-- Posted Sunday, 8 April 2007 | Digg This Article
Paris, France
Friday, April 6, 2007 - Good Friday
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*** The easiest way to make money - steal it…liar's loans…one fraud leads to the next…
*** The subprime trickle-down effect…standards are falling…
*** Why do we like gold? It doesn't run for public office…never makes TV appearances…and earns no stock options…
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The easiest way to make money, often, is to steal it. But stealing money only benefits the thief, while everyone else suffers. Groups of people are generally better off when people work hard to create wealth…knowing that they will be able to hold onto it, or exchange it for wealth in other forms. Thievery interrupts the whole process. So, societies typically set up barriers to discourage larceny - locks, taboos, prisons.
But yesterday, we read an article by Martin Hutchinson who explained what happens when people try to find ways around the barriers. They pick locks, of course. They figure out little angles. They lie. They cheat. And they also pass laws that give them 'entitlements' to other peoples' property.
America and the developed countries have been on a roll for the last 50 years or so. Their entrepreneurs, laborers, businessmen and investors have been able to create wealth faster than the parasites could take it away from them.
But standards are slipping everywhere. More and more people have come to expect to get "something for nothing." And when they get it, they don't want to give it up.
Thus, we find in today's news from Houston something we've been waiting for:
"Groups demand foreclosure moratorium."
The groups are the usual suspects - world improvers representing the poor struggling masses. What these masses tried to do in the last few years was to buy houses without bothering to save up the money for them. Naturally, the lenders took advantage of them (no one is easier to swindle than a swindler), by extending them credit on terms that did them no favor. And pretty soon, everyone was in on it. The borrower asks for his "liar's loan" by telling a fib about how much he owned. The appraiser gently inflated the value of the place so the deal could be made. The lender saddled the borrower with a mortgage that was sure to bring him back in a year or two, so the mortgage company could make another fat fee refinancing the loan. And then, there was the whole structure of Wall Street, packaging the loans up in tidy derivatives and pronouncing them creditworthy for pension funds.
And all of these people were quoting their prices, and toting their figures, in a currency whose standards have been on a steep downhill slide for the last 32 years. The U.S. dollar, in 2007, is worth only about 20 cents…compared to the dollar of 1971. And lately, there is reason to think the incline will become even steeper. The U.S. government's official debt is increasing at a record rate of $80 million every hour. Dollar-based credits and obligations are piling up outside of the United States (as measured by the trade deficit) at the rate of $2 billion every day. And all over the world, "Dark Pools" of liquidity threaten to turn the dollar's descent into a giant water slide.
One fraud leads to another. Gradually, slowly, unwittingly we get so deep into them that we can't see out. And in this swamp of mendacity, the truth seems out of place, like an honest man in a Senate race.
We find, for example, that "Sub-prime trickles down to area businesses," according to the Orange County Register. Well, what did you expect, dear reader? Standards are falling everywhere…and nobody's money is safe:
Next Wave of Falling Property Prices
Oh…and here's the gist of another story, this one from the Attorney General's office in New York:
You send your kid to college. But you forgot to save the $40,000 you need to pay the tuition. So you go to the admissions office and they helpfully refer you to a Student Loan Xpress, where the nice people set your child up with Debt for Life. Little did you know that the people in the admissions office had a stake in the loan company!
Yes, and now the NY gumshoes are on the case.
What has happened? How come standards are falling?
Martin Hutchinson has no answer….but a fuller description. America, he says, has been "Enronized."
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And more thoughts…
*** From The Financial Times:
"Gold prices could exceed last year's 26 year high of $730 an ounce within the next 12 months due to a weaker dollar, rising geopolitical tensions and an investment led rally, according to the annual survey by GFMS, the metals consultancy.
"The strength of the gold price in 2007-to date, the continued moving up of the floor at which physical buying kicks in to support the metal and a further, albeit smaller, decline in gold supply is also expected to boost investor confidence in the yellow metal," it said.
The gold price averaged $603.77 a troy ounce last year, up 36 percent on the previous year, and the second-largest annual average after 1980's record of $614.50. Gold prices hit a peak of $730 in May, the highest level since the record of $850 in January 1980. Gold also appreciated in other currencies too, with a 34 per cent gain in South African Rand prices, a 21 per cent rise in the yen gold price and a 8.7 percent advance in the Euro gold price.
Gold! We are, for lack of a better word, goldbugs…but not necessarily gold bulls. We believe in gold as a hedge against falling standards. Gold may be a relic of the past, an inert, non-performing asset. It may be your grandfather's protection against inflation. But it doesn't lie. It doesn't cheat. Gold doesn't issue phony quarterly reports…or misleading press releases. Gold doesn't quietly pump up the money supply. Gold doesn't buy a company, strip its assets, load it up with debt and sell it back to the public at twice the price. Gold doesn't run for public office…never makes TV appearances…and earns no stock options.
For all those reasons…we suspect gold is going to continue to go up:
Zero-Downside Gold
*** It's Good Friday. We will fast.
"Are you that religious?" a friend asks.
"No, we are barely religious at all. We mock the pretensions and absurdities of man, regularly, because we know them so well. God is another matter altogether. We don't think it is our place to ask questions or, much less, ridicule Him; besides, look what happened to 'God is dead' Nietzsche. Why take chances?"
*** A reader writes:
"In today's Reckoning, you mentioned the term Judeo-Christian. I have never understood how one could combine those two terms. Perhaps you could elaborate in a future column."
We'd be happy to.
Our Western civilization rests, like the Colossus of Rhodes, on two massive legs. One, often considered the rational or left-brained leg (to mix body parts), is planted in Greco-Roman culture. The other, the non-rational leg, rests on our Judeo-Christian religion. The culture of ancient Greece became the culture of the Roman Empire…then lay dormant in Europe (though not elsewhere), until the Renaissance, after which it became the culture of the European enlightenment…and eventually the culture of the European Union…and, broadly, of the United States of America.
The religion of Moses was the fountain head from which the religion of John the Baptist sprang, was transformed by Christ, and then, through the talents of St. Paul and a long line of church fathers came to us in teachings as different as the Church of Rome and the Church of Constantinople, the Church of England…and all the unorthodox and improbably Protestant sects that make up modern Christendom.
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The Daily Reckoning PRESENTS: Farm products - especially corn - have played a large role in shaping American history. Below, Bill Bonner explores the effect this crop has had on the U.S. economy through the years…
THE FRUITED PLAIN
By Bill Bonner
"You shall not press down upon the brow of labor this crown of thorns," said William Jennings Bryant, on July 9, 1896, in the most famous political speech in American history. "You shall not crucify mankind upon a cross of gold."
The proximate target of this gush of oratory was the gold standard. But look deeper. Behind the scene were millions of farmers who had made an age-old mistake. They had gone too deeply into debt in order to increase production. In short, they had overdone it. The burden of today's cogitation is that they overdo it regularly.
Judged as a businessman, the typical farmer would make a good veterinarian. Over and over, he walks into the same trap. When prices go up, he borrows in order to expand his holdings. He buys more equipment. He leases more land. And he plants more crops to take advantage of the high prices.
Of course, the extra production soon causes prices to fall. Then, all of a sudden, he is ducking his creditors and running up the phone bill to his congressman. Save our Farms…Spare Us from the Evil Bankers… Give us subsidies, tariffs, he asks.
Farm products - especially corn - have played such a large role in American history that like the odor of lemon madeleines in Proust, they recall for us a whole series of debacles.
When the farmer gets into a jam, the entire nation feels the pinch. The earliest settlers in the New World learned how to grow corn; it saved their lives. Then, farmers settled in the rich bottomlands…and planted corn. Soon, they ere spreading out beyond the Appalachians growing corn everywhere they could turn the earth.
The trouble in the early days was not growing the corn, but moving it. There were no roads, no canals, no railroads. So, the pioneers figured out that they could pack the energy of corn into a denser form that made it easier to store and easier to transport - corn whiskey.
No market is an island. Each one is connected to the mainland of human economy by tracks that bear a constant, and often curious traffic. After the American Revolution, the Founding Fathers attempted to pay off the nation's war debts by imposing a tax on whiskey. But the nine-cents-a-gallon tax on small producers was enough to set off another revolution - the Whiskey Rebellion of 1794, centered in Monongahela, Pennsylvania. The insurgents got their hands on one tax collector, for example; they sheared his hair, tarred him and feathered him. More comedy than tragedy, George Washington sent out 13,000 troops, who managed to round up 20 whiskey rebels. Two of them were convicted of insurrection, but soon pardoned; Washington said that one was a simpleton and the other was insane.
With the rifles back over the fireplace mantles, farmers went back to making whiskey…and produced so much that the price of the elixir collapsed. This was probably America's golden era, when corn liquor was so cheap anyone could get drunk any time of day or night. The wild Irish slums of New York and Boston were soon blighted by booze…while, out on the frontier, even Abraham Lincoln passed around a jug of 'corn.'
Then, a national epidemic of alcoholism gave way to a worse case of sobriety. The sour Temperance Movement arose - citing the many evils of Demon Rum and Cruel Corn Whiskey as Public Enemies No.1& 2. This infection of public improvement festered for nearly 100 years and finally broke out in a Constitutional Amendment completely outlawing alcoholic beverages in the United States of America. This was not without political consequences of its own; rum-runners, mobsters, and the Kennedy family all got rich.
But it was not temperance that changed the lives of the corn farmers; it was transportation. In the mid-1800s, first canals, later railroads, made it possible to deliver un-distilled corn all over the country. Suddenly, growing corn was more profitable than ever. The price of farmland west of the Mississippi soared. Kansas farmland went up four to six times between 1881 and 1887. The price of an acre of land on which you could grow corn rose as high as $200.
Nature was rarely kinder to the Great Plains than in the years following the War Between the States. It rained out on the prairies, raising crop yields to levels rarely seen before or since. And the new railroads made it possible, for the first time ever, to ship a bushel of corn - inexpensively - from the western prairies to the major cities in the East. Between 1880 and 1887, Kansas doubled the mileage of rail lines. In that same decade, railroad mileage quadrupled in Nebraska and rose 11 times in the Dakota Territory.
All over the Midwest, farmers planted corn, corn, and more corn.
What happened next could have been predicted - by anyone but a farmer, an investor or a banker.
The years that followed were dry…and as the crops withered, so did the credit available to farmers. In the last three years of the decade, mortgage lending fell to only 10% of the previous three years' activity. Land prices fell. And farmers went bust.
Today, it has been 35 years since a debtor was last crucified on a cross with any trace at all of gold content. But, in 2006, you could still go out to Kansas and buy an acre of farmland for only about $1,000. Adjusted to 1880 prices, that is only about $25, or barely 15% of the peak prices set 120 years ago.
But now, there's a new bubble out on the plains…and a new political scam to go with it. In Martin County, Minnesota, says Fortune Magazine, six new ethanol plants are either in operation or being built. In the last eight months, the price of corn has doubled, from $2 a bushel to $4.
Corn is not just a crop in the America; it is a currency. Corn is used to feed pigs and cattle. Corn syrup is a main ingredient in Coca Cola, candies, cakes, ice cream, hamburgers and many other products. When the price of corn changes, every calculation changes with it. The price of land, for example. An average acre in the mid-west produces 180 bushels. At $2, that puts the gross yield per acre at only $360. After costs, farmers had little left over - only about $30, according to Fortune.
But at $4 an acre, farming becomes much more profitable…with net yields 10 times higher than they were two years ago. With that kind of money rolling over the plains, farmers grow bold. They begin to cast an eye over the "Property for Sale" section of the newspaper…and stop in at the John Deer dealership. In fact, Citigroup is expecting a 25% increase for John Deere shares.
In Martin County, Minnesota, an acre of farmland is already up to $4,000 - a price it hasn't seen in 25 years. What happened after the last peak? Corn went down, and farmers who had stretched to produce as much as they could, went broke. Land fell back to $1,500 per acre, where it stayed until the current boom.
Part of the trouble with this boom is that it depends on ethanol. Thirty-one new ethanol plants have been built in the United States since 2005. When corn was $2 a bushel, and oil was $70, they could make more than a dollar per gallon. But at $4 a bushel, their profits have fallen to 3 cents per gallon. And if corn continues to rise, even with their subsidies, they will be losing money.
Meanwhile, farmers are eager to take advantage of these high prices; they are doing what farmers always do -they are overdoing it again. The US Department of Agriculture estimates that 90 million acres of corn will be planted this year - the most in 63 years. In other words, as corn rises in price, nature seems to wake up. Farmers plant record amounts. And the biggest consumers - particularly ethanol plants, which are expected to take up more than a quarter of this year's crop - cut back. Supplies increase. Demand falls. How long will it be before corn falls again?
Of course, this time could be different. Ethanol may be a fraud, but it's got the U.S. Congress behind it. Corn-fed pork might not be good for you, but there are 3 billion Asians yearning for more of it. On those facts alone, we wouldn't bet the farm. But at least we'd be doing our sums on the subject. Could we sell forward enough corn to pay for a few more acres? Or how about a new air-conditioned tractor?
Whether corn will go down soon, we don't know. But even if the price continues to go up, many farmers will still find a way to over-do it…and ruin themselves.
Bill Bonner
The Daily Reckoning
P.S. Falling oil makes it even harder to make a dime in the ethanol industry. With oil dipping down to $50, expect carnage over the next 12 months ahead. Does the ethanol problem and the possible continued slide of oil prices mean all energy investments are a bust in 2007?Not at all…read the full report here:
Better Than Ethanol!
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:
Empire of Debt
-- Posted Sunday, 8 April 2007 | Digg This Article
