The Daily Reckoning - e Era Of Fictitious Capitalism (Addison Wiggin)

verfasst von Firmian, 03.12.2003, 20:12

-->The Era Of Fictitious Capitalism

The Daily Reckoning

Paris, France

Tuesday, 2 December 2003


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

*** So many fools... so little time... Crushed in the Blitz!

*** Consumer debt rising 4 times as fast as real GDP..."It
breaks my heart..." Bankruptcies will rise... especially for
those over 65...

*** 8 x 8... gold over $400 an ounce... manufacturing
up... following Japan... Older, poorer, wiser....Weight-loss
in Ghana... and more!

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

Fools rush in... watch out.

Do you laugh, dear reader? Or cry?

We got news this morning of a woman in Orange City,
Florida, who was trampled while waiting to get into a Wal-
Mart Super Center for a 5-hour 'Blitz' sale. There are so
many fools rushing into so many traps... you risk getting
stomped by them.

Investors are rushing to buy stocks with hardly a prayer of
getting their money back... (See Christopher Byron's note,
below... )

Foreigner central bankers are rushing to buy U.S. dollar
bonds - even as the U.S. dollar itself slides lower every
day.

And consumers keep the illusion of prosperity alive... by
buying things they don't need with money they don't
have... and counting on the kindness of strangers to make up
the difference.

We keep saying that everything has its limits... and that
even the kindness of strangers eventually runs out. But who
listens? And who cares?

Of course, we give a hearty laugh when we see central
bankers blowing themselves up... and a schadenfreudian
chuckle at investors generally. (Isn't the whole idea of
the stock market to separate them from their money?) But
consumers? Ah... the poor lumps are fools, no doubt about
that. But they are such pathetic fools... you can't help but
feel a little sorry for them.

"It's not about people deciding to celebrate at the malls
following a job loss," Elizabeth Warren explained to our
old friend, Scott Burns."It's about people using short-
term, high-interest debt to manage the mortgage payment,
utilities and food at the same time.

"It means bankruptcies will continue to rise, home
foreclosures will continue to go up. The signs of economic
distress are everywhere around us. It breaks my heart and
makes me furious."
Guess which group of Americans is going bankrupt at the
fastest rate? People over 65, said Ms. Warren. And the
second-fastest pace is among people 55 to 65.

These are not reckless kids who don't know any better, she
went on to say. They are people lured by economists and
trapped by the credit industry. 'Go out and buy a new SUV,'
we recall Robert McTeer urging consumers, 'preferably a
Navigator.' And why not? If you're going to blow yourself
up, you might as well do it in the comfort of a luxury road
hog.

Who can help feel a little sympathy for them? The little
lambs have been led to the slaughter by their own shepherds
at the Federal Reserve. Now, the wolves over at E-Z Credit
Lending Center have their chompers into them.

Never before have conditions been so perfect for turning
consumers into dead meat. As interest rates came down, they
were able to take money out of their houses... and still
make lower mortgage payments. Car companies helped out,
offering bigger guzzlers at higher prices - while also
lowering monthly carrying costs.

And then along came the Bush Administration with its own
contribution to consumer insolvency: wars and tax cuts. The
wars silenced conservative critiques, distracted the public
from its balance sheets and gave the nation a sense of
collective purpose. As for the tax cuts, we never met one
we didn't like, but we're having doubts about this one.
Evidence coming in from recent months suggests that
consumers took the money as though it was a gift from
heaven. So buoyed were their spirits that they spent it
all... and borrowed more! Take out the effects of the tax
cuts and extraordinary auto incentives and the GDP grew
only 2.2% in the 3rd quarter, says yesterday's news. But
credit card, non-revolving and other consumer debt rose at
about 10% - or 4 times as fast.

As Addison reported yesterday, a New York Times article
tells us"Why Americans Must Continue to Spend." Why?
Because they want things, says the august journal. And
because, the economy depends on them.

"People in Hell want ice-water," your editor's father used
to remark."But that doesn't mean they'll get it."

Over to Eric, with more news:

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

Eric Fry writing from the Big Apple...

- Apparently, these are the good old days... the economy is
booming, the stock market is booming and the gold market is
booming. What's not to like? Based on the latest government
statistics and the bull market in stocks, we Americans are
becoming more prosperous by the day. Unfortunately, our
prosperity is denominated in dollars, a currency which
tumbles lower by the day.

- Yesterday, the major stock market averages all soared to
their highest levels of the year. The Dow charged ahead 117
points to 9,899, while the Nasdaq jumped 1.5%, to 1,990 -
its highest level in nearly two years.

- The stock buyers gained confidence from fresh indications
of economic revival. The Institute for Supply Management's
November index on U.S. factory activity jumped to 62.8%
from 57% in October. The ISM Index had not logged such a
sharp monthly gain in 20 years.

- Meanwhile, news from the Consumer Front reveals an
insatiable urge to splurge. ShopperTrak, which combines
Commerce Department data with reports from 30,000 store
traffic monitors across the nation, said retail sales last
Friday rose 4.8% over last year. Visa USA reported an even
more dramatic increase in debt-financed consumption.
Spending on credit and debit cards during the Friday and
Saturday following Thanksgiving jumped 12% over the same
period a year ago.

- Curiously, the booming economy and stock market are not
inspiring a corresponding boom for the U.S. dollar. The
greenback hit yet another all-time low against the euro
yesterday morning, before strengthening a bit during the
New York trading session to $1.197 per euro.

- The gold market, meanwhile, dazzled its growing crowd of
admirers by surging $5.80 yesterday to $403.80 an ounce -
its first close above $400 in more than seven years!

- After the gold price topped out above $800 an ounce in
1980, gold investors spent the next 20 years wandering
around in the bear market wilderness of failed rally
attempts and prodigious capital losses. Then, finally,
along came a falling dollar to escort the gold price into
the Promised Land above $400 an ounce - a land where gold
stock profits flow like milk and honey.

- Certainly, it would be no great surprise if gold were to
slip back below $400 for a while. On four separate rally
attempts during the last 15 years, the gold price stalled
in the $400 to $425. In 1989, 1990, 1993, and 1996 gold
breached $400 an ounce, only to tumble shortly thereafter.
History could repeat itself, but Peter Munk doubts it.

- The Chairman of Barrick Gold thinks the gold price is
headed much higher. Should we care what Munk thinks? Well,
we probably shouldn't dismiss his opinion outright. Munk
earned himself a large fortune and a small amount of fame
by correctly betting against the gold price. For more than
a decade, Munk's Barrick Gold used innovative hedging
tactics to lock in high prices for its gold production.
Thanks to Barrick's aggressive hedging strategy, the
company breezed through gold's two-decade bear market.

-"Gold spent much of the 1980s and 1990s in a bear
market," Canada's Financial Post relates,"and Barrick's
gamble on falling gold prices helped the company generate
US$2-billion in cash." But the highly successful gold bear
is now changing his tune. He says Barrick will begin
eliminating its hedge book.

-"Mr. Munk's decision to move away from hedging indicates
that even he believes gold has a bright future," the
Financial Post continues."That's in line with the forecast
from Pierre Lassonde, president of the world's largest gold
miner, Denver-based Newmont Mining Corp. 'Gold at around
US$400 an ounce is probably fairly valued right now. You
are very likely to see its price trade around that for the
next while, with a US$50 an ounce band on either side of
it,' he said. But, he added, that's just the beginning."

- Lassonde predicts an epic gold bull market - the sort of
bull market that most investors have never seen. It's been
more than three decades since gold soared 2,200% from US$35
an ounce in 1971 to a peak of more than US$800 in the early
1980s. Says the confident Lassonde:"Since gold hit US$250
an ounce in 2001, it is up 55%. We still have a long way to
go. This is chapter two of a 20-chapter book."

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

Bill Bonner, back in Paris...

*** Christopher Byron, with more fools rushing in:

"The idea: Buy shares in an obscure and struggling
California outfit called 8x8 Inc. - which plans to take on
corporate giants like Verizon, AT&T and many of America's
largest cable companies simultaneously by selling"all you
can eat" phone calls over the Internet. Viewed from the
north tower of C.A., 8x8 Inc. seems to be emerging less as
a real business than as a gambler's bet that the company
will be taken over by a larger rival before the money runs
out and the business collapses.

"Meanwhile, investors have been going nuts over the stock.
Back in February, the shares were selling for a mere 17
cents, and were still trading for barely 50 cents as
recently as August. Yet by Friday they were changing hands
at prices as high as $8.06 before ending the day at $7.52.

"At that price, the shares have gained 4,323 percent so far
this year, making 8x8 Inc. far and away the hottest Nasdaq
stock of 2003, sporting a market value of $232 million for
a business with just 53 employees and top-line revenues of
less than $10 million per year."

***"The U.S. is following Japan, more or less, with a 10-
year lag."

This idea became such a recurring theme in the Daily
Reckoning that not only did it spawn a book, but readers
and editors alike got sick of it. Still, we have not
abandoned it. The U.S. responded to its crisis faster and
more aggressively than the Japanese. For its trouble, it
got a weeny of a recession and a recovery only marginally
stronger than Japan's. The serious trouble in Japan didn't
begin until several years after the stock market topped out
in January of 1990. America's serious trouble is still
ahead - 10 years following Japan's.

But at some point, America and Japan must part company. The
U.S. is the world's largest debtor. Japan was always one of
the world's largest creditors. Japan - with mountainous
savings and a positive current account balance - could
hunker down and ride out a 13-year slump. America - with
twin deficits (trade and federal budget) of more than a
half-trillion dollars each - cannot. At some point,
America's slump must follow another path.

Some day, perhaps soon, foreigners will stop buying U.S.
treasuries, the dollar will fall... and interest rates in
the U.S. will rise. All of a sudden, the best conditions
for consumers will turn into the worst. Their debts will be
harder than ever to carry - with rising monthly
payments... and less money to spend. Sales will plummet.
Jobs will be lost... and the economy will be a complete
disaster. They will have to walk away from their
houses... and their expensive land barges.

They will be poorer... and finally realize it. They will be
older, and not especially like it. They will be wiser, and
angrier, but not necessarily any less happy.

We look to the pampas for a peek into the future, where
Argentina's middle class has been practically obliterated
by inflation, joblessness, and depression. Friend Paul
Terhorst, who lived for many years in Argentina, sends this
note:

"A friend here gave me a graph showing Argentina's progress
over the last hundred years. The graph compares Argentina's
income per capita, adjusted for purchasing power parity, to
the average of ten other countries, essentially the
developed countries plus Brazil.

"In 1910 and 1925 Argentina, approached the average
standard of living of the base countries. However, even in
those years Argentina must have been far poorer than the
richer countries, Britain and the U.S., for example. I've
never believed the saying that Americans at one time wanted
to be 'rich as an Argentine,' and I think this graph
supports my case.

"Note, too, that for the past 75 years or so Argentina has
been going downhill. If 2001 to 2003 were added to the
graph, we'd see a very steep additional decline."

*** Jules, 15, returned yesterday from a class trip to
Ghana, wiser... and thin as a piece of plasterboard. He had
stayed for two weeks in a boarding school with 200 Ghanian
students.

"Everybody was very nice in Ghana. We were supposed to be
teaching French, but we could barely understand their
English.

"We all got sick," he went on."I mean all the kids in my
group. Dysentery... or just diarrhea. Every day in the
cafeteria, they had the same thing... some kind of rice with
chicken in it. After a few days, we couldn't stand it. But
there wasn't anywhere else to go. Wow... when we landed in
Amsterdam on the way back! All the kids rushed over to
McDonalds in the airport. McDonalds never tasted so good."

"What was it like... what did you learn... what was the
point?" His father wanted to know the return on his $1,200
investment.

"Well, it was hot. And they didn't have air-conditioning.
But we got used to that. And they did have a pool. Thank
God for that. And they had a gym, too..."

"The school is not bad. But very simple. And a lot of the
students are what they call SOS - meaning that they don't
have any money at all or are in some kind of danger... I
don't really know... they all seemed nice to us. And it took
a while to understand what they were saying, so I didn't
really find out too much. They were speaking English, but
it wasn't like our English... and they had their own words
for things.

"The countryside is pretty. We stayed a couple of days on a
lake with crocodiles in it. And we visited the tropical
forest and did a canopy walk... where you walk on these
rickety bridges that seemed to break all the time.

"What did I learn... well, like, always take a large supply
of candy bars and junk food when you go to those places..."

"Have another piece of apple pie," suggested his sister,
"you look like a ghost. Mom will be shocked when she sees
you."

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

The Daily Reckoning PRESENTS: When 'real value' is no
longer what seems to matter... you can be sure it matters
more than ever...


THE ERA OF FICTITIOUS CAPITALISM
by Addison Wiggin

Perspective.

While doing radio interviews this fall regarding themes in
our book, the question invariably arises:"France? Nice
place to visit, but why the heck do you live there?"

The short answer is, of course, the wine is cheap and the
woman are... um, elegant. The long answer is, we gain
perspective. It's the long answer, because it requires an
explanation. One could gain perspective from just about
anywhere, of course... but why not do it in a place where
the wine is cheap and the women pleasing to look at?

An English reader, who also lives in France, recently
passed on an interesting article written by a Chinese
bureaucrat, published on a non-profit website hosted in
Italy, sponsored by the government of Singapore. The aim of
the site is to increase amicable relations between Asia and
Europe in a U.S.-centric world. The purpose of the article:
a strategic recommendation on how China ought to position
itself while the U.S. and Europe - as the major players in
the two-bloc international system the author predicts will
eventually emerge - gear up for eventual war.

If we were writing our daily missives from our offices in
Baltimore, would such a site, and such an article, be
interesting? Probably. But we'd likely judge the origin of
the site through Murdoch's lens at Fox News, like so many
TV-addled minds do, and dismiss it out of hand. Away from
influence, living as foreigners, in a country where they
don't pronounce words as they are spelled, we take to the
extraordinary like gnats to a sugar bowl. We are addicted
to the taste and go there often to get a buzz going. But we
are under no illusions that it has nutritional value.

What could possibly interest us about a Chinese
bureaucrat's white paper on impending global war? First of
all, his conclusion:"In the last century," writes Wang
Jian,"American people were pioneers of system and
technology innovation. However, the interests of a few
American financial monopolies now lead this country to war.
This is such a tragedy for the American people.

"Clouds of war are gathering. Right now, the most important
things to do for China are:

1. Remain neutral between two military groups while
insisting on an anti-war attitude.
2. Stock up in strategic reserves
3. Get ready for a short supply of oil
4. Strengthen armament power
5. Speed up economic integration with Japan, Hong Kong,
Korea and Taiwan..."

It's a rather unsettling idea. China as the neutral power
in a war between the United States and a united Europe. How
did Wang get there? That's the subject of the second part
of the article, which we find intriguing... and even more
unnerving. Wang's view is disturbingly similar to our own
understanding of the way the global economy works.

"War is the extension of politics and politics is the
extension of economic interests," Wang asserts."America's
wars abroad have always had a clear goal, however, such
goals were never made obvious to the public. We need to see
through the surface and reach the essence of the matters.
In other words, we need to figure out what the fundamental
economic interests of America are. Missing this point, we
would be misled by American government's shows and feints."

Wang's argument in a nutshell: By the mid 1970s, the U.S.,
the U.K., France, Germany, Italy, Japan and other major
capitalist countries had completed the industrialization
process now underway in China. In 1971, when Nixon closed
the gold window, the Bretton Woods system collapsed, and
the dollar - the last major currency to be tethered to gold
- came unstuck. Economic growth as measured by GDP was no
longer restricted by the growth of material goods
production. Toss in a few financial innovations, like
derivatives, and the"fictitious" economy assumed the
central role in the global monetary system.

"Money transactions related to material goods production,"
writes Wang,"counted 80% of the total [global]
transactions until 1970. However, only 5 years after the
collapse of the Bretton Woods the ratio turned upside down
- only 20% of money transactions were related material
goods production and circulation. The ratio dropped to.7%
in 1997."

As we note in our book, since Greenspan assumed the central
role at the most powerful central bank in the world, he has
expanded the money supply more than all other Fed chairmen
combined. From 1985-2000, production of material goods in
the U.S. has increased only 50%, while the money supply has
grown by a factor 3. Money has been growing more than six
times as fast as the rate of goods production. The results?
Wang's research reveals that in 1997, before the blow-off
in the U.S. stock market, mind you, global"money"
transactions totaled $600 trillion. Goods production was a
mere 1% of that.

"People seem to take it for granted that financial values
can be created endlessly out of nowhere and pile up to the
moon," our friend Robert Prechter writes in his book,
Conquer the Crash."Turn the direction around and mention
that financial values can disappear in into nowhere and
they insist that it isn't possible. 'The money has to go
somewhere... It just moves from stocks to bonds to money
funds... it never goes away... For every buyer, there is a
seller, so the money just changes hands.' That is true of
money, just as it was all the way up, but it's not true of
values, which changed all the way up."

In the fictitious economy, the values for paper assets are
only derived from the perceptions of the buyer and seller.
A man may believe he is worth a million dollars, because he
holds stocks or bonds generally agreed in the market to
hold that value. When he presents his net worth to a
lender, a mortgage banker for example, and wishes to use
the financial assets as collateral for a loan, his million
dollars is now miraculously worth two. If the market drops,
the lender, now nervous about his own assets, calls in the
note... the borrower once thought to be worth two million
discovers he is broke.

"The dynamics of value expansion and contraction explain
why a bear market can bankrupt millions of people,"
Prechter explains."When the market turns down, [value
expansion] goes into reverse. Only a very few owners of a
collapsing financial asset trade it for money at 90 percent
of peak value. Some others may get out at 80 percent, 50
percent or 30 percent of peak value. In each case, sellers
are simply transforming the remaining future value losses
to someone else."

As we saw in the 2000-2002 bear market, in such situations,
most investors act as if they were deer being approached by
a speeding truck at night. They do nothing. And get stuck
holding financial assets at lower - or worse, non-existant
- values. Anyone suffering glances at their pension
statements over the past few years knows their prior
"value" was a figment of their imagination.

Back to Wang:"In the era of fictitious capitalism, a
fictitious capital transaction itself can increase the
'book value' of monetary capital; therefore monetary
capital no longer has to go through material goods
production before it returns to more monetary capital.
Capitalists no longer need to do the 'painful' thing -
material goods production."

Real-life owners of stocks, bonds, foreign currency and
real estate have increasingly taken advantage of
historically low interest rates and applied for mortgages
backed by the value of these financial assets. Especially
since the rally began 8 months ago, they then turn around
and trade the new capital on the markets."During this
process," writes Wang,"the demand of money no longer comes
from the expansion of material goods production, instead it
comes from the inflation of capital price. The process
repeats itself."

Derivatives instruments, themselves a form of fictitious
capital, help investors bet on the direction of capital
prices. And central banks, unfettered by the tedious
foundation set by the gold standard, can print as much
money as is required by the demands of the fictitious
economy. You can, of course, trade the marginal values of
these fictitious instruments and do quite well for
yourself.

But Wang sees a darker side to the equation."Fictitious
capital is no more than a piece of paper, or an electric
signal in a computer disk. Theoretically, such capital
cannot feed anyone no matter how much its value increases
in the marketplace. So why is it so enthusiastically
pursued by the major capitalist countries?"

The reason, at least until recently, is that the"major
capitalist countries" have been using their fictitious
capital to finance consumption of"other countries'"
material goods. Thus far, the most major of the capitalist
countries, the U.S., has been able to profit from the
system because since the establishment of the Bretton Woods
system, and increasingly since its demise, the world has
balanced its accounts in dollars.

"Until now," writes Wang,"U.S. dollars [have counted] for
60-70% in settlement transactions and currency reserves.
However, before the 'fictitious capital' era, more exactly,
before the fictitious economy began inflating insanely in
the 1990s, America could not possibly capture surplus
products from other countries on such a large scale simply
by taking advantage of the dollar's special status in the
world... Lured by the concept of the 'new economy',
international capital flew into the American securities
market and purchased American capital, thus resulting in
the great performance of U.S. dollar and abnormal
exuberance in the American security market."

And here we arrive at the crux of Wang's argument that a
war is brewing."While [fictitious capital] has been
bringing to America economic prosperity and hegemonic power
over money," he suggests,"it has its own inborn weakness.
In order to sustain such prosperity and hegemonic power,
America has to keep unilateral inflow of international
capital to the American market... If America loses its
hegemonic power over money, its domestic consumption level
will plunge 30-40%. Such an outcome would be devastating
for the US economy. It could be more harmful to the economy
than the Great Depression of 1929 to 1933."

Japan's example suggests, as your editors have oft reminded
you, that a collapse in asset values in a fictitious
economy can adversely affect the real economy for a long
time.

In the era of fictitious capital, Wang surmises, America
must keep its hegemonic power over money in order to keep
feeding the enormous yaw in its consumerist belly.
Hegemonic power over money requires that international
capital keep flowing into the market from all participating
economies. Should the financial market collapse, the
economy would sink into depression.

America's reigning financial monopolies, he believes,
(whoever they may be), would not stand for it.


Addison Wiggin,
The Daily Reckoning

P.S. Wang writes that he was disturbed to draw these
conclusions. And as noted above, he recommends that the
Chinese government plan accordingly.

He could not be any more disturbed than your editors here
in the Paris office. We've grown to like the perspective
we've developed while enjoying carafes at the Paradis and
watching passersby pass by. Trouble is, if Wang's
conclusions are correct, then the currency most suited to
challenge the hegemony of the U.S. dollar has just this
week closed at a historic high of $1.20.

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - e Era Of Fictitious Capitalism (Addison Wiggin) - Firmian, 03.12.2003, 20:12
  • Re: Dt. Fassung ohne Wiggin - Firmian, 03.12.2003, 20:15
    • Re: Dt. Fassung - Hab Dank dafür! Gruss (owT) - Tofir, 03.12.2003, 20:45
    • Auch von mir vielen Dank für die tägliche Ãœbersetzung.. (owT) - spieler, 03.12.2003, 23:03
    • Ich danke ebenfalls - sehr interessant (owT) - bernor, 03.12.2003, 23:44