Contractions Only Dollars Apart Was Maria 'overacting?' The Times of London said so. What did her father think? More below... Is it more important to 'do what makes you happy' than to do well? That was the message of Maria's new play - You Can't Take it With You. Again, more below... Meanwhile... "New car sales fall as buyers shun debt," says a Wall Street Journal headline. Just what we expected...but so long coming we had begun to wonder. Americans represent nearly 20% of the world's consumption. And the U.S. economy, too, is more dependent on consumption spending than any economy ever has been. If American consumers don't spend more, the whole shebang falls apart.
At the bottom, of course, are the ordinary homeowners. "I've got a tiny little house on the edge of London," explained a colleague yesterday. "I've got to sell it, because I put a contract in on another place. But it's been on the market for three months now, and only four people have even looked at it. I'm getting very nervous... "The problem is that it is a starter home. And the banks don't want to lend to people who are buying starting homes. They're the worst credit risks, because they don't earn much money and don't have much in assets. Naturally; they're just starting out. But this is completely different from a couple of years ago, when the banks would lend to anyone..." The people at the bottom are beginning to feel anxious. Many have never, ever seen a time when house prices were not rising and mortgage credit was not readily available. Many loaded up with debt when the going was good. Now that the going ain't so good, they regret it. House mortgage debt in the United States grew by $10 trillion since '99. As a percentage of disposable income, it rose from 64% to 100% - with more new debt added than in the previous 45 years combined. Add in consumer installment debt and the ratio rises to 131%. Of course, when you add that much financing to a society, the financing industry is bound to make money. As a percentage of profits, more and more of America's profits have come from 'financing' as opposed to manufacturing. Wall Street got rich, handed out billions of bonuses, built mansions in the Hamptons and in Greenwich, CT, bought huge collections of monstrous art...and generally made itself obnoxious. But now, at the upper end of the credit structure, Wall Street firms are getting sold off. After billions in losses, shareholders are giving CEOs the old heave-ho. First, Warren Spector of Bear Stearns (NYSE:BSC) got axed. Then, it was Peter Wuffli at UBS (NYSE:UBS). He was followed by Stan O'Neal of Merrill Lynch (NYSE:MER). O'Neal made the headlines for generating two big numbers - the largest losses, at an estimated $18 billion, and the largest 'golden parachute', at $180 million. What are compensation boards thinking? Why not give the guy a kick in the pants instead? They must think shareholders are idiots; and they're probably right! After the O'Neal story died down, along came Chuck Prince of Citigroup (NYSE:C) - America's largest bank. The firm is expected to write down $5 billion this quarter. Chuck was chucked out. And today's news brings a new victim - H&R Block (NYSE:HRB) finance chief Trubeck. Between the honchos at the top and the householders at the bottom are thousands of deals, and millions of ordinary people. The deals are feeling the pressure. "Bond issuance plunges," reports Bloomberg. And 'default swaps' - a form of insurance against bad loans - are rising to record prices, indicating a level of fearfulness not seen on Wall Street for many, many years. The people in the middle must be getting a little sour, too. When the financing for deals slows, so do the new projects...the new companies...and the new jobs. And so does the financing for new houses...and new cars... and all the other new things that make an economy grow... Let's go back to the numbers above. $10 trillion in new mortgage debt was added in the United States over the last seven years. That debt is another potential source of deflation, dear reader. Yesterday, we looked at the bull market in gold. We wondered how and why it might come to an end. If the credit contraction were to worsen, we concluded, the price of gold - in dollars - might go down. When credit expands, more money enters the system...and prices rise. But then, there comes a time when the debts must be paid. Then, people have to take money out of the system; they have to cut back on their expenses in order to put aside the money to pay back the loans. The credit contraction phase is typically a phase of falling prices; as more and more currency is withdrawn in order to pay debts (and, incidentally, build up savings), less and less currency is available to buy things. But wouldn't the financial authorities simply emit more paper money? Ah, yes, they would try. But that is what we learned from Japan. Once a credit contraction begins, it is very difficult to reverse. The Japanese tried monetary policy - with a central bank lending rate of "effectively zero." And they tried fiscal policy - with the largest government deficits in the developed world. Still, prices fell. Ben Bernanke has spent years studying the Japanese example. If we ever got in that sort of jamb, he says, he'd drop money from helicopters in order to break the contraction cycle. We're a long way from there. So far, we seem to be only at the beginning of a credit contraction. The average person doesn't even feel it. When the squeeze begins, only the outer edges feel it first - the top and bottom of the credit structure. But will it eventually involve everyone...and will the Bernanke Fed need to drop money from helicopters in order to get the economy moving again? Maybe... but then we'd really see the price of gold soar! You Can't Take it With You, is a play from the '30s by Moss Hart and George Kaufman. It is too 'dated' and too 'American,' say the British critics. We saw it last night. Was it dated? Yes. Was it too American? Well... The problem with American plays, say the British, is that they tend to have happy endings; at least the plays from the '30s had happy endings. But in the '30s, we needed plays with happy endings. Now, real life seems to end happily enough. We're ready for something different in the theatre...things that end miserably. We have written several books. Three of them were very briefly on the New York Times' list of bestsellers. But we have never read a review of one of our books. When the critics are flattering, we risk becoming conceited. When they are unflattering, we risk becoming depressed. "Better to stay away from them," we warned our daughter Maria. Maria has just begun a career in the theatre. She is starring in her first major role - Alice in You Can't Take it With You - at the Southwark Theatre in London. It is not exactly the West End...but it is still a respectable theatre and, for a debutante actress, a good start. Yesterday, despite our warnings, Maria decided to go online to read the reviews. "What? Oh no... The Times says I overacted... "'Except for overacting by Maria Bonner and Matt Barber,' it says the play was well acted. "Well, I'm not going to pay any attention to it. Daddy, you tell me what you think after you see it tonight..." We watched the play with the keen interest of a hawk, watching a fledgling take his first flight. The play itself has some obvious weak spots. Alice's family is meant to be a bunch of loveable eccentrics. Her grandfather decided 35 years ago that he would do things that he liked rather than things that brought him money or success. This sentiment seems to have been infectious. Her father makes fireworks in the basement. Her mother writes plays and paints (badly). Her sister is taking ballet lessons from a Russian tutor who tells us she is hopeless. Then, an IRS agent pays a call: "Mr. Sycamore, it appears you have not paid income taxes in 20 years. With interest and penalties, you owe us $5,231." "That's a lot of money. But why should I pay it? What do I get for the money?" "Well, you get the army...protecting us for foreign invasion...and the Supreme Court...congress..." "Okay...I'll give you $73...that's what I think that stuff is worth." Alas, all is not purely fun in the Sycamore household. Alice falls in love with the boss's son, down at Kirby and Company on Wall Street. The Kirby's are conventional, successful and rich. Can the two households ever get along? If the play had been written by a writer from the Deep South, it would have turned out that Alice and her beau were actually brother and sister...and than Alice's mother had been raped by Mr. Kirby in back of the Baptist Revival tent 24 years ago... If the play had been written by a gloomy Swede, Alice would have left...and taken up a career as a labor organizer at the Kirby Co....eventually, ruining the business. But it was written instead by Moss Hart and George Kaufman; it ends happily. Love triumphs. "Did you overact?" we replied to Maria's question. "Not at all...you acted just like you do in real life..." Until tomorrow, Bill Bonner
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We are witness to something that doesn't happen very often - like the eruption of a volcano...or the collapse of a bridge - the first stage of a credit contraction. So far, the effects have made the headlines, but it has not yet affected most people. So far...only at the top and the bottom of the credit structure are people getting pinched, squeezed and punished.
Bill Bonner is the
founder and president of