-->End Of Days

The Daily Reckoning

Paris, France

Wednesday, 10 September 2003

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*** A Dear Reader - healed!

*** Consumer debt increases... GDP figures are phony... Dow
falls... retail sales - strong or weak?

*** Shui pao in China! Defending Tricky Dicky... and more!

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"To the Gentlemen [and Gentlewomen] of the Daily Reckoning
and their friends," begins the letter, optimistically...

"Thank you for reassuring your spineless, unworthy reader,
who so foolishly doubted you recently. I speak of myself,
naturally. You responded to my treacherous, cowardly
questioning in fine style and I am now reassured that the
world is moving in exactly the way you have been describing
it. You are not 180 degrees wrong, but spot on, as straight
and true as a Roman road! We have quite a few of these in
England, so I know what I speak of.

"After my recent moment of insanity, when I doubted not
just my own judgment - but much, much, worse... yours - I
can pronounce myself cured."

What pleasure it gives those of us in the healing
professions... to make the blind see and the lame walk! That
is our conceit, at any rate: that we give readers fresh
eyes to see the developing crises... and strong legs to run
for the nearest exit before it is blocked by crowds.

So, open your new eyes, oh dearest reader, and see what is
happening; for it is the greatest financial story every
told.

It is all there - faith, hope, ambition, greed,
stupidity... all the human emotions are on display... vile,
obscene, grotesque, and occasionally even laudatory.

Every day brings new evidence... new events... and new
absurdities:

It is a marvelous economic recovery; at least that is the
picture described by nearly every financial medium. But
with our sharp new eyes, we see the image is only paper-
thin:

"Consumers hike debt," says one headline in the Arizona
Republican."Higher property taxes on the way," says
another.

"Record spike in health care costs," adds the Baltimore
Sun.

The poor consumer, already deeper in debt than ever, is
having a rough time of it. His income is falling... his
debts are increasing. And his living costs are going up.

If the economy really were expanding the way we are told -
at better than 3% GDP growth per year - it should be
creating 200,000 to 300,000 new jobs per month, points out
John Crudele in the NY Post. Instead, for 7 months in a
row, jobs have been cut... with 93,000 hacked off in August.

What kind of a recovery is this?

It is a fraud... the latest in a whole chain of fraud that
stretches back to the Nixon administration... and even
before.

GDP growth is calculated by taking nominal growth figures
and subtracting inflation. If the economy were flat, for
example, and inflation were running at 3% per year, the
government would tell us that GDP was shrinking at 3% per
year. The secret of the latest 'growth' figures lies in the
inflation rate, which the government calculates at 0.8% in
the last quarter, rather than the 2.4% figure in used in
the first quarter. Result: GDP growth came in above 3%
rather than the 1.5% it would have otherwise reported.

Of course, were military spending increases and phony
'hedonic' enhancements removed, the GDP growth figure would
probably be negative.

Inflation begets deflation... deflation begets inflation.
The Fed inflates... the Chinese beget new factories and cut
prices... the resulting deflation begets subtracted from the
government's GDP tally - resulting in inflated growth
numbers!

A friend from Poland wrote to tell us that the Chinese
expression for 'bubble' is something like 'shui pao' -
which works for us; we don't know any better. So, Shui Pao
it is... coming to China, now!

"Factory output soars in booming China," says a Reuters
headline. The assembly lines are putting out 17% more this
year than last. (Where does it all end up? More on that
below... )

But oh no! Gold rose $6.60 yesterday. The bull market in
gold, which we keep predicting but keep forgetting to buy
into, is getting underway without us.

Open your new eyes, dear reader, and look on in awe: we
have what appears to be a major, major bull market in gold
developing. At first, people hardly notice. The price of
gold is reported as a curiosity. 'Must be central bank
buying,' they tell themselves. Or, 'I wonder when those
nutty gold bugs will finally give up.' The average person
has no idea. He listens to CNBC and is blind to what is
actually going on. Gold... the dollar standard... deflation -
they are all occult mysteries to him... strange, forbidding,
and vaguely menacing.

But as a bull market develops, more and more people see
what is happening. Gradually, one by one at first... and
then in droves... they discover the rising market and want
to get in before it is too late. Already, the Tocqueville
Gold Fund reports that assets are up more than 50% in the
last 12 months... but only to $293 million. A prediction:
the fund will have billions in it before the bull market in
gold has run its course.

The rising price of gold means something. Below, Eric
wonders what. We don't know. But when we look upon the
phony mess erected on the sands of the Dollar Standard
system, it seems to be leaning. Is it us? Or is the proud
tower itself actually tilting more and more...? If so, gold
will not hold it up, but it will be a good thing to have
buried in your yard when the average investor finally opens
his eyes... and sees the Dollar Standard fall.

Over to you, Eric:

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Eric Fry writing from New York...

- The stock market charged bravely into the month of
September, but that doesn't mean it will charge
victoriously out of the month. Perhaps it will limp into
October licking its wounds and happy to be alive... But
September has been an unseasonably kind month so far.

- After the first six trading days of the month, the
September body count is as follows: four winning sessions
and two losing sessions for a net gain of 2.2%. Fifteen
trading days remain in this, the most treacherous month of
the year for the stock market... Stay tuned.

- Yesterday, the Dow slumped 79 points to 9,507 and the
Nasdaq fell 15 points to 1,873. Retail stocks tumbled for
the fifth straight day as the companies whined about
sluggish consumer spending five sessions yesterday. The
dollar also crumbled, dropping 1.4% to a three-week low of
$1.122 per euro.

- The gold market relished the stock market's weakness and
the dollar's troubles by rallying $6.60 to $382.80 an ounce
- that's its highest closing price in seven years. $400 an
ounce is so close that the gold bulls can almost taste it.
Will the bulls soon take hold of the magical $400-mark? Or
will that level withdraw from their clutches of like fruit
from Tantalus?

- The gold market has been nothing short of spectacular
over the last few months. The dazzling metal has jumped $30
since the bond market topped out on June 13th. The metal's
impressive rise has inspired a dramatic rally in gold
shares, which has vaulted the XAU Index of gold stocks to a
six-year high.

- Again we wonder,"What does the gold market 'know?'" Does
it know that the Fed's reflation campaign will succeed too
well? Or does it know that President Bush will continue
spending billions of taxpayer dollars to preserve Iraq as a
breeding ground for terrorists and a habitat for anti-
American terrorist acts?

- Or maybe the gold market knows only that U.S. financial
assets are very expensive, and worries, therefore, that
U.S. stocks selling for 35 times earnings, U.S. bonds
yielding 4.40%, and a U.S. dollar selling for $1.12 per
euro are all too pricey for risk-averse investors to own in
large quantities. The gold market offers up itself,
therefore, as an eye-pleasing alternative.

- Gold has always provided a kind of insurance, first and
foremost. It is not an 'investment' per se. But when
economic uncertainties mount, buying a bit of gold
'insurance' can be a terrific investment. At the moment,
insurance is in demand.

- According to the Federal Government, consumers are still
spending money at a rapid clip."Not true," say the
nation's retailers. According to the folks who are in the
business of selling baubles to consumers, spending is
slowing down.

- Consumers are not spending with abandon like they used
to, and they are not eagerly spending money they don't have
on things they don't need. For several days running,
retailers have been whining about sluggish sales, while
Wall Street analysts have been busy slashing their earnings
estimates on various retailers. Clearly, somebody isn't
buying as much junk as they are supposed to... if we are to
have a 'healthy' economy.

- One obvious reason why consumer spending may go from bad
to worse is that the 'recovering' economy is eliminating
jobs, rather than adding them. Meanwhile, the mortgage-refi
well is running dry. The swift run-up in long-term interest
rates has caused an equally swift and sever run-up in
mortgage rates... and that has caused a swift and sever
fall-off in mortgage activity.

- Washington Mutual Inc., the second-largest U.S. mortgage
lender, announced yesterday that new home loan applications
collapsed nearly 40 percent from July."Wamu's" experience
is hardly unique, which is why consumer spending is likely
to drop sharply.

- For the moment, credit is supporting consumer spending.
But that's not a long-term driver of sales. Consumer credit
grew $6 billion in July, with the lion's share of the gains
coming from auto loans and other non-revolving debt. But
that's a temporarily palliative.

-"Consumer spending is predicted to show robust growth of
around 5.0% in the third quarter," says Asha Bangalore of
Northern Trust,"following a 3.8% increase in the second
quarter. A large part of this growth in consumer spending
came from a surge in auto sales in the third quarter."

-"Households are engaged in raising the savings rate to
make up for the loss in net worth during the 2000-2002
period. Year-to-date, the personal saving rate has averaged
3.5%, following a 3.7% average in 2002. This represents a
noticeable upward trend in household saving following a
2.3% average in 2001. At the same time, the household debt-
asset ratio (18% in the 2003:Q1) is the highest on record
since Word War II. This ratio was 13.3% in 1999. The sharp
increase in household debt implies that debt service burden
will be another constraint in household budgets."

- Three continuous years of losses in the stock market have
chastened many investors. Today, they save a little more
money than they used to and spend a little less. Saving
money may be prudent for Mr. and Mrs. Consumer's household,
but it's quite painful for the nation's economy.

-------------

Bill Bonner, back in Paris...

*** A number of dear readers have written in defense of
Richard Nixon. Even 9 years after his death, the Trickster
still has his supporters.

While we see RMN's shifty eyes and fingerprints on every
economic event over the last 30 years, others think they
see the long face and long arm of LBJ."Wasn't it LBJ's
Great Society spending that doomed the gold standard?" they
ask.
"Isn't he the real father of current financial problems,
rather than Nixon?"

"Blood test!" they demand.

"You must have been a liberal Democrat when you lived in
the U.S.," begins one letter,"to blame Nixon for Woodrow
Wilson and FDR's creations of fake money and Marxist taxes.

"As sincerely as I can be knowing that this e-mail will be
deleted without being read," it concludes.

***"I have a question about the Dollar Standard," begins
another."Your articles you often refer to it as 'Nixon's
Dollar Standard,' because he is the one who officially put
his stamp on the new policy. But I was always taught that
his predecessors were mainly responsible. LBJ had
practically destroyed the value of the dollar in order to
pay for his war and his social programs. Others played
their parts in the drama, which led to the dollar being led
away from gold. Nixon just nodded to continuing along a 20
or 30-year path.

"For me, it is intellectual curiosity. I am not taking
political sides, but I am interested in the history of the
creation of the current situation. I may have been raised
in a home that was less concerned about facts and more
concerned about justifying having voted for Nixon."

*** And another:

"Ah, Mr. Bonner, I love your stuff, but lately your
quintessential Democrat-ness is showing - 'Nixon is the
root of ALL evil'....eh?

"I do believe Nixon was preceded by two Democrat regimes.
At the time Nixon did the dirty you bemoan, there existed
offshore Eurodollar (remember those?) balances sufficiently
large that had only 1/3 of the holders knocked on the door
at the Fed and demanded the gold at the official rate,
which foreigners could do at the time, Ft. Knox would have
been left with just a couple of flies buzzing around
inside, and that doesn't even contemplate the other
worldwide balances of the time, such as the petrodollars.
Those balances hardly appeared just after Nixons' '68
election. DeGaulle noticed all this and so demanded the
gold, leaving Nixon with few options.

"Obviously, giving up the gold at the official rate
amounted to an instantaneous admission the emperor had no
clothes - and an instant 100% dollar devaluation. Resetting
the 'official' rate to something that could reasonably back
the worldwide dollar balances, while less damaging than the
former, would still have been a disastrous devaluation and
a de facto repudiation of U.S. Treasury debt. The course
taken was not without risk. As early as 1969, people like
Harry Browne were writing, and I was reading, books warning
that this situation was developing and that when the U.S.
was forced to sever, that the dollar would rapidly fall in
value to its intrinsic value, the value of the paper it was
printed on. As we know, that didn't happen. Those same
writers remained silent on the cause of their failed
prediction, so it took much thought to reason out why the
buck retained its value. Like many problems that seem so
difficult to understand, the difficulty lay in the utter
simplicity of the answer, which now seems so obvious, and
remains so true today.

"Like Democrats of today, who condemn Bush actions without
proposed workable alternatives, you are eager to condemn
Nixon's act, but I have a question: Given the
circumstances, what would your 'solution' have been?

"And please don't say you wouldn't have allowed the
circumstances to arise; they were a virtual fait accompli
by the time of Nixon's arrival. It seems silly to me to
think Nixon had the intellect to conjure up the 'Dollar
Standard' system and all that has flowed from it. His was a
reactionary act of national survival, undertaken with great
trepidation.

"The few who were astute enough to see it coming were
clueless about its effects, and Nixon was just a
lowlife... uh, make that lowly politician, not an
intellectual giant.

"Who knew in advance the world would not only not devalue
the buck, but come to look at it the way a junkie looks at
heroin? Harry Browne certainly didn't, I certainly didn't,
did you? Cheers, keep opining and writing about it!"

Your editor responds:

No, Nixon did not appear on the national stage in like Adam
in Eden. Many were the scoundrels who preceded him; many
would be those who followed.

And no, we have no party affiliation. We voted once - for
Jimmy Carter - and were so ashamed and appalled we vowed
never to do it again. Demoplicans... republocrats.. we have
no favorites, no prejudices... they all deserve ridicule.

We fault Nixon not because he set the stage... nor even
because he wrote his own part in it... but only because he
went along.
An able politician, Nixon put himself forward as a
conservative, and then - like Alan Greenspan and G.W. Bush
- became one of the most egregious activists in Washington
history. It was he who not only presided over the final
destruction of the international gold standard, but also
imposed wage-price controls in order to try to mask the
damage.

Few are the real heroes who make it to public office. The
election process tends to screen out anyone with real
principles or convictions. Those who land in the cushy
seats of power are - like Nixon, Greenspan, and Bush -
mostly dissemblers: frauds, charlatans and mountebanks.
They get there by offering the voter what he wants - hollow
slogans, puerile ideas, a comforting presence... and the
prospect of blaming someone else for his problems while
slipping his hand in the victim's pocket. And so, along
comes the New Deal, Making the World Safe For Democracy,
Preserving the Union, the Great Society, the War on
Poverty, the war on drugs, the war on terror... the EEOC,
Social Security... and all the rest of it.

In this light, we have today's news:

"Senators seek tariffs against China in currency dispute,"
says an AFP headline. The sordid senators are approaching
the problem in typical Nixonian fashion - with a remedy
that is both dishonorable and ineffective.

But rare is the senator who would stand up and tell voters
that the trade imbalance with China is the wages of their
own sin. China's current account with the rest of the world
is in balance, he might point out. It is only with the U.S.
that it is out of whack... and if they would only open their
eyes, they would notice that they buy a lot of stuff from
China, and borrow the money to do it with. As a
consequence, the U.S. current account is out of balance
with almost every other country on the planet, not just
China.

The yuan is not too high; the dollar is too high.

The adjustment, he might point out, should be made - and
will be made eventually - by lowering the price of the
dollar. It will go lower, one way or another. Voters, he
could hint, might want to protect themselves. Then, he
could go back to his office, clean out his desk; in
politics, he'd be beached within a week, with no volunteers
to pour water over him.

But what would WE do, the dear reader wants to know.
Suppose we had been in office in August of 1971...?

We know what readers are thinking: we will dodge. We will
equivocate. We will give a muffle-mouth answer worthy of
the Fed chairman. But no, dear reader, we have an answer
that is as forthright and direct as you might expect.

Had voters had the grace to elect us to the nation's
highest office in '68, we know exactly what we would have
done: demand a recount!

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The Daily Reckoning PRESENTS:"If the dollar-centric world
is on its last legs," says Outstanding Investment's John
Myers,"you can expect real assets to flourish."


END OF DAYS
By John Myers

"Whatever it takes, whatever it costs, this patient, this
resolved nation will win the first war of the 21st
century."

- President George W. Bush,
in a speech to the Reserve Officers Association, Jan. 23,
2002


We are entering a dangerous new era... an era that started
in early 2000 when the stock market peaked and began a
steep slide. Then came Sept. 11, 2001. Since then, nothing
has been the same. Just consider some of the geopolitical
and economic upheaval over the past three and a half years.

The markets reflect the political and economic discord -
creating an environment that is fraught with volatility.
But more than the markets, the economy, even the nation
itself, is on a new track, one quite different from what
existed during the 1980s and 1990s. As long as this track
remains in motion, it will fuel a weaker dollar and higher
prices for real assets.

These are definitely tenuous times to be invested in paper,
especially debt instruments, but they do offer incredible
profit opportunity in the broad class of investments called
real assets.

The bond and stock markets love predictable times.
Stability allows investors to focus on earnings and yields
without worry of political or economic calamity. The bond
market in particular enjoys a serene horizon because during
such times the dollar is stable and manages to hold much of
its purchasing power.

It is no coincidence that two of the biggest bull markets -
1950 to 1960 and 1991 to 2000 - occurred when the dollar
was strong. What we have now is dollar weakness, and I
expect the greenback has much farther to fall.

To understand where we're going, we need to look at where
we've been - notably the incredible deviation between what
happened during the last half of the last century and what
is occurring in the first few years of this century.
Consider briefly the events of the past few years:

* Since Sept. 11, 2001, U.S. forces occupy Afghanistan and
Iraq, and military operations have occurred in the
Philippines, Liberia and Pakistan. The United States has
about 8,000 soldiers in Afghanistan, about 150,000 in Iraq
and 2,500 in Kosovo. Defense spending, after falling for 30
years, is rising at a time when the U.S. government can ill
afford it.

* Between January 2000 and July 2003, the federal
government budget soared from a surplus of $255.9 billion
to a projected a deficit of $324.2 billion. During the same
period, gross federal debt rose from $5.7 trillion to $6.5
trillion. Sometime next year, the federal government will
have added another $1 trillion to its debt load.

* The U.S. dollar has plummeted against indices of major
currencies since 2001. In 2001 $1 would buy 1.8 Swiss
francs. By July 2003 $1 would buy less than 1.4 Swiss
francs... a decline of over 22%.

* Between July 2000 and July 2003, the central bank cut the
Fed funds interest rate from 6.85% to 0.96%. In July 2003
Fed Governor Ben Bernanke said that the central bank would
stand ready to cut interest rates to zero and adopt an
'inflation target' if necessary.

* In June 2003 the yield on the 10-year Treasury fell to
3.09%, the lowest since 1956.

But then, take a look at what's been going on with
commodities between January 2000 and July 2003:

* The producer price index of all commodities rose from 128
to 139.

* The price of crude oil climbed from $24 per barrel to
$31.

* The price of gold soared from $270 per ounce to $360.

* The price of natural gas rose from $2 per thousand cubic
feet (Mcf) to $5.

* And in testimony before Congress this past July, Fed
Chairman Alan Greenspan admitted that natural gas prices
were likely to stay high, admitting that"distant futures
prices suggest that we are not apt to return to earlier
periods of relative abundance and low prices anytime soon."

Because of Keynesian economics, deficits are not only
tolerated, but in fact encouraged. Money is pumped into the
economy through government borrowing and spending and/or an
increase in the money supply.

You see, the banking system, including the Federal Reserve,
is the source of all dollar-denominated money. The Fed
creates the monetary base, while the banks expand the money
supply by issuing loans and thereby creating credit money.

The Fed is able to influence the amount of bank lending
through its selection and control of the Fed funds rate,
the benchmark for all short-term interest rates. However,
it does not directly control the amount of credit money
created by commercial banks. The creation occurs when the
banks lend out the Fed money.

But money can be pumped into the economy two other ways -
first by printing more dollars, which is the domain of the
U.S. Treasury, then by federal government borrowing. When a
government borrows money, it creates a future liability. If
the government can meet that liability with taxes, then
there is no net change in the amount of money. Taxpayer
money is simply used to pay off creditors. It is a zero-sum
game.

However, if the government spends more than it can possibly
raise through taxes, then it creates a future liability
that must either be defaulted on or paid. Governments hate
to default on debt because it ruins their ability to raise
funds in the credit markets and creates a crisis in the
economy. That leaves governments with an easy way out -
monetize the debt so that it pays off dear dollars with
future cheap dollars.

Before John Maynard Keynes (circa 1930s and '40s),
governments would raise capital through taxation in an
effort to create a stimulus for the economy. When taxation
was not enough, governments borrowed money. In the old
days, most major currencies converted into gold, which kept
a lid on the tendency of governments to over-borrow.

Since the major currencies could be easily and immediately
exchanged for a fixed amount of gold, the money supply
could only grow as fast as the amount of gold backing it.
Typically, gold production grew at about 1% to 2% per year,
so that was the cap on the amount of new money that could
be created.

Since fiat money is not convertible on demand into gold,
its value is derived only through the promise behind it -
that it will be accepted in payment for goods, services and
taxes. When there is too much fiat currency, its value
becomes watered down. And while the issuer of the money
will not redeem it with gold, the currency can still be
converted into gold or any other real asset.

Excessive money creation has been the norm in Latin America
for 50 years. In fact, the plague of it continues today.
Since gold has not been a factor in world monetary affairs
since 1971, the Latin devaluation - or any devaluation in
any other part of the world - has occurred against the
world's kingpin currency. Because world trade is conducted
in dollars and since the major asset of the world's central
banks is in dollars, governments and their central banks
are not as eager to liquidate their dollar position as they
would be to sell yen or pesos. Yet as the 1970s revealed,
once push came to shove, an exceedingly expansive U.S.
government and an overly accommodative Federal Reserve
would create an exodus out of dollars.

The problem for dollar holders who are wary of the
greenback's falling purchasing power is where to go. With
the exception of the Swiss franc, few currencies offer a
greater long-term purchasing guarantee than the dollar.
Therefore, once dollar inflation begins, dollar holders are
left with one major headache: what to buy? The answer
invariably comes down to one thing - real assets.

As I mentioned, the last thing anyone wants is a dollar
meltdown. This gives Washington some fudge room to create
an excess of fiat dollars. But just as a cartel encourages
its members to maximize their gain by cheating on their
quota, dollar inflation encourages governments to cheat on
their dollar holdings.

The result is that typically, the devaluation of the dollar
is slow at first, and then accelerates as sellers begin to
notice others are liquidating their dollar positions and
thus begin to escalate their sale of dollars. It becomes a
vicious circle that is usually reigned in by rising
interest rates.

What we are seeing right now, I believe, are the first
stages of the dollar's demise. Dollar holders have already
begun to cheat on the rules of a dollar-centric world. The
evidence of this can be seen in the markets - most notably
the falling value of the dollar and the rising price of
real assets. If this trend follows the pattern set in the
1970s, we will soon reach a point where the conversion of
dollars to real assets will accelerate.

Like a giant boulder moving down a steep hill, once this
trend gains more momentum, it will be very hard to stop.


Regards,

John Myers,
for The Daily Reckoning

P.S. Certainly the Fed will do its best to slow the
dollar's demise by using the only instrument at its means -
higher interest rates. My expectation is that this policy
could occur sooner than most think, and thus we have
already seen the bottom on rates. If so, then not only are
real assets very attractive, but the bond market is also
very dangerous.