Agora Financial’s Rude Awakening

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Ouzilly, France

• When rewarding incompetence masquerades as “compassion for the
  unfortunate,”
• The tale of consumer credit and the ugly consequences of overindulgence
  and,
• The Agora Financial Reserve doors open once more…

Joel Bowman, reporting from Dubai, UAE…

A quick Rude mail to kick off this Monday edition. If response to Eric Fry’s
“Just Wondering” column of last week, one Texan reader writes:

“We’re inundated with babble and crack about “compassion for the unfortunate”
to the point that I want to throw up. The bottom line is that our society is
being trained to reward incompetence and bad judgment. Whether the decisions
are governmental, corporate or individual, it seems the effort is to remove
any and all responsibility for the consequences of foolishness.

“In my humble opinion, it’s all across the spectrum of human activity. This
latest effort by Paulson–a wondrous example of the Duckbill Platitudinous–
is merely one among many. Regards, Art Eatman”

Now that we’re all in the mood, Rude reader, we present today’s column by
Agora Publishing founder and President, Bill Bonner. Enjoy…

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Extraordinary Popular Debt
By Bill Bonner

Despite the Thatcher and Reagan revolutions…deficits still matter.

Consumer credit came into the world as a simple act of kindness:

“Don’t worry, Mrs. McMurphy, you can pay me next week.”

But consumer credit grew up and debt grew mean. As mentioned in this column
previously, until 1980, total credit market debt in America never exceeded
130% of GDP. Now, it is more than 330%. (What happened in 1980? Ah, more
about that below…) And derivative contracts, based on credit, have grown
even faster. There are now $45 trillion worth of credit default swaps, for
example, up nine-fold in the past three years.

So heavy is the burden of this debt that householders at the bottom of the
financial pyramid are being crushed like Egyptian slaves. “Mortgage
Meltdown,” is easily the most popular headline in the U.S. financial press.
Under its banner, the Chicago Sun-Times reports that there is about one house
in foreclosure on every block of the Windy City. What’s astonishing is that
well-heeled areas are affected too – with foreclosures running 100% ahead of
last year in one middle class neighborhood…and up 193% in an area thought
to be ‘wealthy.’

What has happened? Credit, it turns out, soon reaches the point of
diminishing returns. During the entire period up until 1980, it took about
$1.40 worth of extra credit to produce a single extra dollar of GDP. Since
then, the ratio has deteriorated…with recent figures showing as much as $7
in new credit per additional buck of output.

And now…we seem to have passed the top of the credit cycle – with the
credit industry unwilling to pony up more cash…and output falling. John
Crudele, perhaps jumping the gun, says the U.S. economy may already be in
recession.

Who is the culprit? You could blame central bankers…or the City…or Gordon
Brown and George W. Bush. Or, you could blame the entire human race.

Man cannot leave well enough alone, we conclude. He gets ahold of an idea and
he cannot help himself. He takes it up clumsily, as he would a new wrench.
Then he begins twisting it…hammering it…stretching it out…sharpening
it…until he can use it to cut his own throat.

Every innovation turns against him. His television brings him reality shows.
His automobiles lead him into traffic jams. And scarcely a single generation
after he invented them, his airplanes are dropping bombs on London.

These credit mushrooms were no exception. They grew in a hothouse – nurtured
by extraordinary popular delusions…fertilized by the rich manure of
politics…and abundantly watered by liquidity from central banks. People ate
them; their debts grew as large as their hallucinations.

Forget about the central banks; their role is so obvious. But think about the
New Era that came in the 1980s – thanks to the revolutions wrought by Mrs.
Thatcher and Mr. Reagan. They brought in a fresh idea – that capitalism could
be unleashed…and that it would serve man as obediently as a cocker spaniel.
We don’t dispute that there was some truth in it. But it wasn’t quite as true
as people came to believe. Especially in its grotesque new form.

Where in capitalism is the idea that you can spend more than you earn? Where
in the vision of Adam Smith is the idea that foreigners will subsidize your
standard of living – indefinitely? Where in laissez-faire is the notion that
central bankers will prevent corrections by controlling the price of money?
What had happened to the old sturm and drang? Where was Schumpeter’s
‘creative destructive?’ The new capitalists offered creation without
destruction… resurrection without crucifixion! They offered not only to
hold harmless investors in the face of their own bad judgment…but to revive
booms before they ever expired and to cut short corrections before anything
has been corrected.

This was not the old capitalism of our grandfathers. The old-timers had been
wary of it…they knew that the free market was dangerous and unpredictable.
The old capitalism was a jungle…red in tooth and claw. You had to watch
your back. This new capitalism was a zoo; all the dangerous beasts were
supposed to be behind bars. It was almost too wonderful.

The culture of zoo-capitalism spread to all levels of society. At the top,
such was faith in this new doctrine that tax rates were reduced…in the
belief that more capitalism would enlarge the tax base (unfortunately,
spending increased faster). But don’t worry, “Deficits don’t matter,” said
Dick Cheney. In other words, our dynamic capitalistic economy will grow
itself out of any problems. And at the bottom, too, people fell victim to the
same delusion. Householders borrowed and spent money they hadn’t made yet.
Why not? Their houses, their stocks and their incomes would always go up,
wouldn’t they? And savings? Who needs savings when you live in the strongest,
most flexible, most globalized, most technology-enhanced, most tax-
enlightened economy in history?

That is the trouble with man. First, he does. Then he overdoes. His progress
takes him backwards. Every blessing evolves into a curse…and every
revolution leaves him mounting the scaffold.

[Joel's Note: For more of Bonner’s sardonic wit and cheerful tales, check out
his latest book: Mobs, Messiahs and Markets: Surviving the Public Spectacle
in Finance and Politics. Bill was quoted in the Economist just last week…so
you probably don’t have long before the mob cottons on to “Mobs.” Be sure to
stay ahead of the curve and order your copy today. You can do so here:

Mobs, Messiahs and Markets – By Bill Bonner and Lila Rajiva

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Rude Endnote: Remember, if you would like to contribute some thoughts on
Paulson’s 5-year plan, or any other Rude subject matter, please send them on
to the address provided below.

Cheers,

Joel Bowman
Rude Awakening