Agora Financial’s Rude Awakening

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Paris, France

• The World Bank downgrades its world economic forecast,
• A few lessons from the school of German-style hyperinflation,
• Will we be seeing you in Vancouver this year? And plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

Wait…scratch that…make it negative 2.9%.

Somebody must have slipped a few Rude pages to the honchos over at The World Bank. It seems the Washington-based lender is hedging its bets. A 2.9% contraction in the global economy this year is a far cry from its March estimate of 1.7%. But growth will be back to 2% next year, the bank assures us, slightly down from the 2.3% they originally expected.

What went wrong during the springtime, we wonder? Didn’t unprecedented levels of stimulus flow from government taps around the world? Weren’t Bernanke and Geithner manning the pumps? Didn’t the global media confirm sightings of green shoots? Or were they recovery saplings? Your editors were too busy “calling B.S.” to keep up with all those flowery euphemisms for delusion. Still, shouldn’t we be smelling the turnaround tulips by now, on our way back towards bull market springs?

Not just yet, says the bank of the world. The following adjustments must be made to the March forecast:

• Output in the U.S. will drop by 3%…not 2.4%,
• Japan’s gross domestic product will shrink 6.8%…not 5.3%.
• The Eurozone will have it a bit tougher too, contracting 4.5%…not 2.7%.
• And the globe as a whole? Uh…eh…it won’t decline 6.1%, as predicted. Better expect closer to 9.7%.

The lender also called for “bold” actions to hasten a rebound (an urgency upgrade from “tough” actions) and said the prospects for securing aid for the poorest countries were “bleak” (adjective upgraded from “slim”).

Does that mean the “delude-a-bulls” are spent? Is the sucker’s rally over? Insiders seem to reckon so. Bloomberg reports that, “Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.”

Worldwide markets did enjoy a pretty nice rally over the past couple of months. Perhaps that’s the end of the first suckers’ rally. Maybe last week’s 3% mini-selloff on Wall Street was only a harbinger of things to come.

Personally, we wouldn’t expect any hope of a sustainable turnaround until The World Bank downgrades its forecast from “bleak” to at least “apocalyptic.”

And now, back to restate his ever-strengthening case, we present Mr. Bill Bonner…

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Déjà vu All Over Again. Once More.
By Bill Bonner

Rarely has The Daily Reckoning been criticized for understating trouble. But trouble keeps getting ahead of us. We can barely keep up with it. So often have we anticipated ‘disaster’ or ‘catastrophe’ that the words now fall like empty shells. We light the fuses; they don’t go off. Alas, we have become alarmists with no bell or siren. We break the glass and pull the lever every week, but no sound is heard…except the familiar words whispered with in a hoarse, weary voice…watch out!

So today we turn to the dead for eyewitness accounts:

Otto Freidrich described the period of German hyperinflation and its effects: “… People carried wages home in huge crates; by the time they could spend even their trillion-mark notes they were practically worthless… There was not a single girl in the entire middle class who could get married without her father paying a dowry… They saved and saved so that they could get married, and so it destroyed the whole idea of remaining chaste until marriage…the girls learned that virginity didn’t matter anymore.”

“Against my will,” wrote author Stefan Zweig “I have witnessed the most terrible defeat of reason and wildest triumph of brutality in the chronicles of history.” Zweig lived through the hyperinflation in Germany during the ’20s and sold stories to survive. Later, he moved to Brazil and blew his brains out.

Brutality triumphed because civilized life was smothered by inflation. The Treaty of Versailles condemned the Huns to pay more than 47,000 tonnes of gold in reparations. Taking that amount of real money out of the economy left the Germans with no choice. They had no money left. They had to create it. Result: hyperinflation. The size of the banknotes rose with the crisis. In 1922, the highest denomination was 50,000 Mark. By 1923, the highest denomination was 100,000,000,000,000 Mark. By December 1923 the exchange rate was 4,200,000,000,000 Marks to 1 US dollar.”

The German middle class was wiped out. More importantly, the handrails and guideposts wobbled, so there was nothing to hold onto and no way to know where you were going. Businesses, banks, military, police, even the government itself – everything tottered and fell down. In the tumult, war-hardened rabble rolled towards Herr Hitler like loose nuts.

“In economics,” begins the Wikipedia description, ” hyperinflation is inflation that is very high or out of control… Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses.”

Who’s the biggest borrower today? The United States of America. At 12% of GDP, its deficit is more than twice as large as that of France. It already owes Japan and China as much as Germany owed its former enemies in reparations – adjusted to today’s money. But America’s debts are far grander than those of Germany in 1923 – even relative to the size of the US economy. Where Germany owed a little over $1 trillion; America – if you include private debt, official government debt, off-budget obligations and internal commitments – owes 100 times as much. And the United States keeps borrowing more. In a single year – 2009 – it will borrow $1.3 trillion, again, just shy of the debt that sank the Weimar Republic.

While the private sector during the bubble years brought U.S. debts to a record 3.7 times the entire nation’s output, now it’s the public sector that does the borrowing. The Obama Administration is adding to the accumulated U.S. debt at a suicidal pace – four times faster than the record set just last year. And America’s central bank hands the borrower a loaded pistol; it is adding bank reserves – which allow the money supply to expand geometrically – at a 4,500% rate.

That last number is not a typo. It’s an alarm. If the Federal Reserve were a heart patient, the defibrillators would be on already. If it were a normal bank, it would be closed down immediately.

But neither Karl Helferich nor Ben Bernanke set out to ruin their economies. Central bankers don’t do it intentionally; they do it inevitably. Not because they want to, but because they have to. Like the Germans in the ’20s, America has no politically acceptable way to pay her growing debts – except by printing more money. And now, her leading intellectuals urge her on. Cometh the hour when the feds begin to think about cutting back on their program of inflation, cometh the experts who will tell them to keep at it.

“The crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts,” writes Nobel winning economist Paul Krugman in the New York Times this week. “Those demands should be ignored. It’s much too soon to give up on policies that have…pulled us a few inches back from the abyss.”

“It’s déjà vu all over again,” he concludes, referring to the Japanese in the ’90s and the Americans in the ’30s. In both cases, he thinks their economies died because they turned off the juice too soon. But people come to think what they must think when they must think it:

“To follow the good counsel of stopping [the inflation machine] would mean… that in a very short time the entire public, factories, mines, railways and post office, national and local government, in short, all national and economic life would be stopped.”

Karl Helferich, Chairman, Central Bank of Germany, 1923.

Déjà vu, all over again. Once more.

Joel’s Note: Our annual Agora Financial Investment Symposium in Vancouver, British Columbia is rapidly approaching…and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a “Decade of Reckoning”…four days that will help you to gain greater insight on how to turn investment ideas into the profit opportunities of the next decade.

So, will we be seeing you there? This event is already 70% sold out, so you’ll want to be nimble. Click below for all the info:

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[Rude Endnote: The Europeans seem to be taking the World Banks insults to heart this morning. Almost all the major measures were in the tank when we checked a couple of minutes ago. Indexes in France and Germany were about tied for equal worst, down about 2% each, while the Brits were 1.5% in the red.

For the most part Asian markets rallied today. Japan’s Nikkei 225 and Hong Kong’s Hang Seng managed to add 0.4 and 0.8% respectively. The Aussie All Ordinaries also finished up 0.4% on the back of strong performances from mining majors, BHP Billiton and Rio Tinto. The former announced just last week that it expects its first uranium shipment to hit Beijing before the end of the year.

Over in the commodities pits, crude toppled from its plus $70 perch over the weekend on demand concerns after the World Bank’s statement. The market appears not to be too concerned with supply side constraints, at least for now. In any case, a barrel of the global goo goes for a few pennies shy of $68 this morning.

Gold slipped back to $920 as the greenback made ground against a negative global economic backdrop.

More Rude business tomorrow.

Until then…

Cheers,

Joel Bowman

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