-->Nepal

The Daily Reckoning

Paris, France

Tuesday, 23 September 2003

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*** The end of forever... yen soars... dollar falls... gold
up $5.40

*** Chinese aren't buying Treasuries the way they used
to...

*** Fastest growing economy in the G7?
Japan!... Mussolini... and more...

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When does forever end, dear reader?

Yesterday, we said 'the dollar will fall'... and it did
fall.

"Yen soars after G7" was how Reuters described the event.
An"Asian Awakening" was the phrase used by the Financial
Times.

But even here in Europe, people seem to be rubbing their
eyes and shaking off summer's sleep. The euro rose too,
ending the dollar's rally.

What will happen next?

"An orderly depreciation of the dollar," is what the world
hopes for. A lower dollar would help ease America's debt
burden... it would lower the current account deficit... it
would give American manufacturers a little boost in global
commerce. But hoping for something doesn't make it happen.

"History tells us that the U.S. dollar has only just begun
its downward descent," explains Stephen Roach."On a broad
trade-weighted basis, the dollar (in real terms) has
fallen about 8% from its early 2001 highs. In a full-blown
current account adjustment, a drop of around three times
that magnitude can be expected - not all that different
from the 30% real depreciation of the dollar that occurred
in the late 1980s when the current-account disequilibrium
was far less acute. In the end, a lopsided world has no
choice other than to accede to a weaker dollar."

We note that the last time the dollar began a serious
decline was before Alan Greenspan became Fed chief and
whilst the U.S. still had a positive net overseas credit
position. Until the mid-'80s, more was owed to the people
of the U.S. than was owed by them. Now, Americans are
about $3 trillion indebted to the rest of the world and go
deeper into debt by $1.7 billion every day.

But what did investors think? Did they think the world's
financial system could get further and further out of
whack forever? Asia's balance of trade with the U.S. is
getting more and more lopsided... with China's exports, for
example, growing at almost 40% per year. Reserves of
dollars in that part of the world are piling up. Already
estimated at more than $1 trillion, they're rising by 20%
per year.

Meanwhile, as we laboriously illustrate in chapter 7 of
Financial Reckoning Day, the dulcet voice of debt has
seduced millions of Americans into ruining themselves.
Since 1975, for example, personal bankruptcies are up
400%. Foreclosures have risen 350%.

But it was supposed to be eternal, wasn't it? The Dollar
Standard system - which allowed Americans to spend money
they didn't have - worked so well; people saw no reason it
should ever end. Why else would consumers go deeper into
debt... even with unemployment rising? Why else would they
lend money to the U.S. government for 10 years and, after
inflation, get almost nothing in interest? They must all
think nothing can go wrong. Or why would they buy stocks
at 50 times earnings unless they believe that everything
must go right, forever? At a P/E of 50, we remind readers,
an investor gets his money back in half a century, by
which time the average investor has found eternity.

"The path that the Fed and the central banks of the world
has put us on, is the path to bankruptcy, and I refer
specifically to bankruptcy of the currency," wrote Richard
Russell yesterday."You can't run negative annual budgets
of half a trillion and negative trade balances of half a
trillion and still have a stable currency. It's not
possible. The way we are going has put the dollar on the
path to either steady attrition or outright collapse."

Things get out of whack from time to time. Often, they
stay out of whack for so long people begin to think the
trend is eternal. But things do not stay out of whack
forever.

Otherwise, out of whack would be normal and normal would
be out of whack. Eventually, one way or another, they tend
to go back into whack.

We may not have come to the end of the world, dear reader,
but at least we seem to be approaching the end of forever.

Over to Eric in New York...

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

Eric Fry reporting from Wall Street...

- The dollar stumbled again Monday morning, which knocked
the legs out from under both the stock and bond markets.
The Dow Jones Industrial Average dropped 109 points to
9,535 and the Nasdaq Composite fell 1.6% to 1,874.
Treasurys also slumped, with the 10-year Treasury note's
yield climbing to 4.24% from 4.16% on Friday.

- Meanwhile, the ghoulish gold market delighted in the
dollar's misery by rallying $5.40 to a 7-year high of
$388.30 an ounce... Gold bugs may wish to send thank-you
notes to the G-7 ministers.

- The G-7 concluded its weekend confab in Dubai by issuing
a communiqué calling for 'flexibility' in exchange rates.
To the casual observer of global monetary affairs,
'flexibility' may seem like an innocuous term. But to the
cognoscenti - and to currency traders worldwide -
'flexibility' means a freely floating Chinese yuan and a
non-manipulated Japanese yen, both of which mean a lower
U.S. dollar.

-"We emphasize," the G-7's communiqué declared,"that
more flexibility in exchange rates is desirable for major
countries or economic areas to promote smooth and
widespread adjustments in the international financial
system, based on market mechanisms."

- Unfortunately, the announcement triggered anything but
"smooth adjustments." On Monday morning, dollar-holders
trampled all over one another running for the exits. The
greenback plunged 1.6% against the yen to 112.13, and
slumped nearly 1% against the euro to $1.1472.

- The dollar's selloff was not a complete shock, however.
In the Daily Reckoning's Weekend Edition, we remarked,"No
amount of finger-wagging from officialdom will alter the
dollar's fate. On Monday, the dollar will be just as
dangerous a currency to own as it is today. It will be no
less reliable a store of value, and gold will be no less
reliable a hedge against the dollar's demise." But even
your dollar-bearish New York editor was surprised to see
the G-7's politely worded communiqué deliver such a savage
beating to the U.S. currency.

- Ironically, the dollar's decline comes at the urging of
the same nation that prints it. And this irony is not lost
on the world's largest dollar holders. Already, many Asian
central banks are exploring ways to lighten up on their
U.S. dollar holdings.

-"The Chinese aren't lapping up our treasury paper for
its great investment attributes," quips Stephanie Pomboy
of MacroMavens,"but [rather] because of a mechanical need
to maintain the Yuan/dollar peg... Given the formidable
shortcomings of maintaining this peg, it is no wonder why
there is a clear movement afoot across Asia to wean itself
from its dollar dependence. The EMEAP (the Executives
Meeting of East Asia and Pacific Central Banks) has
launched an Asian bond fund to recycle Asian central bank
dollar reserves into dollar-denominated Asian debt...

-"China's suggestion that it is considering a peg to a
basket of currencies is just another piece in its larger
puzzle... one which will ultimately find Asia unleashing
itself from its dollar tether. Of course, this will not
happen overnight. But as Asia comes together to deflate
the bubble we have foisted upon it, the sun will set on
dollar hegemony..."

- Such a sunset would be particularly unpleasant for us
Americans. Continuing dollar weakness could exert a
disastrous influence over international capital flows. As
it stands currently, America borrows hundreds of billions
of dollars from foreigners every year and racks up half-a-
trillion-dollar trade deficits every year, without ever
worrying about when, if ever, the rest of the world will
tire of funding our Texas-sized capital requirements. But
the Day of Reckoning may yet arrive, even if - like an
Italian train - it does not show up exactly when it is
expected.

-"This country is privileged to consume more of the
world's goods than it produces and to finance the deficit
with dollars," notes James Grant, editor of Grant's
Interest Rate Observer."International finance can be a
difficult subject, but there is nothing abstract in the
piles of empty shipping containers rising at America's
deepwater ports or in the mounds of dollar-denominated
securities accumulating in the monetary warehouses of
foreign, mainly Asian, governments. The containers stack
up in America because this country imports much more than
it exports. The securities accumulate abroad because the
supply of dollars is greater than the private demand for
dollars."

- This bizarre state of affairs is very handy for a
consumption-heavy, debt-heavy, savings-lite country like
the U.S.."Lucky us!" we might say. But how much longer
until our luck runs out? Given America's massive debts and
massive dependence upon foreign creditors, the range of
appropriate responses could include anything from a
simple,"Thank you," to a more exotic"Arigato" or"Xie
xie."

- But instead of thanking the Japanese and Chinese for
funding our deficits, our Congress says,"Raise tariffs!"
and our Treasury secretary says,"Lower the dollar!" From
their lips to the foreign exchange market's ears...

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

Bill Bonner, back in Paris...

*** Guess which country has the fastest-growing economy in
the G7? Japan! GDP grew 4% in the 3rd quarter in the land
of the raw fish eaters. And now Bloomberg tells us that
the Japanese - who are the world's biggest holders of U.S.
Treasury bonds - are losing interest in dollar assets. Oh
là là... What if they decide they don't need so many
Treasuries, after all?

*** A dear reader comments on Mussolini:

"[John T. Flynn's] 'As We Go Marching' is an undiscovered
classic. Sadly, it is out of print. I see just a few
copies for sale on the Amazon.com secondary market. The
two copies in my local library have not been checked out
more than three or four times in the past twenty years. I
can only wonder how few college courses on U.S. history or
government assign the book. What a loss to inquiring minds
everywhere.

"Adding to John Flynn's description of Il Duce, here is
more on Mussolini. I think this is important to know, in
understanding how he came to power post-WWI. Mussolini was
a widely known Socialist journalist in the pre-WWI days.
He ran his own publication that had a narrow but
influential readership. He was an Italian irredentist with
respect to the city of Trieste, and the Isonzo-Caporetto
region, and strongly advocated Italy's entry into the War
to fight the Austrians.

"Soon after Mussolini's war-wish came true, he applied to
the Italian Army for enlistment. Due to his leftist
leanings and political opposition to the incumbent
political power, the Italian Army hierarchy refused his
application and told him to await any call-up of his
Reserve unit, 'Class of 1884.' Thus in the early days of
the war, Mussolini endured the insults of his
contemporaries (what is the Italian word for
'chickenhawk'?), having advocated going to war but then
keeping a civilian job in the rear. But the War was not
quick or easy, contrary to the early handicapping.
Mussolini got his wish when his unit was recalled about
six months into the fighting.

"Because he was well educated, Mussolini wanted to be an
officer. But the Army commanders had no need for Socialist
officers. Mussolini was given the rank of Corporal. His
Commanding Officer offered him a job as regimental clerk,
but Mussolini replied, 'I joined the Army to fight, not to
type.' He went to the front lines with his unit of fanti,
mostly peasants from the south of Italy. Mussolini's first
encounter with the Austrians was as part of a bayonet
charge, met by Austrian machine guns. The fight dissolved
into an exchange of rifle sniping and hand grenade tosses.
After several hours, Austrian sappers blew up the Italian
trenches, killing over 30 of Mussolini's comrades before
his eyes.

"Isonzo was the location of the numerous battles of the
Caporetto. Mussolini made a name for himself as a hero in
Italy's tragedy. Casualties were in the hundreds of
thousands, including a few of my mother's uncles. What
Verdun was to Britain, Isonzo was to Italy - a generation
broken on the hard rocks of the Alpine slopes...

"Are we pushed by history, or pulled by Destiny? Maybe
both? The Battle of Isonzo was what it was. But had
Mussolini died at Isonzo, what would have happened to
Italy and the world? It is worth pondering, because in the
U.S. expedition to the Middle East today, what might
happen due to fortune and chance of even a single person?
Osama bin Laden could rapidly become Osama bin Shot-In-
The-Head by a Navy SEAL sniper. Game, Set, Match to the
USA in that part of the world. Same thing with Saddam
Hussein. One afternoon, a couple hundred Army Rangers
surround a small house in the town of El Crapola. A few
hours later, a helicopter delivers the corpse of Saddam to
the Morgue in Baghdad. Spin that one, Governor Dean. G. W.
Bush will take another victory lap around the aircraft
carrier. China will buy more bonds. Wal-Mart will buy more
stuff from China. And John Flynn's books will still be on
the shelves of libraries, waiting for their moment in the
modern sun.

"But back to Mussolini...

"Mussolini's efforts in this combat earned him a field
nomination from his Commanding Officer to an Officer's
Training Program. About one week after reporting for
training, Mussolini was summarily dismissed from the
program at the order of the Commando Supremo of the
Italian Army. As before, there was no room for Socialist
rabble-rousers in the Army.

"Mussolini returned to the front lines at the rank of
Sergeant. Not long thereafter, he was loading a mortar
when one of the rounds detonated prematurely. Mussolini
was severely wounded, suffering over 40 schrapnel wounds,
a smashed shoulder and almost losing a leg. He was
evacuated to the rear, where he almost died after several
medical corpsmen refused to treat him because they viewed
him as 'the man who started this damn war.' But he
survived, was discharged, and returned to the rear as a
war hero. Adding to his luster, Mussolini's son (by his
mistress) was killed in combat and awarded the 'Gold
Medal, Posthumous' for bravery.

"During the course of the fighting with the Austrians in
the Julian Alps, the Italian Commando Supremo determined a
need for specially trained mountain assault troops. Units
were raised to suit this purpose, called arditi ('the
daring ones'). These were men of a certain violent
predisposition, screened from applicants for just that
purpose and trained to be fearless. They had a unique
uniform of brown mountaineer pantaloons, black shirt, fez
hat and all carried a long trench knife.

"Tens of thousands of these fighters were fed into the
Battles of the Caporetto, almost all who survived being
utterly brutalized during the vicious combat.

"Post-war, these arditi became a social problem for Italy.
Quickly mustered out at the conclusion of hostilities,
they returned to a broken and bankrupt land, with no
prospect for jobs. Former arditi rapidly formed bands and
associations, and Mussolini quickly organized and
capitalized on these fighters without portfolio. Mussolini
appealed to their sense of betrayal, urging the arditi on
with talk of how they had been 'abandoned by their
nation.' These arditi became the political muscle for
Mussolini, the backbone of his ascendency, his"black
shirts" as we know them today. The arditi formed the
nucleus of Mussolini's rise to power, through whose
efforts he captured the pre-existing institutions of the
Italian government. With just a few minor changes to the
pre-existing institutions, Mussolini was in a position to
label his administration as a 'Fascist' form of
government.

"I think that this level of detail is what John Flynn does
not tell you, when he says that absent the War some other
person might have come to power in Italy, and governed
with a different form of 'fascism.' Absent the War,
Mussolini would have remained a Socialist crank on the
fringes of power."

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The Daily Reckoning PRESENTS: Dr. Marc Faber ruminating on
a rainy day in Nepal...


NEPAL
by Marc Faber

I have just spent a week in Nepal, following my own
suggestion, which I made last year at Christmas, to visit
a new place at least once a year. Nepal is one of the
world's most scenic countries - it is also one of the
world's poorest.

Entirely landlocked, Nepal is squeezed between India to
the south, and Tibet (now China) to the north. Its GDP per
capita is just US$240 - the third-lowest in Asia. The life
expectancy of its population, 60 years, is among the
lowest in the world (Botswana has the lowest at 36 years;
Japan the highest at 81.5 years), and its literacy rate of
just 42% is also one of the lowest in the world.

Nepal's capital city of Kathmandu offers many unusual and
impressive cultural sites, which suggest some wealth in
earlier times. Kathmandu also has some charm and a
pleasant atmosphere. Rapid population growth over the last
100 years became a burden, as a growing number of people
had to be supported by the same quantity of land, which,
in the absence of industry and commerce, simply
impoverished the country. In addition, while certainly
poor, Nepal's population of 22 million distinguishes
itself by having supplied the world with some of its
toughest and most courageous warriors, who form the
renowned Gurkha batallions of the British and Indian
armies and guards, who are nowadays widely employed in the
Middle East. (It is worthy of note that Nepal has never
been colonized or conquered by any of its formidable
neighbors.)

After spending a few days in Kathmandu, we flew to
Pokhara, which is situated beneath the Annapurna and
Dhaulagiri mountain chains and, in clement weather, offers
sensational views of the mountains. Unfortunately, we were
only able to admire them from postcards and photos,
because it rained solidly for the four days we stayed in
the town. The continuous rain provided me, however, with
the opportunity to read about Nepal and its history and
also to think about the global economy and the financial
markets.

While in Nepal, I had some very mixed feelings, altering
between being depressed by the poverty of some of its
farmers, who live in small and remote villages high in the
mountains, without electricity or water supply in their
homes (agriculture - predominantly rice and corn - makes
up 40% of GDP, compared to 1.4% in the United States) and
moments of high mood because of the friendly nature of the
Nepalese, who seem to be quite content and happy even
while being poor and conscious of the privileged lives
most of us enjoy in the Western industrialized countries.

I also had some time to ponder on the future of Nepal and
on a question I was recently asked by a reader, who wanted
to know if the Asian stock markets would suffer should the
U.S. stock market experience a serious correction or a
crash in the next few months. This question prompted me to
look at some very simple economic, financial, and social
statistics in Asia, and to compare them to the rest of the
world. My conclusion? The long-term favorable potential of
the Asian region may remain intact even if the Western
economies were to weaken once again. In fact, a decoupling
of the Asian stock markets from the performance of the
U.S. is a distinct possibility.

Officially, the U.S. has a GDP of about US$11 trillion,
while China's GDP amounts to US$1.1 trillion and India's
to about US$500 billion. Moreover, whereas the world's GDP
stands at about US$32 trillion and the advanced economies
have a combined GDP of US$25 trillion, the emerging Asian
economies (including China and India, but excluding Hong
Kong, Japan, Singapore, South Korea, and Taiwan -
countries that are classified as advanced economies) have
a GDP of just US$2.2 trillion. However, if we look at some
production figures, it becomes obvious that the U.S.
economy is nowhere near ten times as large as the Chinese
economy, or more than 20 times the size of India's GDP.
Neither do the G7 countries have a GDP ten times larger
than the emerging Asian countries.

According to The Economist's World in Figures 2003
directory, China ranks as the world's largest producer of
cereals, meat, fruits, vegetables, rice, zinc, tin, and
cotton. It is the world's second-largest producer of
wheat, coarse grains, tea, lead, raw wool, major oil
seeds, and coal, the world third-largest producer of
aluminum and energy, and ranks between fourth and sixth in
the production of sugar, copper, precious metals, and
rubber. India ranks among the top three producers of
cereals, fruits, vegetables, wheat, rice, sugar, tea, and
cotton. Indonesia ranks among the top four producers of
rice, coffee, cocoa, copper, tin, and rubber; while
Thailand is the world's largest producer of rubber, and
Vietnam the world's second-largest producer of coffee.

"So what?" some readers may think, since these are just
commodities... and thus are 'irrelevant' in post-
industrialized societies!

However, if we consider that China is already the world's
largest manufacturer of textiles, garments, footwear,
steel, refrigerators, TVs, radios, toys, office products,
and motorcycles, just to mention a few product lines, and
if we then add the industrial production of Japan, Taiwan,
South Korea, and India, we get a totally different picture
of the size of the Asian economies than is suggested by
statistics.

Why? Nominal GDP figures don't take into account the
difference in the price level between different countries.

In fact, statisticians, in order to account for the fact
that in some countries the price level is far lower than
in the Western industrialized countries, have calculated
the GDP level based on purchasing power parities (PPP).
And while I have some doubts about the methodology of PPP-
adjusted GDP figures, it is nevertheless interesting to
see how large the emerging economies are when based on
this measurement: Asia - including China, Japan, India,
South Korea, Indonesia, Taiwan, Thailand, the Philippines,
Pakistan, Bangladesh, Malaysia, Hong Kong, and Vietnam -
has a PPP-adjusted GDP of US$14 trillion, which is 50%
larger than the U.S.'s PPP-adjusted GDP of US$9.6
trillion.

In fact, by this measurement, Asia, in which we should
probably also include Central Asia, Australia and New
Zealand, as well as parts of Far East Russia, would be by
far the world's largest economic bloc. Just taking
manufacturing output into account would show that the
combined outputs of Japan and China alone, not to mention
those of South Korea, Taiwan, and India, would exceed that
of the U.S..

"So what?" the skeptics will say again."Europe and the
U.S. have a thriving service sector, which is far more
important than the manufacturing sector." But the point
about the service sector is that in Asia, with its low
urbanization rate, many services never enter the GDP
statistics. In Nepal, I took some interest in the economy
of a remote mountain village of around 25 houses. I saw
that most services in this small community never involved
any cash transaction and, therefore, could not have an
impact on GDP. Although land is individually owned,
villagers harvest their small rice fields together. When a
new house is built, everyone helps with the construction.
Or, when a house changes ownership, which is most
infrequent and usually only happens when people get
married or pass away, no real estate agents, legal
documents, cleaning services, and other real estate-
related services are required.

In a developed country, each time an existing home is
sold, it boosts the service sector's component of GDP, as
commissions and fees change hands.

Now, it ought to be obvious that if existing home sales in
the U.S. increased overnight by, say, ten times and people
bought and sold homes at the pace they traded stocks
online a few years ago, then GDP would be boosted
significantly as a result of a rise in real estate
transaction-related service income. But what would have
been added to the wealth of the nation?

In poorly developed Nepal, most services in rural
communities don't involve any cash payment and therefore
have no impact on GDP figures; whereas in our mature,
developed, and highly differentiated economies, such
services tend to lift the GDP figure. I should like to
stress that one should not underestimate the importance of
a well-developed service sector - health care, financial
institutions, distribution, retailing, etc - in maximizing
the potential of an economy, but in our developed and
industrialized countries, the service sector may somewhat
overstate GDP. By contrast, in emerging economies, the
underdeveloped service sector may understate the size of
the economy.

Just think of it this way: I am a very poor GDP booster,
since when I travel I never eat breakfast, I clean my own
shoes, do my own laundry and shave myself, and I don't use
all the available towels in my bathroom and, for
ecological reasons, don't change them daily. And since I
have few hairs left on my head, I hardly ever require the
services of a barber. Compare this with a fellow traveler
who daily employs the services of a shoeshine boy, a
laundry, and a barber, eats five times and changes his
towels twice and, instead of walking one block to an
appointment, takes a taxi.

That such a person enlarges GDP and contributes
statistically to economic growth ought to be clear, but
what economic value has really been added?

I admit that some economic value might have been added if
the shoeshine boy, the laundry, etc, use their income from
our fellow traveler to build a modern, well-functioning
electric utility, which then improves the power system and
eliminates power blackouts. But if the recipients of this
income just turn around and use their income themselves to
eat five times a day and to use the very same services
from each other, then precious little value has been added
to the system.

At Kathmandu airport on the way back from Nepal, I almost
went berserk, since it took about an hour to clear
immigration and security checks. I cursed poor countries
like Nepal, which have an underemployment rate of at least
50% and more likely even higher, for not putting
sufficient immigration officers and security personnel in
place to ensure that foreign visitors, which are Nepal's
most important revenue source, can arrive and leave
satisfied with their experience of the country and in good
spirits.

But then I remembered that, when I arrived in Chicago in
late July, it took me more than two-and-a-half hours,
waiting in line in a packed and totally disorganized
arrivals hall, to pass through immigration. When I
complained to an immigration officer about this deplorable
state of affairs, I was told that the immigration
department was understaffed because of the State of
Illinois employee cutbacks and that all the immigration
officers who were on duty that day were already doing
overtime work. But not to worry, as in many other
businesses, these cutbacks will show up in higher
productivity figures in U.S. economic statistics and boost
the stock market.

But what about the consumer's productivity, who is forced
to wait in line for two hours? His productivity is, of
course, conveniently never measured.


Warm regards,

Marc Faber,
for The Daily Reckoning

P.S. It would be my guess that we have, in Asia today, the
largest economic bloc of any region... and that the current
ongoing economic expansion may already have replaced the
United States as the engine of real growth for the global
economy.

Asia is a large producer of resources, but it still
requires the import of an increasing quantity of
industrial commodities, including copper, cotton, crude
oil, iron ore and food. In my opinion, the Asian block is
largely responsible for the strength in commodity prices
we have seen over the last two years and which is likely
to continue for the foreseeable future - particularly if
economic growth is now picking up in the industrialized
countries, including Japan, as most experts currently seem
to suggest.