The Daily Reckoning - Nixon's The One!

verfasst von Firmian, 29.08.2003, 22:35

-->Nixon's The One!

The Daily Reckoning

Paris, France

Friday, 29 August 2003

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*** Did anything happen? Does anyone care?

*** Dollar rises, Dow too... GDP growing at 3.1% (a
fact... but don't believe it)

*** Back to school... new friends... rain... and more!

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What is there to say today? Did anything happen yesterday?
Will anything happen tomorrow? Does anything ever happen?

Yes it does, dear reader. But the events themselves mean
nothing. It is the interpretation that matters; that is
what gives events meaning and predictive power. A metaphor
has more truth in it than a fact, says Norman Mailer.

In today's Figaro, we learn a fact:"Growth has returned to
the American economy." Number crunchers at the Department
of Commerce punched up the figures for the 2nd quarter to
give us a GDP increase of 3.1% annualized. Was this the
beginning of a new boom... or the end of an old one? Does
this mean we're going to get richer than ever?

Alas, probably not. The GDP numbers were both defective and
corrupt. Nearly half of the growth came from military
spending, which has never made anyone richer, except
perhaps military contractors and political insiders. And
the rest is a combination of puffed-up computer numbers and
a heroic effort on the part of consumers to ruin
themselves. With mortgage rates at 30-year lows, homeowners
squeezed out ever-bigger chunks of imaginary 'equity' from
their homes so they could spend it on imports. Auto sales,
for example, hit new records... which continue to be broken.
This very month, auto sales reached another epic high. Now,
there are more cars than there are licensed drivers - 1.9
million compared to 1.8 million. Mortgage debt as a percent
of GDP has risen from 35% in 1980 to nearly 60% today... and
consumers are going bankrupt faster than at any time in
history.

The 2nd-quarter numbers look more like a 'last gasp' by
consumers than a genuine recovery. Since June, mortgage
rates have gone up, which triggered a rush to buy houses.
But refinancing applications have faded as fast as the
living room drapes. Last week, they fell again by 13.7%,
bringing them 65% below levels at the end of the 2nd
quarter... and 78% below their peak.

"Refinancing is over, basically," says the Atlanta Journal-
Constitution.

Without more credit, what will happen next?"There will be
no proper recovery from the recent recession," says the
Levy Institute.

More on what will happen next... below...

Herewith, we bring you more news from Addison:

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

Addison Wiggin in Paris...

-"The Daily Reckoning is the antidote for the mass media,"
writes a reader on the discussion board on our website,
"... don't know how I got by without it!" Poor soul...

- If it's true, your editors assure you, we know less about
medicines (except for those of self-administered kind) than
the stock market, economics or history. We are not an
'antidote' by design, per se. It's just that there is so
much absurdity in the news, we can't help but open our
mouths, day after day... after day... and decry it.

- Exhibit A: as we were preparing this bit of market
commentary, we received an e-mail from a colleague in the
London office of The Daily Reckoning. It contained a BBC
article with the headline: Houses 'Better Investment Than
Gold'. The bolded subhead of the article reads:"... owning
your own home has been almost twice as profitable as
investing in gold over the last 3 1/2 years..."

- Loyal readers will recognize immediately where we want to
go with this. Of course, houses have been a better
investment than gold! London is coming out the backside of
the most aggressive housing bubble the world economy has
seen in the last 3 1/2 years! Gold, on the other hand, has
spent the better half of the last 3 1/2 years trying to
rehabilitate its reputation as the red-headed stepchild of
the investment world.

- To be fair, or rather, to point out a further absurdity:
the body of the article reveals that, indeed, home price
rises have been slowing in England, month-over-month, for
the last 5 months, bringing the total YTD gains down to
8.9%. Over the same period, gold has risen 16%. A set of
numbers that might just as easily be interpreted as
proving: 'Gold"Better Investment Than Housing"'...

- Nary a mention is made of the fact that the same monetary
stimulus, which goosed house prices in the first place,
laid waste to the bedrock of the financial system... and is
now driving people to buy gold in droves to cover their
a$$ets.

- Oy... it gets worse. The credible information source cited
in the article is Nationwide, a mortgage lender, among
other things, with a slaked interest in keeping the lumps
flippin' houses in the London area... which has come under
the most intense pricing pressure in England over the past
year. One immediately assumes Nationwide spends a lot of
money on advertising with BBC News. We could, of course, be
jaded. Anything is possible. On the other hand, if you fall
victim to this kind of 'analysis', we suspect you really do
need an antidote... we're just not sure The Daily Reckoning
can help you.

- Meanwhile, on the other side of the Atlantic, the markets
exhibited their own brand of absurdity yesterday. The
Nasdaq ended up a percent... squarely on the 1,800 mark...
its first time in this territory in over 16 months. The Dow
added 40 points to 9,374. Even bonds got in on the action,
with the 10-year US Treasury note up 28/32 to yield 4.42%.
Gold retreated a bit from its late summer mini-
bull... falling back $2.50 to close at $371.

- Reuters helpfully predicts that John Snow will fail in
his attempt to woo Chinese bureaucrats into releasing the
yuan from its dollar bondage next week.

- Busybodies at the IMF, reports the Financial Times, have
suggested that the U.S. government is in danger of harming
the global economy if it doesn't admit to its spending
habit and enroll in a rehab program. The U.S. economy
"... is still vulnerable to a sharp correction in global
current account imbalances..." the report states. Okay... so
far, so good. But the IMF report also"urges central banks
to keep interest rates low and cut further if necessary..."
Oh man! The authors of the report must be sharing lunch
counters with their friends over at 20th Street and
Constitution Avenue.

- Greenspan is slated to give the opening address at the
Kansas City Fed's annual pow-wow in Jackson Hole. The
Jackson Hole conference has, as future historians will
discover, assumed a special place in the archives of
monetary inanity. For it was here that Ben Bernanke first
chided the Bank of Japan for not cutting its rates fast
enough following the burst of their asset and real estate
bubbles in the 90s... then proceeded to recommended a plan
for how the Fed ought to deal with its own home-grown
bubble. The vision landed Bernanke a front-row seat for the
final dramatic act of the 3-part play, whose first scene is
set 30 years prior, starring Richard Nixon (more from
Bonner, below... )

-"Can Greenspan reduce confusion?" asks a headline on
CBSMarketWatch.com, referring to Greenspan' expected
remarks."The Fed - and Greenspan in particular - have a
long history of using ambiguous statements to communicate
with the markets," writes Rex Nutting, then goes on to
speculate what the Fed chair might say. After going the
distance and reading the whole article on your behalf,
we're left a little unclear about what to expect from
Greenspan's speech... but are fairly confident in suggesting
to you that it won't make a lick of sense.

- Hmmmn... let's see... should we even get started on this
headline from the AP:"U.S. Economy Shifts Into Higher
Gear"? Naaah... it's the Friday before Labor Day weekend,
after all, and we're sure you'd like to get a head start on
your burgers and beer. A bientôt...

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

Bill Bonner, still in Paris...

*** The dollar is still at $1.08 per euro. Alas, our advice
has not changed: sell the dollar, buy euros and gold.

*** Oh là là... the summer seems to be over. It is raining
in Paris. Jules has already returned to school; the other
children go back to classes next week.

*** Ahh... the return to school. New schools, new classes,
new friends...

"How was your first day of school," Jules was asked last
night.

"Okay..."

"Did you like your classes... your teachers...?"

"They were okay... except I have one teacher who's clearly
insane."

"Oh...?"

"But that's better than at the French school, where they
were all insane."

***"I met a nice woman when I was waiting for Jules to
come out of school," your editor explained to his wife.

"Oh good, we should get to know some of the other parents."

"Well, I thought she was one of the parents. I mean, we
were sitting at the café together and I naturally thought
she was an American woman waiting for her children. So we
struck up a conversation. But it turned out she was just
having a drink..."

"You mean, you picked up a strange woman at a bar...?"

"Oh no, she is parent too... but just not of one of the
students at the American School... She's French... and she
races motorcycles..."

*** Much of the discussion on the streets of Paris is still
about the heat wave. Estimates put the death toll in France
as high as 10,000. Even Marie Antoinette's oak tree fell
victim. Opposition politicians criticize the government for
not doing enough to help old people through the hot
weather. What were they supposed to do? We don't know, but
if they figure out a way to keep old people from dying, we
will be the first to tell you about it, dear reader.

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The Daily Reckoning PRESENTS: A Bonnerian Final Reckoning
of the 'Great Dollar Standard System'...


NIXON'S THE ONE!
by Bill Bonner

This morning, we sat down in the Paradis for a cup of
coffee. We had in front of us two books and two whores.

The Paradis is a local hangout, not only for your Daily
Reckoning team, but also for a team of prostitutes who work
the rue des Lombards. Looking at them, and looking at us,
it is hard to tell which team is more broken down. Of
course, it all depends on the context. In any other line of
work, the whores would be delightful and attractive. In a
crowd of grandmothers, they could be as fetching as the
average. They seem like cheerful women... and ready to
please; what more could you want?

In the running for the governor's office in California are
two whores, too... that is, two women who perform indecent
acts in front of the camera. One promised 'a date' to any
contributor to her campaign fund who gave $5,000. Pressed
for details, she maintained that the date didn't include
anything dirty - which must make her the first and maybe
only candidate in American history to publicly refuse to
prostitute herself for the sake of public office.

We mention this only because it opens today's discussion;
it allows readers to think we are writing about something
interesting.

We are still talking about dirty deeds and family
resemblances. Resemblances between the trade deficit and
the mortgage refinancing boom... betwixt worldwide deflation
and the rise of gold... between... between... well, the harder
we look, the more resemblances we see. In today's world
economy, we see brothers and sisters and cousins
everywhere!

So far, we seem to have been the only ones to notice. But
when we look at almost any chart, it is like looking at a
family tree, with the same common ancestor. There he
is... circa August 1971: Richard Nixon. Remember his
campaign slogan:"Nixon's the one!"

In the 1968 election campaign, Nixon's opponents - or maybe
it was Rolling Stone magazine - came out with a spoof,
showing a pregnant welfare mother accusing: Nixon's the
one!

History will show that Nixon was the one who cut the dollar
loose from gold. A paternity test would show that he was
also the one who loosed upon the financial world almost all
its current discontents. Hardly a discontent appears
anywhere in the world's financial press that can't be
traced to Nixon's dirty deed.

But we have made this point before. We think we see Nixon's
nose on every newborn crisis. We dust every crime scene for
his fingerprints. We imagine we spot his jowly face in
every line-up in the financial pages.

And so, we bore our friends and trouble our dear readers
with ennui."You're repeating yourself," they say."You're
becoming obsessed," they warn.

"So what?" they want to know.

But today, we elaborate anyway. For we think we have
stumbled upon a dirty deed that explains nearly
everything... and gives a hint of what comes next.

A chart of imports compared to exports, for example, shows
steady progress in the '60s... but there, in 1972, comes an
inflection point. All of a sudden, world trade explodes
upward... with a growing gap between what America imports
and what it exports.

A chart of the world's central bank reserves shows little
growth before 1971. Then, in 1972 it lifts upward, slowly
at first, but climbing steadily... and then really takes off
in the mid-'90s.

Just look what happened in Japan. Gold had prevented trade
balances from getting too far out of whack... because the
gaps had to be filled with gold. But under Nixon's new
system, the trade chasms could widen to grotesque
proportions, for the limits had been removed. Japan was the
first nation to take advantage of this opportunity. Lights
went on in factories all over the nation. Around the clock
they worked... producing for the American market. The money
flowed into Japan's companies... and was then deposited in
its central bank. And there it is on the chart... on page
123. Dollar reserves rose steadily in the '70s... and then
exploded upward in the '80s. We know what else happened:
the gush of new money sent Japanese stocks and real estate
spurting to preposterous levels. Of course, then the bubble
burst... and Japan has been trying to recover ever since.

I refer to the charts in Richard Duncan's book, The Dollar
Crisis. There, on page 145, is his chart showing"the
infamous twin deficits," the U.S. budget deficit and U.S.
trade deficit. Again, both begin to lift off after Nixon
unloads the gold ballast. The rise slowly at first... but
then, in the early '80s, they begin to soar. The budget
deficit shifts dramatically in the mid-'90s -- thanks to
the tax revenue generated by the bubble economy. For a few
years, the federal budget went into a surplus of sorts
(ignoring the fact that federal debt actually increased in
those years) and then, when the bubble burst, took flight
again, reaching the highest levels in history.

And there's the surge in U.S. stock prices. It took a while
to get underway; yet the Dow went over 1,000 in
1972... dropped back... and then began its rise to glory 3
years later.

On page 101, we find out what the Dollar Standard did to
total credit-market debt in the U.S.. There again, we see
the same pattern: gently rising indebtedness throughout the
'70s and '80s, on a steeper and steeper slope. From 150% of
GDP in 1971, the figure is now near 300%.

Of course, for every debit there is a credit. Who owns all
this debt? To whom is it owed, in other words? We find the
answer on page 96. It shows that the amount of U.S. credit
market assets owned outside the U.S. has risen from about
$300 billion in 1980 to more than $3.5 trillion in 2002.

Believe it or not, the U.S. was a net creditor until about
the time Alan Greenspan became chairman of the Fed. But in
the mid-'80s, it crossed the line that separates the slave
from his master... and then sank to such a level of
servility that it now faces net indebtedness of more than
$2.5 trillion.

While the lines were all rising, central bankers, investors
and consumers felt like rats that had fallen into a
dumpster in a good neighborhood. They gorged themselves on
the leftovers. But now, they struggle to get out.

The whole world economy is stuck in a system that no longer
works. It depends on the U.S. economy as its 'engine of
growth'... and upon the U.S. consumer to push the pedal to
the metal. If Americans do not continue to buy, the whole
thing comes to a halt. But something is going wrong.
American consumers still buy... but they are running out of
money. Americans have begun to ache and strain under the
burden of the $2.5 trillion net that they owe to
foreigners. And if the 'engine of growth' is to keep
running, Americans must add another $500 billion to its
borrowings each year.

At the present rate, estimates the Levy Institute, the
amount owed to foreigners will rise to $8 trillion by 2008,
or 60% of GDP. Which shows why Nixon's Dollar Standard
system is about to go bad. Every dollar the U.S. borrows
from abroad adds to the amount it must borrow to service
its borrowings. Even at 5% interest, the carrying cost of
$8 trillion in debt is $400 billion per year. That is in
addition to the $500 billion of trade deficit... and in
addition to the anticipated federal deficit of $500 billion
or so. The U.S. would soon be in the position of needing to
import more capital than the entire world saves.

Something that cannot continue in the same direction must
go in a different one. We're not sure how the Dollar
Standard will end... nor what direction the new world
financial system will take. But we know it won't be the
same one.

Exactly where we are going, we don't know. But Richard
Duncan describes what getting there is likely to be like:

"The U.S. economy has only just begun to enter the vicious
downward spiral stage of this credit bubble cycle....It is
only a matter of time before [consumers] are forced to rein
in their consumption, pay down their debts and rebuild
their savings. That... will drive the U.S. - and the world -
much deeper into recession. Aggregate demand will contract,
but industrial capacity will remain in place. Capacity
utilization will fall further, providing a graphic
illustration of the excess capacity, and corporation
profitability will suffer as a result. One bad thing will
lead to another in a negative mirror image of the virtuous
upward spiral the economy enjoyed during the bubble years.
Poor corporate profitability will result in higher
unemployment, which in turn will cause a further reduction
in consumption, still worse profitability, rising corporate
bankruptcies, financial-sector distress, and credit
contraction. Housing prices will deflate again once the
aggressive credit expansion that fueled their rise is cut
off."

We sign off and pledge to change the subject.


Bill Bonner

P.P.S. If you would like to peruse Richard Duncan's
excellent book, you can purchase it at Amazon.com... we
cannot recommend it enough.

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gesamter Thread:

• The Daily Reckoning - Nixon's The One! - Firmian, 29.08.2003, 22:35