Personal FN is privileged to bring to you Mr.Bill Bonner, President & Founder, Agora Inc., and co-author of “Financial Reckoning Day” and “Empire of Debt”. In a conversation with

Mr. Satish Mehta, MD & CEO, Quantum Information Services Pvt Ltd (Personal FN)

Bill shares his view on a wide range of subjects from economics and investments to some questions on his and Agora’s philosophy

About Mr. Bill Bonner In 1979, Bill created what is now known as AGORA Inc. What began as a small publishing company based in Washington, DC, has grown to be one of the largest and most successful consumer newsletter publishers in the world.  Bill, along with his friend and colleague Addison Wiggin, has written two New York Times Best Selling books: “Financial Reckoning Day” and “Empire of Debt”. Both works were critically acclaimed and internationally distributed. His most recent book, co-authored by Lila Rajiva, Mobs, Markets and Messiahs, also hit the New York Bestseller list.   In 1999, Bill founded “The Daily Reckoning”, he continues to write for it everyday. The Daily Reckoning weaves information about the financial world, investing, and everyday life into an educational and entertaining format. Today, more than 500,000 subscribers read Bill’s daily columns.   Bill has received many awards for his business successes, including “Entrepreneur of the Year” as well as Direct Marketing “Man of the Year.”

 

Mr. Satish Mehta:The world seems to be on a road to recovery, after experiencing the recession of 2008/2009. Do you think this recovery is real…are there still some roadblocks in this whole process?

Mr. Bonner: "Well I think the recovery is basically a fraud – it’s basically a counterfeit recovery. Because there are something’s you can’t recover from and when you die you don’t recover from that. That’s it - Its over. I think there was a mistake to refer to what’s going on as a recession in the first place and which now the economist have taken to refer to it as the great recession. Well it was never a recession and so it was certainly never very great. What it is, is a recession is a pause in otherwise a healthy economic system, where the things are running a bit headed themselves, they cool-off, they relax, they slowdown for a while and then they take-off once again. But what we have experienced since 2007 is not a pause not for America, not for Britain (rest of the world is a little different), but the leading Anglo-Saxon economy share a kind of phenomenon, which is a huge great boom – a credit expansion that’s gone on for gone for last, since the end of world war II really. And that credit expansion is part of the economic model, which was elaborated in early 30’s, following a great depression in which it was believed that you needed to stimulate consumer spending in order to grow. And while they believed that the more you stimulate the consumer spending the more you grew - Infact an economist named William Phillips, developed what they called as the Phillip’s curve which is purported to show that as you increase the level of inflation, so did the level of employment go up. And so you had a whole economic system which had a built in bias towards inflation, towards credit expansion and every time they had a real recession, the governments came in to try stimulate more consumer spending, because Lord Keynes (John Maynard Keynes), believed that stimulating consumer spending was the key to prosperity. Keynes was wrong, he was dead wrong about that. You know it’s not consumer spending that creates prosperity; consumer spending is the result of prosperity. And when you invest, when you build capital, when you acquire the capital through investing through factories, through manufacturing, through all those things which you do with capital; that produces high wages, more output per hour; high wages then lead to greater consumption, leads to consumer spending. So he had an entirely backward philosophy. But the economy has functioned on this backward philosophy - this backward economics since last 50 years, but as you can see the stating in the simplest form, this increasing consumer spending leads to higher prosperity was fine until consumer spending outruns people’s ability to spend. So it did outrun probably in the 1980s in AmericaU.S. economy was largely a result of additional debt – the additional credit, beyond what people could afford – they spend all they could spend, and then they spend more. And when they spend more the additional increment – the spending beyond what they earn was probably responsible for 100% of the growth during the last spurt between 2002 and 2007. And so now you got to the stage that came to an end in 2007, because it couldn’t continue -  because the average consumer who had by then mortgaged up his house (he bought his house at sub-prime mortgage) he couldn’t continue – he couldn’t pay. It became obvious that he couldn’t make his debt payment and that his collateral – the house itself is going down and so he couldn’t continue. Then, when it became obvious that the guy couldn’t pay – that his collateral is going down, then all the derivative financial instruments built on the premise that he would pay his debt those were down and the holders of those derivative financial instruments and the holders of the debt from those holders that is to say AIG and Bear Sterns; they realised that they were in trouble. So the whole financial system seemed to collapse. This was misinterpreted by the main leading economists as a liquidity crisis. It wasn’t a liquidity crisis at all, it was plain money flowing around - it was a debt crisis – being too much debt. But misinterpreted again, they interpreted it as the world recession, as they had every other time since the war every slowdown – more credit. But this time it didn’t work. This time they put in more credit, they didn’t get a boost up in the consumer spending. Consumer spending is really going down in Britain and America – the numbers are kind of fishy right now, but they seem to be going down – saving rate is going up. The consumers after this long period of expansion are now de-leveraging – they are getting rid of debt. This is what you should expect – a big run-up? You got to have a correction and we are having that correction. But government’s reaction to that - totally, inappropriate is to add more debt to the systems and that’s not working.  So what they do? They add more spending. This is exactly what happened in Japan. They reached the limit of monetary stimulus very soon – you take rates down to zero. Then what you do? You can’t take them down further. Then you have to resort to fiscal stimulus – the government has to spend money. And so what we are seeing now is the result of the biggest fiscal stimulus in the history of the planet and it is making it appear that there is a recovery, but the recovery is not real – what it is a replacement of private spending - private business activity with largely government in the U.S., military contracts and stuff like that, which really don’t add to human happiness or prosperity. But they look like they do, because in the GDP numbers they show up as growth".

 

Mr. Satish Mehta:  But given the inherent psychology of being a spending or a consumer economy in the U.S. and U.K. primarily as you said, and given their role that they play in the world economy and then the inter-linkage with China’s production, do you see this as public memory being short and this rise in savings and decrease in consumption being a short term blip as people recover and then we’ll all go back to the old game of spending more money and consuming more stuff?

Mr. Bonner: "Oh well that will be exactly the forecast, if this were a recession you expect people to recover – stop spending for a while and then you go back to their old ways. But it is not a recession – it’s a depression, and it’s a depression because the old model no longer works. Again I refer to JapanJapan they tried that. They tried the monetary stimulus, they tried the fiscal stimulus –they tried it for 1 year, 2 years, 3 years, 4 years, 5 years…they tried it for last 20 years and it still hasn’t done any good. But why was that? It’s because that old model no longer worked. Now the model in Japan is totally different from the model in the U.S. Japan is an export economy, but is actually very much like China, where there’s heavy reliance on exports and overinvestment.In the U.S. Americans overspend and they over consume. But in China and Japan, they over produced. They over produced, in response to the overspending in the U.S. And so now we have the situation where, the U.S. consumer cannot continue to do what he’s doing. That expansion was not just 5 years debt expansion or a 10 years, it’s a 50 years done expansion and won’t be corrected in 3 or 4 quarters, because the debt is just too great. So that going to take years and years. We don’t know, it may take 20 years – I don’t know. I did a rough calculation and I came up with 7 years".

"But what happens now if we get this kind of Japan like response, which we are getting from the government. And what the Japanese did is, the government interceded in the process of correction and turn the economy into fundamentally a zombie economy, where the companies which should have gone broke, didn’t go broke, the banks that should have failed, didn’t fail, and the economy kept going – an economy that should have collapsed, people should have been wiped-off, so that it could be re-built, didn’t happen. It just kept staggering along like a zombie. My only trouble with these zombies is that they suck life from living organisations – living organisms. And that’s exactly what happened. People don’t realise that when governments spends money, it is using up resources. And we only have resources – certain amount of time, capital, all those things. When government does that, it sucks those resources out of the real economy and uses them for its own purposes and says well the private sector wasn’t using it so we are going to use them. And since 2% GDP, the private sector had collapsed we are going to put in 2% and then it will be just the same, right. But it is not the same, because the government doesn’t use the money in the same way.The private sector spends money, makes investments, takes risks, and produces things that people want. The government what did they do in Japan, they built roads, channel rivers and they did all of it, they more pour more concrete than any country in the world ever put. But is it good thing? You don’t know. Now people have got savings down the concrete. Good luck!!"

 

Mr. Satish Mehta:Do you think global finance as it is defined today; is a complication by the Wall Streets of the world? If you were to send 3 institutions or individuals, to the gallows for what has happened, who would those 3 be?

Mr. Bonner: "Well, that’s an interesting question. There are people who make mistakes, there are people who do things that are sharp and there are people who do things that are wrong. People make mistakes, like the guy who bought a big house with a big sub-prime mortgage that was a mistake – he shouldn’t have done it. But, I wouldn’t send him to the gallows for that, I would just take away his house for that. There was the guy who lent him the money to buy that house, who knew he wouldn’t get it back (you know he got a fee, he got his bonus, and he walked on) he’s certainly a sharp dealer, certainly a shyster, I wouldn’t send him to the gallows for that – that‘s how the whole world works. You got to be sharp. But then there’s somebody else in this equation. There is the guy who passed the law in U.S. creating “Fannie Mae”. And “Fannie Mae” provided mortgage support. Mortgage backed the mortgage of these people and then off course “Fannie Mae” just couldn’t pay all those bad mortgages. So then “Fannie Mae” gets taken over by the government, which in effect says to the poor guy who lost his house - you going to pay for the mistake made by the bankers, made by the guy and everybody. I say should send the politicians to the gallows any way. I think you don’t make any mistakes by sending the politicians to the gallows. So I would do that any way. I wouldn’t need to have a trial; I would send him to the gallows anyway".    

 

Mr. Satish Mehta:India, the markets are up from 8,000 last year to almost 17,000 now (the index). Do you think this is fundamental, is this a flight of capital of the U.S. and U.K. into India and China, or this the pure sentiment that “in bad times that anything green is like a green shoot”?

Mr. Bonner: "Well I think it two things. One thing it’s both a mistake and wise perception at the same time. Because fundamentally I think, India is a solid growth story. Where, America is at the end of the 50 year credit cycle, India is at the beginning or some where in the middle, so India is a good story, it’s probably got years to go. So the investor can rightfully say, “India is growth story going to invest in India”. But, there is something else going on too, because India is extremely susceptible/ vulnerable to movements of money globally and from what I can tell there’s some small pools of money looking for opportunity, that money has moved India and that’s why moved the price has moved up so much. So I would be very careful in the Indian market now. If you are an investor who doesn’t expect to stay for 10 years, then it is probably good time to leave. If you are going to stay invested for 10 years you live through couple bear cycles".

 

Mr. Satish Mehta:But on a larger scale, do you think stock markets truly reflect the economy of a country?

Mr. Bonner: "Well, yes and no. They do sometimes and sometimes they don’t. You get all kind of things in stock markets.But, I think generally yes, generally over the long-run they do and not in the short-run. In the short-run you get all kinds of movements and right now there’s movement. The Indian stock markets suggest a heck of a lot of optimism and will India grow like that (steep upwards)? Probably not. Probably like that (fluctuate). So probably people would lose money. So what the, market shows right now is not exactly optimism, but not pessimism. And so what’s going to happen, who knows. But my guess is it doesn’t really reflect what’s going on. Because if I’m right and we are in the beginning of real deflation/ a real correction stock market ought to show that".

 

Mr. Satish Mehta:You have been a big advocate of gold for quite a while. Does that (gold) still shine in your recommendations?

Mr. Bonner: "It does. I like gold. I’m a gold bug. But that doesn’t mean I’m always a gold bull. But as a gold bug I believe that - it’s not just that I like gold, but it’s just that I don’t like paper money. I don’t think the people running paper money are capable of maintaining its value. So if were to think about my grand children and if were thinking of leaving them thousand paper dollars over an ounce of gold, then a I think I would leave them an ounce of gold".

 

Mr. Satish Mehta:Would you actually buy gold at this price and where do you see gold in the next 12, 18, 24 months?

Mr. Bonner: "Well, I would buy gold at this price. But, I will not buy to make money; I will buy to protect money. If you look at gold at over last 1200 years, which the guy called Jastram (Roy W. Jastram) did in the book called the “Golden Constant”, he found that gold never moves very much. Generally, you take an ounce of gold it will buy you new suit, clothes. It goes up, it goes down, but over the long-run it’s about there. And if you look at it now it’s not too low in terms of what you are buying. But we happen to be in this period, where I expect monetary crisis. I expect that the system set up in 1971 – the system where paper backed by paper backed by more paper, I expect that system to fall hard. And in the process of it falling hard, there is going to be hell a lot of volatility, hell a lot fright in the market. People will turn to gold because it’s the only thing that people can hold onto as it won’t disappear".   

Just moving away completely from economics and investments.

 

Mr. Satish Mehta: Agora is headquartered in Baltimore, MD which is spread across a collection of restored 19th century mansions within the historic Mt. Vernon district. You also conduct business in several other historic properties in France, Nicaragua, England, and Ireland, all of which have been carefully preserved and restored. What is the philosophy which reflects this pattern?

Mr. Bonner: "It’s not an explicit. But between gold and historic buildings, there is a correlation - you know they are things that endure. We don’t want to but cheap buildings that are going to be torn down because that doesn’t have any interest to us".

"Infact the name Agora in Greek means market place – the ancient Greek market place. We encourage our editors to think what they “outside the box”. This housing thing provides a kind of foundation. We want to think about things in a long-term way, just from the intuition that is better to do things from the position of antiquity here".

 

Mr. Satish Mehta:So where do you see the Indian operations based in 5 years from now? Not in building that can be torn out

Mr. Bonner:"Well, there are beautiful buildings in Bombay. Right now there is a problem and I don’t understand. But for some reasons there are some buildings, you can’t buy them and you can’t fix them up. But we will like to be in one of those beautiful colonial buildings".

 

Mr. Satish Mehta:AGORA launched its first publication, “International Living”, in 1979. Today your company publishes more than 300 books and 40 newsletters, reaching 1 million readers from around the world on various subjects. Your company is a holding company for various publishers. You have also written two New York Times best selling books “Financial Reckoning Day”and “Empire of Debt” along with your friend and colleague Addison Wiggin. Is that your market place in a way, is there a link between these or this an end to itself?

Mr. Bonner: "No no. I have a market. We sell ideas, information, recommendations, and so on. We sell them as I say them “alternative”. We have no intention of competing with the Times of India or the New York Times – we are not in the main stream information business. Now, an idea we can publish anyway we can – we publish them in books, we have websites, we have magazines – we having the leading financial magazine (Money Week) in Britain. We have that magazine in France too written in French. So, we will publish in any form, that we can. Not all forms work, but some do, some don’t work. So basically we are a newsletter publisher".

 

Mr. Satish Mehta: So what’s your leisure reading personally, and what do you do in your free time, if you have any?

Mr. Bonner:  "In my free time, I’m a hobby builder - I lay bricks and things like that. And reading".

 

Mr. Satish Mehta: Charities, is that a philosophy again? You have been involved in charities; you have created the “Roberto Clemente Health Clinic” in southern Nicaragua. So what drives that part of your emotions?

Mr. Bonner: "I’m quite suspicious about organised charity, I have to say. Because it’s very hard to help people really. You try to and it back fires. It’s a long discussion but my observation is that, when people get something that they don’t work for, it’s corrupting to the giver - the giver feels superior because he’s now helping somebody and it’s corrupting to the receiver who is getting something for nothing. You see this in Africa. There was a marvellous book written a year ago by an African woman whose name I can’t recall. She was giving the history of foreign aid to Africa and showing how corrupted all those governments that came and how they made the countries weaker economically. For example they would give grain to a poor country and then the farmers couldn’t grow anything – they couldn’t compete with free grain. So the farmers were out business. They went to cities and became beggars. They give money to a foreign government and when the money goes to the foreign government, which it all did practically through the government, the government skimmed off all of it and the sales of Mercedes Benz, went up right after that".

 

Mr. Satish Mehta:So we have the average Indian – the man on the street, he does’t understand derivatives and Wall Street. He doesn’t understand why he lost his job here and why is the economy hit badly. So what would be your advice to that guy on the street, who is just worried about the food on the table, the shelter and clothing for his family - what would be your advice to the average Indian investor? How does he protect himself against 18% food inflation and that’s happening which is completely out of his control?

Mr. Bonner: "Well there’s not much that he can do and I can’t give any good advice on that".

"Buy gold for the short-run and for the long-run find good businesses. I think India has got some really good businesses, but some of the prices are little high. But in the long-run I want to be in those businesses - I want to own those pieces of those businesses. India is a remarkable place – there are so many entrepreneurs".

 

Mr. Satish Mehta:If you had a free hand to do what you wanted with the world, economically – not politically and not socially. What would be your top 3 agendas?

Mr. Bonner: "If I had to do what I want, I would undo the mistakes made by central planning and would eliminate all stimulus programmes, I don’t think it works – they are counter productive. I would cut taxes, which will be the fun part".

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