The world economy is calling in sick.

It’s Monday morning. The world economy is calling in sick.

A Bloomberg report confirms last week’s news: the U.S. economy lost more
jobs last year than at any time since the end of WWII. The jobless rate is
now at a 16-year high.

The Dow fell 143 points on Friday. Oil stayed at $40. Gold didn’t budge
much from $855. And the dollar rose – to $1.34 to the euro.

“Economists see longest recession since WWII,” is a headline at Reuters.
Economists are always the last to know what is going on. If they see a
long recession coming, maybe the recession is already over? But, no...this
time, we think even the economists have it right.

“This is worse than the S&L crisis,” said our old friend Jim Rogers a year
ago. “This is the first time – this is the worst credit bubble we've ever
had in American history. No – never in American history have people been
able to buy a house with no money down, never. That's never happened
anytime in the world. So, we have the worst credit bubble. It's going to
take a long time to work its way out. You don't cure a bubble in five or
six months... It takes five or six years.”

The world economy is clearly ailing. But what’s really wrong with it?

In 1945, the war economy was suddenly out of business. Orders for tanks,
guns, and C-rations stopped coming. The economy felt a little ill.
Economists feared the United States would sink back into a ’30s-style
depression. And investors sold off stocks in anticipation.

Instead, the soldiers came home and got married. Women gave up their jobs
building airplanes and began to build families. Then, the new families
started spending the money they had saved up during the war years. In came
the orders for refrigerators, houses, and automobiles...and the illness
passed!

Once again, the economy is feeling like it has a touch of the flu. And
once again, the cause can be traced to a change in the weather. After so
many years of living beyond their means, Americans are reluctantly
beginning to live beneath their means. Instead of spending every nickel
they earn, plus a few they didn’t, they’re finally beginning to save. Not
that they want to; but they have to. The easy credit is gone.

And so the orders for new cars, new granite-topped kitchen counters, and
new televisions have stopped coming in.

But now there are no soldiers coming home – or not enough to make much of
a difference. And there are no women giving up their jobs at the aircraft
factories to start new families. And no kindling to light a fire under a
new consumer spending boom – people have soggy debt, not savings.

This is not just a problem for the United States; it’s a problem for much
of the world. Americans were the world’s consumers. They could be counted
on to spend money – even when they didn’t have any money to spend. They
bought the gadgets made by the Chinese, the wine made the Chileans, and
the automobiles made by the Japanese. They were the chumps of last resort
for the entire planet. Now that American consumers are coming to their
senses, the whole world economy is feeling a little ill.

Left to their own devices, people would adapt. Chinese factories would
gradually switch from making gee-gaws for people in Minnesota to making
things for people in the middle kingdom. Displaced Japanese autoworkers
could open noodle stands. One way or another, things work out...the malady
would pass.

But the quacks threaten to make it much worse.

Of course, they’re delivering the standard elixirs – in massive doses.

As to the ‘fiscal stimulus,’ the president elect says he will change the
TARP program so that it corrupts more taxpayers – rather than just a few
big ones on Wall Street. He says he aims to create 4.1 million new jobs.
Already, according to the Congressional Budget Office, the U.S. deficit
for 2009 is expected to come in at $1.18 trillion – BEFORE Obama’s new
stimulus program is added in.

As to ‘monetary stimulus,’ there’s nothing left to cut in the Fed’s key
lending rate. If they want to ease rates further, they’re going to have to
pay borrowers to take the money.

But the new super drug at the Fed is its policy of “quantitative easing.”
What is ‘quantitative easing,’ you may want to know? It describes the
Fed’s latest ploy, in which it buys toxic assets from banks. The banks
thus increase their reserves. If they were to maintain the same
loan-to-reserve ratio, they would have to lend out more money. But when
the Fed buys assets from the banks, it does not borrow the money; it
creates it ‘out of thin air.’ In other words, between ‘quantitative
easing’ and ‘printing money’ there is not enough space to wedge a subway
ticket.

So far, this new treatment has produced no signs of recovery. But don’t
worry; the quacks won’t give up. They’ll give larger and larger doses –
until the patient dies.

Our old friend Jim Davidson, founder of the National Taxpayers Union,
sends this note:

“Obama has confirmed he will take rapid action to cut taxes for 95% of
Americans. At first blush, cutting taxes for 95% sounds like a grand idea.
However, look closer. The top 5% of income earners already pay 60% of all
income tax, up from the top 36.64% in 1980. The corollary to Obama’s tax
reduction, which will go mainly to people who don’t pay income taxes, is
that a large increase is scheduled for the high earners.

“A hint of the magnitude of the coming burden was offered by The
Washington Post on January 2, when it published its assessment of the cost
of the bailout as already announced.

“According to Post, if equally apportioned over the 139 million tax
returns filed last year, the toll of the bailout would be $61,871 per
taxpayer. But taxes are manifestly not apportioned equally. Even before
Obama's tax hikes take effect, 60% of the tax burden falls on 5% of
earners – roughly speaking, those who earn $250,000 or more annually.

“If you are one of them, your share of the bailout cost will be about
$750,000. Pencil that into your balance sheet.”

A dear reader writes:

“I hear people telling me that things are heading up again, that the
market reached the bottom in December, blah blah blah. Consider:

“My wife and I were in an excellent seafood restaurant on route 1 in
Saugus – an extremely heavily traveled commercial strip north of Boston –
back in mid-November. We were there from 12:45 to 2:00. There was one
couple there when we arrived, and two more came whilst we were there.

“Traveling over the Mystic River Bridge into Boston, the parking lot below
the bridge where imported cars are parked before being shipped to dealers
was full to overflowing. A news item along about that time reported that
they were trying to find more parking for the cars that were still en
route.

“In a mall store a day or so after New Years Day I remarked to the clerk
how dead it seemed. He said it was worse the day before when the store
(Radio Shack) did only about $1,500. On a slow day he rarely did less than
$5,000.”

A friend reports that it is worse in Ireland:

“It’s unbelievable how fast that country has gone downhill. We had a house
there that we sold in 2006. Now, the people who bought it from us are
trying to resell it at a quarter of the price they paid us. Even at that
price, there are no buyers.”

“WWFM is what we call it in the family,” Elizabeth explained at a
dinner party. “The Worldwide Financial Meltdown. Bill just goes on and on
about it. He keeps hounding us all to cut expenses. So this year, we’re
trying to cut back ...turning out the lights...and staying at home.”

Yes, dear reader, the Bonner family is getting in the spirit of the WWFM.
And it is amazing how much you can save, when you put your back into it.

“Elizabeth, can you sew up this hole in my sweater,” we asked on the
weekend.

“Just give it to Katya [the cleaning lady]...she’ll sew it up for you.”

“But she charges us 10 euros an hour.”

“Well, it’s cheaper than buying a new sweater.”

We also found a guitar on the street. Someone had just thrown it away. We
took it home and put on new strings. It’s not much to look at and it
sounds funny; but it works.

And on Saturday, the heating system developed a leak.

“No, don’t call the plumber; Edward and I will fix it ourselves.”

“Uh oh...”

The connection between male and female is always a bit tricky. In the
plumbing world no less than the rest of the world. Our union was
uncooperative. But an economist armed with a wrench is a formidable foe.
We banged the joint and then cursed it. And when the battle was over there
was water all over the floor but the leak was fixed.

“There...see, we fixed it!” we announced in triumph.

“I don’t know if you really saved any money. The water probably leaked
down to the apartment below us...they’ll probably have to fix the ceiling.
And we’ll have to pay for it.”

Until tomorrow,

Bill Bonner
The Daily Reckoning