The Daily Reckoning - New Year's Resolutions, Part II (Bill Bonner)

verfasst von Firmian, 12.01.2004, 19:53

-->New Year's Resolutions, Part II

The Daily Reckoning

Paris, France

Friday, 9 January 2004

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

*** Soak the Stupid! But the strangers' kindness has its
limits...

*** Debt soars... the dollar swoons... M3 stumbles...

*** Bush gets money from money hustlers... prozac...
politicians... and more!

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

"Soak the Stupid!"

We propose the slogan to the Republican party... for they
seem bent on an original method of government finance. They
cut taxes... but increase expenses. Who then will pay for
their programs of guns and drugs? Rather than soaking the
rich or wringing out the poor, the Republicans want to hose
anyone dumb enough to lend money to the Bush Administration
at Eisenhower-era rates. They borrow... and then degrade the
currency in which the debt is calibrated.

It is chicanery... but an elegant chicanery; nearly half the
lending comes from foreigners... and the poor foreigners
don't vote!

But what's this? The dollar fell again... after a one-day
rally. Gold rose $2.10. And now it appears that the
kindness of strangers has reached its limit. They are
voting with their feet.

"An ominous harbinger for U.S. financial assets," writes
our friend Terry Reik of Clapboard Hill Partners,"has been
the stunning collapse in foreign-capital flows... From a
peak of $110.4 billion in May, net foreign flows have
fallen to $90.6 billion in June, to $73.4 billion in July,
to $49.9 billion in August, to $4.2 billion in September."

September's net inflow, Terry explains, is only 10% of the
monthly minimum required to fund our $500 billion current
account gap. Private interests overseas have forsaken the
dollar in favor of other assets.

So far, only central bank buying of dollars - or, buying
U.S. dollar assets, such as Treasury bonds, thus lending
money to the Bush administration - has kept the dollar from
destruction. In September, for example, while the rest of
the world was dumping dollar assets, the Bank of Japan was
spending $40 billion to support the dollar."Without this
Herculean effort by Japanese authorities," Terry continues,
"foreign flows would have been an unthinkable negative
$35.8 billion."

This apparent bout of sanity among foreigners comes at a
bad time. For every passing day, Americans seem to need
more credit just to stay in the same place. Again, Terry
reminds of the numbers: credit grew at a $2.2 trillion
annual rate in the first quarter of 2003... and then
exploded at a $3.3 trillion rate in the second quarter.
Debt has reached $33 trillion, with annual interest of
nearly $2 trillion - even at today's Eisenhower rates - and
it's growing seven times as fast as the economy itself.

What is debt on America's balance sheet is a credit (albeit
of uncertain value) overseas. In the first 200 years of the
republic, Americans managed to build up net assets with
foreigners equal to about 5% of GDP. But then Reagan's
"Supply Side" folderol took hold in Washington, followed by
Clinton's"Anything Goes" years, which was in turn followed
by George Bush the younger's program of"Soak the Stupid."
By the beginning of Reagan's second term, net foreign
assets had fallen to zero and over the following 17 and 3/4
years, foreigners owned more and more U.S. assets while
Americans owned, net, less and less foreign ones.

By April of 2003, foreigners owned $3.301 trillion more
than the Americans owned of foreign assets. And then, in
the following 90 days, the number shot up 21.5% to over $4
trillion.

Whew! Our head spins.

Here's Addison with more details...

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

Addison Wiggin confused over the day's financial news...

- The refi boom has busted... and with it financial
reckoning day - the deleveraging of America - begins in
earnest. This much, we think we understand...

-"Credit crunch coming?" CNNMoney alliteratively asks,
covering a report released by the American Bankers
Association yesterday."The refinancing boom, triggered as
mortgage rates fell to the lowest level in a generation,
offered home owners a ready source of cash. Most consumers
plowed that cash back into their houses, for new washers
and dryers, carpeting or to build that new deck... shut off
the refi spigot, and you may have shut off the ability of
some cardholders to pay."

- Credit card delinquencies shot to record levels in the
3rd quarter."Even if there's a pick-up in job creation,"
says the ABA,"we should not see real improvement in
delinquencies until later this year - there's about a six
to nine month lag."

- But now we begin to wonder. Yesterday's new jobless
claims report came in at an unexpectedly high 14,000 - the
first increase since the beginning of December. The Dow
reacted positively to the news - up 63 to close at a
bewildering 10,592 - because, so the story goes, the jobs
picture is slowly recovering from a three-year slump.
Unemployment claims have remained below 400,000 for 13
weeks, which feel-good economists feel is a good number.
Still, without the support of rising housing prices, or
refinancing, the 'recovery' rests squarely on the creation
of new jobs. Or debt.

-"The economy is doing well because people are going into
debt," Samuel Gardano, head of the American Bankruptcy
Institute, told the Kansas City Star yesterday. Leaving us
wondering further still: what does he mean by 'well'?
During the year that ended September 30, 2003, the
institute recorded 1.66 million bankruptcies... the highest
number ever recorded in the nation's history.

- Gardano suggests that credit card delinquencies and
personal bankruptcies are"a natural outgrowth" of a $10
trillion economy driven almost totally by consumer
spending. And quite happily adds that the more the"economy
improves, the more people will grow deeper in debt and
bankruptcies will grow." Now we're completely baffled.
Orwell couldn't have improved on this one: Increasing debt
and bankruptcies rising from an already staggering
historical level = an"improving economy." Color me
confused...

-"It's a conundrum," says Roger Whelan, a former
bankruptcy judge now in the employ of the institute.
"Credit fuels the improvement, but overspending can result
in debt and losses to the credit industry." Hmmmn... that
helps."We're living in a society where living within our
means is not the thing to do." Okay, now we're starting to
see."Keeping up with the Joneses has a greater meaning
today than it ever has." Aha! We need these kinds of"debt
= wealth" explications... because the lumps just can't
suffer the embarrassment of looking shoddy to their
neighbors. (Is it just a tasty bit of irony, as we pointed
out in these pages a few weeks back, that Wyndclyffe, the
house in upstate New York that is believed to have given
rise to the term"Keeping Up With The Joneses" has fallen
into decrepit ruin?

- But it ain't just the Joneses and their hapless admirers
that should be concerned. According to a report released by
the IMF yesterday, the U.S. government's got another think
coming, too. According to the NY Times, the report warns
"that the U.S. net financial obligations to the rest of the
world could skyrocket to 40% of the entire economy within
the next couple of years. That represents 'an unprecedented
level of external debt for a large industrial country' and
could raise havoc with the value of the dollar and
international exchange rates."

-"The IMF is right," says Fred Bergsten, an economist with
Institute for International Economics, as though he were
prone to imbibing wine with your Daily Reckoning editors.
"If those twin deficits - of the federal budget and the
trade deficit - continue you are increasing the risk of a
day of reckoning when things can get pretty nasty."

- How can the government owe 40% of an economy, we wonder,
beginning to get bamboozled by the logic again, fuelled
largely by consumers who are going bankrupt at historically
rapid rates? This question outlines the Great Disconnect,
suggests Dr. Richebächer.

-"For us, the greatest uncertainties [in the global
economy]," writes the good doctor on the Daily Reckoning
website,"are about the U.S. economy, its financial system
and its currency. The great issue not only for America but
also for the global economy is whether the U.S. economy has
definitely reached the stage where economic growth has
become self-sustaining. Or whether it may relapse into
sluggish growth next year, if not recession. Looking at the
markets, we have the impression that many people
[foreigners especially] are struggling with this
question..."

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

Bill Bonner, back in Paris...

*** As alarming as the failure to attract money from
overseas is the drop in the U.S. money supply. M3 is
collapsing. From August to November, M3 fell at its fastest
rate since they began collecting statistics back in 1960.

*** If there is anyone who knows exactly why M3 is falling,
he doesn't work at the Daily Reckoning. Well, Addison
might, but he's not telling. Still, without knowing the
cause, we can still guess at the effect: Instead of a real
recovery... a real recession lies ahead. Again, we quote our
friend Terry Reik:

"We view recent monetary and fiscal stimulus and the
consumption and borrowing it has fostered, as merely
delaying an inevitable process of rationalization, debt-
reduction and deferral of consumption to rebuild national
savings. A sustainable economic recovery has never occurred
in the U.S. with its current account in such disarray and
savings rates so low. We do not expect it to happen this
time either."

***"Big financial firms, including Enron, become Bush's
top donors," says a headline in today's International
Herald Tribune. Here we offer an explanation.

We are living in a degenerate age, we conclude, when both
our economy and our government have been corrupted by easy
money. Why go to all the trouble of making things, when you
can make money out of thin air? Companies no longer make
money by hustling to make things and sell them, but by
hustling money itself. As a proportion of total corporate
profits, those that come from"financial" firms have risen
from under 10% during the Eisenhower years to nearly 40%
during the reign of George W. Bush. Why are financial firms
giving so much money to Bush? Because they are the only
companies that have any money left to give.

They are also the companies with the motive as well as the
opportunity. Who has more at stake in seeing the reckless
spending and borrowing of the Bush years continue? Who most
benefits from the credit bubble? Who hustles the stocks and
bonds in the"Soak the Stupid" era? Whose clients are going
to be soaked?

It is decadent. It is disgusting. But it is America,
2004... It is the New Babylon we offer so generously, so
selflessly to the desert tribes of the old one...

*** A note from a dear reader:

Mr. Bonner,

Please settle an argument for me! My friend and fellow DR
junkie believes that if you were forced to have to vote for
a political party it would be democrat. I say it would be
republican. Now, before you say they are the same, I am
talking about what they claim to stand for, not what they
actually do. The fact that you last voted for Carter is too
long ago to make a judgement today. I said that you scorn
all politicians and since a Republican happens to be in
office, it sounds like you dislike what Republicans claim
to believe in. But if a democrat were in office, you would
be mocking him also.

WHO IS RIGHT?

THANKS
Dave

*** Your editor dodges: We learned our lesson in the Carter
campaign. We voted... were deeply embarrassed... and vowed
never to do it again. Since then, we have liked every
politician we ever met personally... and despised them all
professionally. Republicans as well as democrats; we have
no prejudices.

Democrats favor boondoggles for the poor. Republicans favor
boondoggles for the rich. Moderates favor boondoggles for
everyone. A pox on them all!

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

The Daily Reckoning PRESENTS: What if America can't pay its
staggering debts? Mr. Bonner digs through history and
uncovers and alarming answer.


NEW YEAR'S RESOLUTIONS, Part II
by Bill Bonner

Americans, at the beginning of Anno Domini 2004, were a
happy and contented race - but in Revolt against Fate.

Their paper money - unbacked by anything more than promises
from the world's biggest debtor - was destined to go bad;
all paper money always did. Their economy was doomed to
slow down - debtors cannot increase their spending forever.
Their stocks were sure to fall, victims of an excess of
enthusiasm and a paucity of real profits. Their bonds were
living on borrowed time, too - for it was amazing that
foreign lenders continued to buy a 5% bond when the
currency in which they were denominated was losing 20% of
its value in a single year.

But as the snow fell in the winter of 2004, they hardly
suspected. For they believed their position in the world
must reflect some kind of innate grace, or must be a
product of their own invention. Since they had invented it
themselves... surely they could control it.

Little did they realize that there was nothing really new
to their system. But no fantasy is so hard to destroy as a
man's good opinion of himself... and in January of 2004,
Americans' opinion of themselves had not yet been bruised
by a falling dollar... nor hardly even touched by the recent
recession and bear market. Americans still could not
describe their special gift... but they were sure it put
them on top of the world. For they had invaded Iraq... not
the other way around. Their economy was racing ahead of
their European competitors (they ignored the effect of the
dollar)... and they alone could still issue pieces of paper
that the whole world called 'money.'

If a bull market can turn a schmuck into a genius, The
Great American Bull Market in Debt created a whole nation
of them... all somehow sure that the end of history had
come... and its final chapter had them as the big winners.
They ignored the hard work of their fathers and
grandfathers in the chapters ahead of them. They dismissed
the virtues of thrift, sound money, limited government and
collective modesty that made their forebears so successful.
They flipped through the pages of American history and paid
no attention to the dead. And the young... the unborn? It
was as if they thought the book had no sequel... as if it
were the last oeuvre ever... the last word... the final,
culminating perfection of all Western civilization. The
young are on their own... they will have to pay off our
debts as best they can!

We can almost hear Fate snickering. Not that we know what
he has in store for us. But since it is the beginning of a
new year, we guess and wonder...

We wonder how Americans can avoid a drop in their standards
of living. In global terms, wage rates have fallen in the
U.S. for the last 2 years - and are down 40% in euro terms.
A few more years of this, and the average American factory
worker will be competitive with a Bengali!

We wonder when stocks will begin to fall. Soon is our
guess. The Feds reloaded the bubble in 2003. But what
ammunition do they have left? Lower interest rates? Bigger
deficits and more government spending? Another tax cut?
None of this is very likely anyway.

We wonder when the Chinese and other lenders will come to
their senses and stop lending to Americans at such low
interest rates. We don't know. But eventually.

But all of these wonders and guesses you have heard before.
Readers say they are getting tired of our 'gloom and doom'
and would welcome some 'constructive suggestions' for
surviving 2004.

Alas, we have no constructive advice. The best we can do is
to continue digging down... day by day. Our resolution for
the New Year is the same as for the old; we are still
trying to get to the foundation... the hard meaning of it
all. It is slow going, for we are digging into the bedrock
of the modern consumer economy... trying to understand what
it rests upon. When does it give way, we wonder? What
happens when the proud tower of debt and paper money
finally becomes too high, too heavy for the earth beneath
it? What happens when the wind blows? Which direction will
it fall?

"Republican hearts are all aflutter over one quarter of
strong GDP numbers," writes Robert Freeman."But the 8.2%
third quarter growth was purchased on credit - the $374
billion budget deficit that was the largest in the
country's history. All indications are that next year's
deficit will be even larger, exceeding half a trillion
dollars.

"There is simply no magic to 'growth' under these
conditions. Any idiot with a hand full of credit cards
charged to the next generation's children can gin up the
short term illusion of prosperity. Until, that is, the
bills come due.

"George W. Bush inherited a $127 billion fiscal surplus but
ran through all of that and more in his first year. He has
turned a $5.6 trillion 10 year forecast surplus into a $3+
trillion forecast loss - an almost unimaginable reversal of
$9 trillion in only three years. And this, in an economy
that has grown for ten of the last twelve quarters.

"How, then, does a nation deal with debts that so greatly
outrun its ability to pay?" There are only a few ways, says
Freeman."All are unappealing. Most are calamitous."

Over the past 4 and a half years, here at the Daily
Reckoning we have chronicled the build-up of debt... and the
extravagant delusions that support it. Now, we look ahead
and wonder what happens next. When the tower of debt
falls... where does it land? Who gets hurt?

But we find no answers staring blankly into the space of
the future. Instead, we get our clues and hints by sifting
through the sediment of years past... and talking to dead
people.

We have dug down through the Bush years... and past the
Clinton and Reagan eras. We sliced our spade right through
the sordid debris of Nixon's time... and kept going through
the Great Society, WWII, the New Deal, the Great
Depression, and Roaring Twenties... and even down to the
founding of the Federal Reserve and WWI.

Of course, we've collected many entertaining nuggets in our
sifter:"We're all Keynesians now," said Nixon. Beware
"irrational exuberance," warned Greenspan. We will"make
the world safe for democracy," said Wilson. We stop and
giggle.

And then, we take up our tools and dig a little deeper. We
have reached the 19th century... and have wandered over to
sunny Italy. There, after the"risorgimento," or
renaissance of the Italian state under Mazzini and
Garibaldi, Italy joined the modern, democratic world.

There was a time when kings, princes, and emperors ruled
the world. Back then,"the people" knew their place. But in
this new, modern world it became necessary for rulers to
appease the masses with various programs designed to fool
them into obedience. Armed with ballots, everything seemed
possible.

Ortega y Gasset describes the scene:

"Whereas in past time life for the average man meant
finding all around him difficulties, dangers, want,
limitations of his destiny, dependence, the new world
appears as a sphere of practically limitless possibilities,
safe and independent of anyone... and if the traditional
sentiment whispered: 'To live is to feel oneself limited,
and therefore to have to count with that which limits us,'
the newest voice shouts: 'To live is to meet with no
limitation whatever and, consequently, nothing is
impossible, nothing is dangerous... '"

He might have been describing the mindset of the
contemporary American investor, who sees no limit to stock
prices and no risk anywhere. And so he was... but 70 years
ahead of his time.

Voting cannot really increase the masses' well-being. It
brings no more hogs to market... builds no more
gadgets... improves no meals... nor does it increase the
efficiency of the internal combustion engine. But the
masses will believe anything... and after Bismark and
Garibaldi came to believe that this new world of
assemblies, parliaments and election fraud offered a better
world. It then became the job of politicians to find a way
to appeal to these fantasies. This they did, in 19th
century Italy as in 21st century America, by borrowing
money - thus creating the illusion of spending power, out
of thin air.

From 1859 to 1925, the Italian government ran deficits over
46 years. In only 20 years was the budget balanced. The
lire was not a reserve currency; Italian politicos had to
do the best they could.

But the debts continued... and led, according to John T.
Flynn in his excellent book,"As We Go Marching," to war.
Not because anyone in particular wanted war... or debt for
that matter. It was just that one was an evolutionary
consequence of the other... and both were consequences of
the natural urges of democratic society.

"Out of the condition of Italian society sprang certain
streams of opinion and of desire that governments acted on
and people accepted or at least surrendered to with little
resistance, even though they may have not approved or even
understood them. Bewildered statesmen turned to government
debt as a device for creating purchasing power. No one
approved it in principle. But there was no effective
resistance because people demanded the fruits it brought.
Another was the ever-growing reliance of social-welfare
measures to mitigate the privations of the indigent, the
unemployeed, the sick, the aged. The instruments of debt
and spending became standard equipment of politicians. And
this need for spending opened the door to an easy surrender
to the elements most interested in militarism and its
handmaiden, imperialism."

"Out of Italy," he continues,"had gone definitely any
important party committed to the theory that the economic
system should be free."

Whenever the debts threatened to overwhelm the nation,
inventive politicians found new enemies to distract the
people and quiet opponents.

"If the country had no natural enemy to be cultivated, then
an enemy had to be invented," wrote Flynn.

In September of 1911, Italy went to war with Turkey. Then,
WWI provided fresh diversions. But after the war, the debts
mounted even higher. The pre-war debt was 15 billion lire.
When the war ended it was 4 times as much. But after the
war came new promises... and old-age pension
system... unemployment insurance... a national heath care
plan. The deficit reached 11 billion lire in 1919..then
rose to 17 billion in 1921. How could the debts possibly be
paid? Was there anyway out, people wondered?

It was at this point that a scoundrel worthy of the crisis
arrived on the scene - and proceeded to make things worse.
Benito Mussolini was the man for the job - energetic,
opportunistic... with no scruples or fixed positions to
hamper his movements. Mussolini, like Roosevelt, Bush, and
practically every politician elected to any office in the
entire 20th century, denounced the loose spending policies
of his predecessors... and then spent even more. He decried
the unbalanced budgets that had brought Italy to the brink
of ruin... and then piled new debt on the heavy end of the
scale. Taking office in 1921, he found himself with a debt
of 93 billion lire. By 1943, the New York Times estimated
that his debt had risen to 405 billion lire, with a deficit
for the year of 83 billion lire.

"Spending had become a settled part of the policy of
fascism to create national income," concluded Flynn,
"except that the fascist state spent upon a scale
unimaginable to the old premiers."

"We were able to give a new turn to financial policy,"
explained an Italian pamphlet from the period,"which aimed
at improving the public services and at the same time
securing a more effective action on the part of the state
in promoting and facilitating national progress."

The policy ended in disaster.

Spending on domestic programs shifted to spending on
military ones. Soon, Italy was at war again. In blood,
steel, shame, disgrace, and financial ruin... it settled its
accounts.


Bill Bonner,
The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - New Year's Resolutions, Part II (Bill Bonner) - Firmian, 12.01.2004, 19:53
  • Dt. Fassung vom Investor-Verlag - Firmian, 12.01.2004, 19:55
    • Danke- wie immer sehr interessant! Gruss (owT) - Tofir, 12.01.2004, 20:56
    • So eine erbauliche Lektüre braucht man zum Abend, danke. (owT) - prinz_eisenherz, 12.01.2004, 21:15
  • Frage: Quelle der Zahlen? - fridolin, 13.01.2004, 09:42
    • Re: Frage: Quelle der Zahlen? - Cosa, 13.01.2004, 10:44