Bonner: The US Economy Is Just Waiting to Crash
YOUGHAL, IRELAND — What goes around comes around.
Last week, we were listing the few things we’ve learned over the last 20 years. Among them was that the main insights of economics could be found not in the Federal Reserve’s claptrap formulae or in flattering corporate reports, but in old-timers’ sayings and old wives’ tales.
And today, we wonder when what went around to Zimbabwe and Venezuela will come around to the United States of America.
Jewel to Crap Hole
The inquiry was sparked by last week’s news.
Here at the Diary, we wish ill to no man. But that doesn’t stop us from sometimes getting a sly smile on our lips when we read the obituaries.
That was how we greeted Friday’s headline: “Robert Mugabe is dead at 95.”
In 1980, Mugabe founded Zimbabwe, formerly Rhodesia, which was one of the richest countries in Africa, growing at more than 5% per year.
“You have inherited a jewel,” Julius Nyerere, president of Tanzania, said to him. “Keep it that way.”
Alas, the world turns. The first shall be last, it says in the Bible. And Robert Mugabe won’t be the first or the last person to take a decent country and turn it into a crap hole.
Today, Zimbabwe is one of the poorest countries in the world. We will return to how it got that way in a minute.
First, let’s look at what is going on in the U.S. …
This morning, Bloomberg told us that “Stocks Rise With U.S. Futures Amid Stimulus Hopes.”
Donald J. Trump, too, is looking to lower interest rates to goose the economy a bit and give him a better shot at reelection.
But last week a university study showed what we expected: Lower rates (or any other kind of stimulus, for that matter) won’t work.
Central banks’ negative interest rates were supposed to increase spending, stop deflation and stimulate the economy. They may have done the exact opposite.
According to research from the University of Bath, central banks charging commercial banks to hold excess cash reserves have actually decreased lending. That’s because the additional costs reduce banks’ profit margins, leading to a drop in loan growth.
Elsewhere, like wild geese, there are more and more signs of an economy heading south.
The Washington Post:
…this year, manufacturing has turned south and entered what Federal Reserve data show is a technical recession, or six-month slump. It seems unlikely to recover in the near future: A major survey of U.S. manufacturing purchasing managers found a negative outlook, and the other is just a whisker away from going negative for the first time since 2009.
Growth in output of consumer goods and business equipment was down too. And on Friday the jobs numbers honked; they too told of an approaching winter.
The official count of jobs added in August was near 100,000. And a closer look at the details tells us that the figures are worse than they appear. Mining, logging and construction industries all lost hours of work. So did shipping-related industries.
Dead Man Walking
Remember, corporations can do all the buybacks, mergers and acquisitions they want. But unless they’re shipping the goods, the “boom” is phony.
That’s why we watch the Dow Jones Transportation Index. It hit a high in October 2018. Since then, despite all the stimulus, Fed talk and speculative hype, it still has not moved higher.
That leaves our hypothesis — that the stock market topped out a year ago — still standing. And if it is correct, it means the Dow is a dead man walking … waiting to fall over.
And now, when we look at jobs in the shipping sector — trains, planes and trucks — we see that hours spent on the job are falling fast.
Six months ago, the number of hours worked in transportation and warehousing was rising at a 5% annual rate. Now, it is rising at less than 1%.
And the Cass Freight Index — which measures monthly freight activity in North America — has been signaling a transportation recession for eight straight months. The index is now nearly 6% below where it was a year ago.
But an approaching recession is nothing to be alarmed about. The ebb and flow of an economy is a natural thing.
And so it was that Robert Mugabe, fresh on the job after the elections of 1980, went to work. Ian Smith’s “Rhodesia” was history. Henceforth, it was Zimbabwe, and it was Mugabe’s country.
And to make sure it stayed his, he brought out the long knives. His main opposition was in Matabeleland. So, he sent in his North Korean-trained troops with a list of his “enemies.” When they were finished, they had massacred some 10,000 men, women and children.
The Western press barely mentioned it; it just didn’t fit into the narrative of the time. The evil white supremacist, Ian Smith, was gone. Mugabe was the face of the new Africa — finally throwing off the shackles of European colonialism and ready for a great and glorious future.
One of Mugabe’s signature innovations was to drive out the white farmers in order to give the rich land to his cronies. Trouble was, the cronies weren’t farmers. They didn’t have the equipment, the capital or the skills to operate a serious farm.
There were 4,000 white farmers in Zimbabwe in 1980. By the time Mugabe left, there were only 300. Output and exports disappeared, along with the money they produced.
By the end of the ’90s, the inflation rate was already around 30%. Mr. Gideon Gono, head of the central bank, was in an “Inflate-or-Die” trap. The easiest way out was to print money — to stimulate the economy, of course!
Mr. Gono added more and more zeros. The inflation rate passed 11 million percent in 2007, when Zimbabwe became the first nation ever to issue a $100 billion note. In nominal, local currency terms, Zimbabwe had the world’s best-performing stock market in 2006.
But finally, the economy collapsed completely, and Mr. Mugabe was forced into exile.
Later, Mr. Gono was asked why in the world he inflated the currency so disastrously.
“I only did what you are doing,” he replied, referring to major central banks.
More to come…
• This article was originally published by Bonner & Partners. You can learn more about Bill and Bill Bonner’s Diary right here.