The Daily Reckoning - Progress Backwards (Bill Bonner)

verfasst von Firmian, 28.02.2004, 11:25

-->Progress Backwards

The Daily Reckoning

Ouzilly, France

Friday, 27 February 2004

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

*** Greenspan warns of deficits... urges cuts in Social
Security and Medicare...

*** Best of all worlds gives way to the worst...

*** Lucky Jack Kerry... and other myths, frauds and fishy
business...

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

It's payback time.

The nation's huge budget deficits have become such a
problem that even Alan Greenspan has noticed. In his latest
public discourse, he urged Congress to cut Social Security
and Medicare payments as a way to close the budget gap. The
only other way would be to raise taxes. Either way, the
result will be lower living standards in America. Another
way to look at it... the huge credit boom, in which
standards of living have been boosted by borrowing from the
future, is now coming to an end.

Similarly, America's gargantuan trade and current account
deficits will have to be reduced, too. How? People have to
stop spending so much money or the dollar has to collapse.
Probably both. Either way, living standards in the U.S. go
down.

You will note, dear reader, that despite the drop in the
dollar of the last 2 years, the trade deficit is wider than
ever. China has kept its currency pegged to the dollar. As
the dollar dropped, China's yuan dropped right along with
it. Americans gained no advantage - at least not against
China. And since China has become so important to worldwide
exports, lower prices on Chinese-made goods tend to drag
down prices everywhere.

The latest employment report was discouraging. Initial
jobless claims are edging up. And layoffs rose in January.
Economists are puzzled. The economy is in full
recovery... how come employment is not increasing?

Low rates and tax cuts from the Feds were supposed to light
a fire under the economy. And they did - under the Chinese
economy! All that caught fire in America was debt, housing
and speculation - all hotted up by the Fed's tinder.
Americans go deeper and deeper into debt - lured by low
interest rates and EZ credit terms. Speculators go wild on
nanotech plays... and, thank God, the Chinese have not yet
figured out how to export houses to the U.S.

But as Greenspan looks ahead to what must happen, he sees a
world that looks to us like deflation, but deflation of a
particularly obnoxious sort. Not only must America's 50-
year credit boom implode into an epochal credit bust, but
this must happen at the same time the world's economic
power shifts to Asia. Imports from Asia drive down prices
all over the world... as globalized labor markets push down
the going rate for American workers. In Nicaragua, for
example, you see grown men working all day in the hot sun
for $5 a day. Benefits? Health care? Vacations? They hardly
exist.

They only way to compete would be to invest massive amounts
of money in capital-intensive industries and extensive
worker training - similar to what has happened in
Switzerland or Singapore. Instead, Americans squander their
capital in a spending spree. Wal-Mart replaced General
Motors as the nation's biggest employer... and GM now earns
its money not by making and selling cars, but by financing
activities. Meanwhile, young Americans leave the hard
engineering and science courses to foreigners and
concentrate on Gender Studies. The best of them set their
sights on Wall Street and hope to retire rich by handling
flaky IPOs or maybe starting a hedge fund to speculate in
junk bonds.

That is why there has been almost no growth in real
earnings of American factory workers over the last 30
years... and why American information-industry wages are now
being squeezed... and why it is so hard to add jobs - even
with interest rates at 50-year lows.

Greenspan & Co. cannot create jobs by stimulating the
economy. The titillation ends up overseas. Nor can they
bring prosperity to America by giving consumers more
credit; consumers already have far too much of it. Their
efforts only make things worse... drawing the nation into
bad habits of spending and speculation... and making the
pain of adjustment to deflation and a more competitive
world much more difficult. In the coming credit deflation,
Americans will likely have to pay their debts... while
investing in new industries. They will likely find their
standards of living falling... as their incomes fall, too.
They may find their houses falling in price... while their
mortgage payments rise. They should see the price of
imports (such as oil) rise... as their dollars falls in
value.

Deflation... with rising prices? Think about that a minute.
(We would think about it ourselves... except we are still on
vacation.)

Payback time will be the time when the Best of Worlds
becomes the Worst of Worlds... when the economy that seems
Too Good to be True becomes one that seems too bad to be
true... and when things that 'Couldn't Get Any Better' can't
get any worse...

*** Addison is enjoying his time in the sun... at the Supper
Club meeting in Puerto Vallarta. And so we are the sole
bearer of news for today, dear reader.

Here in France, it is cold. We arrived from the tropics and
found it snowing in Paris. Out here in the country, it
froze last night. The house is as cold and dark as a tax
collector's tomb.

*** A quick perusal of yesterday's market action yields
mixed results. Blue chips lost a little, while tech stocks
firmed - the Dow shaved 21 points from its tally to 10,580;
the Nasdaq drifted 9 points higher to 2,032.

*** And what's this? The GUDD trend - gold up, dollar down
- reversed for another day. As"anticipation grows for an
interest rate cut in Europe," says CBSMarketwatch, the
dollar continued its impressive bear market rally. The
Esperanto currency fell 0.5 percent to $1.2440 against the
greenback, while the dollar rose 0.6 percent to 109.62
against the yen.

But not everyone is convinced that the ECB will lower
rates."All this weakness is tied to political pressure
being applied to the ECB to cut rates," offers Chuck Butler
over at Everbank.

"Wednesday it was German Chancellor Schroeder, yesterday it
was the French Prime Minister, Raffarin... Look, I don't
care who they are and what title they have before or after
their respective name, the ECB is not going to bow to
political pressure. In fact, I think that all this
political pressure more or less seals the lid on Pandora's
box of rate cuts, as now the ECB would be seen as weak if
they cut rates... So, let the dollar bulls have their day in
the sun, but come next Thursday when the ECB meets, and
leaves rates unchanged, we'll all be able to kick sand in
the dollar bulls' faces!"

*** The dollar's sprightliness put a damper on the yellow
metal... but only a small one. April gold closed just 60
cents lower, at $395.50. Buy.

***"Warren is selling," writes colleague Dan Ferris.

"During the fourth quarter, Buffett sold his entire stake
in Duke Energy, Dun & Bradstreet, Great Lakes Chemical and
Level 3 Communications. Berkshire Hathaway sold 5 million
shares of The Gap (clothing retailer), lowering its stake
to 15 million shares.

"Buffett also sold big chunks of holdings in health-care
company HCA Inc., H&R Block, and industrial manufacturing
company Dover Corp.

"Buffett bought only one stock in the fourth quarter:
Cadbury Schweppes PLC."

Warren is selling something else, too - the U.S. dollar,
for the first time in his life.

***"Hey. Peak Oil [the hypothesis that the world really is
running out of oil] is on the front page of the N.Y.
Times," writes Byron King,"except that [the author,] Jeff
Gerth does not use the term in so many words. Still, for
several years the decline in Saudi production has been the
subject of inside discussion, certainly foretold by the
distant drumbeats coming out of the oil patch. Now, for
whatever reason (and what do you think that might be?), the
Saudis are willing to discuss it publicly.

"The West, particularly the U.S., does not have much time
during which to get its house in order. National debt,
industrial decline, problematic demographics and resource
depletion. All these horsemen are on the horizon, riding
our way.

"I remember the bumper sticker from when I was working for
Gulf Oil Company down in Texas in the 1970s:"If you don't
have an oil well, get one." Cute, back then. But it kind of
has a whole new ring to it, now that Saudi Arabia is coming
clean on its inability to serve as the world's swing-
producer in the future."

*** And now this about"Lucky Jack Kerry" from a source
we're not sure we can reveal, said to be a retired Rear
Admiral:

"I was in the Delta shortly after he [Kerry] left. I know
that area well. I know the operations he was involved in
well. I know the tactics and the doctrine used. I know the
equipment. Although I was attached to CTF-116 (PBRs) I
spent a fair amount of time with CTF-115 (swift boats),
Kerry's command.

"Here are my problems and suspicions:

(1) Kerry was in-country less than four months and
collected, a Bronze Star, a Silver Star and three purple
hearts. I never heard of anybody with any outfit I worked
with (including SEAL One, the Sea Wolves, Riverines and the
River Patrol Force) collecting that much hardware so fast,
and for such pedestrian actions. The Swifts did a
commendable job. But that duty wasn't the worst you could
draw. They operated only along the coast and in the major
rivers (Bassac and Mekong). The rough stuff in the hot
areas was mainly handled by the smaller, faster PBRs.

(2) Three Purple Hearts but no limp. All injuries so minor
that he lost no time from duty. Amazing luck. Or he was
putting himself in for medals every time he bumped his head
on the wheel house hatch? Combat on the boats was almost
always at close range. You didn't have minor wounds. At
least not often. Not three times in a row. Then he used the
three purple hearts to request a trip home eight months
before the end of his tour. Fishy.

(3) The details of the event for which he was given the
Silver Star make no sense at all. Supposedly, a B-40 was
fired at the boat and missed. Charlie jumps up with the
launcher in his hand, the bow gunner knocks him down with
the twin.50, Kerry beaches the boat, jumps off, shoots
Charlie, and retrieves the launcher. If true, he did
everything wrong.

(a) Standard procedure when you took rocket fire was to put
your stern to the action and go balls to the wall. A B-40
has the ballistic integrity of a Frisbee after about 25
yards, so you put 50 yards or so between you and the beach
and begin raking it with your.50's.
(b) Did you ever see anybody get knocked down with a.50
caliber round and get up? The guy was dead or dying. The
rocket launcher was empty. There was no reason to go after
him (except if you knew he was no danger to you just
flopping around in the dust during his last few seconds on
earth, and you wanted some daring do in your after-action
report). And we didn't shoot wounded people. We had rules
against that, too.
(c) Kerry got off the boat. This was a major breach of
standing procedures. Nobody on a boat crew ever got off a
boat in a hot area. EVER! The reason was simple. If you had
somebody on the beach your boat was defenseless. It
couldn't run and it couldn't return fire. It was stupid and
it put his crew in danger. He should have been relieved and
reprimanded. I never heard of any boat crewman ever leaving
a boat during or after a firefight.

"Something is fishy.

"Here we have a JFK wannabe (the guy Halsey wanted to court
martial for carelessly losing his boat and getting a couple
people killed by running across the bow of a Jap destroyer)
who is hardly in Vietnam long enough to get a good tan,
collects medals faster than Audie Murphy in a job where
lots of medals weren't common, gets sent home eight months
early, requests separation from active duty a few months
after that so he can run for Congress, finds out war heroes
don't sell well in Massachusetts in 1970 so reinvents
himself as Jane Fonda, throws his ribbons in the dirt with
the cameras running to jump start his political career,
gets Stillborn Pell to invite him to address Congress and
Bobby Kennedy's speechwriter to do the heavy lifting, winds
up in the Senate himself a few years later, votes against
every major defense bill, says the CIA is irrelevant after
the Wall came down, votes against the Gulf War, a big
mistake since that turned out well, decides not to make the
same mistake twice so votes for invading Iraq, but oops,
that didn't turn out so well so he now says he really
didn't mean for Bush to go to war when he voted to allow
him to go to war.

"I'm real glad you or I never had this guy covering out
flanks in Vietnam. I sure don't want him as Commander in
Chief. I hope that somebody from CTF-115 shows up with some
facts challenging Kerry's Vietnam record. I know in my gut
it's wildly inflated. And fishy."

***"We hiked over through the jungle," Jules explained,
when we met him and his brothers at Los Perros beach. Los
Perros is separated from Santana by a range of hills that
juts out into the Pacific. While we drove around them, the
boys took an old dirt road through the forest.

"We saw a couple monkeys. Edward started making monkey
noises at them. They must have recognized one of their
own....because pretty soon there were lots of them. There
must have been 50 or so. And they were getting closer to
us. Edward got scared and ran down the mountain."

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

The Daily Reckoning PRESENTS: On the sun-kissed shores of
Nicaragua, your editor enjoys the view... but cannot help
but contemplate its cost.


PROGRESS BACKWARDS
by Bill Bonner

"The mortgage-stones that covered her, by me, removed - the
land that was a slave is free..."

- Solon, recorded by Plutarch, boasting of reducing Athens'
debt burden by inflating the currency


"Two years ago, there was nothing on this beach. And
nobody. The guy who lived here with his family, he was just
a caretaker."

We were sitting on the porch of a beach shack, on a small
hill overlooking Los Perros beach. The beach was broad,
with white sand stretching out around a point of palm trees
and then continuing a mile or two to another clump of
hills. The effect of the green trees, white sand and blue
water was a bit like a huge flag laid out on the ground
before us.

We sat on tree trunks under a rusty tin roof, our backs
against the rough boards of the house, enjoying the warm
breeze.

"When I was a boy I used to come here to swim. This is the
best swimming beach... and there was never anyone on it."

But things have changed. Now, your editor is building a
house on the hills near the beach. His children played in
the surf as he and Antonio talked. And down the beach,
right on the high-tide mark, a developer has begun a group
of condominiums.

"I don't know what he was thinking," Antonio remarked."I
tried to tell him. Anyone who knows the ocean can tell that
he's too close. If we get a bad storm, the river will rise
on one side and the ocean on the other. He'll have real
problems."

The last real problems came about 10 years ago. A tidal
wave washed away one of Antonio's own houses. The old folks
say that such a wave only comes along once every 100 years.
The developer must have done the math; he, the buyers, and
even the insurers will be long dead before the next one
hits.

So progress continues. Now, at least, they put the footings
deep in the sand... and hope the building holds together in
high water.

All over Nicaragua, or at least everywhere we went, we saw
evidence of progress. In Managua, there are new roads, new
buildings, new restaurants, and shiny new gas stations on
nearly every street corner.

Out in the country, the progress one sees is yesterday's
progress, not tomorrow's. The invention of corrugated tin
roofing changed the look of the place. Where once the
traveler only saw graceful old houses with their clay tiled
roofs... or hovels covered with palm fronds... he now sees
cinder blocks and rusty tin. Everywhere he looks, he sees
tin in various stages of decomposition. The tin is meant to
be galvanized, of course, resistant to rain and weather.
But in this climate, Galvan's process seems to do little
good. Rarely do you see a piece of tin in good condition;
it is almost always brown from rust. Perhaps some day,
rusty tin will be regarded as quaint or picturesque. But
for now, like leprosy in a Siamese brothel, it corrupts the
beauty of the tropics all over the world.

Another friend has taken it upon himself to become the
Freddie Mac of one little corner of Nicaragua.

"You ought to require tile roofs," we suggested.

"I put $5,000 into a building fund," he had explained."I
told the staff that it was available to anyone who wanted
to build a house. I just did it to try to help these
people. I don't really care if I get paid back or not."

And so, by an act of charity, people who never owed a penny
to anyone are seduced into the consumer credit economy.
Previously, they might have spent the day fishing... happy
to catch only enough for dinner. Or, they might have traded
an extra fish with a neighbor and walked home with some
rice and beans, too.

But the new mortgagee has no choice; he must work in the
money economy in order to make his payments. Soon, he will
open an account at the local bank... and get a credit card,
too. He will borrow more to buy a car... and to install
central air conditioning. In a matter of time, he will not
be able to do without them. And then... what joy!... his
living standards will rise to those of Americans. He will
have all the comforts of modern life... and live paycheck to
paycheck to pay for them. His debts may rise to the level
of Americans', too... and like them, he will hope he never
has to pay them.

Progress comes in fits and starts... with occasional
tempests to carry off mistakes.

Plutarch tells how the debt burden in ancient Athens rose
so high that its"mortgage-stones" had begun to crush the
city. Solon, a famous politician from the 6th century B.C.,
found a solution..."for he made a pound, which before had
passed for seventy-three drachmas, go for a hundred; so
that, though the number of pieces in the payment was equal,
the value was less; which proved a considerable benefit to
those that were to discharge debts."

The old Solon may or may not have been the first; he was
definitely not the last. People build up debts on sunny
expectations... and hope some act of God will wash them
away. But it is not God, but man, who erases debt. And he
does so not by acts of nature... but by acts of fraud, that
is, by cheating lenders. Today, Americans put their faith
in Alan Greenspan and the Feds, trusting that these modern
Solons have mastered the art.

Antonio stood up and leaned against the porch
post... looking down the beach.

"If he sells those condos, he's going to build them all
down the beach. I guess we could turn this old place into a
bar. Then, at least the people who buy there will have a
place to get a cold beer."

"Put some clay tile on the roof," was our advice.

"We could keep it just as it is," Antonio continued."I
think people would like it....they could sit on these
stumps... The guy who buys the condo will be able to pay $5
and sit on this porch drinking beer just like the caretaker
used to."

The customer will look out on the beach... with its new
condos and new visitors. He can sit and wonder how he will
make his monthly payments... then, he will drink his beer,
served by a bartender with his own monthly payments to
make.

He may have paid $150,000 or so for the condo... maybe more.
But even if he paid a million, he'll never be able to enjoy
the beach that the caretaker had, all to himself, for free.

Is that progress, or what?


Bill Bonner
The Daily Reckoning

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• The Daily Reckoning - Progress Backwards (Bill Bonner) - Firmian, 28.02.2004, 11:25
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