Bill Bonner
Today, we boldly announce a NEW THEORY about the way the world works.
Yes, dear reader, you are the first to hear it.
But before we get to that, let's talk about what's going on in the markets.
Stocks continued shuffling along like zombies...the Dow rose 24 points. But gold shot up to $1,248 - a new record.
Makes you wonder. Inflation is no threat to anyone...at least, not now. The economy is recovering - at least, that's what everyone says. So why is gold hitting a record high? Something must be wrong.
Something is wrong.
Gold buyers are probably just like us. They're not sure exactly what is wrong. But they know something is rotten in the state of Denmark. And Greece. And Spain. And New York. And California. In Washington, DC. And in the Gulf of Mexico.
We just had the biggest financial crack-up of all time. Even under ideal conditions, it will take people a long time to rebuild lost savings...to get rid of houses they can't afford...and to restructure debt they can't pay. While this restructuring and adjustment is going on, you'd expect the markets to be a little punky.
But instead of letting people get on with it, the zombies have moved in. At first, you hardly notice. An arm here. A leg there. Pretty soon, you're dead!
The percentage of the economy controlled, guaranteed, or paid for by the government is increasing. Since the feds were already deeply in debt themselves, the only way they could spend more money was by borrowing more. You can't cure a debt problem by borrowing more money. Net debt is going up. So, there's something wrong. The economy isn't recovering... It's just not possible.
Which brings us back to our new theory...
Many are the ideas about how the world rumbles and trundles along. Most have some sort of dialectic at the center of them...some tension between one thing and another that causes them to oscillate to and fro...some yin and yang of opposing forces, constantly battling it out for control.
Good vs. Evil. Progress vs. Backsliding. The proletariat against the bourgeoisie. The moneyed elite vs. the people. Democracy vs. Totalitarianism. Freedom vs. Slavery.
Here we offer a new and improved theory with a dynamic of its own: the producers vs. the parasites.
Yesterday, we read in the local Washington newspaper that the parasites gained more ground in suburban Maryland. It was a minor issue on a minor page of a minor section of the paper. But that's the way the parasites work. Little by little...an arm here...a leg there.
In the present instance, people who live in trailer parks can now feed on the people who own the ground beneath their feet. The state government has added a term to their contracts that neither party agreed to. Henceforth, if the trailer park owner wishes to close down his business, he cannot merely honor the terms of his contract with his lessees. He must also pay them off according to a formula decreed by the legislature. Trailer park residents have been zombified.
A bigger illustration can be found on the front page of yesterday's paper.
BP has agreed to provide the zombies with $20 billion dollars of raw meat:
"BP backs $20 billion spill fund," says The Financial Times.
BP is a producer. It makes something valuable. In fact, it makes the thing that is the pentagon's most valuable and most important resource - liquid energy. It does so at a profit, also rewarding all the little old ladies, lonely orphans and rich sons-of-a-gun who own its shares. BP normally pays dividends; those dividends are currently suspended, as BP diverts cash to the spill fund.
Yes, it also makes mistakes, for which it must pay.
But circling BP today is an army of parasites. Zombies who toil not. Neither do they spin. Instead, they file lawsuits and try to get something from the producers without paying for it. BP's Gulf disaster is a godsend for them. Like a busload of plump English tourists delivered to a bad neighborhood...
The Democrats have always been the recipients of big donations from tort lawyers. Many lawmakers of both parties are lawyers, which is to say they were probably parasites even before they entered public service. It is not surprising that their instincts are the same - to leech onto productive businesses.
Remember the giant tobacco settlement? In 1998, the tobacco companies lay down and opened their veins. A quarter of a trillion dollars was paid out in a huge class action settlement. The money was supposed to go to redress the damage done by smoking. But $19 out of every $20 found its way, instead, into the pockets of the lawyers, the activists, and the bureaucrats. That is to say - the zombies got it.
Will the oil settlement be any different? Not likely. The zombies will take most of it. Much of the rest will be used to turn honest working people into zombies. Instead of finding new work in new areas, for example, Gulf-area residents will be encouraged to stay put and collect checks. If they take up new work, the measure of their 'damages' will go down!
Here is our theory: in the beginning, an economy, a business, a nation...or even a family budget...is fresh, clean and dynamic. Over time, little by little, the parasites encrust themselves -like barnacles on a ship. Then, they grow. Eventually, they become as fat as ticks on a hound in the summertime...
At first, they are just nuisances. The economy can support them.
'The masses want bread? Sure why not. Give them a circus too. And give my lazy brother-in-law a sinecure.'
Gradually, more and more people get their teeth into it. An unnecessary department in a thriving business. A subsidy to one group. A special favor to another. A make-work job...a handout...a bailout... An expense here. An extravagance there...
When things go well, the parasites take more blood. Heck, the economy can afford it. When they go badly, they grab the weakened host and pull it down in a feeding frenzy. BP, are you ready?
They succeed because in most cases it is generally cheaper to go along than to fight.
Without hardly noticing, the living become cooperative zombies too. The cigarette companies become tax collectors for the feds. The oil companies too. Doctors go along with nationalized health care. Teachers get their lifetime tenure. Ordinary citizens stand in line to be inspected at airports, counted by census takers, interrogated by tax collectors. Soon, the whole nation is zombified.
The zombies win. And then...there is collapse, war, revolution, bankruptcy... The zombies are killed off...new life begins.
That's why the feds fight so hard to prevent a financial collapse. The last thing they want is a fresh, new, healthy economy...
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.
As is typical of me, I saw gold making a significant move today so I tuned in to the Financial News channels to see what all the geniuses were saying about gold.
One commentator suggested gold was more than a safe haven now, it's a currency play, as the world's currencies all seem to be teetering on the brink of debasement. Another said the technicals on Gold suggest it will hit $1300 as early as next week. And still another reporter chimed in and said but today's volume is low so be careful. Higher prices on lower volume can be dangerous to buy into.
Then as if the floodgates of gold news have opened, I also read two articles on gold. One says Central Banks are now buying Gold and another states that gold still has a long way to rise.
Ho Hum! This is all old news to our loyal readers but you know I have to comment. As far as gold being a currency play, of course as world currencies falter, investors move out of currencies and into something they deem safe. Of late, investors have been escaping the Euro and into gold, U.S. Treasuries and maybe even the dollar as now the dollar is seen as one of the world's least weak of many other currencies.
To the comment that we could see gold at $1300 as early as next week, we at Lear Capital have been saying for months, that we are in the gold-at-$1500-by-the-end-of-the-year camp. Being it is half way through the year, it's about the right time to hit $1300, considering gold's propensity for a steady climb.
Here's my favorite one. "Gold is trading on low volume today so be careful." (I paraphrased a little) Low volume is often attributed to lack of buyers. But given gold supply has notably run out a couple times in the last year or so, I say low volume can just as easily be attributed to lack of sellers. Do you want to sell your gold today?
I submit, people who own gold today do not own it so they can make a few points of return. They own gold it because they are uncertain about the future of the world's economies. Make no mistake, gold demand is on the rise.
The article today that finally acknowledges 
A bubble is a significant increase in valuation supported by a set of artificial, inexplicable, and otherwise unsustainable conditions. The 'increase in valuation' can be nominal as in a price that goes 'higher' without a corresponding increase in value, or a decline in the value underlying the asset while the price remains nominally the same. (note 1)
True bubbles almost always involve some element of secrecy, a cover up, and some dispensation from common knowledge and experience. There are almost always dissenters, voices of warning, that are ignored and even ostracized. "It's different this time..." without there being an identifiable difference, only the self referential rationale.
Stocks are not a bubble because they are going higher and the market is infallible. Housing cannot be a bubble because the housing market is so geographically diverse. You get the point. Not all things that increase in price are a bubble, but this does not mean that bubbles cannot be identified. They can, but when they serve some greater end, the voices of dissent are overwhelmed. Almost all bubbles involve control frauds and the corruption of the media, the analysts, and the regulators, to some degree, through benefits and intimidation.
When the artificial conditions are removed the valuation of the bubble 'reverts to the mean, ' a more normal valuation based on the fundamentals, unadjusted and undistorted supply and demand. An asset bubble often involves a fraudulent design taking advantage of and even perpetuating a corresponding foolishness. In other words, the fraud is father to the folly.
The duration of a bubble does not make it valid or 'the new normal.' Like most chronic conditions it just means that the adjustment will be all the more difficult.
The US dollar as the world's reserve currency, and the unusual period of US prosperity, is an historical artifact of the post World War II era that will not continue indefinitely. When the reversion to the mean occurs, it is likely that the dollar will have to be reissued as 'the new dollar' similar to the rouble in the post-Soviet adjustment. I can think of few better examples of what the US faces than the collapse of the former Soviet Union. For the UK, it looks like Argentina, or Iceland writ large, but with the sharp edge of a police state.
