us govt being a spendthrift

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    and some say this is why the DOW will go up.If so then I can see that the higher the bigger the fall.

    Thursday, 28 August 2003


    *** The sum also rises:

    Increase in money supply: $3 billion per week Cost of Iraq adventure: $1 billion per week U.S. federal deficits: $10 billion per week U.S. current account deficit: $10 billion per week. It adds up!

    *** Gold soars $7...Dow sinks...Some recovery!

    *** Boom for cargo ships...bust for mortgage industry...the genius of the war...good strategy, but how long can this go on?

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    We were looking at the day's headlines. All of a sudden, it was like being at a wedding with a large family. Not for the first time, we gasped when we noticed the resemblances.

    And so we stand back and marvel again today; what an amazing world we live in, dear reader.

    There are so many pretty women in Paris. We mention this, not as a digression, but an elaboration and observation. Only a happily married man can appreciate beautiful women properly; they pose no threat to him, so he is free to use his imagination and enjoy their company. A free man, on the other hand, must close his eyes; he is in constant danger. He has to watch himself, for he might get himself into trouble with any one of them...on almost any day, his whole life could be turned upside down.

    When Richard Nixon divorced the dollar from the gold standard, the world's economists got hair transplants and bought convertibles. last, they were free to dally with inflation and credit expansion all they wanted. It was fun for a while, but now we see the results of it - the world has been turned upside now...and we find ourselves amidst a whole tribe of half-wit love children. You read about them in every news story...

    If George W. Bush has his way, the federal government will run deficits of more then $5 trillion over the next 10 years, says the Congressional Budget Office.

    China's export growth has created a "boom for cargo ships," says the New York Times.

    Oh no! The price of gold rose more than $7 yesterday. The index of gold stocks rose more than 6% to its highest level in 6 years. Merde! We are just like every other lump investor. We made up our minds to buy gold when it was near $350, but we didn't get around to doing it. Now that the price is $25 higher, we buy...because we are afraid the really big move in gold has already begun!

    The money supply is growing by nearly $3 billion per day. Richard Russell calculates that at the present rate, M3 will increase in the next 18 months by enough to buy up every ounce of gold in the entire world.

    Still, the public has no idea. It looks at each headline as if it were a foundling, unrelated to the other kids in the orphanage. As far as it is concerned, the price of gold has as little to do with the federal deficit as an Olympic skater with a walrus. Stocks are going up, they believe; the economy is recovering. Why bother to look hard or run a paternity test?

    And yet there, in the family of financial news, is a genetic strain as striking as red hair. Every headline seems to have a carrot top - even the recovery.

    "Some recovery," says the Atlanta paper. Nine million people are looking for work. It quotes an analyst: "With recoveries like this, who needs recessions?"

    What is the matter with the recovery? Why is China booming? How come the price of gold is going up? Whither the U.S. budget deficit?

    All of it - the whole line of today's news - is touched by the sin of the Nixon Administration...a sin neither original nor capital, but common and sordid. Cutting the dollar loose from gold freed the world's monetary system to get itself in the worst kind of trouble. We are in it now...surrounded by the mad offspring of the Dollar Standard system. It will be a long evening.

    Eric is out this week, but Addison brings more of the latest news:


    Addison Wiggin in Paris...

    - The recession that wasn't has morphed into the recovery that isn't. And the long, soft depression of the 21st century inches another toe into the light. Soon we'll see a whole pied...and maybe by next year, a jambe.

    - The depression, of course, like all great bear markets, wants to take its time and lure in as many unsuspecting players as possible. After all, the build-up since "Nixon's Sin" (as Bill terms it) arrived slowly and subtly enough to escape attention...causing people to believe that the good times were permanent and a New Era had arrived. It will take a long, slow destruction of wealth before 'believers' give up the ghost.

    - Still, the details inch their way out of the darkness. Since the 'recovery' began, over a million people have lost their jobs. Go back 18 months, and the number rises to 3 million. In all, some 9 million Americans are jobless...more than a million have given up looking for work...and about 4 million more are scraping by in part- time jobs, when they would prefer to be fully employed. That's a hefty 14 million people - 9.9% of the U.S. labor force - sitting on the sidelines during the 'recovery.'

    - The problem, as an Atlanta Journal-Constitution article accurately describes, is a lack of corporate profits. "A typical recession starts when consumers pull back on spending," writes Michael Kanell. "When they flood back to stores, they kick recovery into motion. But this time, consumer spending was solid through the recession. There was no pent-up desire to be unleashed. And no sudden spur to recovery...What spun the economy off the rails in the first place was a collapse in companies' investment in 2000. That spending has come back only in corners of the economy, and only modestly."

    - U.S. capacity utilization - or the total use of the nation's existing factories - is not helping matters; it is still hanging around 74%. Economists tell us real hiring doesn't begin until that number jumps above 80%.

    - Throw in a strange brew of historically significant one- off events - the productivity 'miracle,' just-in-time delivery, global outsourcing, and rising levels of trade protectionism...not to mention the War on Terror, the War on Drugs, the burgeoning surveillance, the aftermath of a burst investment Bubble, replete with corporate accounting scandals - and it's no wonder this recovery ain't what it's generally cracked up to be.

    - As longtime DR readers are painfully aware, the 'recession-that-wasn't' of 2001 was softened by incessant Fed meddling and slashing of interest rates, tax cuts pushed through Congress, and huge outlays to the security, defense and airline industries. Rather than cut back on Government spending, this Republican administration has been spending other people's money like a Vegas hustler after a particularly large score. This is no secret to even the dimmest of news consumers: the Congressional Budget Office released a report yesterday projecting that deficits will reach $5 trillion in less than a decade. The occupation of Iraq alone is expected to drive the 2004 shortfall to a record $480 billion.

    - "They kept the recession from being so deep," former Federal Reserve economist Dean Croushore told the Atlanta Journal-Constitution, referring to federal spending and artificially low interest rates, "so you don't get the bounce back as much." And so the long, slow depression glides a little further into the light.

    - The major indices yesterday, for their part, appeared simply clueless, directionless and otherwise mystified. The Dow lost 7 points to 9,334; the S&P remained virtually unchanged. Tech stocks helped pull the Nasdaq 11 points higher to 1,782 - a fresh 16-month high.

    - But behind the scenes, institutional investors and foreign central banks seem downright clear about what they're expecting to result from the shenanigans coming out of Washington. Signified by three key events:

    * Yesterday, the Treasury held an auction of 2-year treasury notes...and only 26% of those available were picked up. The biggest buyer of this kind of debt is generally a stiff suit from a foreign central bank. "It looks like foreign central banks were reluctant to show up for this sale," Michael Cloherty, a banker at CSFB, reported ominously. The U.S., we Daily Reckoneers are wont to say, has been relying on the kindness of strangers to finance its historically high current account deficit...but now, it looks like the strangers have begun to get a little less kind.

    * By contrast, Dan Denning pointed out to me this morning that according to the Commodity Futures Trading Commission, large-scale institutional speculators added 61 tonnes of gold to their long positions in the last week. Those holding short positions reduced their exposure by 12 tonnes. Net gain? 73 tonnes to the long side, or a gain of 35% in one week. * Mortgage applications dropped to a 14-month low last week...down 65% from their peak in the last week of May.

    - Bankers are getting nervous about holding U.S. government debt...and institutional investors are going long gold...and the housing bubble is about to collapse: "It has begun," a reader of Dan Denning's new Strategic Insider blog service noted, referring to the great deleveraging of America. Buy gold...sell the dollar. (If you want to know more about Dan's new blogging project - an effort to chronicle the unwinding of America's debt obligations and offer useful investment steerage throughout - send the gentleman an e-mail: [email protected])

    - Gold, by the way, my friends at the Everbank World Currency Research desk tell me, has outperformed the dollar by 81% since 1972 - within months of the date Nixon dissolved the bonds between the two. (More from Everbank to come...)


    Bill Bonner, on the other side of the desk in Paris...

    *** The key struggle, said George Bush this week, is between "civilization and chaos." At a cost of $1 billion per week, the U.S. is attempting to impose American civilization in the area where civilization began. Civilization may have gotten its start in the Tigris and Euphrates valleys. But it has been chaos ever since.

    The administration now says that the project involves a "generational commitment." Hmmm...said an expert from the Cato Institute on CNN last night...that sounds like about 20 years at $1 billion per week...hmmm...that's over a trillion dollars!

    Here at the Daily Reckoning, we know no more about foreign policy than we do about economics. But a trillion bucks seems like a lot of money, even to those of us who have just written checks for college tuition. First, we're not sure the Chinese will lend us that much money. And we kind of doubt that the world will stand still for 20 years while George W. Bush tries to get the desert tribes to watch reality TV shows and shop at Walmart.

    Chaos, or civilization? Which is more likely? Our guess is that Iraq will still be in a state of chaotic civilization 20 years from now...and that the U.S. will go broke long before Bagdad turns into Butte or Cleveland.

    *** But what do we know? An e-mail from a reader made us realize that we had failed to grasp the genius of the war against Iraq.

    "Tactically and operationally, what we are seeing is the 'flypaper' strategy. Draw the bad guys to some place far from lower Manhattan, and get them stuck in their own quagmire. Now, they are fighting us in a hot, dusty climate, far from any support bases (like San Diego or Miami, host-towns of several 9/11 hijackers), without access to easy funding, and wondering which next-door neighbor will turn them in to the U.S. forces in the next couple of days. We can duke it out with the bad guys on non-U.S. soil. No triple-canopy jungle to hide from prying eyes. Not much of a Ho Chi Minh Trail for resupply. No Great Power patrons overtly supporting the bad guys (but see below). Advantage to the U.S., tactically and operationally, as I said.

    "A not-insignificant number of bad guys are from the 'internationalist' school of militant Islam. Many are alumni of the training camps in Afghanistan. They would hate the U.S. and the West in any event, and be out looking for a fight. If not fighting the U.S. in Iraq, they would be fighting Russians in Chechnya, or building shoe-bombs in the anterooms of some mosque in Liverpool, or tossing carbon fibers onto electrical trunk-lines outside of Toledo, Ohio in an effort to trigger a power blackout to 50 million people (some of their ideas are just so silly...)

    "We can fight them there in Iraq, or on the streets of Paris if you prefer (from what I hear, there are parts of Paris where white boys dare not go). The U.S. presence gives them a short bus ticket to the front lines; there, (they hope) to kill some Yankees and martyr themselves. (I like that part about martyring themselves. We can arrange that.)

    "In the grand scheme, these Bin-Lincoln-Brigade guys will not make much of a difference to the outcome. By comparison with the Vietnam War, it took a massive Soviet-Chinese resupply effort over two years (1973-74), coupled with a rather large North Vietnamese Army invasion lasting about three months (early 1975), to bring us to the calamitous events of April 1975. And this latter was in the face of no U.S. airpower dropping bombs on their red NVA heads, because Congress had cut off funding for military operations no matter what Pres Ford and Dr. Nobel-Prize Kissinger wanted to do. (Actually, there were a couple of B-52 strikes on fuel supply lines that stopped the NVA advance in its tracks. Sen. Church et al. were outraged. Payback came in 1977, when Pres Carter cancelled the Air Force's B-1 bomber program. Forgiveness came in 1981 when Pres Reagan revived it. There are no accidents, Comrade.)

    "Moving from the tactical to the theatre-level, my larger concern is that there are significant players over there and elsewhere in this great big wonderful world of ours who do not want the U.S. to succeed. Is a fairly free, politically moderate, economically viable Iraq in the interest of many of the entrenched interests in the Middle East? Do the Saudis really want to see an Arab nation just to the north, with moderate mullahs in the mosque where they belong, and women out in the workforce? Does the present gang of Iranian leaders want to see a U.S. success? How about the Syrians? Or Der Fuehrer und Partei of Ein Volk, Ein Reich, Ein Palestinian Authority? Heck, do even the Turks want us to 'do Iraq' successfully, so as to create a model for ethnic minorities in Turkey? Do the French, Germans and/or Russians want to see the U.S. succeed, and win this round of the Great Game? How about the Chinese, when they are not busy exporting crap to Wal- Mart and accumulating U.S. Bonds?

    "The Chinese view their oil security as coming from the Middle East over the next 75 years. Do other world oil producers (e.g. the enlightened despots of Venezuela or Nigeria) really want to see Iraq's oil come on line to anything approaching its potential? A U.S. success in Iraq will be bad for a lot of people's business, it seems to me. It is probably worth it to be 'paranoid' when everyone really does want to see you go down.

    "Getting back to Iraq, there are a lot of different political-economic-cultural interests in Iraq. What of them?

    "Will any politically successful party be viewed simply as a U.S. Quisling? It's not like in Japan, where MacArthur bought off the Emperor (well, let him keep his head attached), and in turn His Highness (the Emperor, not MacArthur) told the people to behave and fall in line. Or like in Germany, where out of the rubble we found Konrad Adenauer who understood a thing or two about economics. And as to Germany, we could always point to the USSR's Red Army and those nice East German Stasi boys as a sobering influence.

    "This nation-conquering and nation-building stuff is hard work. And expensive, too. And that is my grande problemo. How do we support all this world leadership we are doing? What economic sacrifices are the U.S. politicians (and American people) making to pay for all of this? The malls are full of late-model cars, and the shoppers are rushing home with their treasures (mostly, from some 40-foot container that was loaded on a ship in Hong Kong). Expensive houses still sell in expensive markets, and it only costs a bit more to fly first-class. Yes, I know, we are all suffering from sleepless nights as we worry about the increasing national debt. But how long can this go on?"

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