-- Posted Tuesday, 11 January 2005 | Digg This Article
The Daily Reckoning
London, England
Tuesday, January 11, 2005
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*** This could be the start of something big...stoning the smokers...shipping French prostitutes off to Timbuktu....
*** Counting on the general lawlessness of the people...behold; the power of cheese...the Fed wants to be your friend...
*** Consumers are holding back...thanks for nothing, democracy...the Cheapskate tells all...and more!
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A hopeful sign, dear reader; that maybe Americans are finally coming to their senses.
Something remarkable happened towards the end of last year: Consumers cut back. In November, consumer credit dropped by more than it ever had dropped since they began keeping the numbers 60 years ago.
We'll work our way back to that...but first, more signs that Western civilization is in danger. From Rome comes news that even the Italians seem to have lost their heads about smoking. No more smoking in public places - including restaurants and bars, reports the International Herald Tribune. The French newspaper, Liberation, adds that you can be collared by the cops and fined 550 euros if you have "a lit cigarette in the presence of children or a pregnant woman." We can only guess what penalty a pregnant woman who lit up herself might suffer - perhaps public stoning.
But the Italians are a civilized people; maybe they will just ignore the law.
Meanwhile, in Paris, the fuzz is cracking down on prostitutes. One of the sleazy pleasures of the city is being able to drive around the Bois de Boulogne at night and gawk at the half-naked women - often men dressed as women - flashing motorists and offering themselves to passers-by. Not that your editor ever resorts to them, but it's nice to know they are there - just in case.
Alas, a law-and-order politician on the make, a French Giuliani or Spritzer, is rousting them out of the park. Where they are going, we don't know, but it is hard to believe the French would put up with this kind of moral tidiness for long.
Fraud, humbug and poppycock will always be with us - in the 21st century, no less than the centuries before. In both Italy and France, our hopes for the future lie in the general lawlessness of the people. But America was a free country not so long ago. People there have less experience with moronic laws; they tend to take them more seriously. That is what makes the place seem naïve and uncivilized to Europeans. In France, citizens take their cheese seriously and ignore the Code Civile whenever they can get away with it. In the U.S., real cheese is practically against the law... and Americans treat the law as though it deserved respect.
Which brings us to the Law of 1913, passed when most of the pols were on vacation, setting up the Fed as America's central bank - without saying so. The Fed is based on a scam - that a group of bankers and economists can do a better job of protecting the people's money than the people themselves. It was a law intended to make the world, or at least the United States, a better place. On the evidence, the conceit behind it is unfounded. The dollar was worth a dollar for the 100 years before the Fed existed. In the 92 years since, it has declined to five cents.
Why that should be is no mystery. The Fed can tinker with banking rules. Beyond that, its power lies in its ability to set short-term lending rates at an artificial level - that is, a level that is different from the one set by the market, matching willing lenders with willing borrowers. The Fed can move its key rate up...or down. It can move short rates higher than they "should" be. Or lower. But a Fed that sets rates higher than they should be gets no fame, no glory and no thanks. On the other hand, the Fed that offers money below its actual cost - at a rate lower than that set by the market of buyers and sellers - is a friend to all. It is like a bartender who forgets how many drinks you've had...or a prostitute who does her work just for the fun of it. Who's going to complain about that?
But making credit available at rates where previously there was none adds money to the entire economy. "Extra money' is an economist's definition of inflation. The consumer sees it later, as the extra money is reflected in higher prices. But in the short run, inflation is welcomed by nearly everyone. Every door is open to it; the Fed that governors behind it are heroes. The extra money makes people feel richer, more content...and more ready to re-elect presidents and refinance houses.
And when the economy faces a financial challenge - the LTCM meltdown...the Asian crisis...the Tech Bubble, for examples - the Fed is ready to lower the cost of credit even more. Thus it was, in the late '90s, that Alan Greenspan's mug was put on the cover of TIME as one of a triumvirate of public servants known as the "Committee to Save the World." Salvation from the Fed came in a familiar form - yes...lower rates! More money! More credit! And then, of course, when a new crisis came along in 2001 - and the Fed was desperately afraid of Japanese-style deflation - the Fed knew just what to do. More credit! Lower rates! Drinks on the house for everyone!
And now, the customers stumble. Each time credit was offered a loan at below-market rates, what else could the average man do but take it? Is it any wonder they're now awash in it? The average middle-class American has more debt than ever before. The average central banker in Asia has more U.S. dollar credits than ever before...and more factories, too. And the whole world economy - or at least two big pieces of it: U.S. consumption and Asian production - now depends on the American consumer. He must somehow continue to spend...or the whole thing falls apart.
That is why last week's news was so shocking. Never before had consumers held back so much - consumer credit fell by $87 billion in 4 weeks' time. "They're just waiting for better deals at Christmas," said the analysts. But Christmas came and went; not only were holiday sales less than expected, the profit in them almost all disappeared because of aggressive discounting. Not even selling products at a loss was enough to keep Americans buying.
Is this the beginning of something big? Or just a fluke? We don't know yet...but we will know soon.
If it is the beginning of a consumer pullback, what will the world-improvers at the Fed do about it this time?
More news, from our team at The Rude Awakening:
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Eric Fry, reporting from Manhattan...
"The stock market sometimes divines the future well before it becomes visible to the human eye...or gets priced into the commodity markets. In other words, certain agricultural stocks might already be "sensing" the effects of a weak dollar, even though the dollar's weakness is exerting no apparent influence over grain prices themselves."
For the rest of this story, and for more market insights, see today's issue of
The Rude Awakening
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Bill Bonner, back in London:
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Not only will there be investment presentations from 11 countries, but the top speakers from The Daily Reckoning will be there as well. Our Editor-in-Chief, Addison Wiggin, will be moderating "The Great Profit Debate: Micro vs. Macro Investing." You won't want to miss Dan Denning, James Boric and Chris Mayer duke-it-out...for more information, see here:
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*** Another of the great conceits of the Western civilization, circa 2005, is that democracy makes people more peaceful and more prosperous. The evidence for the peaceful part is blemished by the history of the 20th century - in which nations that were democratic (at least at the beginning) fought the bloodiest wars in history. But how about prosperity? Does voting really make people wealthier?
A new study done by a pair of Stanford professors seemed intended to prove the point. The professors spend many pages explaining how democratic openness leads to market reforms, which then lead to greater output. But the actual evidence is inconclusive. According to the report in the International Herald Tribune, about as many countries lost ground, thanks to democracy, as gained it.
The professors looked at GDP rates in countries that have gotten people to line up at voting booths in the last 30 years. Then they compare growth rates in the 10 years before democracy to rates of growth in the 10 years following. Looking down the list, we see several marginal "winners" and only one big one - Chile, where GDP growth rose from 1.6% in the 10 years prior to democratization to 5.8% in the years after. On the other hand, what strikes our eye is a couple of big losers. Portugal's growth rate fell from 7% before democratization in 1974 to 1.2% after. Spain's growth rate dropped to 0.3% from 5.4% and Ecuador practically went broke; it's growth rate fell from 6.8% to minus 0.4!
*** An interesting report in Barron's tells us that the rich have their problems too. A survey of private banking clients revealed that almost all felt that they could barely get along on their money - no matter how much they had. Very few thought they had "enough." Most thought they needed twice as much as they had. And almost all worried that their children and grandchildren would be spoiled by wealth.
We've noticed similar attitudes in our own family. Jules, 17, gets five euros a week allowance. Ten, if he works with his father on the weekend. Henry gets three euros per week. Edward gets two and-a-half. All report that their friends get far more. Even their mother thinks Dad is a cheapskate.
On the other hand, the children get paid by the hour when they work on an especially big project. Painting the new library, for example, Henry made an additional $50.
"Look," the Cheapskate responds. "It's good to be short of money when you're young...then, you're less likely to be short of money when you're old."
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The Daily Reckoning PRESENTS: Over the years, many economists have become increasingly concerned over the U.S. trade deficit and the susceptibility of the U.S. dollar...and recently, foreign investors are beginning to regard the dollar with trepidation. What's in the stars for America's currency? Dr. Hans Sennholz explores...
THE DOLLAR'S QUESTIONABLE FUTURE
by Hans Sennholz
If the love of money is the root of all evil, the depreciation of money must be the mainspring of all shams and frauds. It works silently and covertly, impoverishes many while it enriches a few, and thereby inflicts great harm on social cooperation and international relations.
A few economists are sounding the alarm about the decline of the U.S. dollar. In recent months, it fell visibly toward the euro and Japanese yen and is likely to fall even lower. But most Americans refuse to be alarmed, as they are unaware of exchange rates and foreign exchange markets. Why should they be troubled about the financial affairs of money traders and dealers?
We may not be able to see the future, but always can learn from the past. Looking at the recent history of the dollar, this economist perceives distinct stages with various characteristics, causes, and consequences. One stage was from the end of World War II to 1971, when the U.S. dollar was tied to a small anchor of gold. President Nixon cut its ties and embarked on a wholly new road of fiat dollar management. Many other countries readily accepted the new system acclaiming its flexibility and manageability. At this time, the world is still traveling this road, but several countries are making preparations for leaving it and proceeding toward a multiple standard system. It is not clear whether they will depart in an orderly fashion or in crisis and contention.
Throughout the decades, some economists were always worried about the magnitude of the trade deficits and the vulnerability of the American dollar. But their fears proved to be unfounded because they underestimated the worldwide demand for dollars and the willingness of foreign investors and central bankers to trust and hold U.S. dollars. After all, until recently, the deficits never exceeded three percent of GDP and Americans still were net creditors in their foreign accounts. By now, the dollar standard has reached a stage in which not only a few economists, but also some foreign creditors are beginning to question its future. The Federal government is swimming in an ocean of debt. In its first term, the Bush administration increased the Federal debt by $2.2 trillion. Congress raised the Treasury debt ceiling three times, by $450 billion in 2002, by $984 billion in 2003, and by another $800 billion on November 19, 2004, to $8 trillion 184 billion. The ready willingness of Congress to finance such deficits is a clear indication of the political and ideological mold and make of most members of Congress and the public that elects them.
Foreign observers are drawing similar conclusions. The Bank of Japan, with more than $800 billion in dollar obligations already announced its reluctance to increase its holding. China, with dollar reserves exceeding $500 billion, is laboring under "unsustainable U.S. trade deficits." Asian banks altogether, holding more than $2 trillion in American obligations are suffering hundred billion dollar losses in terms of purchasing power. It is not surprising that the central banks of India and Russia, as well as some Middle East investors, have begun to sell dollar obligations.
According to some estimates, foreign banks and investors are holding some $9 trillion of U.S. paper assets. They own some 43 percent of U.S. Treasuries, 25 percent of American corporate bonds, and 12 percent of U.S. corporate equities. They obviously are suffering losses whenever the dollar falls against their respective currencies; even if they are pegged to the dollar, they are incurring losses against all others that are rising.
The dollar standard surely would enter its final phase of disintegration if its holders would panic and start selling their American paper investments - their U.S. Treasuries, U.S. agencies, and corporate bonds and shares. The crash would be felt around the world and neither foreign sellers, nor American authorities, could be trusted to react rationally in the fear and noise of the crash. The scene could be similar to the political bedlam of the early 1930s.
There always is the hope that the primary creditors will act in concert and once again bail out the debtor. The European Central Bank, the Bank of Japan, the Bank of China, and the Bank of England may decide to avert the unthinkable and support the dollar by mopping up huge quantities. The mopping would stabilize the situation once again by inflating and depreciating their own currencies; they would pass the depreciation losses on to their own nationals. Optimists in our midst are hoping for this scenario; they are convinced that the Bush administration will, in time, save the situation by balancing its budget and the Federal Reserve will allow interest rates to seek market levels. Such a policy would avert the dollar dilemma, although it would lead to a painful recession, forcing all economic factors to readjust to market conditions.
Pessimists in our midst cast doubt on such a scenario. They point not only to the host of legislators and regulators who cherish their position and power, but also to public opinion and ideology, which call for government favors. They are prepared to proceed on the present road and brace for the morrow. A few cynics even contend that a government facing a financial crisis of such magnitude is prone to divert public attention from its ominous path by embarking upon foreign adventures.
This economist is ever mindful that debts do not fade or pass away. Individuals must face them, deal with them, or renege in bankruptcy. Governments have an additional option: As the issuers of their own currencies, they may inflate and depreciate their debts away. The United States government has done this ever since it cast aside the gold standard and imposed the dollar standard. It undoubtedly will continue to do so as far as the eye can see. It is an iniquitous road, which individuals would soon be barred from traveling, but governments love to take, shedding their debts one percent at a time. It is a road of the dollar standard designed at Bretton Woods, built by the U.S. government, managed by the Federal Reserve System, and financed largely by creditor central banks in Europe and Asia. It is a road on which the fall in dollar value has inflicted losses on all foreign dollar holders each in proportion to the amount of dollars held. It is the political road of debt default the magnitude of which amounts to trillions of dollars, undoubtedly the largest in the history of international relations. It will be remembered for generations to come.
It is unlikely that the Federal government and the Federal Reserve will soon mend their ways, but it also is doubtful that foreign creditors will continue their support indefinitely. The U.S. dollar is bound to continue to depreciate and gradually surrender its role as the world's primary reserve currency to a multiple reserve-currency system resting on the euro, Japanese yen, Chinese renmenbi, and the American dollar. The multiple-standard system is likely to perform more efficiently and equitably than the dollar standard. Competition would avoid the abuses and inequities of a monopolistic system. Confining the powers of the Federal Reserve System and constraining the deficit aptitude of the U.S. Treasury, it would ward off any further inundation of the world with U.S. dollars.
In idle reverie of years long past, this economist is tempted to compare the gold standard with the dollar standard. Throughout the long history of the gold standard, the balance of payments of gold-producing countries was usually "unfavorable." Since the birth of the dollar standard, the United States has assumed the position of the gold-producing countries; its balance of payments usually is unfavorable. Much capital and labor were spent to find, mine, refine, and market gold; the United States bears minuscule expense in the production of its money. Market forces limited the quantity of gold coming to market; the quantity of dollars depends on the judgment of Federal Reserve governors who are appointed by the President. In times of turmoil and war, the quantity of gold mined does decline; in such times the stock of fiat dollars tends to multiply and its value depreciates quickly. The quantity of gold is limited by nature and its value is enhanced by many nonmonetary uses; fiat and fiduciary moneys have no such uses or limitations. They are the sorry creation of politics.
Regards,
Hans Sennholz
for The Daily Reckoning
Editor's note: Dr. Sennholz is in good company with his concern over the dollar's long, slow slump...world-renown Austrian economist, Dr. Kurt Richebächer says, "U.S. dollars are the bricks and mortar of the American economy. They're also a key pillar in many foreign economies, too. Now the 'bricks' are crumbling around us - and there's no telling how long it will last."
Using history as a guide, Dr. Richebächer predicts that this dollar slide could last for several years to come...but you still have time to find out how to protect your assets. See here:
7-Year Slide
Dr. Hans Sennholz is president emeritus of The Foundation for Economic Education (FEE) in Irvington, NY. His essays and articles have appeared in over thirty- six major German journals and newspapers, and 500 more that reach American audiences. Dr. Sennholz is also the author of 17 books covering the Great Depression, Gold, Central Banking and Monetary Policy. You can write to him at this address: hans@sennholz.com
-- Posted Tuesday, 11 January 2005 | Digg This Article
