-->Poor Democracy

The Daily Reckoning

London, England

Wednesday, 23 June 2004

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*** What's up with the 'Trade of the Decade?'

*** 'Pseudo wealth' is not the same as the real
thing... borrowing is not the same as earning... spending is
not the same as saving...

*** The Great Enabler... his real purpose. Starvation in
China... and more!

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How is our 'trade of the decade' doing? Well, not bad.
Nothing much has happened. It is doing just fine, in other
words.

Long-time Daily Reckoning sufferers will recall our lazy
man's way to wealth - just make an investment decision once
every 10 years. Then, turn off the television, cancel your
subscription to Money Magazine, and turn your attentions to
things that really matter - women, and drinking, for
example.

Our 'trade of the decade' was announced in the year 2000.
'Sell stocks, buy gold,' we said. At the time, stocks were
higher, especially Nasdaq stocks, and gold was lower. So,
we're ahead. But we're not rich. The Dow lost about 2,000
points. Gold rose about $100. Big deal. You can still get
26 ounces of gold for one Dow (the combined value of the
Dow stocks). A quarter of a century ago, it was one-for-
one.

The real payoff, we suspect, still lies ahead. We don't
know what is coming, but we greatly doubt it will include
higher stocks and lower gold. It is one of those rare times
when people have never been more sure that nothing will
happen... thus greatly increasing the odds that if something
does happen - it will pay off big for those who take a
chance on it.

"Stability causes instability," said economist Hyman
Minsky."There's a crime for every purpose under heaven,"
we add, here at the Daily Reckoning office.

Either by ineptitude or perverse intention (see readers'
notes, below)... Mr. Greenspan's deep purpose is to wreck
the world's faith in the dollar... in the American
economy... and in paper money. He does this by creating a
phony boom and a deceptive stability.

In a real boom, people earn more money. With more money to
spend, they buy things... employers employ... profits are
made and reinvested. But in a phoney boom, real demand is
replaced by phoney demand - based on borrowing rather than
earnings, debt rather than wages. And real assets - profit
making/wage paying businesses - are replaced by phoney
assets, or 'pseudo-wealth' as Kurt Richebächer calls
it... expensive houses and over-priced stocks.

In 1952, household sector assets equalled 3.75-times the
GDP. Today, the ratio is 4.9. As recently as 1995,
household debt was only 70% of GDP. Now, it is 85%.
Personal savings were at nearly 6% of income in 1995. Last
year, they were less than 2%.

"It didn't take long for the American consumer to uncover
the miracle of the Roaring Nineties," writes Stephen Roach.
"The 'wealth effect' - the ability to monetize asset
inflation and convert it into consumer purchasing power -
quickly became the rage. The macro role of wealth effects
is very much dependent on context. In a vigorous income
generation climate, wealth effects are the 'icing on the
cake' - in effect, allowing households to indulge in excess
spending or build saving for the future. In an income-
constrained environment, the wealth effect takes on a very
different role; it can plug the gap brought about by a
shortfall in income generation, thereby enabling consumers
to defend the lifestyles they had grown accustomed to. Both
roles have come into play in recent years.

"But the Great Enabler [Alan Greenspan] has now created the
ultimate moral hazard: overly-indebted consumers and
overly-exposed financial institutions, both of which are
exceedingly vulnerable to a long-overdue normalization of
monetary policy."

The lumps cannot believe their good fortune; they borrow
and spend money they never had to earn... taking out
'equity' from their houses... sure that they will never have
to pay it back.

Someone will pay, of course. But how? Inflation will rob
creditors little by little. Deflation will cheat them all
of a sudden. And any kind of 'flation at all will cause the
Dow to collapse.

And gold? Inflation will send it soaring. Deflation should
send it up too - as people flee less secure assets.

But who knows? Maybe central bankers have finally mastered
the art of paper money... of creating purchasing power out
of the thin air of pure credit... and then controlling it so
carefully that neither inflation nor deflation ever go
anywhere but right where Alan Greenspan and Co. want them.
Ever. There's no guarantee of any kind of 'flation at all,
in fact.

On the other hand, even Greenspan is human. And all humans
err. That the Fed chairman and his jolly co-enablers have
erred is just a bet... but, right now, we know of no surer
wager in the world.

Sell stocks, buy gold.

Back in the USA, with more news:

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Tom Dyson, reporting from Camden Yards...

- Your lesser of two Baltimore-based editors was treated to
a sporting spectacle last night. The New York Yankees were
in town. We walked down to the Orioles' stadium after
work...

- By the mid-point of the second inning, 9 runs had been
smashed via three home runs. Unfortunately, from his spot
in the hotdog queue, underneath the stand, your editor
missed all the action. To the disappointment of the crowd,
the Yankees never relinquished their lead, and won the game
10 - 4.

- But unlike the events here in Baltimore, things didn't
start off so well in New York. Stocks got clobbered out of
the gate. Nevertheless, investors never gave up hope and
matching the style of their pinstriped mascots, and with a
few home runs of their own, stocks also surged to victory.

- The Nasdaq had been down by as much as 11 points mid-
morning, but following an impressive 30-point rally, the
index was recording 1,994 at the bell, up exactly 1% on the
day. The Dow added 24 points to 10,395, while the S&P
closed at 1,134, up 4 points. The S&P has now spent 7
consecutive days trapped between 1,130 and 1,135.

- With all the nonchalance in the markets, we turn to our
readers for entertainment. It's not always possible to
reply to all the correspondence, but rest assured that,
here at the Daily Reckoning HQ in Baltimore, we read
everything. Dear reader, please continue to send your
thoughts, criticisms, jokes, articles and questions... we
love them.

- Today, we kick off this special Reader Reckoning market
notes with an interesting theory on Alan Greenspan and his
love of bubbles. This from a reader in Vancouver, with a
guess about the Great Enabler's real intentions (he's true
to Ayn Rand, after all):

-"In the guest essay dated June 21, 2004, the Mogambo Guru
ponders, 'One of the big mysteries to me is why Alan
Greenspan, a guy who once wrote a defense of gold as money,
while writing, at the same time, a classic denunciation of
fiat currency, would do what he does.' I too have thought
about this apparent contradiction and would like to suggest
a theory to explain it..."

-"Suppose Alan Greenspan wholeheartedly believes what he
wrote about gold in The Objectivist in 1966. Suppose also,
for a moment, that with this belief he realized that he
would probably spend the rest of his career as a brilliant,
but frustrated, academic economist espousing the merits of
gold and decrying the monetary theft being perpetrated on
the world by government.

-"He might conclude that the only way he could actually
prove his belief about gold and its essential monetary role
might be to do what he is currently doing. After all, by
printing money at the rate he has been, he is merely giving
the people and their governments what they want anyway. At
the same time he has managed to become one of the most
powerful people on the planet and will undoubtedly collect
untold riches from his political masters for doing so. This
would be infinitely more preferable than working as an
under-funded academic economist that nobody listens to.

-"Now, suppose that, at the same time, and known only to
him (and perhaps Ayn Rand), his real motivation is to set
the required conditions for his ultimate goal: to prove to
the world without equivocation that governments (the
people) must base a currency on more than faith, on
something that will prevent government abuse. Sure, the
world will suffer from the lesson, but the lesson shall be
learned (until the next time). In the meantime, Alan
Greenspan might be known, throughout history, as the
greatest economics professor of all time. And as the man
who taught the world a lesson. Wouldn't Ayn be proud of her
pupil now? Just a theory."

- In the markets, nothing is often more remarkable than
something. It is of no surprise, therefore, that the
current lethargy in the S&P, as we touched on above, has
attracted attention. Next up, we offer you a timely
conspiracy theory sent from a concerned reader. Naturally,
we don't believe it, but we enjoyed reading the note all
the same...

- More bad news... another reader writes:

-"My wife brought my attention to an article in the July
edition of American Vogue, which reports that mini skirts
are out, and that long hemlines and otherwise demure
clothes are in. Quite apart from the disappointment this
may lend to those of us who are male heterosexuals, there
are those, as I'm sure you are aware, that claim that stock
markets track the length of women's hemlines. And if this
is true, it isn't looking good... and nor is it good
looking."

- To wrap up this special Reader Reckoning, we leave you
with this - from Down Under...

-"Many commentators are now speculating on the timing and
form of the end of the current wave of real estate
speculation," writes today's final reader."This is an
especially important question for those of us who live in
Australia, where the real estate boom has gone further than
almost anywhere else, where adjustable rate mortgages are
regarded as the norm, where the current account deficit is
over 6% of GDP (higher than in the U.S.), and which does
not have the luxury of owning the world's reserve
currency."

"History does give pointers as to what is possible, and
some may be interested in the following extracts from the
book"The Land Boomers" by Michael Cannon, published in
1966. The book deals with the experiences of the Australian
State of Victoria in the 1880s and 1890s. At that time
Victoria was a self-governing colony under the British
Empire..."

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And over in London, we go back to Bill Bonner...

*** Americans believe the whole world longs to be just like
them. Send the army to knock off Saddam, said the neocons,
and the whole country will rise up in relief... all yearning
to be democrats and republicans.

"Stay the course," says President Bush. The Iraqis still
want to be Americans; there are just a few reactionary
elements standing in their way.

This conceit is projected not just upon the desert tribes
of Mesopotamia, but all over the world.

Of course, as everyone knows, the Chinese are just like us
now. They're all capitalist roadies, right deviationists,
and closet democrats. Give them a choice and they would
vote for George W. Bush and open boutique hedge funds on
every street corner.

But as recently as the last years of the Eisenhower
Administration, the Chinese seemed very different:

In the winter of 1959, the Chinese communist leadership of
Mao decided to make war on the peasants, writes Jasper
Becker in his book,"Hungry Ghosts." Troops were sent to
confiscate grain. 'Rich' peasants were tortured and
murdered. Moronic farm practices were decreed. Private
kitchens were outlawed. Old people were sent away to
"Happiness Homes" where they were allowed to starve to
death. Children were put into communal barracks - where
they, too, starved.

"The most extraordinary aspect of these events is that,
throughout the famine, the state granaries in the
prefecture were full of grain which the peasants said was
sufficient to keep everyone alive," writes Becker."Several
sources have stated that even at the height of the famine,
the Party leadership ate well. By the beginning of 1960,
with nothing left to eat and no longer able to flee, the
peasants began to die in huge numbers. In the early states
of the famine, most of those who died were old people or
men forced to do hard labor on inadequate rations. Now, it
was women and children. Whole villages starved to death. In
Xixian country alone, 639 villages were left deserted and
100,000 starved to death. A similar number died in Xincai
from starvation. Corpses littered the fields and roads as
the peasants collapsed from starvation. Few of the bodies
were buried. Many simply lay down at home and died.

"That winter, cannibalism became widespread. Generally, the
villagers ate the flesh of corpses, especially those of
children. In rare cases, parents ate their own children,
elder brothers ate younger brothers, elder sisters ate
their younger sisters..."

*** It is a typical summer day here in London - it is
raining. But then again, it always rains for Wimbledon.

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The Daily Reckoning PRESENTS: In this age of globalization
and advanced technology, it is taken for granted that
economic progress is touching every nation on the planet.
This is simply not true. Many people in many countries are
actually getting poorer, not richer. It's a travesty,
therefore, when the bureaucrats make things even worse...


POOR DEMOCRACY
by Hans Sennholz

A recent report by the World Commission on the Social
Dimension of Globalization, sponsored by the International
Labour Organization, is long on pious advice and short on
economic reasoning.

It lists l6 developing countries, with 45 percent of the
world's population, where the gross domestic product is
rising by more than 3 percent a year. Among them are the
world's giants, China and India. But in 23 countries, with
5 percent of the world's population, GDP per head is
falling. In another 14 countries, with just 8 percent of
the world's population, incomes per head are rising by less
than 1 percent a year. In short, the age of globalization,
which has brought significant economic advances to many
countries, is not reaching 37 countries with some 750
million inhabitants. Lingering in dearth and want, many
millions continue to struggle for food and shelter.

The report admonishes poor countries to pursue social and
economic policies that characterize all Western
democracies. It urges prompt adoption of a democratic form
of government, of national independence and sovereignty,
and high labor standards enacted and enforced by
government. Unfortunately, the advice is apt to be as
unrealistic as is its explanation of high standards of
living in more productive countries.

Democratic institutions surely provide a broad basis for
popular government and give people the noble notion and
pride that the country belongs to them. Whenever they grow
weary of their government, they can exercise their right to
change it. Yet democratization is not a necessary condition
for economic development. The most startling economic
progress, over the past two decades, has been in China,
which labors under an authoritarian regime. And many new
democracies, from Azerbaijan to Kazakhstan, show little
ability to progress economically. Even established
democracies stagnate economically, with millions of workers
condemned to unemployment and declining standards of living
when guided by economic ideologies hostile to economic
productivity. Government by the people may be as injurious
to economic well being as any other form of government.

Similarly, national independence and self-government are no
guarantee of economic progress. The world's poorest
countries, such as the Democratic Republic of the Congo,
Burundi, and Ethiopia, are as independent as the wealthiest
countries, but are poorly governed. In fact, the world's
poorest countries may even be poorer today than they were
in ages past when they labored under foreign rule. In
contrast, many countries that, until the twentieth century,
lacked complete independence and self-government, such as
Australia (1901) and New Zealand (1947), expanded rapidly
as colonies of the British Empire. They enjoyed the
ideological and legal preconditions of economic
development, that is, safety of private property,
entrepreneurial freedom, and the spirit of enterprise. The
poverty of many countries, which moves wealthy countries to
pity and foreign aid without end, obviously lacks these
preconditions; the suffering of the people is likely to
continue as long as the sovereignty of their disfunctioning
governments remains unchallenged.

It cannot be surprising that the Commission report also
acclaims stringent labor legislation while it condemns the
omnipresence of informal, illegal labor markets. It
obviously ignores the harmful consequences of labor
legislation that creates huge surpluses of unskilled labor
and thereby gives rise to informal labor markets, commonly
called"black markets." Legal labor markets tend to be
characterized by standards and benefit costs that exceed
actual employee productivity and, therefore, condemn
millions of workers to chronic unemployment. While some
victims readily content themselves with lives on
unemployment benefits and other forms of public charity,
many prefer to descend to the underground economy where
services are rendered at true market rates and contracts
are concluded by word of mouth and a handshake.

Stringent labor legislation, such as that in old welfare
states, invariably gives rise to dualistic national
economies with a highly paid legal sector and a huge
illegal market sector. The former, stunted by legislation
and regulation, generates the surplus of labor for the
large underground economy, which tends to grow with every
new law and regulation that grant costly benefits to labor.
In the old welfare states of Europe, where the official
rate of unemployment rarely falls below ten percent of the
official work force, the informal underground sector may
exceed one-third to one-half of total economic production.
Without the underground economy, many people would be
immeasurably poorer.

The chronic conflict between the legal economy and the
unregulated market - which is immune to regulation - begets
corruption and decadence. Where the authorities are
determined to enforce the myriad of labor regulations they
turn their countries into"police states" that prosecute
feverishly and meet out fines and imprisonment for petty
infractions. To offer unregulated employment to unemployed
workers is a grievous employer offense that is punished
with heavy fines. They are rather effectual in maintaining
high unemployment rates.

The Commission's report clearly reflects its sponsorship by
the International Labour Organization. It spurns market
economics and sows class conflict. Democracy, sovereignty,
and labor regulation give no assurance of economic
development; only private property in the means of
production and the unhampered market order will encourage
economic development and ever-rising standards of living.


Regards,

Hans Sennholz
for The Daily Reckoning