The Daily Reckoning - America's Empire Of Debt (Bill Bonner)

verfasst von Firmian, 09.02.2004, 21:10

-->America's Empire Of Debt

The Daily Reckoning

Paris, France

Friday, 6 February 2004


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

*** Hesitation... which way will the stock market go? Do good,
dear reader... and you may do very well

*** Working on a Sunday... what will happen come Monday? The
President's quiescent resolve...

*** Too many houses? Gold below target price... and more!

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The market hesitates. It seems undecided. What to do next?
Delight the lumps by shooting up to even more absurd heights?
Or give the bears what they have been waiting for - the next
phase of what they believe is the Great Bear Market of 2000-
???

Or do nothing at all.

What is going on, we ask? What will happen next? What is the
Big Picture?

Here at the Daily Reckoning, we crawl up a pile of corpses in
order to get a better view. Jesse Livermore, Freeman Tilden,
Josef Schumpeter, Nikolai Kondratieff. We creep up over the
bones and stretch our necks:

"He is but a mean man who takes more than a transient
pleasure in successfully prophesying a catastrophe (though
Lucretius intimates that no man is above a touch of vanity),"
wrote Freeman Tilden from his house in Warner, New Hampshire
in 1935."So after a grim smile at the unhorsed cavalry of
commerce - those mounted captains of industry and
exploitation who had been accustomed to saddle and to spur
just long enough to forget what one does with feet; and after
a sincere ejaculation of pity for the wretched hoplites,
washerwomen and sutlers who had ignorantly pawned their
valuables to follow such leaders to the promised land of
Something-for-Nothing - I began to speculate upon the
principles that must lie behind such feats and such famine,
such weal and such woe, such quondam luxury and such present
misery. For there must be, I considered, if one could find
them, very definite rules that produce, from the identical
causes, identical results over two thousand years of written
history. And this unending procession from boom to crash and
from crash to boom is one of the most constant of the
phenomena associated with social man..."

Tilden went on... helping us understand the world of the
'30s... and maybe our world too:

"The world has several times, and perhaps many times,
squandered itself into a position where a total deflation of
debt was imperative and unavoidable. We may be entering one
more such receivership of civilization. It is a curious fact
that in all such periods, men and governments persist in
behaving, as creditors, as though the world were operating
for cash; and as debtors, as though the economy of pure
credit sufficed for all purposes. When one such passionate
belief encounters another, the result is never very happy."

The two periods - then and now - stand out like twin peaks on
a chart of debt. In the early '30s the residual debt of the
Roaring Twenties totaled more than 250% of GDP. Today, the
still-growing debt of the Dollar Standard Era reaches more
than 350%. At all other times - that is over the plains and
valleys of the rest of the century, debt to GDP averaged only
about 150%.

Still climbing up the mound of cadavers... we come
upon... what's this? One who's not quite dead yet! Here is Sir
John Templeton, over 90 years old, and still talking to the
Nightly Business Report:

"Usually God favors the people who try to do good. So when
you find that the crowd is desperately trying to sell, help
them and buy. When you find that the crowd is over
enthusiastically trying to buy, help them and sell. It
usually works out...

"All currencies, not only the American dollar but all
currencies, always go down, mainly because of democracy. The
voters will vote for a person who is going to spend too much.
And so you have to expect all currencies to go down. And just
recently, America has started to spend too much and the
currency has already gone down a lot. But other nations now
realize that and they don't want to lose out to America. So
they make their money go down, too...."

More on debt, the dollar, love and death... below...

In between-time, here's Addison (whose family has owned a
farm in Warner, New Hampshire since 1922) reporting from
London with more of the latest information:

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

Addison Wiggin, high above Tottenham Court Road...

-"It looks like the first thing traders will do next week is
sell the dollar," Xinyi Lu, chief strategist at UFJ Bank Ltd
in Tokyo told Bloomberg late last evening. Traders the world
over are preparing for what could be the first phase in a
very 'disorderly decline' in the dollar - otherwise known as
a rout.

-"I'll be in this Sunday and everyone will be in especially
early on Monday," said Rick Lloyd, head of G-7 currency
trading in Asia for ABN Amro Holding NV in Sydney."We see
plenty of reasons for continued dollar weakness," added
Trevor Dinmore, a currency strategist at Deutsche Bank AG in
London."Because of the event risk, you don't want to be
adding dollars before the G-7 meeting," he said.

- Group of Seven finance ministers and central bankers meet
on today and tomorrow in Boca Raton, Florida. Traders are
speculating they won't be able to agree whether they should -
or even if they could - halt the greenback's slide. The G-7
includes the U.S., Japan, Germany, France, Britain, Italy and
Canada... countries not exactly renowned for their chumminess.

- Even in the depths of an ether-induced coma, loyal Daily
Reckoning readers would be able recite the problem these
finance ministers will be addressing: a cocksure, arrogant
administration and a spendthrift Fed betting the rest of the
world has no better place to invest its money."Although Bush
administration and Federal Reserve officials acknowledge that
the rest of the world won't lend ever-increasing amounts of
money to the U.S. forever," opines the Wall Street Journal,
"they insist they don't see any imminent threat of a crisis."

-"Reliance on borrowed funds may not be sustainable," Easy
Al told German bankers in a speech last month. But then, he
added that"there is, for the moment, little evidence of
stress [Ha!]... The dollar's declining value is a sign of
waning foreign appetite for dollar-denominated assets, yet
inflation, the typical symptom of a weak currency, appears
quiescent."

- What really appears to be quiescent is the president's
resolve to stop spending money. In an effort to fund the
nation's wars and drug habits, the U.S. Treasury announced it
plans to sell $24 billion of three-year notes, $16 billion of
five-year notes and $16 billion of 10-year notes next week.
The offerings are one chunk of an expected record $177
billion in net government borrowing in the first quarter.
"It's unprecedented this much supply is coming into the
market," commented Andrew Lombara, a bond trader in New York.
"Obviously that's got to get placed somewhere"... or does it,
we wonder?

- These are the kinds of lingering doubts that will be
prompting currency traders to head into the office on Sunday.

- Never before has the national checkbook been scribbled in
at such a blistering pace. Dan Denning, pouring over the
budget numbers in his Strategic Insider blog, points out that
while most people harp on the president for increasing
defense spending, there's plenty of room for criticism
elsewhere, too.

- Citing the work of the Tax Foundation, Denning points out
that the administration has proposed $466 billion for non-
defense discretionary programs..."an increase of $123
billion, or 36%, above President Clinton's final fiscal
year."

-"Despite the fact that the administration would effectively
freeze discretionary spending in real terms in FY 2005," the
Tax Foundation reports,"discretionary spending has grown by
an average of 6.0 percent during the term. This is a faster
rate of real growth in discretionary programs than at any
period over the past 25 years."

- What's more, entitlement spending is set to grow by almost
5% per year during this term - a growth rate only exceeded by
George Bush, the First. The Tax Foundation:"As a share of
the budget, entitlement spending will top 57% of total
federal spending. This means entitlements are consuming 11
percent more of the budget than they did during President
Reagan's last fiscal year in 1989."

- Biding its time in advance of the G7 meeting, the dollar
limply settled in at $1.26 against the euro in New York
yesterday. What will happen come Monday? It's anybody's
guess, but we suspect it won't be pretty.

- And there's a lot at stake:"The United States has been
responsible for 96% of the growth in world GDP since 1996,"
writes our friend John Mauldin,"We are the engine that pulls
the world. However, to do it we have run ever increasing
trade deficits, which now run well over $500 billion. This is
an unsustainable trend. As the dollar continues it slide, at
some point the world will cease to finance our deficits at
today's level.

-"However, this presents the world's central bankers with a
dilemma. If they let the dollar fall too far, too fast or
somehow damage the U.S. economy, the main source of their
economic growth would be reduced. If the U.S. economy catches
cold, many of the nations of the world might also catch our
colds or develop economic pneumonia."

- The Fed's reserve printer Ben Bernanke reportedly blabbed
to a South Carolina business group yesterday that"economic
headwinds had been overcome" and that he expected stronger
job growth soon. Meanwhile, the BLS reported the number of
initial claims for jobless benefits in the last week in
January rose by 17,000 to 356,000 - the highest level in five
weeks.

- The Dow managed to tack on 34 yesterday to close at 10,496.
The S&P 500 added 3 points to 1,131 and the Nasdaq advanced
15 to 2,035.

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

Bill Bonner, back in Paris...

*** A disturbing little chart made its way onto page 8 of
this week's Barron's. Seems the stock of un-sold single
family houses is rising sharply. Not since the mid-'90s have
so many digs been for sale. The number was as low as 280,000
in 1997. Now, it is at 380,000. And new homes are being built
as fast as the pneumatic nail guns can put them together.

*** The Bank of England raised its prime rate a quarter of a
point yesterday. Naturally, the dollar fell again. Shrewd
move: borrow in dollars at low rates, deposit in pounds or
euros at higher ones. You'll earn a higher yield... and your
foreign currency will, most likely, go up against the dollar.

*** Gold is still below our target price... at $398.80 per
ounce. This might be the last time we will see gold below
$400 in our lifetimes. Or, it could be there forever.

*** How long before the world begins laughing at the dollar?

"This story circulated in Switzerland in the 70s," writes our
friend Gregor:"A person goes to buy a Monopoly set. There
are two models, the salesman explained. One sells for 80
Swiss francs and one for 50 Swiss francs.

"'What is the difference?' the buyer asks.

"'The cheaper model uses real U.S. dollars.'"

*** Not much family news to report:

Maria is waiting to see her face all over Paris when the new
Lancel handbag ad campaign appears... while trying out for the
part of a high-class hooker in a new French movie.

Jules is just trying to get through the 11th grade at the
American school without working too hard or taking too much
time out from the serious business of playing guitar and
watching movies.

Henry is looking forward to his trip to Rome, where he will
do his"profession of the faith" at St. Peter's.

Edward is looking for a new school, after the headmaster made
it clear that another institution might be more suitable for
him.

And the whole family is looking forward to an upcoming winter
vacation - which will take us to Latin America, as usual.
Students in France have a short summer vacation - they do not
get out until July - but they have several weeks off during
the school year.

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

The Daily Reckoning PRESENTS: Against the backdrop of
history, the 'accomplishments' of the 2nd Bush administration
appear even more spectacular... and scandalous.


SEX, LIES AND AMERICA'S EMPIRE OF DEBT
by Bill Bonner

A recent NYTimes provides a comment from David M. Walker,
Comptroller General of the United States.

"The Federal government's gross debt - the accumulation of
its annual deficits - was about $7 trillion last September,
which works out to about $24,000 for every man, woman and
child in the country," he announces."But that number
excludes items like the gap between the government's Social
Security and Medicare commitments and the money put aside to
pay for them. If these items are factored in, the burden for
every American rises to well over $100,000."

We add to Walker's lament:

One out of every 4 dollars spent by the federal government is
borrowed. And for every dollar that comes in the door from
income taxes, the feds borrow another 80 cents. Economists
used to worry about government using up the nation's savings.
But now Americans have no more savings to use. And still, the
nation that can't save a dime... sets out to save the entire
planet.

The cost is as monumental as the project. Taking out Social
Security surpluses, federal deficits are expected to be about
half a trillion dollars each year for the next ten years - or
$5 trillion in total (half of GDP). We put no exclamation
point following that last sentence, because the numbers
seemed to shriek without one. Still, America's economists are
deaf to the problem... just as its policymakers are dumb to
any solution. After all, we are reminded of the words of Dick
Cheney:"Deficits don't matter."

Myths, fraud, lies and claptrap.

Here at the Daily Reckoning, we do not so much lament the
humbug... we enjoy frolicking it in. But early this week, we
were suddenly struck by a feeling of such abject
pointlessness we had to stop and order a drink.

"Of course, it is all phony," Merryn Somerset Webb, editor of
MoneyWeek magazine, had explained."But our lives are made up
with this stuff."

'Get over it,' she might have added.

We drank and reflected on this. We realized that we had to
come to terms with it. We could not write another Daily
Reckoning or mock a single economist until we had made peace
with this unsettling realization. For it was true: it is all
illusion. And if we were to strip away all the vain, pompous,
foolish, puerile... and lovely... illusions, what would be
left? We would be banishing all the sentimental and
terrifying romance from life. If we never spoke again to a
vain charlatan or pompous mountebank, we would spend the rest
of our days in a sort of self-imposed Trappist isolation.
What fun would that be?

No, dear reader, God has placed us all in His great comedy so
that we may play our parts. And so we get on with it with
neither a snicker of contempt nor an open-mouthed awe of the
naïve believer... but with the mischievous smirk of the man
who is ready to do his duty... and enjoy it.

Some are dangerous illusions; others are welcome ones, we
conclude. When your wife tells you she loves you, you might
as well believe it as though it were Holy Writ. What do you
gain by questioning motives or deconstructing meaning?

Every illusion has its price, of course. You will as pay
dearly for a chimera of love as for all others... but you will
pay in kisses and caresses, a currency better spent than
saved.

But other illusions are more costly; some are fatal.

"When the government tells you do to something," said a
French friend at lunch yesterday,"it is usually a good idea
to do the exact opposite."

We thought about the advice recently offered by Fed
officials. Spend, spend, spend... advised Robert McTeer,
pointing to a shiny, new SUV."Preferably a Navigator."

Borrow, borrow, borrow... suggested Alan Greenspan, pointing
to his lower EZ credit interest rates.

Print, print, print... added Ben Bernanke, pointing in the
direction of the U.S. Bureau of Printing and Engraving.

Worse advice has been urged on voters. Every election
campaign brings out a plague of it, like a nasty species of
4-year locust. Our friend had in mind the period, more than
60 years ago, when the Vichy government summoned Jews to
railroad stations, where they would be shipped to 'work
camps' in the East. And of course, every war comes with its
incitations to murder and mayhem.

Each branch of government has its own particular expertise.
Politicians specialize in bad voting advice. The Fed gives
ruinous financial advice. And the Pentagon offers young men
and women often-lethal career suggestions.

But here at the Daily Reckoning, money is our beat. And so we
focus on America's leading economic illusion-du-jour:
deficits don't matter. Here, once again, we climb a pile of
bones to get a clearer view. This is not the first time a
nation has gone head-over-heels into debt.

"Since Prime Minister Sir Robert Walpole's introduction of
the funding system in England during the 1720s," writes H.A.
Scott Trask for the Mises Institute,"the secret was out that
government debt need never be repaid... Walpole's system
proved its worth in financing British overseas expansion and
imperial wars in the eighteenth and nineteenth centuries. The
government could now maintain a huge peacetime naval and
military establishment, readily fund new wars, and need not
retrench afterward. The British Empire was built on more than
the blood of its soldiers and sailors; it was built on debt."

The new system was slow to catch on in America. Jefferson was
against it. In 1789, in a letter to James Madison, he
wondered whether"one generation of men has a right to bind
another." His answer was 'no.'"The earth belongs in usufruct
to the living," he concluded."No generation can contract
debts greater than may be paid during the course of its own
existence."

But dead men don't talk and the unborn don't vote.
Politicians in America - just as those in Britain, Italy and
Germany - gradually came to see that they could get the
benefits of spending money in the present, while passing on
the debts to the next administration and the next generation.
Then, as now, war provided cover for excess spending. First,
there were the debts from the Revolution itself... which were
paid down quickly. Then came the War of 1812, War with
Mexico, and the Civil War. Each time, spending was increased,
debts were taken on, and then... after the war... the debt was
paid down, or paid off completely.

WWI saw federal debt explode from $3 billion to $26 billion.
Presidents Harding and Hoover paid it down to $16 billion.
But then came the Depression, Roosevelt, and WWII. By 1945,
federal debt had reached $260 billion. But then came
something new. The war did not end. It continued as"The Cold
War"... which meant, rather than paying down the debt, it was
increased.

Under Ronald Reagan, America's debt seemed on course for
Mars. Less than $1 trillion in 1980, it soared to $2.7
trillion before Reagan left office. One might have expected
some relief after the Cold War was over. But the habit of
getting something for nothing is hard to break. By the time
George W. Bush took office, the debt had risen to $5.7
trillion.

Mr. Bush, a conservative, might have seized the opportunity
to pay down the debt. The nation was at peace and expected
huge budget surpluses. He promised as much when he stood
before a joint session of Congress in 2001 and announced his
budget.

"That night," Paul O'Neill tells us in his book with Ron
Suskind, The Price of Loyalty,"Bush stood before the nation
and said something that knowledgeable people in the U.S.
government knew to be false."

But the paradox was there. Generations of Republicans had
promised balanced budgets. Only war had permitted them to
wriggle off the hook and continue running up debt. With no
war, the Republicans just squirmed. Then came a remarkable
event: 9/11. All of a sudden, another, strange war was
announced... a war on an enemy no one could find on a map... a
war on"Terror." Now, the war, the spending and the debts
could go on forever.

In the following 24 months, the Bush Administration added
more debt to the nation than had been built up in the first
200 years of its existence. Jefferson and the generations of
dead men who paid their debts must weep in their coffins. The
tadpoles of the unborn must shiver.


Your editor,

Bill Bonner
The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - America's Empire Of Debt (Bill Bonner) - Firmian, 09.02.2004, 21:10
  • Dt. Fassung vom Investor-Verlag - Firmian, 09.02.2004, 21:14
    • Re: Dt. Fassung: Gruss und vielen Dank. - Tofir, 09.02.2004, 22:27