After a Big Boom, You Get a Big Bust. History Indicates the Economy Will Unwind

Buenos Aires, Argentina

Not much time to write this morning; we’re on our way up to the Andes to check on our cattle and our cabbages. If things get really bad, we may have to live off the fat of the land up there. Trouble is, there’s not much fat on that land.

More on that... and why the UK’s economy is doomed (and how you can protect your self as the pound sterling continues to crumble)... below...

(By the way... we’ll be out of email range for the next few days... will write again on Monday.)

In the meantime, let’s keep it simple.

After a big boom, you get a big bust. That’s what we are seeing now.

And there is no evidence anywhere in the historical record that the financial authorities can stop it. They can hold it off - for a while. They can distort it. They can possibly divert it. They can make it worse. But there is no evidence that they can make it better.

Losses are losses. Mistakes are mistakes. They don’t go away when government throws money at them. They can be moved around... shifted from the people who deserve them to, say, the innocent householder. But somehow... some time... someone has to write them off and work them out. That’s the basic plot of almost every financial story you read in the paper and see on the news every day - the de-leveraging... the unwinding... the downscaling of the world economy.

Almost every business is reporting worse results than last year. An exception is the pawn shops - they say business is running 50% ahead of 2007. Another exception is Apple Computer, whose IPhone has boosted profits 26%.

Everyone else is singing the blues. Stocks are down all over the world. More money has been lost than in ’29 - much more.

Yesterday, the Dow dropped 231 points, following a strong showing on Monday. Oil slid further - to $72, and then below $70 overnight. The dollar rose to $1.30 euros. And gold dropped another $16 - to $773.

If you lend money to the US government for 91 days you will be earning only about 1% annually. Still, there’s a rush to do it. Money is pouring into money market funds.

Most likely, there will be a big rally in the stock market - as there was in ’29. It lasted about 6 months and took prices back to shouting distance from their highs. But it was a sucker rally. In April of ’30, stock prices collapsed again. And then the economy fell apart too.

These things take time, dear reader. Businessmen are only now beginning to realize that they need to cut back - fast. They cancel orders for new equipment, new projects, and new employees. Then, after they’ve stopped the new spending, they look around the shop to see what else they can cut. And then they see that middle aged baby boomer drinking coffee. He’s tired. He’s already thinking about retirement. And he costs a fortune.

‘Get rid of the guy,’ they say to themselves. Then, they say it to the poor employee.

The "Boomer Bust" will make it very hard for this economy to recover, says the Wall Street Journal. The boomers led the boom. Now, they’re going to lead the bust. They’re going to be forced to cut back on spending. In fact, they’re going to cut back so much they’re going to make thrift popular again. Fashionable. Almost hip.

But if the boomers don’t spend... who will?

That’s the other half of the story. aul Krugman and other economists are urging Congress to "spend baby spend," as TIME magazine puts it.

Word in today’s news is that the feds will spend more than $700 billion bailing out the banks.

New York says it faces a $13.5 billion budget gap. Over on the other coast, California says it has a big gap to fill too.

Meanwhile, Congress is taking up another "stimulus" package... said to be worth $300 billion, even before it gets decked out.

And then, there’s this headline: "Fed to provide up to $540 billion to aid money funds."

"The US deficit is set to soar," continues TIME.

So, the pols are beginning to do what they do best - squander money. And now they can do it under the cover provided by one of the most popular economists of the 20th century: John Maynard Keynes. Now, they’re not just greasy politicians handing out stolen goods. Now, they’re providing the necessary "stimulus" to an ailing economy!

More news:

*** The pound sterling has taken another huge hit overnight, following Mervyn King’s admission that the UK’s in recession.

"The balance of risks to inflation in the medium term shifted decisively to the downside," said the Bank of England Governor.

Look out for more UK rate cuts and a further slump in the pound, say colleagues in London. "Hedge your portfolios as Britain heads into a deep recession and a run on the pound."

Sounds like a good plan. The dollar is rallying hard against the pound and the euro, but the UK economy looks to be in more serious trouble than its cross-Channel neighbours.

"Get your hedge in now... things are only going to get worse," explain our Fleet Street Letter editors, "the UK economy and stock market are in for a rough time. Our crisis hedge has outperformed the stock market by 25.19% since our recommendation on 9 August. "As the UK economy crashes into recession, this investment actually gains in value. Also, since tipping, it has paid a dividend to shareholders and represents a great potential safe haven in this volatile bear market."

It’s worth a look, dear reader. Anything that can protect your wealth in times like this is definitely worth a look.

See how bad it’s going to get... and how you can get some protection... here.

And more thoughts:

*** Money is pouring into the gold coin market. Apparently, dealers can’t keep up with the demand. Of course, financial analysts tend to view the gold coin market as a place for nuts and kooks. "If the world really does fall apart, you’d be better off buying ammunition," said one analyst. But it depends on how apart the world falls. If commerce is still done peaceably gold coins would be a good thing to have in your pocket. But, he’s right; when things really fall apart, you’d be better off packing heat than kruggerands.

But we’re not worry about that kind of world - it is too wild and too unpredictable.

Have you downloaded your free report on gold coins? You can get it here.

*** "Bill, do you realize that one of your neighbors up there produces one of Argentina’s finest wines," asked a friend last night.

We bought a bottle from Tacuil and had it with dinner. It was a very interesting wine... a mixture of malbec and cabernet grapes, we were told. Produced at high altitude.

What a relief! We can roast our own cows, eat our own beef, with cabbage on the side, and wash the whole meal down with the fruit of our neighbour’s vines.

So we’re not going to worry. We’ll be all right. Even if it doesn’t blow over...

"But you know," said another dinner companion, "that’s why I like it here in Argentina. Because I think this world is getting more and more dangerous. Did you read today’s paper? It says Pakistan is on the verge of anarchy. The Taliban is going across the border and operating in Pakistan just like they do in Afghanistan. They took over a bus and killed everybody. They blow up police stations. They could take over the country. Of course, I wouldn’t care who runs Pakistan, but it’s a nuclear country.

"Down here, at least you feel like you can live well without worrying too much about these things. We have plenty of sunlight. We have plenty of water and food. We even have very good wine."

*** A Dear Reader currently living in Buenos Aires sends this comment: "My cab driver here (and in Caracas) understands and cares more about currencies and inflation than all my friends in the states combined."

Recommended reports:

"Protect your wealth from a deepening UK economic crisis and a run on the pound". Click here.

Get your free report on gold coins. Click here.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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After a Big Boom, You Get a Big Bust. History Indicates the Economy Will Unwind

After the Boom, the Bust