-->Wilson's Destiny, Part II

The Daily Reckoning

Paris, France

Wednesday, 7 April 2004


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*** Loto louts and other oafs... while Americans spend money
they haven't got, Buffett saves his...

***"We'll think of something"... and other fairytales...

*** A 'crack-up boom'... misleading numbers... states of
emergency... and more!

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Unearned good fortune is almost always a curse, dear
reader.

A recent photo in the English papers showed a heavy-set
young man, with black leather jacket, earring, and gold
chain giving the camera the finger."The Loto Lout," the
press called him. The man had won millions of dollars in
the lottery. But instead of handing out $10 bills to
orphans or taking lessons in elocution, the big oaf seems
to be using it to become even more oafish than he had been
before.

"He's got so much money, he can get away with anything,"
commented an observer.

Likewise, America has always been a nation of optimists. It
is a land of immigrants; pessimists would have stayed home.
But thanks to good fortune, they are becoming even more
optimistic than they have ever been - to the point of
making themselves both delusional and dangerous.

A recent retirement survey shows that fewer people are
bothering to put away money for their golden years. In the
year 2001, only 61% of working people saved any money at
all for retirement. Today, the figure is only 58%. More
than half the survey respondents between 45 and 55 years of
age said they had less than $50,000 in savings and
investments, excluding their own homes.

Americans think they need no retirement savings for the
same reason they think they need not worry about Asian
competitors taking their industries and their jobs. What
will they live on? What jobs will their children and
grandchildren find? How will they ever pay their debts?

"We'll think of something," say people who rarely think at
all, as if their fate depended on their own creative
cogitation. But how did they get where they are? Creative
thinking had nothing to do with it. Had they been born in
India or in China, rather than in the U.S.A., they might
have come back from the maternity ward on a bicycle rather
than in the backseat of a big Volvo... and might now be
sitting on a wooden bench 12 hours a day in an unheated
factory earning 35 cents per hour - and feeling lucky, but
not necessarily optimistic.

Thus do Americans owe their situations not to themselves,
but to the whims of the gods. Through neither fault nor
virtue, they have won the Loto... finding themselves in one
of the world's relative paradises... like a gypsy orphan
tossed into the Garden of Eden. They ought to fall upon
their knees in gratitude... and pledge to turn away from
temptation before it even shows itself. Maybe then, the
gods would look upon them with favor and let them stay.
Instead, the dumb oafs take their credit cards and go in
search of apple trees.

Cash? Savings? Firewood? Umbrellas? Inventory? Who needs
them! We'll come up with something just when we need it.
Always have.

Americans even put the roofs over their own heads at risk.
They've mortgaged more of their homes than at any time in
history... and, on the advice of their leading economist,
Alan"Bubbles" Greenspan, have increasingly favored riskier
adjustable rates over fixed-rate mortgages. When interest
rates go up - as they must, sooner or later - millions will
lose their houses. But of course, they'll think of
something.

Warren Buffett, meanwhile, is hoarding cash. He had $13
billion of it in 2002. Now, his cash pile has grown to $36
billion.

But what does Buffett know?

Over to Addison... for the news:

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

Addison Wiggin, writing from Baltimore...

- In the land of raw fish, the Nikkei gained one percent
yesterday, breaking 12,000 to set a new 32-month high. The
index has now gained 50% in the last twelve months. We are
beginning to wonder if after 14 years, the excesses in
post-bubble Japan have finally been wrung out...

- But then again, the Nikkei isn't the only index that has
performed well recently. In fact, you'd be hard pressed to
find one that didn't rise last year. Dart-throwing monkeys,
children, and even Japanese investors should have made
money last year, as the massive global reflation bid up the
prices of almost every asset under the sun.

- Life is good... and any old fool can get rich by trading
stocks, so it would seem. Of course, we at the Daily
Reckoning know better -"pride cometh before a
fall"..."complacency breeds contempt"... choose your cliché;
it makes no difference. History shows that a bear market
doesn't end until the excesses of the previous bull market
have been beaten out of stock valuations.

- As we laboriously detail in our book, the Japanese know
all about bear markets - their stocks have recently hit 20-
year lows. But the lumps here in America do not. They know
about bull markets and tech stocks; they know about
million-dollar mansions and million-dollar debts. What they
don't know is what happens when the fat lady begins to
sing...

- Yesterday, the Dow went up and the Nasdaq went down - a
rare and meaningless divergence. The Nasdaq dropped 19
points to close at 2,060, while the Dow gained 12 to
10,571. Predictably, the S&P was somewhere in the middle,
falling 2 points to 1,148.

- Despite yesterday's indecision, Mr. Market is still
smiling... though his grimace is more like a grin - a
devilish grin. For Mr. Market is fond of games; he likes to
deceive and confuse. Last month, we thought the"Baghdad
Bounce" was history when the indices dropped nearly 10% in
two weeks. But just as the bears sharpened their claws and
licked their lips, the market reclaimed its losses.

- The Financial Times reports that confidence among U.S.
business leaders is stronger than at any time in the last
20 years. A return to profitability has encouraged
companies to begin hiring once again, and heralds the end
of the"jobless recovery." More than three-quarters of CEOs
expect uninterrupted growth over the next six months.

- Of course, 20 years ago, stocks were cheap. 1982
represented the start of a multi-decade bull market, and a
wonderful buying opportunity. Today, however, the landscape
is very different and stock valuations retain the bulk of
their 20-year gains.

- Even the barbarous relic was in a good mood yesterday.
Gold added $3.40 to close at $418.50 in New York, while
silver added 10 cents to $8.20. All's well that ends well,
eh?... at least, until the bear begins anew.

- In the meantime, while the markets are rising and we feel
so flush, we can't resist wandering over to our favorite
subject - wine. As much as we relish the taste of un bon
vin... and the stupid things it allows us to say... the
Sovereign Society tells us it also has a secondary
function: it stores value. Particularly if it's"fine"
wine.

- In fact, a carefully selected vintage can appreciate
significantly in price, while offering much sought-after
diversification to the lucky owner."It's completely off-
scale to what conventional money managers look at in terms
of alternative investments," writes Wanda Lubelwana in an
article back on the DR website,"but the trend in fine wine
prices is up, sometimes dramatically.

-"For instance, tracking prices across a range of
publications and listed prices, a case of the 2000 Pétrus
is now valued at US$22,400 up 100% from initial release in
2002. Backtrack to the 1982 vintage - a case of Pétrus
purchased in 1994 for US$3,000 is now worth US$29,000." Add
in the fact that capital gains made from wine investing are
exempt from taxes, and you've got a pretty attractive
alternative investment.

- The global reflation shows no signs of slowing. In the
face of such rapid monetary expansion, investors might want
to start looking for tangible assets that will maintain
their value... and are absent from the mainstream's radar
screen. Fine wine offers just such an opportunity - if,
unlike us, you can resist the urge to drink it.

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

And Bill Bonner, back in Paris...

*** The media's lumpenfeed is abundant, but not very
nourishing. The more you have of it, the less you really
know. For example, everyone now knows that jobs are finally
being created. This is taken as proof that the Feds can
manage the economy successfully. Who bothers to notice that
American workers continue to get poorer? As debt piled up,
the average weekly paycheck in the private sector fell 88
cents last month. As the King Report explains below, the
new jobs are lower-paying jobs:

"How could non-farm payrolls explode 308k when a) the
unemployment rate increased to 5.7%; b) wage growth was
less than expected at 0.1%; c) the 'employed population
ratio' actually FELL to 62.1% from 62.2%; d) the
'employment participation rate' was unchanged at 65.9%; e)
total employment was unchanged at 138.3m and most
importantly f) the avg workweek fell 0.1 to 33.7, which is
near a 40-year low (33.5)! (See table A-1.)

"When dissecting the numbers we learned that NSA service
job wages fell 8 cents and they accounted for 230k of the
308k job growth. Leisure & hospitality wages NSA fell 4
cents; and NSA avg hours worked fell 0.3. Something is
obviously wrong. Healthcare contributed 36k jobs, leisure &
hospitality 28k, retail 47k, government created 31k and the
phantom jobs estimated to be created by small business was
153k! This is now known as the business birth/death rate.
Apparently a large number of workers entered the workforce
in order to force the unemployed rate higher, but still
something seemed incredibly wrong.

"After the close, our good friend and astute, no nonsense
economist, ex-Fed official and investment adviser (at Van
Hoisington Management), Lacy Hunt, provided the answers to
the conundrum. Of the 308k jobs created, 296k are temporary
or part-time jobs!

"Let us repeat and let's be very clear, almost all jobs
created in what is heralded as a great employment report
are part-time jobs.

"'In March, the number of persons who worked part time for
economic reasons increased to 4.7 million, about the same
level as in January. These individuals indicated that they
would like to work full time but were working part time
because their hours had been cut back or because they were
unable to find full-time jobs.' People want full-time but
can't find it. Lacy opines that Congress did not renew
unemployment benefits so many people took whatever they
could get. This accounts for the surge in people entering
the workforce."

*** Everyone is wondering when the Fed will raise rates.
The economy is said to be growing nicely... and finally
creating jobs. Yet, the Fed holds its key lending rate at
1% - an"emergency" level. What's the emergency? Our
friend, Trey Reik, comments:

"Maintenance of an 'emergency' Fed Funds rate of 1%
after second-half-2003 GDP-growth of 6% speaks volumes. We
have long maintained that the Federal Reserve cannot raise
(short) rates without causing a wave of defaults on our
nation's $33 trillion in debt.

"Nevertheless, such ridiculously low rates have finally
begun to spill into rampant price inflation of everything
'hard.' With all due respect to the CPI and PPI, which have
become nothing short of insulting to one's intelligence,
prices of things are exploding. The CRB Index continues to
set 20-year highs! The Journal of Commerce Economic Cycle
Research Institute Industrial Price Index, as reported
today, April 5, estimates trailing 52-week inflation in a
broad basket of industrial inputs at 39.44%! Last week's
much-heralded ISM Manufacturing Survey (reading of 62.5)
included a 'prices-paid' component of 86.0! If any reading
above 50 is 'expanding,' what would 86 imply? Off-the-
charts?

"Austrian economics terms the final stage of rampant credit
excess a 'crack-up boom.' Increasingly, we sense that such
a condition may be unfolding in the current economic
landscape."

*** We don't know when the Fed will raise rates... but when
they do, we suspect, many among the lumpen will be driven
from Paradise. Having developed an irresistible dependence
on the Fed's E-Z credit, Americans are dangerously close to
finding their apple trees.

Then again..."would there have been a U.S. central bank,
the Federal Reserve, to fund the type of world economy that
has evolved" - had the 28th President of the United States
not come along, asks our friend Byron King?

Below, our unpaid correspondent reaches for an answer...

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The Daily Reckoning PRESENTS: Were it not for Woodrow
Wilson, what sort of world would we be living in today?
Without Wilson's legacy of"federal credit, national debt,
a large centralized government, and an imperious... moral
ideology built and financed thereon," argues Byron King,
would we recognize our own times?


WILSON'S DESTINY, Part II
By Byron King

Yesterday, we began to explore the impact President Woodrow
Wilson has had on the international system. The world, we
wrote, still spins on a Wilsonian axis. Yet how did one man
manage to impart such a lasting legacy - one that has
shaped national and world events ever since?

Wilson clearly could not have achieved what he did without
the help of a few key tools. The first year of his
presidency say the advent of three elements which would, as
Wilson put it, greatly assist him in putting government"at
the service of humanity." Today, we look at how Wilson used
these tools... and how his actions have shaped the world we
know today.

Wilson was an activist in expanding the federal role in the
economy, pushing through such legislation as the
establishment of the Federal Trade Commission (1914) and
the Federal Farm Loan Act (1916). Both of these laws
brought the federal government into the daily lives of
Americans, in a way that would have been incomprehensible
to the Founding Fathers.

On the international front, during his first term Wilson
embroiled the U.S. in Mexico's civil war, up to and
including invading Mexico, a bone of contention between the
two nations ever since. (In his second term, Wilson would
send U.S. troops into Russia to oppose the Bolshevik
Revolution, but this gets ahead of the story.)

When the Great War broke out in Europe in 1914, Wilson's
administration of U.S. international trade and monetary
policy was decidedly lopsided, and certainly lacking in a
sense of balanced neutrality towards all belligerents. The
Wilson administration forbade"loans" by U.S. banks to the
warring powers. Yet Wilson's administration permitted U.S.
banks to extend massive"credits" to the French and
British, thus creating an economic situation in which the
U.S. bankrolled their conduct of the Great War.

Without U.S."credit" to fund their purchases in 1914 and
1915, such credit extended into the economy by the U.S.
Federal Reserve and its"elastic currency," it is quite
likely that Britain and France would have run out of cash
after a few months of fighting. In all likelihood, Britain
and France would have had to make some accommodation for
peace with Germany, and bring the War to a relatively swift
conclusion. But absent peace imposed by the pocketbook, the
European war went on and on, sucking more nations into the
fray and wrecking the lives and cultures of many peoples.

It cannot be overstated that, during Wilson's first term in
office, European combat was funded and supported on the
Allied side by U.S. money, its elastic currency, and U.S.
materiel. Meanwhile, Germany, a militaristic culture
lacking any real internal political process that would
sanction failure of its armed forces to prevail, had little
choice but to dig deeper into its economy and fight on.

In essence, Wilson's economic and trade policies, abetted
by the Federal Reserve, perpetuated the European War. They
also led to (and even required, from a military standpoint)
German submarine warfare on the high seas. That is, with
submarine technology at its disposal, German military
strategy had no other option but to sink ships carrying war
materiel to Britain and France. So long as U.S."credit"
paid for the materiel, the ships would sail and the
cargoes, once landed, would threaten Germany.

There was deeply rooted opposition in the U.S. electorate
to any direct American participation in the European War.
However, the nation enjoyed the economic boom times caused
by the war-related orders pouring in from Britain and
France. Mines, mills, factories and farms all posted and
received premium prices for their wares, courtesy of U.S.
"credits" to the Allies and the newly created Federal
Reserve and its elastic currency. The economic myth was
that the Allies were supporting the booming U.S. economy
with their purchases of war materiel. The reality was that
the Allied purchases were based on U.S. credits, supplied
ultimately by Wilson's new creation, the Federal Reserve.
Thus, the war boom was at root simply inflation created by
the FED.

Running for his second term in 1916, Wilson's campaign
slogan was"He kept us out of war." This was not quite
correct, because by 1916 the U.S. was deeply invested in
the British and French role in the fighting. After Wilson
was safely re-elected for a second term, his obstinate
pursuit of his otherwise failed economic and trade policies
favorable to Britain and France led to a point where German
submarine warfare became an American cassus belli. Less
than ninety days after beginning his second term, Wilson
called upon Congress for a declaration of war against
Germany.

Domestic opposition to Wilson's policies was intense,
particularly within the large Irish and German populations
in the U.S. But Wilson, the learned scholar of Government
and former President of Princeton, was prepared to control
this dissent with some of the most sweeping laws ever
passed to limit free speech and political dissent. And
Wilson's Federal Reserve and newly enacted national income
tax funded the war effort, all the while giving Wilson the
resources he needed to expand his domestic vision of a
powerful central government that literally took over many
elements of U.S. industry.

According to historian Robert Nisbet,"The blunt fact is
that when (under Wilson) America was introduced to the War
State in 1917, it was introduced also to what would later
be known as the total, or totalitarian, state."

As if the foregoing accomplishments would not be enough for
any president, whether or not"ordained" by God to govern,
another of Wilson's enduring legacies was a direct
outgrowth of U.S. participation in the Great War. This was
Wilson's effort to shape the peace and his remarkable turn
of phrase, to"make the world safe for democracy." This
term, and its underlying panglossian concept of remaking
the world in a Princeton-honed image of American
participatory government, has haunted U.S. policy ever
since it was uttered. Nine decades later, U.S. foreign
policy is fundamentally Wilsonian. The concept of a world
"safe for democracy" has such Jovian gravity as to be
inescapable, and essentially all modern political debate in
the Western world is framed in its terms.

But a"world safe for democracy" requires certain
underlying assumptions of power and price, which are the
key elements in"making" anything happen anywhere, and
certainly in"making the world safe for democracy." Whether
he understood the implications or not, Wilson had a Federal
Reserve, an elastic currency, and a national income tax
with which to do his bidding. Not all peoples, races and
nations are so fortunate.

Had Woodrow Wilson never been president, would the U.S. and
the world have had a far different 20th Century? Or was
Wilson just one man in a particular time of great change, a
man who articulated concepts that were beneath the surface
and waiting to be revealed? When Wilson walked into the
White House in 1913, Germany and Italy had already spent 40
years creating and building centralized, debt-financed
governments. In this regard, Wilson was an imitator, not an
inventor. So did Wilson make history, or perhaps give it a
shove in a particular direction, or was he merely governed
by historical forces whose time had come?

These types of questions are endless, and just asking them
certainly gives one thoughts of a world far different from
this one in which we live. Absent Wilson, would there have
been a U.S. central bank, the Federal Reserve, to fund the
type of world economy that has evolved? Absent Wilson, what
would U.S. politics have done with the 16th Amendment, the
income tax amendment? How did Wilson's presidency effect
the direction of the national income tax? And absent the
tax revenue, what would have happened with the early growth
under Wilson of centralized federal power in the U.S.?

Absent Wilson's inept neutrality, his biased diplomacy and
willingness to throw U.S. dollars into the Great War on the
side of Britain and France, would the U.S. have become
involved in what was later named World War I? Would the
Great War have lasted so long and caused so much damage to
the fabric of European civilization and colonial influence?
Would the world ever have heard, just a few years later, of
war veterans such as Herr Hitler and Signor Mussolini?

Absent U.S. participation in the European War, would a
pedestrian lawyer, and middling state-level politician
named Franklin Delano Roosevelt have found his first
federal job as Assistant Secretary of the Navy? Would the
U.S. ever have bred such soldiers as Douglas MacArthur and
Harry Truman, and most of the rest of the list of future
political-military leaders of mid-century?

Absent events put into motion by Wilson, would the Great
War have lasted so long as to cause Russia to break up and
descend into a Bolshevik Revolution? Absent Wilson, would
U.S. troops have gone ashore in Russia to take sides in the
matter? In another region of the world, absent Wilson,
would the Ottoman Empire have dissolved, to spawn the
modern politics of the Middle East? And absent Wilson,
would the concept of League of Nations/world governance
ever have gained the traction it did?

Woodrow Wilson said that he wanted to put government"at
the service of humanity." But when you distill things to a
basic essence, Wilson bequeathed his nation, the world, and
"humanity" the legacy of federal credit, national debt, a
large centralized government, and an imperious, if not
crusading, international moral ideology built and financed
thereon.

What is more, Wilson's legacy has lasted for nine decades
and today seems immutable. None who are alive have
experienced anything different from a Wilsonian world. No
one can remember or recall first hand any time when this
world of ours worked otherwise. And when things change, and
change they certainly will, most people will be trapped in
a Wilsonian paradigm and not understand what is happening.


Regards,

Byron King
for The Daily Reckoning