The Daily Reckoning - The Madness Of George II (Bill Bonner)

verfasst von Firmian, 08.12.2003, 21:54

-->The Madness Of George II

The Daily Reckoning

Paris, France

Friday, 5 December 2003


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

*** Economy strong. Thanks to that tax relief... looking out
for number 1...

*** Gold slips... dollar falls... short the dollar... a once-
in-a-lifetime opportunity to die rich..

*** Soldiers are not"nurturing"... and more!

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

"Our economy was strong and is getting stronger.
Productivity is high; business investment is strong;
housing construction is strong. The tax relief we passed is
working."

The president was speaking at a fund-raising event in
Dearborn, Michigan. The crowd of amateur economists - as
Nixon remarked years ago, we're all Keynesians now - looked
on as if they had a clue.

The next line of the New York Times report stuck the fly in
the honey jar:

"The positive news is tempered somewhat by the federal
budget deficit, which is expected to reach $500 billion
next year as growth is financed in large part with borrowed
money, and by a lofty trade deficit."

The tax cut did not exactly increase America's wealth.
Neither taxpayers nor tax collectors were putting any money
aside. Every penny was already being spent. But by the
ledgerdemain of fiscal policy, money that would have been
spent by government was shifted back to the people who
earned it, who then promptly spent it.

The government, meanwhile, did not decrease spending in
line with its reduced resources. No, it increased spending,
too - borrowing on more than 100 years of good credit, and
20 years of declining consumer price inflation, to get a
good rate. Spending went up, but so did the mountain of
debt that will one day cause a problem for someone. (More
on this, below... )

But this is still 2003... not 2004... nor 2005... nor any
higher number.

We're looking out for number 1 right here and now. Next
month, next year, the next generation - they can all take
care of themselves!

We note a couple of sly little articles in the Wall Street
Journal. One tells us that corporate leaders are selling
stock in their own companies at twice the average rate of
the last 5 years. Forget going down with the ship; these
captains are taking to the life rafts. They'll be safely in
St. Barts before the passengers even hear the alarm.

"Companies Race to Issue Debt," begins the other. We don't
need to read it. We can imagine. When fools want to part
with their money, someone has to take it. The cleverest
thing to do in the late '90s was to get together some kids
who wore their baseball caps backward, create a dot.com
business, hire a publicist, cut a deal with Jack Grubman or
Henry Blodgett to pump the stock... and sell as much stock
as possible. Then, instead of spending the money, junk the
business plan immediately. Put it in T-bonds. Then, after
the stock collapsed in the dot.com bust of 2001... either
close the company and distribute the shares... or use it to
buy a real business.

Now, tax and rate cuts have produced another bubble. And
this time there are plenty of fools - foreign and domestic
- who are willing to lend money at rates that barely cover
the current inflation rate. It is as if they hadn't noticed
that the dollar is falling... that the federal deficit has
reached half a trillion... that the trade deficit is another
half trillion... that consumer debt is higher than
ever... that the federal government is $44 trillion in the
hole... that debt has reached three times GDP... and that it
is growing 6 times as fast... and that consumers are already
going bankrupt at record rates.

Borrowed money may not seem cheap today. But it will likely
seem almost free before it is paid off. Advice to
borrowers: just don't forget to hold onto it.

Over to Addison... for more news:

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

Addison Wiggin in, er, London...

-"Foreign central bank holdings of U.S. securities rose to
a massive $1.045 trillion on Wednesday," our London
correspondent, Sean Corrigan, reports (from the wilds of
the West Texas oil fields, curiously)."A cool $40 billion
has been gifted to the Federal Reserve by these non-dollar
banks in just FOUR weeks... at a rate of $2 billion every
trading day."

- You'd think that would have single-handedly boosted the
dollar's value, wouldn't you? Instead, these central bank
billions have merely managed to limit the greenback's
decline to just 2.3% over the same period."Imagine what
would have happened had they not pumped $2 billion a day
into the Fed's reserves," Sean wonders aloud."If $40
billion cannot bring about even a minor rally, just
how weak and despised IS the once-Almighty dollar?"

- On November 20th, we noted the Bank of Japan has been
selling their own currency short at a rate of $1 billion
per day. At the time, we'd heard they only had 8500 yen
left in their Forex accounts... giving them 79.9 more days
of spending at that rate.

- We've also noticed that the bank will deny the Japanese
government of over 1% in annual tax receipts because
they've lost so much money this year. Given the bias of the
six other G7 nations, since they met in Dubai in October,
you've got to wonder how long they can hold out. (Back of
the envelope calculation: 64.9 days. Then, look out below!)
The dollar fought off a fifth straight low against the euro
yesterday and closed at $1.20 versus the euro.

- Fear of the doomed dollar dropping didn't deny dealers in
Dow stocks the pleasure of watching their index rise
another 57 points to 9,930 yesterday. The S&P and Nasdaq
put on 5 and 8.5 points respectively.

-"While the U.S. has less than 2 per cent of world crude-
oil reserves," observes a tangy e-mail put out by a British
outfit called schNEWS.org.uk,"it gobbles up a quarter of
the world's supplies. Without imports, it would run out of
its own reserves in just three years. Britain's total oil
reserves are enough to satisfy our cravings for a mere
seven and a half years.

-"Attracting the greatest interest [among political
strategists in London and Washington] will be places that
harbor particularly abundant supplies of vital materials,"
schNEWS quotes U.S. Professor of Peace and Security
studies, Michael Klare. As you may recall from Tuesday's
essay, we have been pondering the conclusions of the
Chinese economist Wang Jian, who pointed out to his
superiors in the Zhongnanhai - the Chinese answer the White
House and the Kremlin (heck, we might as well get used to
the term!) - that"America's wars abroad have always had a
clear goal; however, such goals were never made obvious to
the public." And that in order to"see through the
surface," the Chinese need"to figure out what the
fundamental economic interests of America are."

- Well, the editors at schNEWs think they've got the
Americo-British strategy all figured out. They suspect that
the Persian Gulf region - including Iraq, Iran, Saudi
Arabia, and Kuwait, which possess two-thirds of known
future oil reserves - as well as the Caspian Sea Basin -
including the Central Asian states of Azerbaijan,
Kazakhstan, Turkmenistan and Uzbekistan, which harbor a
fifth of the world's total reserves - are the next targets
for the"oil junkie West."

-"Last year, Georgia," the e-mail offers up as proof,"a
country of five million, was given $64 million of U.S. aid,
making it the second-biggest recipient of U.S. aid per
capita after Israel. The reason? Georgia is in the
frontline of the 'war on terror.' Russia says that its
mountainous Pankisi gorge is a hideout for Chechen rebels,
while the U.S. reckons that amongst these fighters there
might be as many as a dozen Al-Qaeda members, which works
out around over five million dollars a head!"

- Reading between the lines, schNEWS suspects an
alternative explanation might help those who are unusually
attracted to the truth:"... for the last 10 years, the U.S.
and Britain have been investing in central Asian oilfields,
but have been struggling to find a way of getting the oil
to the West without taking it through Iran or Russia.
Bingo! Just weeks ago, the World Bank and European
Development Bank each approved a £300 million contribution
for BP's massive Baku-Ceyhan pipeline project, which will
stretch from the Caspian through Azerbaijan, Georgia and
Turkey to the Mediterranean.

-"According to the director of the 'Liberty Institute' in
Georgia," schNEWS goes on,"Western oil money provided some
of the finance behind the toppling of the Shevardnadze
regime. With 60 percent of its population living well below
the poverty level, the Georgian people had clearly had
enough of Shevardnadze. But he had also upset his western
'friends' by arguing that the Baku-Ceyhan pipelines could
damage the country's ecology and, more importantly, by
pursuing major energy deals with Russia.

"Within weeks, President 'elect' Bush sent senior adviser
Stephen Mann to Tbilisi with a warning: 'Georgia should not
do anything that undercuts the powerful promise of an East-
West energy corridor.' When the energy deals with Russia
went ahead anyway, former U.S. secretary of state James
Baker flew in and warned the Georgian leader of the need
for a free, fair parliamentary election. The vote was
rigged, the people rose, and in a bloodless coup
Shevardnadze became history. The new president Mikhail
Saakashvili is a U.S.-trained lawyer who, according to
Business Week, has been courting Washington for some time
with promises to block Shevardnadze's plan to give Russian
oil interests a foothold in the country."

- What interesting times we live in, eh?

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

Bill Bonner, back in Paris...

*** Gold slipped a little yesterday, but still trades over
$400. Stocks have gone up, too, which leaves the gold/Dow
ratio unchanged at about 25 to 1. Our Trade of the Decade,
we remind new readers, is to sell the Dow and buy gold. We
expect gold and the Dow to come to about the same level -
sometime in the years ahead. At that point, an ounce of
gold will buy the entire 30 Dow stocks. Few people will
want to make the trade. But it will probably be a good
idea.

*** Gold is in a major bull market. All our friends say so.
But in terms of euros, gold has barely moved at all. Gold
is not in a bull market, after all. It is the dollar that
is moving - down. The dollar is in a major bear market, we
conclude.

"I'm shorting the dollar," said Kurt Richebächer yesterday,
dropping by the Daily Reckoning headquarters in Paris."I
don't trade," he explained after talking to his broker on
the phone."I make big money every once in a while by
investing in these big movements."

"You know," the octagenarian continued,"Americans have
such strange ideas. They don't mind spending all their
money - leaving their children nothing. They even make a
virtue of it... as if it were a good thing to start with
nothing... or even less than nothing. I detest this
mentality. I see the collapse of the dollar as the way to
make a lot of money to leave to my children and
grandchildren."

The Austrian economist expects the greenback to go to $1.50
to the euro. It now trades at $1.20.

*** Last night, your editor was stood up by two women in
one evening. At least, he thought so. Sitting at a table at
Les Editeurs, by himself, in front of a mirrored wall, he
had an opportunity to reflect. Everyone he knows is short
the dollar. Buffett and Soros are said to be short. Buffett
never bought a foreign currency in his life. Now, he says
he can't avoid it; he has his shareholders to considers.
Economists are quoted in almost every paper; all say a
continued fall in the dollar should be anticipated. Hearing
Kurt Richebächer talk about it, the fall of the dollar is
the surest thing since the dot.com bubble blew up. Even
TIME magazine warns readers to 'hedge' against a falling
dollars, without telling them how.

Is it too late, we wondered? Is the fall of the dollar over
- now that everybody is onto the trend?

Probably not. Most dollar holders still cannot imagine a
genuine collapse of the currency. Most Americans have all
their assets in dollars and would have no idea how to
hedge. The value of those dollar-based assets is over $50
trillion, and may be as much as $100 trillion. By contrast,
the value of all the gold and all the world's gold mining
companies is barely $2 trillion. Gold is the world's money
of last resort... it is its anti-dollar... its anti-
economics... its antidote to paper assets, debts,
derivatives... its reality check. Most Americans own no
gold. Most don't even know how or where to buy it.
Organized crime and central banks still rely almost
exclusively on the dollar to hold their reserves. And
corner drug dealers still quote prices in dollars.

No, dear reader, the collapse of the dollar has a long,
long way to go. Most likely it will surprise us all - by
falling more, faster than anyone expects.

*** From our friend Byron King:

"I just read your attribution in today's TDR (12-04-03) to
Tom Friedman and David Brooks:

"Instead, (American soldiers are) 'idealists' and
'committed democracy builders' sent... by a 'non-healing
administration' on the 'most important liberal,
revolutionary U.S. democracy-building project since
the Marshall Plan... '

"'Nurturing,' says... (Mr.) Friedman, 'that is our real goal
in Iraq.'"

Bill, you know that I am a Navy guy. And one of the things
I do in my Navy Reserve job is look after a bunch of other
Navy guys, all of whom are somebody's son, husband, father,
brother, uncle, friend. In October, we drilled for a good
many days and got everybody re-qualified to shoot M-16
rifles, M-9 pistols, 12-gauge shotguns and some other
heavier weapons. This is in anticipation of some of those
fine souls being sent off to distant parts, there to use
such martial skills. I assure you, and you can pass this
along to Messrs. Friedman and Brooks, that"democracy-
building," and revisiting the goals of the"Marshall Plan,"
and especially"nurturing" anything, particularly in Iraq,
are not even close to the radar screen of any member of the
gun-toting combat arms with whom I am acquainted.

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

The Daily Reckoning PRESENTS: The dark underbelly of human
calculation... and an inevitable side effect.


THE MADNESS OF GEORGE II
By Bill Bonner

Squeeze a human heart, and the slime oozes out.

We weren't aware that the U.S. Constitution was still in
force, but we read that retired General Tommy Franks told
Cigar Aficionado magazine that another terrorist attack
like Sept. 11th would bring it to an end. We wondered how
Americans would bear up under the strain of a financial
disaster.

Under pressure, a man reveals the juice - good and bad. A
soldier, for example, may tell a reporter he is building a
democracy. But threatened by a mob, he reaches for the
trigger.

The list of stable paper currencies built by central
bankers is as short as the list of stable democracies built
by armed invaders. Some basic grease in the human heart
seems to work against them. When bankers discover that they
can increase the supply of money simply by printing up some
worthless paper, they don't seem able to stop themselves.
Soon, there is too much paper and it becomes worthless. And
when foreigners invade a country - even foreigners who
think they have a better idea how to run the place - the
locals seem to resent it. That may not stop us from hoping.
But readers might want to check the odds - just in case.

The madness of George II, reigning president of the
American government, is that he believes he can do what has
never been done. Never mind the grease, says he; with some
Ajax and a little scrubbing, the economy and the war effort
will sparkle.

Most Americans believe he will succeed. More spending and
borrowing will bring a recovery, they think. Somehow, the
war in Iraq will work itself out, they pray. Few notice the
long odds; fewer still bet against them. What will they do
if things go against them? Suppose the dollar falls more
and the Chinese stop buying U.S. debt... or actually sell
it? What would happen to U.S. spending if interest rates
were forced up? How many people would refinance their
homes? How many could continue to live in the style to
which they've become accustomed? How many would lose their
homes? How many would lose their jobs - or be humbled into
accepting a lower income, and a lower standard of living?
How many would blame themselves?

Our worry is not that George II will be proved wrong; we
have little doubt that neither of his grand projects will
yield a decent return. Instead, we worry what will happen
when the hearts are squeezed harder... when the miry clay of
disappointment, bankruptcy, depression, inflation, and
national humiliation have Americans entrapped, struggling
to stand up straight.

"Incompetent central bankers are more lethal even than
incompetent generals," writes our old friend Lord Rees-Mogg
in the Times of London this week."They, too, have their
Gallipolis.

"'We have suffered more from this cause [bad paper money]
than from every other cause of calamity,'" Lord Rees-Mogg
quotes a dead man, Daniel Webster."'It has killed more
men, pervaded and corrupted the choicest interests of our
country more, and done more injustice than even the arms
and artifices of our enemy.'

"I have lived through most of the period of the decline of
the pound and the disintegration of the sterling area," his
Lordship continues."It was a long, historic process. Its
early stages, which occurred before I was born, have some
resemblance to the current state of the dollar. After 1918,
Britain was heavily indebted and had lost competitiveness
to new economies.

"The U.S. is now heavily indebted, and the debts are
growing rapidly. The U.S. in its turn has lost competitive
advantage to the countries of East Asia....High savings and
competitive exports were the characteristic of the U.S. 100
years ago. Now they are the characteristics of East Asia."

The U.S. dollar cannot be called stable. A dollar today
will buy only about 5% of what it would have bought a
century ago. Compared to gold, too, it has lost more than
90% of its value since Franklin Roosevelt devalued it in
the '30s.

'Steady' might be a better word to describe it. But even
that is not true. The dollar does not drop at a steady
rate, but at a jerky one. Like a melting polar ice cap, it
tends to lose a little every year... and then, suddenly, a
large iceberg falls off. Over the last 20 years or so, a
strange weather pattern has persisted over the northern
hemisphere. While the dollar has continued to melt
away... it has melted at a slower and slower pace. Against
gold, it did not melt at all - until recently, it froze
even more solidly.

With no telling entrails in front of us, we cannot know
what will happen. But we take a guess: a chunk the size of
New Jersey is about to fall off.

Your editor had tea with Lord Rees-Mogg on Wednesday. We
reminisced about paper currencies. None had ever survived
for very long - and even gold-backed currencies tended to
give way under the stress of a shooting war. Squeezed for
cash, the Continental Congress of the American colonies
issued 'continentals' - I.O.U.s not backed by gold. They
were just promises to pay later, after the war was over.
But after the war was over, they became the thing that
worthless things were worth more than.

In America's war against the Southern States, again, the
Lincoln administration resorted to paper. It established a
central bank - a forerunner to the Federal Reserve system -
and issued I.O.U.s....which subsequently lost their value.
The Confederate States did likewise. Years after the war,
desk drawers in Atlanta were still full of I.O.U.s -
completely worthless, of course.

Largely under pressure from Johnson's War on Poverty and
war in Vietnam, the Nixon Administration resorted to
I.O.U.s again - paper dollars backed by the world's biggest
debtor. Since 1971, the world has seen nothing else.
Central bank coffers are full of them. For every ounce of
gold in the world, there are approximately $20,000 worth of
dollar-based assets and maybe $10,000 worth of dollar-
denominated debts, with the paper-based assets and credits
growing many times as fast.

The dollar will almost surely fall more - perhaps much
more... and perhaps very suddenly. That is when hearts get
pinched... and the juice oozes out.


Bill Bonner

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gesamter Thread:

• The Daily Reckoning - The Madness Of George II (Bill Bonner) - Firmian, 08.12.2003, 21:54
  • Dt. Fassung ohne den Hauptartikel... wird vielleicht nachgeliefert? - Firmian, 08.12.2003, 22:00
    • Re: Danke an alle, die ihr Gefallen bekundet haben... - Firmian, 08.12.2003, 22:14