Agora Financial’s Rude Awakening

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Dubai, UAE

· Asian and European markets rally…to within a mile from all time highs,
· How the U.S. is treading the path that cost Japan twenty years,
· “Burn baby, burn, burn!” the financial inferno heats up and plenty more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

Europe is breathing a little easier this morning; so too are markets across Asia. Japan’s Nikkei 225 is up over 3.5% as we write. China’s Hang Seng is fairing even better. It leads the Asian measures, up over 5%, while London’s FTSE is in the green by about 2.3%.

Were it not for the horrific, scorched earth selloffs across these and other indexes around the world, today’s early figures might be cause for celebration. Alas, the party poppers and face painting kit have been gathering dust in the bottom drawer for a while now.

In December of 1989, Japan’s Nikkei hit a lofty 38,916. Today’s relatively modest rally tips it into the 9k’s. In the Land of the Rising Sun, the party paraphernalia is all but fossilized. Japan’s central bankers managed to protract what might have been a healthy and relatively short-term correction. Interest rates dropped through the floor at the end of the eighties, and there have remained, even to this day.

But the Bank of Japan did not respond to its particular real estate and stock crisis with the same knee-jerk dexterity that has been exhibited in the U.S. over the past year. The BoJ waited 17 months before they began slashing and burning through key lending rates. It wasn’t until the mid-90s – a quarter way through what has now become the “lost two decades” – that they fell below the 0.5% mark.

The U.S., after having cautioned the Japanese against such measures, wasted no time in firing off a few rounds of emergency rate cuts. Today, at 1.5%, interest rates in the U.S. actually lag the rate of even official inflation figures. Real rates, adjusted for inflation, are actually negative. Put another way, a borrower is effectively paid to extend his line of credit, knowing that when the day comes around when he does have to make good on his debt, his currency will be worth less than when he took the loan in the first place.

Japan is a long way from the beginning of its crisis…and perhaps a long way from the end. Many a “zombie” company was kept afloat by cheap credit in order to avoid the shame and dishonor of bankruptcy. As a result, consumer confidence still lags from Seagaia to Sopporo. Capital still slushes around inefficient boardrooms in costly face-saving strategies; capital that could be put to better use in hungrier, newer enterprises.

Through diverting funds away from those who may have reaped the benefits of the financial forest fire in Japan – well-run companies with little debt and sound management – central bankers there have managed to ensure the country would remain mired in timidity for decades after the fact.

By contrast, Wall Street is only one year and one week past it’s all time high of 14,093. Since then we have seen rates plummet, ill-managed firms granted tens of billions in bailouts, nationalization of the country’s mortgage giants, Mac and Mae, and the Federal Reserve morph into a kind of open shop lender for anyone with an overdue electricity bill.

All the while the American taxpayer – the ingenuity of whom may reasonably be relied on to produce the country’s way of the financial quagmire – foots the bill.

In the column below, Bill Bonner investigates just how much fuel is on the financial inferno in America and wonders where it’s all headed from here. Enjoy…

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These Firefighters Are Pyromaniacs
by Bill Bonner

This week opened with the wail of fire engines. The Europeans announced a bank rescue, variously reported to cost 1.3 trillion euros (Le Monde )…1.7 trillion (Liberation ) or 1.873 trillion (Financial Times ). They ought to get their story straight. But who cared…investors had a bid!

As the Great Fire burned through their capital, investors bowed their heads and said their prayers: ‘Please God, spare me…and I will be happy with what I’ve got.” And lo! A host of smoke jumpers came down from the heavens. Investors turned their faces to the sky and thought they saw angels. And there was the archangels Gordon Brown and Henry Paulson leading the flock. Suddenly, the wind died down…and the fiery furnace calmed. ‘Hallelujah,’ they said…and bought some more stocks!

In the last 100 years there have only been two fires similar to that of today. The first inferno was in 1929, centered in New York. The second was in 1989, when Tokyo went up in flames. In both instances, rescuers took extraordinary measures. And in both cases, they not only failed to save the economy, they scorched it even more. Obviously, few economists share this analysis with us. The few who do are probably either insolvent or insane, or perhaps both. So, the burden of proof is on us.

We begin by calling an expert witness; Murray Rothbard, once professor at the University of Las Vegas, now among the forgotten dead. A properly-functioning economy is balanced, he explains in his classic, America’s Great Depression . One industry enjoys an expansion, another suffers a contraction. But sometimes there is a “cluster of errors” which causes a major boom. Whence cometh these errors? Who is responsible for them? Rothbard identifies the culprit: “monetary intervention in the market, specifically bank credit expansion to business.” If Rothbard were still among the quick, he’d probably be pointing his finger at Alan Greenspan – the arsonist who lowered the key U.S. lending rate to an “emergency” level of 1% and held it there long after the emergency was over. With the Fed’s false signal before them, business, investors and consumers racked up the biggest pile of tinder in history. Then, he’d probably point at Ben Bernanke, who continues to add kindling…and to Hank Paulson, who led Goldman Sachs while it created trillions of dollars worth of asset-backed explosives and sold it to financial institutions all over the world.

“The boom…is the time when errors are made…” Rothbard continues. “The ‘depression’ is actually the process by which the economy adjusts to the wastes and errors of the boom… Far from being an evil scourge, [the depression] is the necessary and beneficial return of the economy to normal… Evidently, the longer the boom goes on the more wasteful the errors committed, and the longer and more severe will be the necessary depression readjustment.”

But here come the rescuers with yet more dry wood! After stoking the flames with easy credit…they bring more. Professor Rothbard, reviewing the record of the post-’29 rescue team came to this conclusion: The authorities “met the challenge of the Great Depression by acting quickly and decisively…[using] every tool, every device of progressive and ‘enlightened’ economics, every facet of government planning to combat the depression.”

Yet, the fire didn’t go out. It intensified. An expected recovery in 1931 went up in smoke, says Rothbard, thanks to government meddling:

“The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy and placed where it properly belongs: at the doors of politicians, bureaucrats and the mass of ‘enlightened’ economists. And in any other depression, past or future, the story will be the same.”

Six decades and half a world away, the Japanese proved him right. In January, 1990, a spark touched off the Nikkei Dow. Soon, Japan’s miracle economy was in trouble. Bankruptcies rose. Profits fell. Banks teetered. But the Japanese had their economists too. And soon, they were doing what Hoover and Roosevelt had done before them. As to monetary stimulus, the Bank of Japan’s key lending rate was cut from 5% down to “effectively zero.” And there were plenty of fiscal stimuli too. Japan’s government did just what Keynes recommended – it spent money. It went on a spree of what Alan Booth calls “state sponsored vandalism” in the 1990s, taking the budget deficit to a remarkable 5% of GDP in 2002. Roads to nowhere, concrete shorelines, bridges and dams…Japan, per square mile of available territory, covered 30 times as much surface in concrete as in America.

In 1996, the Shumizu Corporation even announced plans to build a hotel on the moon using specially developed techniques for making cement on the lunar surface.

Once again, these heroic efforts produced nothing more than farcical consequences. The Japanese economy is still barely on speaking terms with prosperity. And the Nikkei Dow closed at 8,276 last week… a level last seen (except briefly in 2003) a quarter of a century ago.

America’s pyromaniacs still have a ways to go. There are 150 basis points between the Fed’s current key rate and zero…and the US budget deficit is expected to quadruple – reaching $2 trillion in 2009. In the resulting roast, we predict, even the devil will sweat.

[Joel's Note: Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis .

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking Here: Mobs, Messiahs and Markets

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[Rude Endnote: Yesterday we alerted you to an exclusive webinar broadcast in which our resident short seller, Dan Amoss, will deliver a presentation designed to help you secure and/or recover your retirement. Dan’s been on the right side of the trades both before and during this ongoing crisis with put options on several casualties of excess including, but not limited to, Lehman Brothers.

In his presentation, Dan will address:

· How we got in this mess in the first place
· Where we will go in the near-term future
· Specific ways you can protect yourself — and profit — from this dismal situation right now

The broadcast will begin at 11am tomorrow and is free of charge for all Rude Awakening and Executive Series readers. Simply drop your email in this box and look out for the viewing instructions, which will be emailed to you 30 mins before the webinar begins. The process is pretty simple, so you won’t need any fancy computer knowledge to access the feed.

For those of you who wrote in to say you won’t be available at the time of broadcast, we’ll be making the webinar available for viewing for one week after the initial posting. But we don’t need to tell you, of course, which bird gets the worm.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com