FROM THE DAILY RECKONING 3/23/09

Get Set for a 15-Year Depression By Bill Bonner London, England Our old friend Congressman Ron Paul says we're headed into a 15-year depression. He's probably right. In the old days, "panics" and "depressions" ended fairly quickly...at least unemployment tended to be short-term. There were no elaborate social welfare systems then. No unemployment compensation. No food stamps or "independence" cards. People had to make do. So, when a depression hit, wages fell quickly and people got back to work. They earned less, but the whole economy would adjust, with lower prices for everything. There were no bailouts and no stimulus plans, either. Mistakes were corrected relatively quickly. Businesses went broke. Men were "ruined" and had to drink themselves to death. Now, things are better. If their businesses go broke, they can go on almost as if nothing had happened... as long as they owe money to the right people. Heck, they might even get a bonus. On Friday, the Dow dropped 122 points. What happened to the rally? Is it over already? We wait to find out. Oil held steady at the end of the week, having risen over $50 to a high for the year. Oil's rise was entirely explained by the sinking dollar - down to $1.35 per euro on Friday. "Dollar sell-off gathers momentum," explained one headline. "Gold soars," Bloomberg added. Gold shot up nearly $70 an ounce on Thursday. It took a rest on Friday...but we don't think it will take a break from its epic run for long. Take advantage of this pause in the gold price and buy some now. You can still purchase the yellow metal for just a penny per ounce. Learn more here. But back to the story of the 15-year depression... Goldman says it wouldn't have lost much money if AIG had been allowed to go broke. So, don't think for a minute that it wanted the government to save AIG just so Goldman could get its $20 billion back. The public and its paid representatives in Washington are up in arms. Reporters have been following the trail of the hundreds of billions of taxpayers' money handed over to Wall Street firms. They discovered that it went into various silk-lined pockets - notably, those of the aforementioned Goldman Sachs, foreign banks and the bankrupt firms' own executives. The politicians were shocked. Shocked! The public was outraged. Whence cometh this outrage? Not from any matter of principle that we've been able to determine. The taxpayers don't mind robbing Peter. But they don't like it when the ill-gotten gains go into someone else. "Hey, my name is Paul and I've been out of a job for six months," they say. "Where's MY bonus?" Congress sprang into action last week to set things right. But rather than give every Tom, Dick and Harry a big bonus, the House proposed a 90% tax on the AIG bonuses...and urged the states to take the other 10%. The whole thing is a dangerous distraction, in our opinion. The bonus amounts are trivial in comparison to the huge amounts of the bailouts. And when the pols start taking money away from people our sympathy is with the takee, not the taker. Besides, it encourages a very bad idea: that politics, rather than a free market, should decide who gets what. The next thing you know, they're going to be telling us which businesses succeed and which fail. Wait a minute...they're already doing that! Which is why Ron Paul thinks we're going to have a depression that lasts longer than most marriages. When markets are allowed to work, they often make mistakes - especially when government is fixing interest rates. Periods of growth are punctuated by crises - including sharp breaks in business activity and bouts of 'creative destruction.' Like forest fires, these episodic conflagrations burn off the dead wood, permitting new growth. But when government allocates capital and resources, it is almost always a soggy disaster from beginning to end. The dead wood never gets cleared away. Instead, it is protected...propped up...leaving the new shoots to struggle in the shade. Not much growth, in other words. We repeat: there were only two examples of major depressions in the last century. Both came after a huge run-up in debt. And both were met with programs that economists should be ashamed of - bailouts, stimulus, loans, props, safety nets and hooks. In both cases - the '30s in the United States and the '90s in Japan - the depressions continued, on and off, for many years. WWII brought an end to the first one - 12 years after it began. The second one continues - nearly 20 years after the crash of the Tokyo stock market. And now we have a third one...and this time the feds are determined to beat it. What's their strategy? More firepower! What's their secret weapon? QE, or quantitative easing, which is actual monetary inflation caused by buying debt directly from the government. Will it work? Will Geithner/Bernanke succeed where others failed? Will economists finally master depressions...and find a way to get "creative" without the destruction? Ah...we think we know the answer. But in the meantime, we're enjoying the show...