“So somewhere in my youth or childhood, I must have done something good…”

CNN worries about a “tidal wave of foreclosures” hitting central Florida.

“Orlando has blown up,” says a source quoted by CNN.

The man doing the talking runs a website where desperate sellers can try to get rid of their houses fast. The houses are put up for sale at prices below appraised values…and then marked down systematically until they sell.

“There’s been a 700 percent increase in traffic of people filling out our forms,” he continued. “I could put a bull’s-eye on Orlando and write the headline for what will be going on in January and February.”

Today, dear reader, we take up a profound subject in a superficial way – what is real?

When you need to make a monthly mortgage payment, there is not much fantasy or romance to it. It is real. When you don’t have the money, it is even more real…which is to say, the experience is more intense and more memorable.

In the financial world today, some experiences are much more real than others.

As you know, we are enjoying what Mises called a “Crack-Up Boom.” It’s great fun…as long as it lasts. But it has some very un-real parts to it.

The whole thing is tricked along by money that is, essentially, not real. Central banks create money “out of thin air.” The quantity of money is growing very rapidly, all over the world. Everywhere you look, money is increasing two to 20 times faster than GDP growth. (In Zimbabwe, the increase is infinite…since the money supply is growing by thousands of percent, while GDP growth is negative.)

Can you get something real from something un-real? Does something come from nothing?

We don’t know…

But what we do know is that there are a lot of phony parts to this boom. In the West, art, stocks, houses – they’re all going up. Just look at a chart of almost any stock market in the world. Or a chart of housing prices. Or a chart of almost any tradable asset class. Asset prices are rising; and the people who own them feel they are much richer. But is this increase real? Are these assets actually worth more? Or are they merely being teased up in price by a higher volume of money? Is a Monet more attractive today than it was 10 years ago? Not really. Does a house give better service? Is the yield from a stock higher? The answer is no. Much of the extra wealth that people think they have is un-real.

Meanwhile, in the East, factories are being built…output is going up…people who used to tend ducks and till the soil by hand are now working on assembly lines and living in air-conditioned apartments in brand new cities. This wealth is real and growing at breakneck speed.

Meanwhile, back in the Homeland…and Britain too…ordinary people are suffering their prosperity. They have enjoyed more apparent wealth – bigger houses, more vacations, more dinners out – but this is wealth consumed, not wealth created. In order to afford to spend so much more money, they had to borrow. So their real net wealth actually went down.

“Lost your pay slip? Call us…” say signs along the highways in Britain. We had no idea what this meant. Why wouldn’t people just ask their employer for a copy?

“Oh no…it’s a big scam,” MoneyWeek editor Merryn Somerset Webb enlightened us. “There’s a whole industry of people who provide fraudulent pay slips so that you can get a mortgage to buy a house.”

And now many of these people are living in bigger houses, but sending in higher mortgage payments and more property taxes, and these larger houses cost more in utilities. When the going was good, it looked as though it would be no trouble to keep up this level of extra wealth consumption. But now that the going is not so good, many of these people are in real trouble. Some are trapped between two mortgages and need to sell a house fast. Others simply have mortgage payments that are too large.

Mortgage rates are rising in the United States. And in Britain, last week, the Bank of England raised rates. “Now it REALLY hurts,” shouts a headline in The Daily Mail.

Freddie Mac predicts that house sales this year will drop 7% – to their lowest level since 2001. And an article in Barron’s explains why. The REAL mortgage rate is the difference between what a person pays for a mortgage loan and how much the property goes up. If mortgage money costs 6%, and a house goes up 6%, in effect, the real cost of the mortgage is zero.

A couple years ago, people might have paid only 5% for mortgage money…while their houses went up 15%. It was as if the mortgage rate was really MINUS 10%. But now, house prices aren’t going up…they’re going down – at least in America.

So much so, in fact, that our friend Mish Shedlock recently informed readers of his Survival Report that if the current price collapse follows previous boom-bust cycles, housing values could crash 43.5% – between now and 2011. Ouch. (For Mish’s full report, and to find out how you can hedge protect yourself and your assets against the coming housing fall-out.

Barron’s put the real cost of a mortgage at about 6%. But in an area such as Orlando, where house prices could be falling fast, the real cost of a mortgage could be 10%…or 15%. No wonder sales are sluggish. Who wants to buy a house under those conditions?

Not only is the marginal homeowner subjected to some real pain, so are the rich professionals who lent him money. Credit Suisse estimates that real total losses from CDOs (collateralized debt obligations – derivatives backed by mortgages) will top $52 billion. Of course, that assumes that no one panics…and nothing else goes wrong.

Bill Bonner
The Daily Reckoning
London, England
Tuesday, July 10, 2007

More news:

————–

Addison Wiggin, reporting from Baltimore…

“Ben Bernanke is speaking today before the National Bureau of Economic Research – the quants who officially declare the nation in recession, when the time warrants. Bernanke is expected to confuse them over ‘inflation targeting’ and explain away the nation’s housing woes…look for both the pound and the euro to rally.”

For the rest of this story, and for more market insights, see today’s issue of The 5 Min. Forecast

————--

And more thoughts…

*** What else is unreal in the real world?

The International Energy Agency warned yesterday that the world will face an oil “crunch” in five years. Crunches are just the thing that oil is supposed to prevent…the black goo, after all, is a lubricant. But something must be going wrong. IEA says supplies are falling faster than expected. Instead of growing at 2% per year; it’s now thought that oil consumption will grow at 2.2% per year.

Even that seems as though it might be on the low side…if the global Crack-Up Boom continues, that is. Which is what makes our job of reckoning so difficult lately. There are so many phony and precarious trends to reckon with. The dollar is a fraud, as explained above. More dollars bring forth more yen, more yuan, more euros…and so forth…which, in turn, bring forth more production, more sales, more investment, more consumption, and more energy use!

More “money” – even fraudulent money – begets more economic activity, which begets more use of raw materials, especially oil. New houses in America are about 15% larger than they were just six years ago. They need to be heated and cooled. On a really hot day, Phoenix – one of the fastest-growing metropolises in North America – can use more electricity than New York City.

Half of the new houses and apartments in China are equipped with air-conditioning. Millions of people who, only 10 years ago could barely afford to buy bicycles, are now driving around in automobiles. And now even the poor in America fly on airplanes…use air-conditioning…and keep their TVs running day and night.

Thanks to the worldwide Crack-Up Boom, people all over the planet are building new cities and new lifestyles. But they are all basing their plans on yesterday’s oil prices! And yesterday, there was still plenty of oil. Oil from Britain’s North Sea is now in decline…and by 2015, Dubai’s oil boom will be over. And many geologists – including, notably, our friend Byron King – believe that the entire world supply of oil has peaked out.

On the one hand, it looks to us as if the oil market has underestimated this huge new demand. On the other, it looks to us as if this huge new demand cannot continue to grow at the same pace – because a Crack-Up Boom must crack up. And when it does, demand for oil…art…stocks…and many other things…will go down in a hurry.

There. Is that helpful? Probably not. But that is the state of our reckoning with the oil market. We think oil is probably under-appreciated. But we suspect it will be appreciated even less when the credit bubble starts to go flat.

*** More bad news for the hedge funds. It is as if the press were finally waking up to what hedge funds really are – a way to separate a rich fool from his money.

Hedge funds, like all public spectacles, begin with deception. How could anyone paying 2% in fees and 20% in profits ever hope to make much money after taxes? Yet, some of the savviest investors believed they could.

After deception, the stage was set for farce, as Forbes reported recently:

“Hedge funds are a hotbed of questionable behavior, whether at blue-chip Wall Street firms or at fly-by-nights. Two youngsters and a 53-year-old assistant literature professor at a small college in New York formed a hedge fund, JB Stanley, and lost most of the $400,000 they raised from 15 investors. They siphoned off the rest for car payments, ATM cash withdrawals and other personal uses, according to SEC claims that led to a summary judgment against the three managers.”

But things could soon stop being funny.

“The hedge funds have been flooding the market with subprime mortgage bonds in order to raise cash needed to return to investors,” says a recent report by Roddy Boyd. “That has driven down prices across the board, depressing fund performance and making the bonds less attractive as collateral for loans.

“Investors are expected to learn over the next two weeks just how much damage hedge funds have sustained as a result of the subprime mortgage mess, and if the news is as bad as some market players expect, there is a fear that investors could pull out in droves.”

That will be when the final stage of the Crack-Up Boom comes along and farce turns into disaster.

The Daily Reckoning PRESENTS: Hans Sennholz, who passed away two weeks ago, was a died-in-the-wool doomsayer, a charismatic speaker, and an influential player in the financial freedom movement. Mark Skousen, who was a close friend of Dr. Sennholz’s, gives us a snapshot of his life, below…

GONE, BUT NOT FORGOTTEN

Two weeks ago, an old dear friend in the financial freedom movement died at the age of 85: Hans Sennholz.

Hans was an inspirational speaker at investment conferences in the 1970s and 1980s. I heard him first at a Howard Ruff conference in the early 1980s. Speaking in a mesmerizing German accent, he was spellbinding and always got a standing ovation. I wished I had his facility of expression.

But Hans Sennholz was also a died-in-the-wool doomsayer who throughout his life was probably wrong more than right about the outlook for stocks and bonds. He always thought high inflation was just around the corner, and Wall Street was headed for collapse at a moment’s notice.

Sennholz was a thorough-going gold bug, a devoted follower of Ludwig von Mises and a critic of anyone who opposed the gold standard. He wrote books with titles such as “Inflation or Gold?”, “Debts and Deficits,” “The Age of Inflation,” and “Money and Freedom.” When Milton Friedman died late last year, he took the Chicago school to task for advocating monetary inflation. “In its search for stability,” wrote Sennholz, “the Friedman amendment, unfortunately, proceeds on the old road to nowhere. There is no absolute monetary stability, never has been, and never can be.” For Sennholz, a true Misesian, there was only one solution to inflation: return to the classical gold standard, where the dollar is backed by gold.

Sennholz’s plane was shot down by allied troops and he spent several years as a POW in the United States. After the war, he discovered Mises and returned to the United States to earn his Ph. D. in economics in 1955 from New York University, where Mises taught. For 37 years, he taught some 10,000 students Austrian economics at Grove City College in western Pennsylvania. (Peter Boettke, top Austrian economist at George Mason University, is one of his students.)

Sennholz was a prolific advocate of the Austrian school, writing 17 books and over 500 articles during his career. He wrote regularly for “The Freeman,” “Human Events,” and financial publications such as “The Inflation Survival Letter.” Since 2000, he wrote online columns (www.sennholz.com/current.html). He and his wife Mary (also an editor and writer) once met Ronald Reagan, who said “I’ve been plagiarizing you for years.”

But Hans Sennholz was best as a powerful electric speaker with that unforgettable German accent. He flew his plane all over the country giving speeches on the evils of inflation, deficit spending, and the falling dollar before bankers, stockbrokers, businessmen and religious leaders. I first met him at a Howard Ruff conference in the late 1970s. After hearing him for only a few minutes, you were smitten by this true believer and a gold bug. He was the Douglas McArthur of Free-Market Economics.

Like Ludwig von Mises, Sennholz was a pessimist. In the 1970s, he warned that America was headed toward an inflationary Armageddon. During the inflationary seventies, he debated John Exter, a former Citibank executive, on “Inflation or Deflation?” While Exter predicted massive deflation, Sennholz warned of triple-digit inflation. Both were proven wrong, and did not anticipate the supply-side revolutions of Reagan and Thatcher, which brought sanity back to the global economy.

Even then, Sennholz thought the Reagan-Thatcher revolution was temporary, and remained a pessimist. His final column, “Money is flooding the world markets,” written May 19, 2007, states: “A few pessimistic economists are convinced that a devastating economic cataclysm lies ahead. They usually point to three threats that may have a serious impact on the American economy. There is the burgeoning tower of public and private debt resting on a foundation of greed and overindulgence. There are a multimillion dollar list of promises to a retirement system and a vast building of government guarantees and promises that are bound to be unkept. There even is a world of complex derivatives, the value of which depends on something else, such as stocks, bonds, futures, options, loans, and even promises. They all, according to these economists, will be the victims of the coming cataclysm. This economist, who has observed central bank policies since the 1950s, is in basic accord and feels sympathy for these pessimists.”

Yet the amazing thing is that despite this negative outlook, Hans Sennholz was an astute investor and died a very wealthy man. How is this possible? He was always predicting a crash in the stock market, he was bearish on bonds, and he seldom did well trading commodity futures. What’s left? Surprisingly, he made millions in small town real estate! Over the past 50 years he bought and sold numerous rental properties in his college town of Grove City, Pennsylvania, and other near-by locations. At one time Hans Sennholz was probably the largest landlord in Grove City. He even owned the property where we held his funeral!

He sold off a lot of his real estate when, in 1992 at the age of 70, he and his wife Mary took on the daunting task of reviving the Foundation for Economic Education. FEE was the first free-market think tank founded by Leonard Read in 1946 in Irvington-on-Hudson, New York. After Read died in 1983, FEE struggled financially and lost its influence. Sennholz came in and over the next five years righted the ship. He fired people and slash the budget, and got it back on course. In 1996, FEE celebrated its 50th anniversary by having Margaret Thatcher as the keynote speaker.

It was during his tenure as president of FEE that I got to know Hans Sennholz personally. He frequently invited me to speak at FEE’s monthly lecture series. I invite all my subscribers to come and we had big crowds at the FEE mansion. At the beginning of my talk, I’d turn to Hans and ask him to tell my subscribers all about FEE. In that unmistakable German accent, he spoke eloquently for 10-15 minutes and convinced people to donate to a good cause. Later he asked me to be a columnist for “The Freeman.” He also had FEE published the third edition of my book, “Economics of a Pure Gold Standard.” I am convinced that my becoming the president of FEE in 2001-02 was directly the result of Hans Sennholz’s unwavering support.

I was privileged to participate in writing a collection of essays in honor of Sennholz when he retired from full-time teaching at age 70, A Man of Principle (Grove City College, 1992). My favorite book by Hans Sennholz is called “The Politics of Unemployment” (Libertarian Press, 1987). His books are available at www.libertarianpress.com, run by his son Robert.

Douglas McArthur used to say, “Old soldiers never died, they just fade away.” Hans Sennholz may have faded away, but he shall never be forgotten.

Regards,

Mark Skousen
for The Daily Reckoning
July 10, 2007

Real Estate’s Harsh Realities originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Yet there was a stark contrast in the two sessions. The Friedman room was expansive and held more than a thousand enthusiasts, while Galbraith’s session attracted no more than 50 people. Some of the difference can be explained by the fact that the AEA meetings were held in Chicago, where Friedman taught for 30 years, and because two of the speakers were Nobel laureates, Gary Becker and Bob Lucas.

However, there is little doubt that if these two economists were honored 50 years ago at an AEA meeting, their fortunes would have been reversed. In the late 1950s, Friedman was a relatively unknown professor at Chicago who was regarded as a “reactionary” monetarist devoted to extreme laissez faire. Galbraith was hailed as the “progressive” Keynesian from Harvard who eloquently understood “American Capitalism,” and articulated the “countervailing powers” of Big Business, Big Labor, and Big Government. In 1958, his bestseller, “The Affluent Society,” made a convincing case for redistributing wealth and progressive taxation as the only legitimate solution to the widening gap between “private opulence” and “public squalor.” Galbraith went on to become a member of the “new economics” team of the Kennedy Administration and ambassador to India. In 1967, Galbraith completed his trilogy with “The New Industrial State” at time when America’s financial institutions were flexing their muscles around the globe. Galbraith reflected this hubris: The “technostructure” of big business could control markets and manipulate consumers through planning and advertising, and was no longer beholden to shareholders, consumer sovereignty, or supply and demand. The Sixties were the high tide of Keynesian economics and fine-tuning the economy.

But a series of unpredicted crisis and trends in the late 1960s and early 1970s opened the door for Milton Friedman and the growing band of free-market economists. The West suffered a sharp rise in inflation and economic crises, and American manufacturing lost its dominance in the world economy. It was time for a counter-revolution to the Keynesian-Galbraithian monolith.

At Chicago Friedman’s rigorous analysis of the business cycle and free-market solutions started paying dividends. His mammoth “Monetary History of the United States,” published in 1963 and co-authored with Anna J. Schwartz, gradually convinced the economics profession that the Great Depression was not a result of “bad” distribution of income, “bad” corporate structure, and a “bad” banking system, as emphasized by Galbraith in his book “The Great Crash,” but largely because of “bad” government policy by the Federal Reserve, which allowed the money supply to collapse by more than one third. Friedman’s achievement was a triumph of empirical economics that Galbraith could never match.

Friedman and other market economists also countered Galbraith’s “social imbalance” thesis in “The Affluent Society.” The Keynesian “tax and spend” solution had failed miserably to redress the gap between private affluence and public poverty because government often lacks the market incentives to cut costs and meet the needs of its customers, the taxpayers, in an efficient way. In his 1962 book, “Capitalism and Freedom,” Friedman argued that the solution to this social dilemma was to expand the market (supply side economics) and apply market principles to public enterprise where feasible. This led to the privatization movement around the world, where country after country systematically denationalized, deregulated, and privatized public enterprises and services, especially after the collapse of the Soviet centralized planning model in the early 1990s.

Unfortunately, Galbraith seemed to be oblivious to these dramatic changes. In the 40th anniversary edition of “The Affluent Society,” Galbraith had a chance to revise his thesis in light of the worldwide movement toward freer markets. Yet the privatization solution completely eluded Galbraith’s mind. He chose not to even mention it.

In sum, one gets the impression that Friedman and other the free-market schools are today’s “progressives,” offer new bold solutions to public issues in education, welfare, and fiscal policy, while Galbraith and the old-style Keynesians are the “reactionaries,” unwilling to entertain the new market solutions to public problems. Over the past 30 years, Friedman’s star has risen while Galbraith’s has fallen. Well did George Stigler conclude, “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.”

Regards,

Mark Skousen
for The Daily Reckoning
January 30, 2007

Editor’s Note: Dr. Mark Skousen is is a professional economist, financial advisor, university professor and author of more than 20 books. Dr. Skousen has taught economics and finance at Columbia Business School, Barnard College at Columbia University and Rollins College in Winter Park, Florida. He has appeared on ABC News, CNBC Power Lunch, CNN, Fox News, and C-SPAN Book TV.

He is the author of the new book, “The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes” (M. E. Sharpe Publishers, 2007). To purchase your copy, see here:

The Big Three in Economics

Rerun the tape!

No, we’re not talking about the War in Iraq; we know how that show goes.

We’re talking about the financial show. Each new twist is just a bit more absurd than the one that went before.

The plot, as we recall it, runs like this: The tech bubble blows up…the economy and the stock market tank; 9/11 comes along…the feds panic; the Bush Administration takes a modest, fraudulent surplus…and turns it into a massive budget deficit; taxes are cut…spending increases. In the span of 18 months, a total of about $1.5 trillion is added to the economy.

Desperately worried that it has a Japan-like deflationary slump coming up (a fear to which we happily contributed, albeit in a small way, in our first book, “Financial Reckoning Day”) the Federal Reserve swings into action, too. It is the Ides of March every day at the Fed. Slash; cut…rates go down to a nominal 1% – or about 2% below the rate of consumer price inflation.

Then, three years later, while rates are being ‘normalized’, the Fed continues to worry…this time about a slump in residential housing. Even though rates are increased, the Fed boosts liquidity by allowing the money supply to expand at a 10% rate – about three times faster than GDP growth. And Adrian Van Eck estimates that another $1 trillion of new money will be added to M3 in 2007.

This tide of liquidity, by the way, doesn’t stop at the U.S. border. Instead, it washes all over the world. Foreign countries need to keep their own currencies from rising against the dollar; they, too, find they have to turn on the taps just to stay even. In Europe, for example, M3 is now rising at 9.7% per year – about the same as the United States – its fastest rate in 17 years.

Where is all this new money going? Into consumer prices? Nope…not yet.

Banks, investment companies, and large speculators control the flow of this new loot. It never reaches the working man, except in the form of additional debt. So, it does not seem to lift prices of Huggies and cola. Instead, it floats up the prices of financial assets. Art…derivatives…swaps…you name it.

As things rise in price, the intermediaries are able to get even more leverage out of them. Trade ‘em, refinance ‘em, repackage ‘em, sell ‘em, restructure ‘em, hedge ‘em; the whole economy has become a dervish – with each whirling, swirling, twirling financial instrument throwing off fees, commissions, and spreads for the shrewd operators who manipulate ‘em.

It’s almost too much for us to keep up with.

The head of the European Central Bank elaborates.

“There is now such creativity of new and very sophisticated financial instruments…that we don’t know fully where the risks are located,” said Jean Claude Trichet. “We are trying to understand what is going on – but it is a big, big challenge.”

Mr. Trichet was speaking to the illustrious group gathered in Davos, Switzerland. The Financial Times describes the debate in which he played a role:

“Many investment bankers and some regulators and economists argued at last week’s World Economic Forum in Davos that the growth of the $450,000 billion…derivatives sector had helped reduce market volatility and made the system more resilient to shocks by spreading credit risk. But other officials fear these instruments may be raising leverage and risk-taking to dangerous levels and keeping the cost of borrowing artificially low, potentially increasing the chance of financial crises.”

More news:

————–

Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“Gold has really been on a strange trading trip, given that the dollar had held the hammer, and oil prices were falling. Now, oil prices are recovering. Let’s hope this lights a fire under gold to move it even higher, eh?”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig

————–

And more views:

*** Here at the Daily Reckoning we have our opinion: The more a financial innovation proves successful, the more successful investors will find ways to make it fatal.

Norman Angell’s book, published at the beginning of the 20th century, argued persuasively that new innovations in politics and markets of the period made war unthinkable. People stopped thinking about it. They stopped worrying. They stopped taking precautions. Never had people been more optimistic and more complacent than they were – right up until WWI began in August of 1914. Then, all the innovations that so delighted Angell – industrialization, technological improvements, nationalization – became the exact same innovations that made it the bloodiest and most expensive war in history.

Coincidentally, that was also when U.S. property prices reached their last epic high. In real terms, they went down in WWI and kept going down for 70 years or more. Only in the last 10 years have they gone back up – returning to their 1914 high only in 2005.

And now, a whole new round of innovations are supposed to make market crashes and depressions obsolete. Perhaps it is true. But we wouldn’t bet on it.

The credit bubble has now been expanding at an extraordinary rate for so long that people have begun to take it for granted. But residential property in the United States is taking a breather, maybe even going down a little. U.S. stocks are taking it easy – flat since the beginning of the year. Oil seems stable around $55. Gold is marking time at $640. Bond yields have been rising for the last two months. Where’s all the money going? Or is this great liquidity bubble finally beginning to lose air?

If not yet…when? We wish we knew. Mr. Trichet warns that investors should prepare for a ‘repricing’ of financial assets. We doubt he knows any more than we do…but we don’t doubt he is right.

*** Our buddy James Kunstler weighs in on last week’s state of the union:

“It was a speech that any county planning board chairman might have made, which is to say a lame defense of the status quo. Missing is the comprehension of a crisis that is gathering like a hurricane unseen from the shore but visible to anyone with rudimentary radar. This president will use every last corn kernel and every last wood chip to keep 260 million cars and trucks running. Better prepare to cut down on the Cheez Doodles, America. He wants to reduce gasoline usage by 20 percent over the next ten years.

“Guess what: circumstances will probably do that for us involuntarily, because the sheer amount of petroleum available to the United States is certain to decline substantially by then, whether we like it or not. Real leadership would recognize this and propose making other arrangements, like getting the trains running again or ending incentives for suburban sprawl. A big tax deduction on health insurance would work for me, but what about the millions struggling to get by on Wal-Mart global-labor-arbitrage wages with no health insurance benefits? They’re just f#%*@*.”

*** “Number of vacant homes for sale surges 34%,” says a headline.

“We gave up,” reports a friend from Florida. “We had our house on the market. We tried to sell it ourselves. Then, we put it with a realtor. But there were nearly a dozen other places for sale on the same block. Almost all of them were empty. We just figured that this was not the time to sell. So we put our house up for rent. It’s not ideal, because now we have to manage rental property, which we don’t want to do. But it’s better than losing money. Of course, right now…it’s still empty. We haven’t found a renter yet.”

Many homeowners have already lost money; they just don’t know or don’t want to admit it. They presume that by taking a property off the market, they are avoiding a loss.

‘Cut your losses,’ is an old-time rule in the stock market. You thought a stock would go up…and it didn’t. This tells you that you’re wrong. You should realize that you don’t know what you’re doing; sell the position, and ‘let your winnings run.’

But the idea of ever-rising house prices is so deeply rooted that people cannot believe they’ve made a mistake. They cannot believe that their theory is wrong. They cannot believe that there is something going on which they just don’t understand. Instead, they merely assume that their timing was off.

“I was a little late,” they say.

And they think that if they hold onto the position, the time will come when it will be a good investment again.

Yet, if it is true that housing follows very long patterns – with a cycle as long as 120 years – they might wait a long, long time before they get their money back.

How David Slew Goliath originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

I was at the New Orleans Investment Conference when I learned that free-market economist extraordinaire Milton Friedman, died on November 16. He was a dear friend. I was probably the last person to go out to lunch with Milton.

We met at his favorite restaurant in San Francisco, where I showed him a picture of him standing next to John Kenneth Galbraith, the premier Keynesian and welfare statist of the 20th century.

Galbraith towered over the diminutive Friedman. Beneath the picture was a funny line by George Stigler: “All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” Milton was so pleased with the photo and caption that he sent it to all his friends only two weeks before his passing.

“All great economists are tall. There are two exceptions: John Kenneth Galbraith and Milton Friedman.” –George J. Stigler

(Left to right: George Stigler, Milton Friedman, John Kenneth Galbraith.

Creation of Mark Skousen. Technical assistance by James Durham.)

Milton had just turned 94, yet his mind was sharp. We discussed the latest Nobel Prize in economics. He said, “We’re running out of good names.” What about the new field of behavior economics that Richard Thaler (Chicago), Robert Shiller (Yale), and Jeremy Siegel (Wharton)? “Yes,” he agreed. “They are making an important contribution. Siegel worked with me at Chicago in the 1970s and is doing brilliant work.”

I asked Milton if he wouldn’t mind giving me a blurb for my next book, “The Big Three in Economics.” He loved my previous history, “The Making of Modern Economics,” and agreed to give me a quote. It saddens me to know he never got to it.

For the past few years, he walked with a cane. He suffered from pain in his legs, a weak heart (after two heart surgeries in the 1980s), and was losing his eyesight. As we left, I asked him, “Do you think you’ll live to be 100?” He answered quickly, “I hope not!”

A few days later he fell and was taken to the hospital. He died a couple weeks later of a heart attack.

Friedman was not only a great economist, but a memorable quotesmith. Besides the standard bearers, such as “Inflation is always and everywhere a monetary phenomenon” and “There’s no such thing as a free lunch,” here are some others less well known:

“Competition is a tough weed, but freedom is a rare and delicate flower.” — (with George J. Stigler)

“If a tax cut increases government revenues, you haven’t cut taxes enough.”

“I favor tax reductions under any circumstances, for any excuse, for any reason, at any time.”

“A society that puts equality ahead of freedom will end up with neither equality or freedom.”

“Nothing is so permanent as a temporary government program.”

“Inflation is taxation without legislation.”

“The economy and the stock market are two different things.”

“If government is to exercise power, better in the county than in the state, better in the state than in Washington.”

“The great advances of civilization, whether in architecture or painting, in science or in literature, in industry or agriculture, have never come from centralized government.”

“The minimum wage law is one of the most, if not the most, anti-black laws on the statute books.”

“Nobody spends somebody else’s money as carefully as he spends his own.”

“The government solution to a problem is usually as bad as the problem.”

I will miss our lunches and dinners together. He was one of the most unforgettable people I ever met.

P. S.  At our luncheon last month, Milton Friedman and I also talked about the upcoming FreedomFest.  He was a big fan and was looking forward to it. He wrote me this statement to all freedom lovers:  “FreedomFest is a great place to talk, argue, listen, celebrate the triumphs of liberty, assess the dangers to liberty, and provide that eternal vigilance that is the price of liberty. We have so much to celebrate but also much to be concerned about.”  We are going to have a special tribute to Milton Friedman at FreedomFest 2007, set for July 5-7, 2007, at Bally’s in Las Vegas.  For more information, go to www.freedomfest.com.

Milton Friedman, RIP originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

From The Compleated Autobiography by Benjamin Franklin, compiled and edited by Mark Skousen (Regnery, 2006).

“He stole the lightning from the heavens, and the scepter from tyrants
–Turgot

When I read in all the papers of the extravagant rejoices every Fourth of July, the day on which we signed the declaration of independence, thereby hazarding our lives and fortunes, I am convinced of the universal satisfaction of the people with the revolution and its grand principles.

The important ends of civil government are the personal securities of life and liberty. I am a mortal enemy to arbitrary government and unlimited power. I am naturally very jealous for the rights and liberties of my country, and the least encroachment of those invaluable privileges is apt to make my blood boil. The revolution has been the work of many able and brave men, wherein it is sufficient honor for me if I am allowed a small share.

A Miracle in Human Affairs

The manner in which the whole of this business was conducted was such a miracle in human affairs, that if I had not been in the midst of it, and seen all the movements, I could not have comprehended how it was effected. I had no doubt of our finally succeeding in this war by the blessing of God. This is the greatest revolution the world has ever seen.

I have lived a long time; and the longer I live, the more convincing proofs I see of this truth, that God governs in the affairs of men! If it had not been for the justice of our cause, and the consequent interposition of Providence in which we had faith, we must have been ruined. If I had ever before been an atheist, I should now have been convinced of the being and government of a Deity. It is He who abases the proud and favors the humble! May we never forget his goodness to us, and may our future conduct manifest our gratitude.

It is a singular thing in the history of mankind that a great people have had the opportunity of forming a government for themselves. We are making experiment in politics. In these sentiments, I agree to the Constitution of the United States, with all its faults, if they are such. From when you assemble a number of men to have the advantage of their joint wisdom, you inevitably assemble with those men all their prejudices, their passions, their errors of opinion, their local interests, and their selfish views. It therefore astonishes me to find this system approaching so near to perfection as it does.

America Has a Great Destiny

America will, with God’s blessing, become a great and happy country. This country affords a good climate, fine wholesome air, plenty of provisions, good laws, just and cheap government, with all the civil and religious liberties that reasonable men can wish for. A virtuous and laborious people may be cheaply governed.

I have sometimes almost wished it had been my destiny to have been born two or three centuries hence, for inventions of improvement are prolific, and beget more of their kind. The present progress is rapid. Many of great importance, now unthought of, will before that period be procured. I mention one reason for such a wish, which is that if the art of physic [medicine] shall be improved in proportion with other arts, we may then be able to avoid diseases, and live as long as the patriarchs in Genesis.

Beware of Party Politics

There are two passions which have a powerful influence in the affairs of men, ambition and avarice, the love of power and the love of money….And of what kind of men will strive for this profitable pre-eminence, thro’ all the bustle of cabal, the heat of contention, the infinite mutual abuse of parties, tearing to pieces the best of characters? It will not be the wise and moderate, the lovers of peace and good order, the men fittest for the trust. It will be the bold and the violent, the men of strong passions and indefatigable activity in their selfish pursuits. These will trust themselves to this government and be their rules…I am apprehensive, therefore, perhaps too apprehensive, that the government of these states may in future times end in a monarchy, and a king will the sooner be set over us.

Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters. But America is too enlightened to be enslaved.

The Rattlesnake as America’s Symbol

During the War for Independence, I observed on one of the drums belonging to the marines that there was painted a rattlesnake, with this modest motto under it, “Don’t tread on me.” It occurred to me that the rattlesnake might therefore be chosen to represent America. Having frequently seen the rattlesnake, I ran over in my mind every property by which she was distinguished. I recollect that her eye excelled in brightness, that of any other animal, and that she has no eye-lids. She may therefore be esteemed an emblem of vigilance. She never begins an attack, nor, when once engaged, ever surrenders; she is therefore an emblem of magnanimity and true courage. As if anxious to prevent all pretensions of quarrelling with her, the weapons with which nature has furnished her, she conceals in the roof of her mouth. But their wounds however small, are decisive and fatal. Conscious of this, she never wounds till she has generously given notice, even to her enemy, and cautioned him against the danger of treading on her.

The rattlesnake is solitary and associates with her kind only when it is necessary for their preservation. She strongly resembles America in this, that she is beautiful in youth and her beauty increases with her age, “her tongue also is blue and forked as the lightning, and her abode is among impenetrable rocks.”

The Mischief of War

When will men be convinced that even successful wars do at length become misfortunes to those who unjustly commence them, and who triumphed blindly in their success, not seeing all its consequences. There is so little good gained, and so much mischief done generally by wars that I wish the imprudence of undertaking them was more evident to princes. For in my opinion there never was a good war, or a bad peace. What vast additions to the conveniences and comforts of living might mankind have acquired if the money spent in wars had been employed in works of public utility! What an extension of agriculture…what rivers rendered navigable….what bridges, aqueducts, new roads, and other public works, edifices and improvements rendering England a complete paradise. But millions were spent in the great war doing mischief and destroying the lives of so many thousands of working people who might have performed useful labor!

The system of America is to have commerce with every nation and war with none.

Our cause is the cause of all mankind. God grant that not only the love of liberty but a thorough knowledge of the rights of man may pervade all nations of the earth so that a philosopher may set his foot anywhere on its surface and say, this is my country!

Regards,

Mark “Be Free” Skousen
for The Daily Reckoning

Editor’s Note: We thank Dr. Skousen for his insights into Franklin’s fascinating life and writings. The Compleated Autobiography by Benjamin Franklin, compiled and edited by Dr. Mark Skousen, is published by Regnery and now available at the link below. It isn’t often that you get a chance to buy a first edition of a book written by a founding father for only $18.45. It won’t last long. Buy it today!

The Compleated Autobiography by Benjamin Franklin

What the Fourth of July Means to Me originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

"One must do mad things when one loves madly." – Ben Franklin

Ben Franklin succeeded like no other. He built a fortune from scratch and is the only Founding Father to make the Financial 100, the wealthiest Americans of all time. One historian calls him "the most versatile genius in all history." More than Adams, Jefferson, or Washington, Franklin improved the daily lives of citizens with his Franklin stove, lightning rod, bifocals, and Poor Richard’s Almanac.

Politically, Franklin should be called the "co-father" of the nation. Washington won the war at home, but Franklin won the war abroad. Without Franklin’s brilliant diplomacy, the French would never have provided the military and financial aid – over one billion dollars – essential to achieve American independence from the British. (In fact, Franklin’s fundraising was so successful that the French government went bankrupt a few years later and caused the French Revolution.)

Franklin also lived longer than any of his founders…to the glorious age of 84. He continued to influence all Americans after he died in 1790, with the publication of his famed memoirs, the most popular autobiography ever written, and the nation’s first "self help" book, "The Way to Wealth."

But now he has pulled off his most astonishing achievement yet: completing his Autobiography 215 years after his death.

Well…okay…so he had a little help from me! Over the past year, I compiled and edited his Compleated Autobiography, drawing upon thousands of Franklin’s personal correspondence and journals. It proved to be the most creative and rewarding project of my life.

Benjamin Franklin’s Success: The Rest of the Story

Let me explain. Franklin was so busy throughout his adult life that he never finished his life story. The Autobiography ends abruptly in 1757, when Franklin was only 51. Yet he lived another 33 dramatic years, some of the most eventful in American history, including the signing of the Declaration of Independence, his nine-year stint as minister to France, and being a delegate to the Constitutional Convention.

I thought it was high time that Americans heard the "rest of the story," as Paul Harvey would say.

In compiling and editing Franklin’s private letters and diaries, I discovered the source of Franklin’s incredible success story. It’s what the French call savoir, as in savoir-faire and savoir-vivre. The words are hard to translate, but essentially they mean "practical know-how" and "good manners."

You see, Franklin has the strongest drive – some might even call it sex drive – of any man alive in the 18th century. Franklin took to heart Poor Richard’s refrain, "Drive thy business!"

Franklin was driven to achieve success in business, politics, and human relations, and he mastered the techniques of success. He was a creative genius. In business, he worked longer hours than his fellow printers…he kept ahead of his competition in new printing techniques and introducing better products, such as the annual farmer’s almanac, which he improved upon.

Throughout his life and writings, he did more than anyone else to lay the groundwork for wealth creation in our emerging nation. He chronicled much of his business success in his autobiography, thus creating the first "rags to riches" story in American history. Business luminaries from Andrew Carnegie to Warren Buffett have sworn by Franklin’s good counsel. In his "Advice to a Young Tradesman," he wrote, "In short, the way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality; that is, waste neither time nor money, but make the best use of both. Without industry and frugality, nothing will do, and with them everything."

Benjamin Franklin’s Success: Strong Personal Relationships

But the most successful method was his ability to communicate and develop strong personal relationships. In Philadelphia, he created the Junto, a club of artisans that met Friday evenings to socialize and debate "morals, politics or natural philosophy." He developed a strategy to befriend everyone, including his enemies, but avoiding dogmatic views and speaking ill of others, and maintaining a degree of humility. "Love your enemies, for they tell you your faults," explained Poor Richard. "A true friend is your best possession."

Franklin succeeded in politics because he focused on projects that everyone supported. Who could oppose the building of a hospital, a college, or fire insurance company, or a library? "A spoonful of honey will catch more flies than a gallon of vinegar," says Poor Richard. And: "A good example is the best sermon."

People of all walks of life were naturally attracted to him. Of all the Founding Fathers, only Franklin is approachable, somebody you could sit down and have a beer with. Washington was too aloof, Adams was too obnoxious, and Jefferson was too intimidating. Only Franklin could say, "I love company, a chat, a laugh, a glass, and even a song, and relish the grave observations and wise sentences of old men’s conversations."

And it wasn’t just men who enjoyed Franklin’s company. Women, in particular, were memorized by Franklin. He exuded sexual prowess. "Somebody, it seemed, gave it out that I loved ladies; and then everybody presented me their ladies (or the ladies presented themselves) to be embraced, that is to have their necks kissed." He went on to write, "The French ladies had a thousand other ways of rendering themselves agreeable by their various attentions and civilities, and their sensible conversation. Tis a delightful people to live with."

While ambassador to France, Franklin developed a close friendship with Madam Brillion, Madam Helvetius, and many other women. Jefferson observed him to be in a "frenzy" around women. The Puritans John and Abigail Adams found the French ladies’s behavior around the old man "disgusting." Franklin, who had been a widower when his wife Deborah died in 1774, proposed marriage to Madam Helvetius, but was turned down.

Benjamin Franklin’s Success: A Family Tradition

Yet, it is clear from his private letters that Franklin was sexually active into his seventies! (If you want proof, see pages 162, 166, and 278 in the Compleated Autobiography.) But he was no lecher, despite all the rumors. Historians say there is no evidence that Franklin sired multiple children out of wedlock, as his contemporary critics maintained. He had only one illegitimate son, William, whose relationship became embittered after William became a British royalist during the American Revolution.

However, William had an illegitimate son, Temple, and Temple sired a child out of wedlock, so there’s a family tradition of promiscuity. (Interestingly, I am a direct descendant of Ben Franklin through a "natural son" of Franklin’s grandson Louis Bache!)

Napoleon Hill’s most famous chapter in Think and Grow Rich is "The Power of Sexual Transmutation." He makes the point that the sex drive, if channeled properly, can be the source of great creative power. It’s much more than the sexual act. Rather than suppressing this natural sex drive into celibacy, it can generate the passion to achieve great productive ends that are rich, powerful and many faceted.

Ben Franklin discovered the power of sexual transmutation and, consequently, fulfilled his destiny. His drive to succeed was so strong that he overcame great odds at various critical times in his life. He had many setbacks in life…financially, he lost most of his regular income when the British fired him as postmaster and colonial agent; he suffered devastating bouts of gout, high fevers, and kidney stones that were so painful he could barely stand during the final seven years of his life; his life was constantly threatened by redcoats, spies and privateers; and he had to fight constantly with John Adams and other commissioners to convince the French to give more and more aid to a new nation who was virtually bankrupt.

If Franklin’s Compleated Autobiography reveals anything, it tells a miraculous story of American independence, and the critical role Franklin played in it. "The whole affair of this business," he wrote, "was such a miracle in human affairs, that if I had not been in the midst of it, and seen all the movements, I could not have comprehended how it was effected." Ultimately, Franklin became deeply religious because of this "miracle" and he would later write, "I have lived a long time; and the longer I live, the more convincing proofs I see of this truth, that God governs in the affairs of men!" He had no doubt in his mind that Providence had preserved his long life to witness the creation of the United States, a nation destined for greatness and the "cause of all mankind"…freedom.

At the end of the War for Independence, Franklin was optimistic about this new nation: "America will, with God’s blessing, become a great and happy country." He was right. And we have Ben Franklin and the other great Founding Fathers to thank for it.

Regards,

Mark Skousen
for The Daily Reckoning

December 21, 2005

Mark Skousen is the editor of  Forecasts & Strategies , now celebrating its 25th anniversary, and it remains one of the most successful investment newsletters in the nation.

"I am much more optimistic," said Horacio Marquez, comparing himself to your editor.

Señor Marquez sees the glass more than half full. He sees it practically running over. Yes, the U.S. economy is overextended and will probably slack off next year. But, no, the world economy will not fall apart. Instead, it will boom, thanks to spectacular rates of growth outside the United States.

We ran into Horacio in Baltimore, where he gave us a copy of his outlook for 2006.

"The best opportunity for profits since the Second World War," it begins. "The deceleration of the U.S. economy will be more than compensated for by acceleration in Japan, Brazil, Germany, Italy, France, emerging countries in Europe, India and China."

If American consumers stop consuming, China’s factories will have to look elsewhere for new customers. India’s service industries will have to look for other people to service. Germany’s auto manufacturers will have to find other drivers. Brazil will have to find new markets for its soybeans.

But so what? America prospered in the 20th century without depending on foreign spendthrifts. Shoemakers in New Hampshire cobbled for aircraft workers in California who built flying machines for businessmen from Atlanta. Nearly every family ended the century richer than it began it. Mightn’t factory slaves in Shanghai buss and shlep for IT geniuses in Bangalore as well as those in Silicon Valley? Mightn’t a new Mercedes grace the parking lots of Singapore as well as those of Hollywood? Mightn’t Malaysians, Indonesians, Nepalese, and Cantonese begin using handheld electronic gizmos made in Japan and fattening themselves on food enriched with soy oil imported from Brazil?

Horacio thinks so.

"Buy Mitsubishi," he recommends. "Japan continues its agenda of profound restructuring, including the privatization of the postal system. The banking system is near the end of its process of restructuring… deflation….is giving way to a light and benign inflation….[and] the Chinese economy feeds on rising industrial and technological imports from Japan."

Likewise, in Brazil, a combination of favorable political developments and an expanding world market for primary products is doing wonders for the economy. Brazil’s finance minister is an old Trotskyite. President Lula has said a lot of stupid and silly things. But, fortunately, he didn’t mean it. Instead, they’ve instituted reasonably sensible and conservative economic policies – almost the exact opposite of those north of the Rio Grande. The fiscal deficit is declining. Interest rates are relatively high (credit is tight). Inflation rates are falling. The economy is growing. And one of Brazil’s major steel producers, CVRD, looks like a bargain, says Horacio.

Maybe he is right. Maybe, on a global basis, the glass really is more than half full. We don’t know. Buying a few solid stocks in growing markets might be a good strategy. The rest of the world kept growing when Britain went into decline in the late 19th century. And so, the rest of the world will probably keep growing as the United States declines, too. But Daily Reckoning readers are urged to hold onto some gold; the transition could be rough.

More news, from our currency counselor…

————–

Chris Gaffney, reporting from the EverBank trading desk in St. Louis:

"Anyone who has been to the doctor, paid school tuition, or had to purchase a home will certainly tell you there is inflation in this economy! The car prices and flat-screen TV prices may be dropping, but just how many cars and TVs can we buy?"

————–

And more views out the window of our new "Casa Bonner" in the Nicaraguan Riviera.

*** Speaking of gold…the price seems to be holding above $500. We expected it to correct. So far, the correction has taken about $30 off the price. We suspect that the correction has further to go. We will wait and see…and prepare to buy at any price below $500.

*** "Dear Lord, bless this house and everyone who comes into it. Help them to grow to love and respect each other…and help the family to come together in peace, joy, and the love of God. "

Padre Mandeca came over yesterday to bless the new house. He turned out to be an agreeable man from Managua who had gone to seminary in Boston.

After the blessing, he took a sprig of hedge, dipped it in sanctified water, and asperged the living room…and its occupants. Then, he moved from room to room, tossing drops of water onto the furniture.

"This is ridiculous," said Jules, a 17-year-old rationalist. "What is the point of this? Is this really going to make the house better in some way… is it going to ward off evils spirits or something?"

"Who knows?" saith his father. "But it is a nice custom. And why take chances?"

"Yes," added his mother. "Don’t be such a cynic. Maybe it does ward off evil spirits. And maybe it just helps us remember what we are doing…and how we want to live…so that WE ward off the evil influences ourselves."

"Well, you brought the padre down from Managua," said our friend Antonio the next day. "But you should also get the padre from [nearby] Tola. He blesses all the new houses in the area."

"Oh…yes…we’d love to have him come and bless the house," said Elizabeth.

"What, you’re not really going to have the house blessed twice," replied the cynical 17-year-old modernist. . "Isn’t that overkill? I mean, either Padre Mandeca blessed the house effectively or he didn’t. Either the blessing was worth something or it wasn’t. If it was…you don’t need to do it again. The house is already blessed. If not, then blessings really don’t work…so there’s no point in doing it twice."

"But why not?" opined his father. "Why take chances?"

*** Padre Mandeca began a special school for very poor children in a very poor section of Managua.

"We have about 300 students. Their mothers bring them every morning. We insist that they pay 10 cents per day. But even that is too much for many of the parents. They bring them to the school and beg us to take them…but we don’t have any more space."

Nicaragua is a poor country. Beggars without arms or legs ask for alms on street corners. Often, the beggars have children too, who pester motorists…offer to clean windshields…or sell tomatoes. Only a few lucky ones get to go to Padre Mandeca’s school.

"How is the school supported?" we wanted to know. Elizabeth visited the school with a friend last year. She was already eager to help.

"We do our best. Much of the staff is made up of nuns…of course, they’re not paid. And the people who are paid don’t get very much money. You know, in that neighborhood, no one gets very much money. We’re able to operate the whole project – in two separate locations – on $5,000 per month. We get about 10% of our budget from the government. The rest comes from private donations. But, to tell you the truth, it’s very hard to raise money in Nicaragua. There is not a lot of money…and so many people who need it."

There are a lot of ways to part with money, dear reader. You can go out to dinner. You can buy a new car. You can get a new shirt or a new watch. You can support a political party…buy a stock…give money to your children…or throw a wild party. We don’t know whether one way is better than another. New cars, new houses, new furnishings, new trips, new art, collectibles, ranches in Argentina – many of the ways a middle-aged man spends his money are embarrassing or pathetic. All we can say is that when we offered to make a donation to Padre Manteca’s school at least no member of the family rolled his eyes or laughed.

"Padre, you blessed our home. We would like to do what we can to help you."

Daily Reckoning readers who would like to make a contribution are invited to contact Kate at our headquarters in Baltimore: Kincontrera@dailyreckoning.com

The Power of One originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

"Lin Yutang?" he asked. "Is that a new Chinese trading system?"

"No, I’m afraid not. It’s a philosophy of life."

He seemed intrigued. I went on to explain that Lin Yutang was a very unusual Chinese philosopher and writer who lived in both in both China and the United States, and understood both cultures. He is known as the philosopher of leisure and "letting go." I quoted his most famous line – a line that usually angers Americans:

"The busy man is never wise, and the wise man is never busy."

I made the mistake of writing this statement on the blackboard on the first day of class at Columbia Business School. A third of the students left and dropped the class immediately. [But those who stayed said it was the best class they ever took at Columbia. As one student said, "We've never been taught anything like this before at Columbia!"]

Lin Yutang: Why You Need Free Time

Yet there is wisdom in Lin’s statement. If you are too busy in your work, you don’t have time to learn new ideas, to discover new truths, to enjoy life’s little pleasures, or perhaps to pick a winning stock! Beating the market requires you to look down un-trodden paths, and you need the free time to do it.

Lin Yutang criticized most Americans for being too busy, and therefore too subservient to the business culture and the old ways. Slaves to their work, they worry themselves to death. In another startling statement, Lin states, "The three American vices seem to be efficiency, punctuality and the desire for achievement and success. They are the things that make the Americans so unhappy and so nervous." Gee, I thought they were American virtues!

Lin goes on to say, "O wise humanity, terribly wise humanity! How inscrutable is the civilization where men toil and work and worry their hair gray to get a living and forget to play!"

Lin offers the secret to success for the businessman [busy man?] in this following statement: "Actually, many business men who pride themselves on rushing about the in morning and afternoon and keeping three desk telephones busy all the time on their desk, never realize that they could make twice the amount of money, if they would give themselves one hour’s solitude awake in bed, at one o’clock in the morning or even at seven. There, comfortably free, the real business head can think, he can ponder over his achievements and his mistakes of yesterday and single out the important from the trivial in the day’s program ahead of him."

Lin Yutang is a champion of the individual – "its unreasonableness, its inveterate prejudices, and its waywardness and unpredictability." But in today’s society, the individual free thinker is being replaced by the soldier as the ideal. "Instead of wayward, incalculable, unpredictable free individuals, we are going to have rationalized, disciplined, regimented and uniformed, patriotic coolies, so efficiently controlled and organized that a nation of fifty or sixty millions can believe in the same creed, think the same thoughts, and like the same food." Lin goes on to warn, "Clearly two opposite views of human dignity are possible: the one believing that a person who retains his freedom and individuality is the noblest type, and the other believing that a person who has completely lost independent judgment and surrendered all rights to private beliefs and opinions to the ruler or the state is the best and noblest being."

I dare say which of the two applies to Daily Reckoning readers!

Lin Yutang: Don’t Compartmentalize

Lin dislikes the popular trend of compartmentalizing people in groups and classes. "We no longer think of a man as a man, but as a cog in a wheel, a member of a union or a class, a ‘capitalist’ to be denounced, or a ‘worker’ to be regarded as a comrade…We are no longer individuals, no longer men, but only classes."

Lin Yutang experienced the brutality of Chinese communism and the heavy-handed bureaucracy of Washington during the New Deal era. Needless to say, he has a low opinion of government. "I hate censors and all agencies and forms of government that try to control our thoughts."

He also questioned the establishment economist and forecaster: "Perhaps I don’t understand economics, but economics does not understand me, either. The sad thing about economics is that it is no science if it stops at commodities and does not go beyond human motives…It remains true that the stock exchange cannot, with the best assemblage of world economic data, scientifically predict the rise and fall of gold or silver or commodities, as the weather bureau can forecast the weather. The reason clearly lies in the fact that there is a human element in it, and when too many people are selling out, some will start buying in…this is merely an illustration of the incalculableness and waywardness of human behavior, which is true not only in the hard and matter-of-fact dealings of business, but also in the shape of the course of history."

Lin Yutang was probably unfamiliar with the one school of economics that does take into account human behavior: the Austrian school of Ludwig von Mises and Friedrich Hayek. That’s why Mises’s magnum opus is called Human Action!

Lin Yutang has many more things to say about our culture and how to live a happy and fulfilling life…about growing old gracefully ("The East and West take exactly opposite points of view. In China, the first question they ask is, ‘What is your glorious age?’")…the need for women in conversation….the evils of Western wear…the only way to travel ("buy a one-way ticket!")…why he is a "pagan"…and his controversial views on smoking. I’ve only scratched the surface of this brilliant Chinese philosopher.

Regards,

Mark Skousen
for The Daily Reckoning
April 12, 2005

P.S. I encourage readers to buy Lin Yutang’s book, The Importance of Living. It was written in 1937, but in today’s’ hustle and bustle world, it is even more relevant.

Our train has come to a complete halt in the middle of nowhere. The Eurostar is normally a reliable and convenient way to travel between the two cities, London and Paris. But occasionally, and for no apparent reason, it stops.

We have nothing to read except clippings from last week’s Barron’s…and half a dozen books on WWI. First, we turn to Barron’s…

American executives are the best paid in the world. It is commonly believed that they are compensated so richly because they make money for shareholders. Why else would capitalists want to give away a significant portion of their profits?

In the last 10 years, Barron’s tells us, the compensation of top executives in America grew at twice the rate of corporate profits. In 1993-1995, the top five officers of public companies were paid 4.8% of corporate profits. In 2001-2003, the level had jumped to 10.3%. In the decade ending 2003, these executives took $290 billion to the top officers. Why would capitalists allow their paid employees such a large, and growing, share of what should have been theirs? Could competent people not be found for less? And yet, you read the story of Enron’s management…or of WorldCom’s…and you see that many of these highly paid executives shouldn’t be allowed to run a grocery store, let alone a billion-dollar public corporation.

What gives? Over time, institutions – even one as nimble as capitalism – have a way of degenerating and corrupting themselves. Everything falls apart. The Catholic Church under the Medici popes would have been barely recognizable to St. Peter. America under George W. Bush would have been repulsive to Thomas Jefferson. And American capitalism in 2005 is a far different thing from the capitalism of Andrew Carnegie or John D. Rockefeller.

American investors are getting worn down. Major stocks are topping out and falling. Mutual funds are losing money. Executives get rich…lawyers and stockbrokers still make money…but the little guys’ retirement portfolios whither. So, the money and enthusiasm leaves the stock market…and moves to houses. Soon, stock prices will fall. And the real estate market, too, is bound to come to a complete halt early or late.

A generation ago, people owned houses because they provided financial and physical safety. They were loath to mortgage them, if they could avoid it, because the mortgage made the house less secure. In hard times, they might lose the house – and have no money and nowhere to live.

Who among the dead could have imagined how things would change!

More news, from our team at The Rude Awakening:

————–

Eric Fry, reporting from Manhattan…

"Down here on Wall Street, the signs of spring are somewhat less evident. Even so, a stock market rally seems to be budding. This sporadic bloomer does not always germinate, but the early indications seem quite promising this year…"

————–

Bill Bonner, back in London:

*** A reader comment:

"Bill, you wrote last week, ‘This part of Johannesburg is so much like Texas. We work in office parks…and go to malls for dinner. We were hoping for something better.’

"You should have come down to Cape Town. There is a reason most of the people living in the Jo’burg spend their holidays here. That might also account for how fast the property prices are rising in the Mother City, it’s scary.

"A few days ago, I saw a local celebrity on television informing the masses how easy it is to re-mortgage their houses. The advert actually featured an ATM in the kitchen.

"Great, we are all rich, now we too can afford to buy flat screen televisions from China. It would appear that the American nightmare is exportable, it’s a pity it will not sort out your trade deficit. But as the saying goes, misery loves company.

"As always, keep up the good work."

[Ed. Note: Your home can be a good investment – but treating it like your personal ATM can be a very costly mistake. If you learn the "rules" and play the property bubble right, you can protect yourself and your home when the walls come tumbling down around the real estate market.

*** Here in Europe, the European Union is falling apart – right before our eyes. Polls in France tell us that the French are going to vote "no" on the new European Constitution. Where will that leave Europe? No one knows. "Europe will be without a unified government for a long time," say press reports. It will probably be better off that way.

*** Maria’s new "friend" came to visit. The young man is very handsome…

"Is he a boyfriend…or just a friend?" someone asked.

"I don’t know yet," said Maria.

We’ll see…

The Three American Vices originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.