Thursday, March 27, 2014

Why a New Depression Would Be Good For Us

by Bill Bonner

Driving Cattle

Today, we go even farther into the unknown … beyond eventually and past sooner or later … to what happens next. Specifically, we don’t think central bankers are going to take the end of the world lying down. They’ve got tricks up their sleeves. These are not new tricks. They’ve been used many times in many different forms. But they’ve never been used on the scale we now foresee.

But before we begin guessing, let us tell you a bit about what is really happening here at Finca Gualfin, our ranch here in northwestern Argentina. Three days ago, Jorge – the farm manager – came to us with a problem:

“Señor Bonner, we found two calves dead. They looked fat and healthy. I’m afraid it is a disease called la mancha. I saw it many years ago. Healthy young cows just all of a sudden fall down and die. It almost wiped out our herd.”

We still don’t know what la mancha is. But it is evidently not something to trifle with. Word went to Salta, a city about six hours away, that we had an emergency. A veterinarian advised us to inoculate the whole herd. Within hours, the medicine was on a bus bound for the hamlet of Molinos, about an hour and a half from the ranch.

The next morning, all the hands were turned out – including your editor. We mounted up and headed out to the campo – an immense valley of some thousands of acres. Our job was to sweep the valley of all the cows … driving them to the main corral, where they would be vaccinated.

The operation took three days. Your editor was probably more of a liability than a help. Driving cattle is not as easy as the local gauchos make it look. More on this later …

When the Debt Bubble Pops

Meanwhile, away from the ranch …

The end of the world comes when the debt bubble pops. But before we get there, we will see more attempts by central banks to keep the debt bubble expanding. From Richard Duncan, author of The New Depression: The Breakdown of the Paper Money System

“Given that the Fed has been driving the economic recovery by inflating the price of stocks and property, it is unlikely to allow falling asset prices to drag the economy back down any time soon. To prevent that from happening, it looks as though the Fed will have to extend QE into 2015 and perhaps significantly beyond.”

So far, so predictable. But there is a “sooner or later” for QE, too. There will come a time when the world can take no more debt… and at that point, the debt bubble will finally blow up. Then we get the equal and opposite reaction. Asset prices that have been inflated by debt will be deflated by debt de-leveraging. A depression will most likely follow.

This is not a bad thing… not at all. Contrary to popular opinion, crashes and depressions do not destroy wealth. They merely tell you that the wealth you thought you had really didn’t exist. As long as the EZ money flows freely, mistakes remain invisible. Rotten companies are kept alive. Bad speculations seem to pay off. Debts that can never be paid are still serviced. Stocks with little or no earnings shoot up.

Then when the bubble explodes the mistakes become painfully obvious. Phony gains return from whence they came. Investors reprice assets at more realistic levels. (After first going to unrealistically low levels and presenting opportunities for patient investors with plenty of cash on board).

Only then, when the economy has been thoroughly thrashed can it get up, dust itself off and get back to work. But central bankers are not likely to let it happen. They’ve made their careers by pretending to improve the economy. When the bust comes they will swing into action with more quack cures.

That is when we arrive at the second stage of the coming debt deflation. It is when we will wish we had bought more gold … more real estate … more old cars and new potatoes.

Most likely (but this is not guaranteed) central banks will find new and bolder ways to get money into consumers’ hands. (Remember Ben Bernanke’s “helicopter” speech?) This will be followed by a crisis of a different sort: high levels of consumer price inflation.

Put on your seat belt. It’s gonna be one helluva ride.

The above article is from Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

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