America's Glorious Empire of Debt
The Daily Reckoning
Ouzilly, France
"There is a crack in every thing God has made," said Emerson.
The truth is that the feds can control either the quantity of the nation's
money or the quality of it. At the heart of the world's next - and probably
greatest - financial crisis is the sad fact that they cannot do both at the same
time. Alas, there is always some catch...some restraint...some skunk in the
woodpile. We cannot grow wiser without growing older. We cannot grow richer in
the future without forgoing the chance to enjoy our money in the present. We
cannot make the Devil's food cake of an expanding money supply without the gooey
spoons and burnt pans of inflation hidden somewhere in the kitchen sink.
Next month, the feds will cease reporting the M3 figure. Thenceforth, it will
be harder to figure out at what rate the U.S. money supply is expanding. That is
to say, it will be harder to know how much money the feds are hoping to steal
from the world's savers.
Yes, dear reader, the great American Empire faces the future, not with grace
and resolve, but denial, delusion, deceit, and more debt.
Will the Bernanke Fed protect the quality of the dollar, or will it tend to
favor the quantity of it? We already know the answer. He has told us himself: he
will hire helicopters to drop the green paper all over the country, if it comes
to that, just to make sure the quality of the nation's currency does not
improve. In Bernanke's big, black book of economic alchemy, there is no worse
sin for a central banker than to allow deflation, otherwise known as an increase
in the value of money.
And so, the feds deceive in order to continue their delusions of power,
grandeur and mediocrity. Yes, they say that the current economy is nothing
special. It is mediocre - just the way it ought to be.
What? Is the yield curve not upside down? Do Americans not spend more than
they earn (the savings rate is net negative) for the first time since the Great
Depression? Are house prices not at record levels, after more than $5 trillion
in appreciation since 2001? Are inventories of unsold houses not also at record
levels? Is the country not at war (for the first time ever) with an unnamed
enemy? Will the feds not borrow half a trillion dollars in the next fiscal year,
while the country buys $800 billion more from foreigners than it sells to them?
Did gold not outperform all major asset classes last year? Are all these things
not exceptional? Surely, they are anything but mediocre.
We suspect that increases in the money supply will also be exceptional in the
years to come - even spectacular. We further suspect that it was to avoid
noticing these exceptional increases in M3 that the government decided to stop
reporting the figures.
Eventually, of course, the inflation news will get out.
"But how about the inflation-price statistics that are announced monthly?"
asked Richard Russell yesterday. "For instance, the latest CPI figures show a
rise of 0.7% in January or at an inflation rate of almost 9%. To hide this the
Fed depends on the ridiculous 'core inflation' rate, which eliminates food and
energy. How about this - the core rate has been lower than the overall gain in
the CPI for 39 consecutive months. That's the longest such stretch since the
government started computing the core rate back in the 1950s."
What a shock! Government quants created the "core" measure in order to
eliminate the volatility of food and energy prices. This would give us a more
accurate and consistent picture of inflation, they said. What it really does is
persistently understate the actual inflation figure.
Lies, lies, lies...and more lies. But, what do you expect, dear reader? Yet,
who doesn't like lies...so long as they are flattering?
[Ed. Note: These lies are adding up...and Dr. Richebacher has made it his
mission to uncover each and everyone one of them. After all, we can't start
fixing our economy until we know the truth...
Statistical Deceptions
http://www1.youreletters.com/t/339725/1466280/784619/0/
More news from our currency counselor...
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Chuck Butler, reporting from the EverBank world currency trading desk:
"The Canadian dollar/loonie is moving higher and leaving the 86-cent handle
in its rear view mirror! Traders and investors are trading the loonie as it
should be traded, after Canada posted a wider current account surplus than last
quarter."
For the rest of this story, and for more insights into the world currency
markets, see today's issue of
The Daily Pfennig
http://www.dailyreckoning.com/Writers/Butler/Articles/022806.html
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Bill Bonner with more views from Ouzilly...
*** Good news for our neighbors to the north who have been feeling left out
because Addison hasn't appeared on their television set, telling tales of
consumer debt and imperial delusion, your wait is over. Tonight, Addison will be
interviewed on Canada's Report on Business Television's program, Squeeze Play.
The interview will air at 5:40 p.m., so if you are up that way, tune in!
*** Let's say you agree. The five Big Es are reshaping the world: the Empire
is peaking out; there's an Exodus of money and power from West to East; the
Economic cycle has turned against us; the Experimental money system - with no
gold backing - is doomed; and the days of cheap Energy are over. So what? What
do you do?
As we wrote a few days ago, we doubt that these big trends are easily
tradable. You can't buy stocks in China and relax. Nor can you be sure that
energy stocks are not already overpriced. And as for the stock market itself,
yes it is bound to turn down. But when? And how? It could be that stock prices
remain nominally stable for the next 10 years, while inflation lowers real stock
values.
Probably the surest trend is the rise of gold and yet, even gold is not
guaranteed to follow any known time schedule. In fact, gold is in "correction"
mode right now, or should be. The price could fall to $500, before beginning the
next big move upward.
So what do you do?
First, lower expectations. Forget about trying to stay young forever...and
forget about making money from your investments. The whole idea is a bit of a
fraud anyway. Why should you get richer without working? The best you should
hope for is to earn a reasonable amount for allowing someone else to use your
savings. You are giving up something: current enjoyment. You deserve to get
something in return. Over the last 200 years, the real return from lending
savings has been between 3% and 6%. If you are able get that kind of return, you
should take it happily.
The trouble is, government notes and bonds don't give you that much. After
inflation and taxes, the net return is negative - no matter how far out you go.
What's worse, the rising price of gold signals that the currency itself is in
jeopardy. If gold were to go to $1,000 an ounce, you would lose more than half
the value of your T-note (measured in gold). A fall in the dollar against other
currencies could produce similar losses (though they might be more difficult to
measure or understand).
Lower your expectations. Forget about building wealth. In these
circumstances, the best you can hope for is that you will be able to prevent
anything from knocking down the wealth you have already built. One way to do
that is by buying things you like with value that is not subject to change. A
house you enjoy, for example. Don't worry about selling it. Don't think about
refinancing it. Don't even ask how much the neighbors got for their house down
the street. Just buy it; enjoy it. Let it go at that.
Likewise, a business - not a stock - can be a decent thing to own. You must
understand it and like it. If you do, you can forget about going public...or
about selling it. Upon being asked being asked about what a normal life
consisted of, Freud allegedly purports: love and work. A business of your own
can provide you with the work - and income - you need.
There are also many "assets" that bring pleasure to their owners beyond
capital gains: paintings, boats, farms, jewelry, vacation houses, cars,
collectibles. Just don't expect to be able to resell at higher prices. On the
other hand, many of these things are rare and irreproducible. If wealth really
is migrating from West to East, it is possible that these things will migrate,
too - at higher prices. We have heard of Chinese and Japanese entrepreneurs
buying French ch‰teaux, and then dismantling them, stone by stone, in order to
rebuild them in Asia. Increasingly, great works of art are sold to bidders from
the Orient. Indian billionaires are building fabulous collections of cars,
planes...even locomotives.
Of course, you will need cash to pay expenses. Not knowing the future, all we
can suggest is that you keep your cash as safe as possible, so that the future
does not steal it from you. Put some in foreign currency CDs, for example, and
put some in gold. If there is one big winner as the Big Es evolve, it is likely
to be gold. The Big Es are big changes, and big changes come with big risks.
When people feel threatened they tend to turn to God, guns and gold. All three
might be useful, or even necessary. Gold is likely to be profitable, too.
*** Last night, we went to dinner in a medieval-era castle not far from home.
The place was built in the 12th or 13th century, and scarcely touched since
then. It is very cold in Europe, but the house had no heating - save a huge log
burning in a magnificent fireplace, in front of which a banquet table had been
set up.
We can now report, from experience, that there has been substantial
technological progress in the world since the 13th century. Central heating is
definitely an improvement. For while our faces were heated to a red glow by the
flaming log in front of us, our backs were cold as ice.
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The Daily Reckoning PRESENTS: Take a moment to admire America's magnificent
empire...the bubbles, the debt, the deficits, and the fraud. Bill Bonner
explores...
AMERICA'S GLORIOUS EMPIRE OF DEBT
by Bill Bonner
Let us take a moment to stand back and gaze at America's great Empire of
Debt. It is the largest edifice of debt ever put up. It sustains the most
magnificent world economy ever assembled. It brings more wealth to more people
than any system ever before devised.
Not only is it incomparably effective, it is also immeasurably entertaining.
For it has its burnished helmets and flying banners; its intellectuals and its
gladiators; its Caesars, Antonys, Neros, and Caligulas. It has its temples, its
forum, its Capitol, its senators; its praetorian guards; its via Appia; its
proconsuls, centurions, and legions all over the world as well as its bread and
its circuses in the homeland and its costly wars in periphery areas.
The Roman Empire rested on a classical model of imperial finance. Beneath a
complex and nuanced pyramid of relationships was a foundation of tribute formed
with the hard rock of brute force. America's empire of debt, on the other hand,
stands not as a solid pyramid of trust, authority, and power relationships but
as a rickety slum of delusion, fraud, and misapprehension.
"My tax guy has been bugging me...You know, real estate is where it is at."
In June 2005, NBC quoted a young woman who had bought a second home at a
Colorado resort. According to the report, more than a third of the houses sold
in the previous 12 months were not primary residences, but second homes or
investments.
Down at the bottom of the pyramid are petty agents spreading deceit and
misinformation - such as the aforementioned "tax guy." You would think a young
woman could trust her certified tax advisor to give her sound counsel. Instead,
he urges her to get into the most bubbly property market in American history.
Naturally, she went for it, aided no doubt by a whole industry of professional
dissemblers. Press reports tell us that appraisers routinely stretch valuations
to help close a deal. Mortgage lenders know perfectly well the appraisals are
lies, but they wink at them with one eye while winking at the borrower's phony
income declaration with the other. Again, according to the press reports,
lenders no longer verify income claims. They have gone blind!
In California, house prices have raced so far ahead of incomes that barely
one in ten buyers can afford the median house. Yet thanks to "creative finance,"
more houses are being sold than ever before. Thus the foundation of the debt
pyramid is laid down in a bed of mutual deceit and cupidity, and covered with
another level of fabrications. Lenders do not stick around to see how the loans
work out. Instead, they pretend the credits are good, and package the mortgages
into convenient units so that investors can buy them. The financiers know damned
well that many buyers can't really afford to pay for the houses they buy, but
they see no point in mentioning it. Nor do the investors want to know.
They're in on the scam, too. The smartest of them even have figured out how
it works: The Fed holds down short-term rates below the inflation rate so that
investors in long-term mortgage financing and buyers of U.S. Treasury
obligations can make an easy profit.
Further up the steps of imperial debt are whole legions of analysts,
economists, and full-time obfuscators whose role is to make us all believe six
impossible things before breakfast and a dozen more before dinner. Quack
economists at the Bureau of Labor Statistics do to numbers what guards at
Guantanamo did to prisoners. They rough them up so badly, they are ready to say
anything. This abuse of statistics is what allows Americans to deceive
themselves about their own economy. It is healthy, they say. It is growing. It
is stable. All these so-called facts are little more than elaborate
prevarications.
Economists, commentators, and policymakers take up these distortions and add
their own twists. It is obvious to anyone who bothers to think about it that an
economy that spends more than it earns is in decline. But try to find an
economist willing to say so! They've all become like rich notables in the time
of Trajan, doing the emperor's work whether they are on his payroll or not. They
will tell you the economy is expanding, but it is an expansion similar to what
happens when a compulsive eater escapes from a fat farm. The longer he is on the
loose, the worse off he becomes.
On the issue of the trade deficit, they will say what the senators and
consuls want to hear, as Levey and Brown did in Foreign Affairs magazine: "The
United States' current account deficit and foreign debt are not dire threats to
its global position, as would-be Cassandras warn. U.S. power is firmly grounded
on economic superiority and financial stability that will not end soon." In
fact, the story of international trade, circa 2005, is the most preposterous
tale economists have ever heard. One nation buys things that it cannot afford
and doesn't need with money it doesn't have. Another sells on credit to people
who already cannot pay and builds more factories to increase output.
Every level colludes with every other level to keep the flimflam going. On
the banks of the Potomac, people of all classes, rank, and station are pleased
to believe that all is well. And there, at the Federal Reserve headquarters, is
another caste of loyal liars. Alan Greenspan and his fellow connivers not only
urge citizens to mortgage their houses, buy SUVs, and commit other acts of
wanton recklessness, they also control the nation's money and make sure that it
plays along with the fraud. They do not even have to clip the precious metal out
of the imperial coins; there is none in it.
From the center to the furthest garrisons on the periphery, from the lowest
rank to the highest - everyone, everywhere willingly, happily, and proudly
participates in one of the greatest deceits of all time. At the bottom of the
empire are wage slaves squandering borrowed money on imported doodads. The
plebes gamble on adjustable rate mortgages (ARMs). The patricians gamble on
hedge funds that speculate on huge swaths of mortgage debt. Near the top are Fed
economists urging them to do it! And at the very pinnacle is a chief executive,
modeled after Augustus, who cut taxes while increasing spending on bread,
circuses, and peripheral wars. (It might be added that some of the biggest lies
in the history of warfare were told to the American lumpen public to stir up
support for the war against Iraq, but it hardly seems worth mentioning it.)
The spectacle is breathtaking. And endlessly entertaining. We are humbled by
the majesty of it. Everywhere we look, we see an exquisite but precarious
balance between things that are equally and oppositely absurd. On the one side
of the globe - in the Anglo-Saxon countries in general, but the United States in
particular - are the consumers. On the other side - principally in Asia - are
the producers. One side makes, the other takes. One saves, the other borrows.
One produces, the other consumes. This is not the way it was meant to be. When
America first stooped to Empire, she was a rising, robust, energetic, innovative
young economy. And for the first six decades of her imperium - roughly from 1913
until 1977 - she profited from her competitive position. Every country to which
she was able to extend her pax dollarum became a customer. Her businesses made a
profit.
But gradually, her commercial advantage faded and her industries aged. The
very process of spreading the soft, warmth of her protection over the earth
seemed to make it more fertile. Tough, weedy competitors sprouted all over the
periphery of the empire - first in Europe, then in Japan, and later, throughout
Asia, even are as she had never been able to dominate.
By the early 21st century, the costs of maintaining her role as the world's
only superpower, and its only imperial power, had risen in excess of five
percent of her GDP, or $558 billion per year. Not only had she never figured out
a good way to charge for providing the world with order, now order was working
against her. The periphery economies grew faster. They had newer and better
industries. They had higher savings levels and much lower labor rates. They had
few of the costs of bread or circuses and none of the costs of policing the
empire. They were freer, lighter, faster. Every day, the competitors took more
of America's business, assets, and money. If the empire were an operating
business, accountants would say it was losing money.
The empire no longer pays because the entire Western world - including Japan
- has lost its competitive edge. Globalization of the pax dollarum era served
the United States well after World War II. The global economic system in the pax
dollarium era was perfectly balanced. For every credit in Asia, there was an
equal and opposite debit in the United States. And for every dollar's worth of
demand from the United States, there was a dollar's worth of supply already
waiting in a container in Hong Kong. But while the imperial finance system was
flawless, its perfections were devastating.
For the moment, Americans salute their imperial standards. They gratefully
paste the flag to their car windows, their jackets, their hats, their beer mugs,
their shirts and even their underwear. Americans are proud of their empire - and
should be. Without it, they could never have gotten so far in debt. What central
banker would fill his vault with Argentine pesos or Zimbabwe dollars? What drug
dealer or arms seller would want Polish zlotys in payment? What insurance
company would want to buy Bolivian or Kyrgzstan bonds to cover its long-dated
liabilities? The dollar has not been convertible into gold for 34 years.
Yet, people still take it as though it were as good as the yellow metal -
only better. Ultimately, lending money to a foreign government is a bet that the
government will put the squeeze on its own citizens to make sure you get paid.
The United States doesn't even have to squeeze. When one foreign loan comes due,
other foreigners practically line up to refinance it; it is as if they were
bringing pastries to an extremely fat man, just to gawk and wonder when he might
explode.
Bill Bonner
The Daily Reckoning
Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning.
He is also the author, with Addison Wiggin, of The Wall Street Journal best
seller Financial Reckoning Day: Surviving the Soft Depression of the 21st
Century (John Wiley & Sons).
In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic
Financial Crisis, they wield their sardonic brand of humor to expose the nation
for what it really is - an empire built on delusions. Daily Reckoning readers
can buy their copy of Empire of Debt at a discount - just click on the link
below:
"Now Perhaps Someone Will Listen!"
http://dailyreckoning.com/EmpireDebt.html
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