of humor to expose the nation for what it really is - an
empire built on delusions.
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