Can sound money really bring about peace?  Actually, it plays a big part in peaceful international relationships.  Money based on commodities, rather than paper, is not subject to government manipulation, and is a key component to free and honest trade.  History shows that if countries engage in trade with each other, their governments tend to find ways to get along for the same reason you do not kill your customers at your place of business, even if they occasionally annoy you.  If someone outright cheats you, however, you may engage in “war” by taking them to court, for example, and the relationship will sour.  Governments and central banks with unfettered power to manipulate currency also have the ability to cheat their creditors.  One way they do this is to simply create enough currency to pay off debts.  This devalues the currency and “cheats” the recipient out of what they are owed.  It would not be fair if you watered down your product the way our government waters down its currency, so it is not hard to understand, in these simplified terms, why loose monetary policy contributes so much to ill will and war around the world.

Sound money, on the other hand, simply is what it is.  Removing governmental power to manipulate money, removes the temptation for government to spend, print and cheat.  Sound money ensures that our government’s spending priorities would be brought into sharp focus and reduced to only what we can afford.

Sound money also limits the ability to wage wars of aggression.  Imagine how much more careful Washington would have to be about starting a war if they did not have this financial sleight of hand at their disposal!  Fiat currency allows government do expensive things they should not be doing while paying the bills with cheap money.  The Federal Reserve has lately been auctioning off large amounts of treasury bills as a way to finance the wars in Iraq and Afghanistan, and our crushing entitlement burden.  The resulting devaluation of the dollar is quickly eroding our image as a good trading partner in the world.  As a consequence, there is therefore more talk of economic isolation and war.

This vicious cycle of spending, fighting and inflating is not what Americans want.  It is what the government wants, and it has had to deceive the citizens into allowing and supporting it.  Sound money curbs the government’s ability to engage in these shenanigans and reduces the wars we fight to only truly defensive ones, for which Americans are more than willing to stand and fight.  So in these ways, sound money is very conducive to peace.

Another benefit of sound money is financial security.

Can sound money give you financial security?  There is something very comforting in knowing that what you earn today will retain its purchasing power in the years to come.  Indeed, the same silver dime that bought a loaf of bread in the 1960′s can still buy a loaf of bread with its precious metal content – which is worth about $1.00 today.  An ounce of gold has always been about evenly exchangeable for a finely tailored men’s suit, which these days is roughly $800.  And in these days of fluctuating gas prices, when priced in gold, oil has been stable.  Meanwhile, since the creation of the Federal Reserve, the fiat dollar has lost 94 percent of its purchasing power.  The erosion of purchasing power rapidly accelerated when it was completely uncoupled from gold in 1971.  This sort of fluctuation in the medium of exchange creates a lot of uncertainty in the marketplace and necessitates that you either take extraordinary defensive maneuvers, or face financial ruin.  Trusting in government for financial security in retirement is not a safe option.  Indeed, a recent study by the Consumer Bankruptcy Project shows that bankruptcies among those 75 and older has more than quadrupled since 1991.  This represents wealth and savings that have been eroded by inflation, and trust in entitlement promises that were more fantasy than reality.  Even with the pittance that social security pays to seniors, it is bankrupt and bringing the economy to its knees.  It is no wonder that many in the younger generations want no part of it, and they should not be forced into a failed system.

On the other hand, holding physical gold can defend against aggressive government monetary policies that threaten to inflate away the value of your life savings.  During the hyperinflation in post WWI Germany, what used to be a comfortable nest egg was suddenly the value of a postage stamp.  If one held just a portion of their savings in precious metals, the crisis was greatly softened.   Gold will never be worth nothing, even if the exact price fluctuates.  There is a famous photograph, however, of a German woman during this time period burning piles of tightly bound banknotes to keep warm.

Imagine if the money you earned had honest, stable value, or even appreciated like an investment!  No such special measures, like converting dollars to gold, would be required to ensure that your savings would sustain you in your golden years.  That is the way it could be and is supposed to be.  However, the government’s thirst for power will not be easily, or cheaply, quenched.  Fiat currency is one tool governments have to extract wealth quietly from the working class.  It is time for the people to wake up to this ruse and look to the Constitution to restore sound currency.

Sound money keeps government spending in check, keeps trade fair and honest, which reduces the temptations, and many underlying causes, for governments to wage wars.  It also gives you the peace of mind of knowing that your savings will be able to sustain you in your retirement.

So if sound money is such a good thing, what is stopping people from simply trading with each other in gold and silver?  Why are you still being paid in fiat dollars, and why can’t you pay for gas in gold?  The answer is that the government has enacted policies that provide considerable stumbling blocks to such transactions.

One of the main stumbling blocks is Federal legal tender laws, which state that government-controlled fiat currency MUST be accepted for many kinds of monetary transactions.  In light of this, Gresham’s Law takes effect.  Gresham’s Law states that bad money drives out good money.  Meaning, if someone is forced to accept your bad money, it is to your advantage to pass it off, like a hot potato, in exchange for something of value.  Any good money you have, you will hoard.  Eventually, real money is driven out of circulation and under people’s mattresses, so to speak.  In the absence of legal tender laws, people are free to accept the medium of exchange of their choice, and are likely to insist on payment in something of real value.

Related to legal tender laws, contracts in gold are not enforced.  Meaning if two parties agree to exchange goods or services for gold, and end up in a dispute, the courts will simply settle the dispute in Federal Reserve notes. While gold clauses have been legally enforceable since the late 1970′s the fact remains that disputes over gold clauses might well be resolved in court with a dollar figure calculated in terms of Federal Reserve Notes.  In the recently decided case of 216 Jamaica Ave v. S&R Playhouse, which reversed a district court decision, the court upheld the enforceability of a gold clause, but sent the case back to the district court to decide what obligations the gold clause imposed on the defendant.  It is not inconceivable that this will result in a decision that the value of the “gold coin” referred to could be valued by the court in terms of Federal Reserve Notes, not in terms of ounces of gold.  Furthermore, given the federal government’s actions against Robert Kahre (the Nevada businessman who paid his employees at the legal tender face value of gold bullion coins) it is obvious that the government is still waging a war on gold.  Whether either of these cases establishes a precedent remains to be seen.  Additionally, because 31 USC 5103 establishes Federal Reserve Notes as legal tender, it would likely take a court challenge to determine whether a gold clause or legal tender law takes precedence.

Governments should do very little, in my estimation, but it should enforce contracts and property rights through the courts.  But in this instance it shirks this basic duty, when it comes to gold, as one way to keep control of our economy and the medium of exchange.  One is also expected to pay sales tax on the purchase of gold.  This is as ludicrous as if you paid sales tax at the bank when you converted dollars into quarters!  The IRS also expects you to pay capital gains tax on gold, which is so backwards, since gains on gold really represent decline in the value of the dollar!

Legal tender laws should be repealed at the Federal level.  Congress has the Constitutional duty to protect the integrity of our money.  However, since it has passed this duty off, and the Federal Reserve has only debased our currency, Congress should no longer force Americans to do business in dollars if they would prefer to transact in gold, or silver, or cigarettes or seashells, for that matter.  Free people should be free to associate and do business in ways that benefit them.  Instead they are forced to use the unstable dollar to their own detriment, and the benefit the government.

In Government We Trust? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy – all the capital misallocation, all the malinvestment – and prevent the market’s attempt to re-establish rational pricing of houses and other assets.

[On September 25] the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I’d only be repeating what I’ve been saying over and over – not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments – investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn’t that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn’t that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn’t the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don’t give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It’s the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day – and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end… It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn’t sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you’re supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects – the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,

Ron Paul
for The Daily Reckoning
October 02, 2008

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency.

Dr. Paul is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives. He never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

The fix is in!

Well…the hacks came through, just like Churchill said they would. At least the hacks in the U.S. Senate. The Senate voted last night to burden the entire nation with Wall Street’s mistakes. Only a handful of Senators dared oppose the measure, among them Bernie Sanders, a socialist from Vermont:

"The masters of the universe, those brilliant Wall Street insiders who have made more money than the average American can even dream of, have brought our financial system to the brink of collapse," Sanders said, and are demanding that the middle class "pick up the pieces that they broke."

Sanders must be delighted by the collapse of investment banking. But he says the way they’re going about imposing socialism is unfair to the proletariat. Oh well…you just can’t please everyone!

Over in the House, the hacks are taking up the measure today. They’re sure to want a few more lights on this tree – tax breaks for their big contributors, bridges, schools…an increase in Congressional salaries – but with the media looking so closely, they’ll probably go along with the Senate and pass the thing without further reflection. We say ‘further’ in the spirit of mischief. The whole project has been taken up with remarkably little real reflection of any kind. But we’ll come back to this in a minute…for the moment, the sky is falling…and the whole world turns its weary eyes on the U.S. House of Representatives for protection.

For example, a big chunk of blue hit the auto industry yesterday. Sales were down to levels not seen since 1993. Even the fuel-efficient Japanese models weren’t selling in September; sales at Toyota were down 32%. And those nice F-Series trucks – the most popular vehicles made by Ford – fell 42%. We used to own one. A nice dark-green pickup. We drove it to work. We drove it on vacations. It was roomy, comfortable…even fun to drive. It used a lot of fuel, but back in the early ’90s, gasoline was so cheap, we never thought about it.

But that was then…this is now. Back then, Ford and GM were still going concerns. Now they’re going out of business. Ford’s stock has only $4.55 cents left to go…and there will be nothing left. GM has $9.45 between it and zero.

"Pass this legislation," said a GM official. It’s the only way to break the "psychological cycle" that keeps people from buying cars and trucks, he believes.

So you see, dear reader, we are back to the ’30s…and we have nothing to fear but fear itself. It’s all in our minds! If people weren’t so ‘negative,’ they’d be more positive. And then, they’d start to buy things again and everything would be all right.

It’s all in our imaginations! We don’t really owe too much money. We didn’t really spend too much money. And those nifty CDOs, MBSs, CDSs…Lehman…Bear Stearns…Fannie, Freddie…Northern Rock – they’re all okay after all.

But bits of sky keep coming down.

Copper has collapsed. So has shipping. Both are telling us that they world’s economy is slowing down. Housing prices are falling faster. Job cuts are accelerating. Local governments are getting hit by lower revenues – they’re having to cut back. Households are cutting back too. Wal-Mart says it’s cutting prices for Christmas toys. Newspapers and magazines are cutting pages.

The sky is falling and anyone with any sense is running for cover…and protecting their portfolio at the same time. The meltdown is far from over, but you can still turn some nice profits…you just need to know where to look. Find all the resources your need to thrive in our Strategic Financial Library.

That leaves the politicians and the bureaucrats – right out in the open.

According to the theory – and here we flatter it, for there is no theory …just wishful thinking – the feds are keeping their heads while everyone else is panicking. The Wall Street boys now say prices for their assets "make no sense." They say Mr. Market has lost his nerve. That is how stalwart government employees are now supposed to be able to buy up Wall Street products at such large discounts they’re almost sure to make a profit.

It’s the fatal conceit…explained Friedrich Hayek in the ’30s…that somehow public employees are immune to the blandishments of power, money and the madness of crowds…that they alone are above it all, like a politician who is too rich to steal and too dumb to lie, or like a bureaucrat who can’t be bought, because he is priceless, and can’t be outwitted, because he is witless.

It ain’t necessarily so. (More below…)

But that is the way it goes. Humanity makes progress in science and technology. In politics, love and banking it merely rehearses the same dramas, tragedies and farces – over and over, forever and ever, amen.

*** Addison and Short Fuse report that today is the day they will be sending a copy of companion book to I.O.U.S.A. to every member of Congress. Many of our dear readers wrote in with…well, not necessarily words of encouragement. Turns out most think that the members of Congress (with a few notable exceptions – see today’s guest essay) don’t read anything at all. And to further prove that point, we got this note from Dan Denning, from the helm of the DR Australia:

"Of course, a spending Bill cannot originate in the Senate because as we know, Article 1, Section Seven of that useless piece of paper (the Constitution) says: ‘All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.’

"So the Senate lobotomized a Bill already passed by the House, which included, among other ridiculous spending provisions, Section 503 (EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.)

"According to Bloomberg: ‘Senators attached a provision repealing a 39-cent excise tax on wooden arrows designed for children to an historic $700 billion bank rescue that is likely to pass tonight. The provision, originally proposed by Oregon senators Ron Wyden and Gordon Smith, will save manufacturers such as Rose City Archery in Myrtle Point, Oregon, about $200,000 a year.’

"Funny.

"But…there are some other portions of the Bill that look surprisingly bold, perhaps even illegal. I wonder.

"First, the totally legal but absurd increase in the statutory limit on the public debt, from Section 122: Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting ‘$11,315,000,000,000′.

"Seriously.

"Thank god for statutory law. If you don’t like it, you can just change it.

"Other sections you might want to have a gander at include section 115, detailing the Secretary’s ‘Graduated Authority to Purchase.’ Passage of the bill gives him $250b to play with. Then, if the President requests it and Congress approves, he can request as much as $350b. After that, it’s $700bn, again subject to a request by the President and approval by the Congress.

"Please note, however, that $700bn is not the ceiling on the Plan. The language says $700bn is the most the President and the Secretary can request…at any one time.

"So this is bailout by installments. But $700bn is not the end. It is just the beginning, provided Congress signs off.

"And the rest of the section makes it hard for them to not sign off by severely limiting debate on the requests submitted by the President. You don’t often see Congress agree on rules for floor behaviour in the House and the Senate in a Bill. The rules committee does that in the House and the Senate sort of makes it up as it goes along.

"But this bill specifies the entire process by which a request from the President (Bush or Obama) MUST be handled by the House and the Senate. No motions to reconsider. No debate.

"And Congress is even trying to cut out judicial review. That’s in Section 119.

"It starts out promisingly enough by saying that ‘Actions by the Secretary pursuant to the authority of this Act shall be subject to chapter 7 of title 5, United States Code, including chapter 7 of title 5, United States Code, that such final actions shall be held unlawful and set aside if found to be arbitrary, capricious, an abuse aside if found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law.of discretion, or not in accordance with law.’

"But what is law anyway?

"Either way, Congress is severely limiting the circumstances under which the Treasury can be challenged. Is that legal? Just asking…not that it matters anymore."

*** American Empire – so long, we hardly knew you. But good riddance! We liked the old Republic much better.

Yes, our French editor told us yesterday that she is re-releasing our instant classic – Empire of Debt.

"You were right on target with that one," said she.

Yesterday’s BBC report told us that the United States was losing its place in the world:

"The financial crisis is likely to diminish the status of the United States as the world’s only superpower.

"On the practical level, the US is already stretched militarily, in Afghanistan and Iraq, and is now stretched financially. On the philosophical level, it will be harder for it to argue in favour of its free market ideas, if its own markets have collapsed.

"The political philosopher John Gray, who recently retired as a professor at the London School of Economics, wrote in the London paper The Observer: ‘Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably.

"’The era of American global leadership, reaching back to the Second World War, is over… The American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated.’

"In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.

"How symbolic that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees."

Of course, not everyone agrees. The BBC reporter put the question to former UN ambassador John Bolton….

He replied: "If Professor Gray believes this, can he assure us that he is selling his US assets short? If so, where is he placing his money instead? And if he has no US assets, why should we be paying any attention to him?"

Herewith, we give a short list of people who had no U.S. assets, but whom readers might want to listen t Jesus Christ, Adam Smith, Emmanuel Kant, Marcus Aurelius, William Shakespeare, etc., etc… As to the question of what one should do with his money after selling the U.S. short, Mr. Bolton, similarly mistakes patriotism for thought. It’s a big world. And there are a lot of places you might want to put your money, where it is beyond the reach of U.S. asset prices – including the most obvious one, gold.

Until tomorrow,

Bill Bonner
The Daily Reckoning

P.S. The price of gold is still sitting just under $900 an ounce – which is quite undervalued. Our advice? Get in on the dips…and buy the precious metal for just a penny per ounce.

The Austrian School and the Meltdown originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

(BTW, Ron Paul has graciously agreed to sit for an interview in our upcoming documentary. And will be a featured guest at the Rim of Fire investment symposium in Vancouver in July. See details above…)

TRANSPARENCY IN MONETARY POLICY

Statement for Hearing before the House Financial Services Committee, “Monetary Policy and the State of the Economy”

Transparency in monetary policy is a goal we should all support.  I’ve often wondered why Congress so willingly has given up its prerogative over monetary policy.  Astonishingly, Congress in essence has ceded total control over the value of our money to a secretive central bank.

Congress created the Federal Reserve, yet it had no constitutional authority to do so.  We forget that those powers not explicitly granted to Congress by the Constitution are inherently denied to Congress – and thus the authority to establish a central bank never was given.  Of course Jefferson and Hamilton had that debate early on, a debate seemingly settled in 1913.

But transparency and oversight are something else, and they’re worth considering.  Congress, although not by law, essentially has given up all its oversight responsibility over the Federal Reserve.  There are no true audits, and Congress knows nothing of the conversations, plans, and actions taken in concert with other central banks.  We get less and less information regarding the money supply each year, especially now that M3 is no longer reported.

The role the Fed plays in the President’s secretive Working Group on Financial Markets goes unnoticed by members of Congress.  The Federal Reserve shows no willingness to inform Congress voluntarily about how often the Working Group meets, what actions it takes that affect the financial markets, or why it takes those actions.

But these actions, directed by the Federal Reserve, alter the purchasing power of our money.  And that purchasing power is always reduced.  The dollar today is worth only four cents compared to the dollar in 1913, when the Federal Reserve started.  This has profound consequences for our economy and our political stability.  All paper currencies are vulnerable to collapse, and history is replete with examples of great suffering caused by such collapses, especially to a nation’s poor and middle class.  This leads to political turmoil.

Even before a currency collapse occurs, the damage done by a fiat system is significant.  Our monetary system insidiously transfers wealth from the poor and middle class to the privileged rich.  Wages never keep up with the profits of Wall Street and the banks, thus sowing the seeds of class discontent.  When economic trouble hits, free markets and free trade often are blamed, while the harmful effects of a fiat monetary system are ignored. We deceive ourselves that all is well with the economy, and ignore the fundamental flaws that are a source of growing discontent among those who have not shared in the abundance of recent years.

Few understand that our consumption and apparent wealth is dependent on a current account deficit of $800 billion per year.  This deficit shows that much of our prosperity is based on borrowing rather than a true increase in production.  Statistics show year after year that our productive manufacturing jobs continue to go overseas.  This phenomenon is not seen as a consequence of the international fiat monetary system, where the United States government benefits as the issuer of the world’s reserve currency.

Government officials consistently claim that inflation is in check at barely 2%, but middle class Americans know that their purchasing power–especially when it comes to housing, energy, medical care, and school tuition – is shrinking much faster than 2% each year.

Even if prices were held in check, in spite of our monetary inflation, concentrating on CPI distracts from the real issue.  We must address the important consequences of Fed manipulation of interest rates. When interests rates are artificially low, below market rates, insidious mal-investment and excessive indebtedness inevitably bring about the economic downturn that everyone dreads.

We look at GDP numbers to reassure ourselves that all is well, yet a growing number of Americans still do not enjoy the higher standard of living that monetary inflation brings to the privileged few.  Those few have access to the newly created money first, before its value is diluted.

For example:  Before the breakdown of the Bretton Woods system, CEO income was about 30 times the average worker’s pay.  Today, it’s closer to 500 times.  It’s hard to explain this simply by market forces and increases in productivity.  One Wall Street firm last year gave out bonuses totaling $16.5 billion.  There’s little evidence that this represents free market capitalism.

In 2006 dollars, the minimum wage was $9.50 before the 1971 breakdown of Bretton Woods.  Today that dollar is worth $5.15.  Congress congratulates itself for raising the minimum wage by mandate, but in reality it has lowered the minimum wage by allowing the Fed to devalue the dollar.  We must consider how the growing inequalities created by our monetary system will lead to social discord.

GDP purportedly is now growing at 3.5%, and everyone seems pleased.  What we fail to understand is how much government entitlement spending contributes to the increase in the GDP.  Rebuilding infrastructure destroyed by hurricanes, which simply gets us back to even, is considered part of GDP growth.  Wall Street profits and salaries, pumped up by the Fed’s increase in money, also contribute to GDP statistical growth.  Just buying military weapons that contribute nothing to the well being of our citizens, sending money down a rat hole, contributes to GDP growth!  Simple price increases caused by Fed monetary inflation contribute to nominal GDP growth.  None of these factors represent any kind of real increases in economic output.  So we should not carelessly cite misleading GDP figures which don’t truly reflect what is happening in the economy.  Bogus GDP figures explain in part why so many people are feeling squeezed despite our supposedly booming economy.

But since our fiat dollar system is not going away anytime soon, it would benefit Congress and the American people to bring more transparency to how and why Fed monetary policy functions.

For starters, the Federal Reserve should:

Begin publishing the M3 statistics again.  Let us see the numbers that most accurately reveal how much new money the Fed is pumping into the world economy.

Tell us exactly what the President’s Working Group on Financial Markets does and why.

Explain how interest rates are set.  Conservatives profess to support free markets, without wage and price controls.  Yet the most important price of all, the price of money as determined by interest rates, is set arbitrarily in secret by the Fed rather than by markets!  Why is this policy written in stone? Why is there no congressional input at least?

Change legal tender laws to allow constitutional legal tender (commodity money) to compete domestically with the dollar.

How can a policy of steadily debasing our currency be defended morally, knowing what harm it causes to those who still believe in saving money and assuming responsibility for themselves in their retirement years?  Is it any wonder we are a nation of debtors rather than savers?

We need more transparency in how the Federal Reserve carries out monetary policy, and we need it soon.

Regards,

Hon. Ron Paul
for The Daily Reckoning
March 14, 2007

Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency.

Dr. Paul is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives. He never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535″ on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

Uh oh…here come the clowns.

“The impact of losing 2.2 million homes, I suspect, will be in a lot of areas of our cities and towns that are already pretty hard hit, so we clearly want to look at it.”

What the chairman of the Senate banking committee wants to look at, is the same thing that Wall Street was eyeing yesterday…the thing was that so disagreeable it sent the Dow down 242 points…and, according to the English papers, upset stock markets all over the world.

And…”It’s going to get uglier,” said Angelo Mozilo, on TV yesterday. Mozilo is the CEO of Countrywide Financial – the nation’s number one mortgage lender.

The whole U.S. mortgage industry – with over $10 trillion outstanding – is already not prepossessing sight. It faces a ‘liquidity crisis’, Mozilo told viewers. There are more than $1 trillion in ‘subprime’ mortgages outstanding. Many of these are turning out as anyone with half a brain might have expected – badly. And yet, the mathematical geniuses who package and trade these things seem to have been caught unawares.

Take a look at the ABX index, where subprime-collateralized debt is traded. “[The ABX],” says the New York Times, “tracks how much it costs to insure a group of BBB- minus bonds based upon subprime mortgages. The index is a derivative which falls in value when the cost of insurance rises, so it can be seen as a proxy for the value of the underlying bonds”. With defaults in the mortgage business mounting, insurance costs have increased dramatically, sending the index into a spiral down. It has declined approximately 30% since January 1, 2007, and 7.4% literally overnight during the recent subprime crisis.

Yesterday was not exactly ugly…but nor was the picture as placid and pretty as it has been for the last few years. Mortgage payments are getting later…nearly 5% of them are delinquent. Among subprimes, the delinquency rate has jumped to 13.33%…with subprime ARMs (adjustable rate mortgages) at 14.44%.

Of the entire mortgage market, about a third is insured by the U.S. federal government – that is, about $360 billion worth. But according to Martin Hutchinson’s calculations, if the U.S. housing market goes down just 15% – a rather modest decline for such an immodest boom – the mortgage industry and its backers, lenders and investors would suffer a capital loss of about $1 trillion, with about a quarter of that amount in loans guaranteed by the federal government’s bagholder – Freddie Mac.

Freddie Mac, unfortunately, has only about $79 billion to draw from…which would leave it a little short. Seeing the handwriting on the wall and reading it without moving their lips, its executives announced that they would tighten standards. Henceforth, it would be harder to lay defective mortgage credits onto the feds…thus Mozilo’s comments. A ‘liquidity crisis,’ after all, doesn’t arise in the desert. Where there is no credit, no one expects credit. Where there is a flood of it, on the other hand, people come to rely on it. And where there is excess credit, people come to rely on it excessively.

How quickly a market can go from excess to shortage! We now see what can happen to the entire ‘flood of liquidity’ that buoys up everything from the prices of Bombay apartments to the art auctions at Christie’s. It can disappear in a trice. Then what happens to all those assets? Simple, they sink back to more reasonable prices…and then (because markets tend to overreact in both directions) to prices that are unreasonably low. So, you see, dear reader, there is much to look forward to.

But let us return to the U.S. Senate, just to laugh at the clowns. The gap between what the feds’ insurer has on hand, and the loss it is likely to be asked to cover…is approximately $150 billion – small change, to be sure. But where will it get the money? It is not as if the entire rest of the financial picture will remain as soggy as it is now – even as the mortgage industry dries out.

We saw yesterday that the Dow is likely to follow the mortgage industry. And the economy, too, is likely to feel the dry breezes blowing off the mortgage financing badlands. Just as the consumer’s water line is connected to the community reservoir, so is his individual consumer spending firmly attached to community house price trends. Come the parching winds and it is likely to curl up and blow away.

Still, the Daily Telegraph reports, “American politicians are considering an emergency bail-out of 2.2 million borrowers struggling with their mortgage payments.”

Are these the same politicians that are already adding half a trillion to the U.S. national debt in the next two years? Anything is possible. If the government – against all odds – can bring peace and prosperity to Iraq, surely it can stop a liquidity crisis…can’t it?

More news:

————–

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

“And since the Fed CANNOT, let me repeat, CANNOT afford to raise rates right now with the subprime mortgage meltdown going on…guess what gets discounted? The dollar!”

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

————–

And more thoughts…

*** First from Addison Wiggin in Baltimore:

“America really is an empire, though it is hotly denied.” So began Antoine Agtmael, the featured speaker at last night’s Empire Salon.

Not long ago, Daily Reckoning sufferer John Henry invited us to attend a series of lectures in Washington, DC.

John, a DC businessman, is a direct descendant of the famed revolutionary figure, Patrick Henry, he of “Give me liberty or give me death” fame. The Henry family is – and has been – concerned that the legacy of economic freedom and political civility left behind by their forebears is being squandered by the current administration.

In 2003, not long after the US invaded Iraq, John Henry and colleagues in the DC area began to gather in a salon format, modeled after the intellectual gatherings of Paris in the late 19^th century. They formed a committee to save the republic and a salon to encourage debate. They call their monthly gatherings The Empire Salon.

We attended the latest chapter of the Empire Salon last night. The featured speaker was Antoine van Agtmael, the gentleman who actually coined the phrase “emerging markets” in the late seventies. The term sounded a lot better than the common vernacular of the time: Rugged Little Third World Countries.

Capital & Crisis editor Chris Mayer, who schlepped along to the Salon with us, diligently took notes on your behalf. He files this report:

“We view ourselves as the center of the universe,” Agtmael said, referring to Americans. “Well, that is a very questionable thing.” Antoine is the author of a new book, The Emerging Markets Century. He presented his uncomfortable thesis to a feisty audience that seemed to itch for a debate.

“We are being pushed off-center,” Agtmael maintained. Relying on insights gained from over “thirty years of living out of a suitcase and visiting all of these places” and years as a professional investor, he told the audience that the future is not a U.S.- or Euro- centric one. Emerging markets – such as China, India, Brazil, and Russia – will make up more than half of the global economy in the coming decades.

Yet many Americans still view such markets with prejudice. They look down on these markets as basket cases. Agtmael maintains we are still stuck in the 20th century and “don’t fully grasp how pervasive this shift is.” “You can make money by working off this prejudice,” Agtmael said. His book covers many companies from emerging markets that have become world-class companies and competitors. Some of his favorites now, from that list, include Brazilian aircraft maker Embraer and Argentine steel maker Tenaris.

Agtmael fended off long-winded questions and pointed comments from the peanut gallery and held his ground. What is the greatest risk to his thesis? Agtmael explains: “What am I worried about? That as we realize this gigantic shift we go the route of protectionism.”

If America should retreat into a cocoon of tariffs, quotas, trade treaties and the like, it’s a good bet the unraveling of the Empire shall unravel a bit quicker.

More on the Empire Salon to come…

Also, if you haven’t had the chance, see:

Empire of Debt

*** Chris Mayer, btw, will be one of our featured speakers at the Rim of Fire investment conference in Vancouver in July. Conference champ, Bruce Robertson explains:

“We spare no expense bringing you the best experts and their top advice. And we put them to work – no sales pitches, no teases, just in-depth analysis and specific recommendations you can bank on.

“In fact, if you missed last year’s Symposium, you missed a chance at some top-of-the-line gains. Commodities guru Rick Rule shared the name of a small metals miner operation in Mexico and Peru. Since then the shares have more than doubled in value, up an incredible 147%.

“Resource Trader Alert editor and MarketWatch columnist Kevin Kerr revealed that he expected big things in the frozen orange juice market. Frozen concentrated orange juice went on to have a record year – taking some futures options contracts as high as 355% in under two months!

“International investment expert Dan Denning recommended a speculative play on Delphi Corp…. an auto-parts supplier. If you listened in, you had a chance to buy shares for $1.25. Today, they’re up 117% – and looking for more! Investment U’s Alex Green offered three conservative ways to play the Asian boom. Just six months later, all three are up double-digits – showing an average gain of 27%!

“As you may have noticed, that’s a pretty diverse set of recommendations. But that’s not all. We also host a bunch of the most outrageous thinkers in the financial world today. The event is always contentious. And this year promises to be the same. Profits are one thing… but  sometimes a good debate is almost as satisfying. No matter who you are, what your goals are, or even how you choose to invest – you’ll discover a trove of useful information in Vancouver.”

[Ed. Note: What? The Rim of Fire Investment Symposium. Where? Vancouver, BC,… When? July 24-27th, 2007.  To secure your seat on the Rim of Fire, call Barb at Agora Travel at 800-926-6575.]

*** Back to Bill Bonner in the land of cheese, wine and good chocolate:

“The real worry lies much deeper than share prices,” writes Anthony Hilton in the Evening Standard in London. Hilton believes the real worry is that we don’t know what to worry about.

“This is the first truly modern financial crisis, the first born of the age in which we live. For the past five years, cheap money from America and Asia has been lent and relent with less and less concern about whether it will ever be paid back, because new financial products – credit derivatives – allowed those lending the money to insulate themselves from the possible loss by selling the risk to default to other people.”

“Three out of four mortgages that are made, are made by a person who is not employed by a bank or savings and loan,” added Fed governor Susan Bies in February. Ms. Bies meant to look on the bright side. All this extra activity by extra participants, she thought, made the whole lending world less risky. The risk, such as it is, was thought to be spread around.

But to whom? How? And how much? And how might it be brought under control?

To the first three, the appropriate responses are ‘we don’t know’ three times. But to the last one the answer is: It will be brought under control by the natural contraction of the credit expansion. That same ‘liquidity crisis’ that now threatens subprime will someday threaten the whole mortgage industry…and then the whole economy. Always has. Always will. What goes up, must come down.

Still, the ‘we don’t know’ answers probably hide bigger problems and more expensive resolutions than we are used to. In the old days, if credit seemed to be expanding a little to quickly, it was brought into line quickly too. The Fed merely instructed member banks to tighten credit. Banks, then, were the source of credit. When they tightened, the easy credit disappeared.

Now, credit comes from many sources – some of them relatively unknown to the average investor as well as to the average banking regulator. The potential uncontrolled run-up of credit is much greater (which is what we have been seeing for the last few years). But so is the potential uncontrolled rundown too (a preview of which we just saw). Mr. Hilton is of the opinion that there is more to come – an opinion shared by your editor.

*** We love democracy. It is more entertaining than any other system of government…and you can laugh at it without going to jail (at least, you could before the passage of the Patriot Act).

Our friend Michel tells us about a hot election campaign:

“…One promises change without disruption…another promises disruption without change… Umaru Yar’Adua (Democratic Peoples’ Party), Chief Emeka Odumegwu Ojukwu (Progressive Grand Alliance) Orji Uzor Kalu (Peoples’ Progressive Party), Chris Okotie (New Democratic Party), and don’t forget General Muhammadu Buharih (Peoples’ Party) and Alhaji Atiku Abubakar (Congrèssional Action).

“This last candidate is affectionately nicknamed the ‘glutton for money’ and is particularly critical of the government’s record, namely: The disappearance of the railroads, the 28 million children who are missed by the school system (out of a total of 34 million supposedly in school), malaria, leprosy and tuberculosis rising to double digit rates, spectacular increase in kidnapping, and importing 100% of the oil needed in the country, despite the fact that the nation is the world’s third largest oil producer!”

Which is this example of democracy in action? Nigeria…

Transparency in Monetary Policy originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The cost of war is enormously detrimental; it significantly contributes to the economic instability of the nation by boosting spending, deficits, and inflation. Funds used for war are funds that could have remained in the productive economy to raise the standard of living of Americans now unemployed, underemployed, or barely living on the margin.

Yet even these costs may be preferable to paying for war with huge tax increases. This is because although fiat dollars are theoretically worthless, value is imbued by the trust placed in them by the world’s financial community. Subjective trust in a currency can override objective knowledge about government policies, but only for a limited time.

Economic strength and military power contribute to the trust in a currency; in today’s world trust in the U.S. dollar is not earned and therefore fragile. The history of the dollar, being as good as gold up until 1971, is helpful in maintaining an artificially higher value for the dollar than deserved.

Foreign policy contributes to the crisis when the spending to maintain our worldwide military commitments becomes prohibitive, and inflationary pressures accelerate. But the real crisis hits when the world realizes the king has no clothes, in that the dollar has no backing, and we face a military setback even greater than we already are experiencing in Iraq. Our token friends may quickly transform into vocal enemies once the attack on the dollar begins.

False trust placed in the dollar once was helpful to us, but panic and rejection of the dollar will develop into a real financial crisis. Then we will have no other option but to tighten our belts, go back to work, stop borrowing, start saving, and rebuild our industrial base, while adjusting to a lower standard of living for most Americans.

Counterfeiting the nation’s money is a serious offense. The founders were especially adamant about avoiding the chaos, inflation, and destruction associated with the Continental dollar. That’s why the Constitution is clear that only gold and silver should be legal tender in the United States. In 1792 the Coinage Act authorized the death penalty for any private citizen who counterfeited the currency. Too bad they weren’t explicit that counterfeiting by government officials is just as detrimental to the economy and the value of the dollar.

In wartime, many nations actually operated counterfeiting programs to undermine our dollar, but never to a disastrous level. The enemy knew how harmful excessive creation of new money could be to the dollar and our economy. But it seems we never learned the dangers of creating new money out of thin air. We don’t need an Arab nation or the Chinese to undermine our system with a counterfeiting operation. We do it ourselves, with all the disadvantages that would occur if others did it to us. Today we hear threats from some Arab, Muslim, and far Eastern countries about undermining the dollar system- not by dishonest counterfeiting, but by initiating an alternative monetary system based on gold. Wouldn’t that be ironic? Such an event theoretically could do great harm to us. This day may well come, not so much as a direct political attack on the dollar system but out of necessity to restore confidence in money once again.

Historically, paper money never has lasted for long periods of time, while gold has survived thousands of years of attacks by political interests and big government. In time, the world once again will restore trust in the monetary system by making some currency as good as gold.

Gold, or any acceptable market commodity money, is required to preserve liberty. Monopoly control by government of a system that creates fiat money out of thin air guarantees the loss of liberty. No matter how well-intended our militarism is portrayed, or how happily the promises of wonderful programs for the poor are promoted, inflating the money supply to pay these bills makes government bigger. Empires always fail, and expenses always exceed projections. Harmful unintended consequences are the rule, not the exception. Welfare for the poor is inefficient and wasteful. The beneficiaries are rarely the poor themselves, but instead the politicians, bureaucrats, or the wealthy. The same is true of all foreign aid– it’s nothing more than a program that steals from the poor in a rich country and gives to the rich leaders of a poor country. Whether it’s war or welfare payments, it always means higher taxes, inflation, and debt. Whether it’s the extraction of wealth from the productive economy, the distortion of the market by interest rate manipulation, or spending for war and welfare, it can’t happen without infringing upon personal liberty.

At home the war on poverty, terrorism, drugs, or foreign rulers provides an opportunity for authoritarians to rise to power, individuals who think nothing of violating the people’s rights to privacy and freedom of speech. They believe their role is to protect the secrecy of government, rather than protect the privacy of citizens. Unfortunately, that is the atmosphere under which we live today, with essentially no respect for the Bill of Rights.

Though great economic harm comes from a government monopoly fiat monetary system, the loss of liberty associated with it is equally troubling. Just as empires are self-limiting in terms of money and manpower, so too is a monetary system based on illusion and fraud. When the end comes we will be given an opportunity to choose once again between honest money and liberty on one hand; chaos, poverty, and authoritarianism on the other.

The economic harm done by a fiat monetary system is pervasive, dangerous, and unfair. Though runaway inflation is injurious to almost everyone, it is more insidious for certain groups. Once inflation is recognized as a tax, it becomes clear the tax is regressive: penalizing the poor and middle class more than the rich and politically privileged. Price inflation, a consequence of inflating the money supply by the central bank, hits poor and marginal workers first and foremost. It especially penalizes savers, retirees, those on fixed incomes, and anyone who trusts government promises. Small businesses and individual enterprises suffer more than the financial elite, who borrow large sums before the money loses value. Those who are on the receiving end of government contracts–especially in the military industrial complex during wartime– receive undeserved benefits.

It’s a mistake to blame high gasoline and oil prices on price gouging. If we impose new taxes or fix prices, while ignoring monetary inflation, corporate subsidies, and excessive regulations, shortages will result. The market is the only way to determine the best price for any commodity. The law of supply and demand cannot be repealed. The real problems arise when government planners give subsidies to energy companies and favor one form of energy over another.

Energy prices are rising for many reasons: Inflation; increased demand from China and India; decreased supply resulting from our invasion of Iraq; anticipated disruption of supply as we push regime change in Iran; regulatory restrictions on gasoline production; government interference in the free market development of alternative fuels; and subsidies to big oil such as free leases and grants for research and development.

Interestingly, the cost of oil and gas is actually much higher than we pay at the retail level. Much of the DOD budget is spent protecting "our" oil supplies, and if such spending is factored in gasoline probably costs us more than $5 a gallon. The sad irony is that this military effort to secure cheap oil supplies inevitably backfires, and actually curtails supplies and boosts prices at the pump. The waste and fraud in issuing contracts to large corporations for work in Iraq only add to price increases.

When problems arise under conditions that exist today, it’s a serious error to blame the little bit of the free market that still functions. Last summer the market worked efficiently after Katrina – gas hit $3 a gallon, but soon supplies increased, usage went down, and the price returned to $2. In the 1980s, market forces took oil from $40 per barrel to $10 per barrel, and no one cried for the oil companies that went bankrupt. Today’s increases are for the reasons mentioned above. It’s natural for labor to seek its highest wage, and businesses to strive for the greatest profit. That’s the way the market works. When the free market is allowed to work, it’s the consumer who ultimately determines price and quality, with labor and business accommodating consumer choices. Once this process is distorted by government, prices rise excessively, labor costs and profits are negatively affected, and problems emerge. Instead of fixing the problem, politicians and demagogues respond by demanding windfall profits taxes and price controls, while never questioning how previous government interference caused the whole mess in the first place. Never let it be said that higher oil prices and profits cause inflation; inflation of the money supply causes higher prices!

Since keeping interest rates below market levels is synonymous with new money creation by the Fed, the resulting business cycle, higher cost of living, and job losses all can be laid at the doorstep of the Fed. This burden hits the poor the most, making Fed taxation by inflation the worst of all regressive taxes. Statistics about revenues generated by the income tax are grossly misleading; in reality much harm is done by our welfare/warfare system supposedly designed to help the poor and tax the rich. Only sound money can rectify the blatant injustice of this destructive system.

The Founders understood this great danger, and voted overwhelmingly to reject "emitting bills of credit," the term they used for paper or fiat money. It’s too bad the knowledge and advice of our founders, and their mandate in the Constitution, are ignored today at our great peril. The current surge in gold prices – which reflects our dollar’s devaluation– is warning us to pay closer attention to our fiscal, monetary, entitlement, and foreign policy.

A recent headline in the financial press announced that gold prices surged over concern that confrontation with Iran will further push oil prices higher. This may well reflect the current situation, but higher gold prices mainly reflect monetary expansion by the Federal Reserve. Dwelling on current events and their effect on gold prices reflects concern for symptoms rather than an understanding of the actual cause of these price increases. Without an enormous increase in the money supply over the past 35 years and a worldwide paper monetary system, this increase in the price of gold would not have occurred.

Certainly geo-political events in the Middle East under a gold standard would not alter its price, though they could affect the supply of oil and cause oil prices to rise. Only under conditions created by excessive paper money would one expect all or most prices to rise. This is a mere reflection of the devaluation of the dollar.

Particular things to remember:

If one endorses small government and maximum liberty, one must support commodity money.

One of the strongest restraints against unnecessary war is a gold standard.

Deficit financing by government is severely restricted by sound money.

The harmful effects of the business cycle are virtually eliminated with an honest gold standard.

Saving and thrift are encouraged by a gold standard; and discouraged by paper money.

Price inflation, with generally rising price levels, is characteristic of paper money. Reports that the consumer price index and the producer price index are rising are distractions: the real cause of inflation is the Fed’s creation of new money.

Interest rate manipulation by central bank helps the rich, the banks, the government, and the politicians.

Paper money permits the regressive inflation tax to be passed off on the poor and the middle class.

Speculative financial bubbles are characteristic of paper money– not gold.

Paper money encourages economic and political chaos, which subsequently causes a search for scapegoats rather than blaming the central bank.

Dangerous protectionist measures frequently are implemented to compensate for the dislocations caused by fiat money.

Paper money, inflation, and the conditions they create contribute to the problems of illegal immigration.

The value of gold is remarkably stable.

The dollar price of gold reflects dollar depreciation.

Holding gold helps preserve and store wealth, but technically gold is not a true investment.

Since 2001 the dollar has been devalued by 60%.

In 1934 FDR devalued the dollar by 41%.

In 1971 Nixon devalued the dollar by 7.9%.

In 1973 Nixon devalued the dollar by 10%.

These were momentous monetary events, and every knowledgeable person worldwide paid close attention. Major changes were endured in 1979 and 1980 to save the dollar from disintegration. This involved a severe recession, interest rates over 21%, and general price inflation of 15%.

Today we face a 60% devaluation and counting, yet no one seems to care. It’s of greater significance than the three events mentioned above. And yet the one measurement that best reflects the degree of inflation, the Fed and our government deny us. Since March, M3 reporting has been discontinued. For starters, I’d like to see Congress demand that this report be resumed. I fully believe the American people and Congress are entitled to this information. Will we one day complain about false intelligence, as we have with the Iraq war? Will we complain about not having enough information to address monetary policy after it’s too late?

If ever there was a time to get a handle on what sound money is and what it means, that time is today.

Inflation, as exposed by high gold prices, transfers wealth from the middle class to the rich, as real wages decline while the salaries of CEOs, movie stars, and athletes skyrocket– along with the profits of the military industrial complex, the oil industry, and other special interests.

A sharply rising gold price is a vote of "no confidence" in Congress’ ability to control the budget, the Fed’s ability to control the money supply, and the administration’s ability to bring stability to the Middle East.

Ultimately, the gold price is a measurement of trust in the currency and the politicians who run the country. It’s been that way for a long time, and is not about to change.

If we care about the financial system, the tax system, and the monumental debt we’re accumulating, we must start talking about the benefits and discipline that come only with a commodity standard of money– money the government and central banks absolutely cannot create out of thin air.

Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.

Regards,

Congressman Ron Paul
for The Daily Reckoning
January 23, 2007

Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

We are in the Age of Mammon.

If the pollsters told the major parties they could win the White House by renouncing the Constitution, the Bible, and the Theory of Evolution…they’d do it immediately.

Consubstantiation, transubstantiation…who cares about any kind of ‘-ation’ if it doesn’t have anything to do with money?

Does anything matter more than money? Is anything more delicious than showing it off? Is there any fight more important than winning ‘effervescent supremacy’?

You don’t know what that is, dear reader? Read on…

The Chinese are still communists…but they’re heroes to every investor in the world. They’ve got the world’s most dynamic economy and its most exciting stock market. Who cares about the fossils in its government?

No. What matters now, dear reader, is wampum…bread…dough…dead presidents…moolah…

Yes, from the center of MoolahMetropole, otherwise known as London, comes news that one single employee of Barclays Capital made history last year with a paycheck estimated at three times the total remuneration of the entire executive board. Roger Jenkins took home between $70 million and $140 million last year. Good work if you can get it.

But what kind of work do you have to do to get that kind of money? Do you have to invent something like Velcro or suitcases with wheels? Do you have to write a hit song, such as ‘White Christmas?’ Do you have to make a movie like ‘Gone with the Wind,’ or start a business like Microsoft? What do you have to contribute to the wealth, health, or enjoyment of the world to earn that kind of money?

Mr. Roger Jenkins – nicknamed ‘Dodger’ – runs a part of the bank…the part that does ‘structured finance.’ What kind of dodge is that? We turn to this week’s The Business for an explanation:

"Jenkins’ division devises complex structures that are designed to improve the profitability of transactions carried out by other parts of the bank. While the transactions can take many forms, their structures have one common aim – to reduce the tax liability of clients."

In other words, what the Dodger dodges is taxes. Readers will note that reducing the taxes of the super-rich is not exactly what economic booms are made of…at least, not usually. The cost of government projects – wars, bureaucracies, humbugs – doesn’t go down because the rich escape taxes. Instead, the money has to come from somewhere. Overall, the economy is no richer, however grateful the Dodger’s clients may be.

‘Never have so few done so little and made so much doing it,’ we said last week. We repeat it, dear reader, so you can write it down.

Money shuffling doesn’t make anyone richer. It merely moves money from the dull people who earn it to the sharp people who skim it off.

But at least the sharp people are having fun with it, this time around.

Normally, you see, rich people try to be a little discreet. They don’t want to foment envy or discontent and end up like Marie Antoinette, who famously joked within earshot of the hired help:

"Why are those women protesting?" she wanted to know.

"Because they are hungry; they have no bread."

"Then let them eat cake!"

What a wit. Too bad she had to lose her head.

But the wits who are living it up in 2007 may not be half as sharp as they think they are, either.

A survey of 294 hedge fund managers, with an average net worth of $197 million, says they spent the following amounts of money last year:

$3.9 million on fine art

$429,000 on yacht charters

$376,000 on jewelry

$204,000 on clothes and accessories.

When you’ve got it, flaunt it…is the 11th Commandment of the Age of Mammon.

Here in London, the hedge fund managers are conducting ‘champagne battles,’ according to the Sunday Times. They don’t just drink champagne; they shake up the bottles and spray each other. According to one club director, a single night battle for ‘effervescent supremacy’ set the sharpies back $150,000.

"Come the revolution…" says a disgusted friend.

More news:

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Justice Litle, reporting from Reno, Nevada…

"…As far as the public is concerned, coal is the Rodney Dangerfield of fossil fuels: It gets no respect. Coal is dirty, lumpy and unremarkable. It is a game show booby prize, a punishment for bad children at Christmas…"

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

————–

And more views:

*** Some interesting tidbits from our friend Chris Mayer…

"We all have a stake in what happens in China. If China relied on the rest of the world for even 20% of its grain needs, there would be an incredible strain on the world’s grain producers.

"Many of the challenges China faces exist in the world at large already. Grain production per person is falling worldwide. So is cropland acreage per person. We are also approaching the limits of what fertilizers can do in terms of boosting crop yields. Plus, strong demand for biofuels – like ethanol – now competes with food demand.

"By some estimates, we’ll need to produce about 136 million tons of grain in 2007 to prevent grain stocks from falling again (they fell in 2006). Yet annual increases in grain production have averaged only about 20 million tons since 2000. That gives you something of a snapshot of the hurdle in front of us.

"The investment conclusion from all this seems to be that we are in a long bull market for grains. Expect the prices of corn and wheat to keep rising. Expect the price of meat to rise. It also seems that fertilizer producers, such as Agrium, should continue to do well. Other ancillary ideas also come to mind - shippers of dry goods (i.e., grains) and manufacturers of farm equipment.

"The potential for another 1930s-style Dust Bowl only adds to the power and durability of these trends."

*** Even President Bush is getting into the spirit of Mammon. It used to be that an American wage earner would work so that he could put ‘bread on the table.’ But that is all old hat now. Now, El Jefe tells us that people want to ‘put more money on the table.’

Ladies and gentlemen, we give you the President of the United States of America: "And one thing we want during this war on terror is for people to feel like their life’s moving on, that they’re able to make a living and send their kids to college and put more money on the table."

It is a curious thought. Why would they want money on the table? They can’t eat it. And in business, you are usually cautioned not to leave money ‘on the table.’ Putting money ‘on the table’ means it is at play. Which is the trouble for most Americans…they have too much money on the table…and not enough tucked away in their pockets.

"I think I understand what he means," writes our Pittsburgh correspondent, Byron King, "but then again maybe I don’t. What table would that be? The gaming tables at Las Vegas, or the slot machines in the gambling gold rush that is sweeping the jurisdictions of the nation? Or perhaps he means the tables that drape the pay windows at Goldman, where they hand out the cash bonuses. Or the corporate CEO tables, like the guys from Pfizer and Home Depot, who walked off with hundreds of millions after troubled tenures. Or the tables (granite counter-tops, no doubt) in the 25,000 square foot ‘spec’ homes going up in Greenwich, for sale to the hedge fund gazillionaires who suck money out of the pockets of their fellow gazillionaires. Those tables?"

*** "Complacency can be a self-denying prophecy," says Larry Summers.

We had to struggle with the phrase for a few seconds. We think it would make more sense if he had said, "Extremely bullish expectations can be a self-denying prophecy." But what can you expect from a Harvard man? Like the president, Summers can’t seem to express himself in a clear sentence.

What he means is that when people are extremely complacent, and expect things to work out well despite the actual fundamentals of the situation, they do such reckless things that they doom themselves to failure, thus denying the prophecy.

Another way to put it is this: Success is self-limiting. When a man enjoys a little success…he reaches further. If he buys a stock and it doubles, he considers himself an investment genius and buys more. If he seduces the heavy hairdresser, he next aims for the slim girl at the cinema. If he holds up a liquor store and gets away with it, he begins studying the bank.

Eventually, his reach exceeds his grasp.

So too, in markets do trends tend to run to the point where they can go no further. Then, since history must continue…since markets must go somewhere…and since there must be a yin for every yang…they begin to go in the opposite direction. Tides come in and then they go out.

There are limits to how much people can pay for a stock or for a gallon of gasoline. There are limits, too, to the cycles of optimism and pessimism…and there’s a limit to the amount of liquidity that be put into a financial system.

We saw yesterday how long some of these cycles can be. If Dan Forshee is right, the broad market in real estate in America, takes as long as 120 years to go from peak to peak. The last peak, he says, was just before World War I. Since then, real estate investments, adjusted for inflation, have gone down most of the time.

This is not good news for us. We do not like stocks. So we have put most of our free money in property. We own office buildings in Baltimore where our business is located. We own a family farm not far away. In addition, we have property investments in Canada, Nicaragua, Panama, Ireland, Argentina and France. If this stuff goes down for 100 years, this will prove to be the worst investment strategy ever devised. Our stock of humility will soar…right up until the moment we drop dead and are tossed into a pauper’s grave.

Most of our property was bought at what we thought were near-distress prices. In fact, so successful were we at real estate investment – until recently – that we began to think we were pretty good at it. We grew careless. Complacent. As reckless and as dumb as any poor lump ever mentioned in these Daily Reckonings.

In France, we have just suffered a huge loss (huge for us). We bought a building to be used as a seminar center. We found an architect to renovate it. We signed the papers and prepared to write a check. But when the time came, we found that the final check was far…far…larger than what we expected. In fact, rotten wood, rotten politics, and rotten heads in the building trades caused such staggering cost over-runs that the building can never really be profitable. What’s more, we still have not been able to work our way through the bureaucratic maze so that we can put the place into use. It stands empty…with the heating system sizzling away, in order to keep the new paint from cracking.

The loss is painful. It’s bad enough that we are losing money. What is worse is that we have called into question our own judgment, if not sanity. We wrote five years ago that ‘chateau’ was the French word for ‘money pit.’ Now, we’ve proved it, digging our own hole deeper and wider than any we’ve ever seen.

*** "How is school going?" we asked Henry last night.

Henry was having trouble in school a few months ago. This was very unusual, because Henry, 16, has always been a good student and a good kid. We went to visit the school, to try to figure out what was going on.

What had happened, we learned, was a combination of things. First, coming back to the school after a year in England, he seemed unsure that this was where he wanted to be.

Then he got on the wrong side of his English teacher when he pointed out to her that she was making mistakes. His English teacher is French. She doesn’t speak English as well as Henry does and seems a little defensive about it. Henry did not realize the awkward position he had put her into when he openly challenged her competence.

Meanwhile, he has been doing badly in math. We feel sorry for the boy; he stays up ’til midnight every night, working on his math homework and still does not get good grades. Nor are we able to help. The problems are far more difficult than any we can recall. The school prides itself on its math scores – as many top French schools do – and is one of the toughest in Paris.

"If you’re going to succeed in this school," said the math teacher without smiling, "you’re going to have to work on these problems as if your life depended on it."

We have never seen anything like it. The teachers and administrators really seem to think that doing well in math is a matter of life or death importance. We don’t know quite what to make of it, except we are glad WE don’t have to go to that school.

"Oh…it’s okay. I got a good grade on my last math test this week."

"What about English?"

"That’s okay too…I’m learning to keep quiet."

A Vote of No “Confidence”, Part II originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

A VOTE OF “NO CONFIDENCE”, PART I

The financial press, and even the network news shows, have begun reporting the price of gold regularly. For twenty years, between 1980 and 2000, the price of gold was rarely mentioned. There was little interest, and the price was either falling or remaining steady.

Since 2001 however, interest in gold has soared along with its price. With the price now over $600 an ounce, a lot more people are becoming interested in gold as an investment and an economic indicator. Much can be learned by understanding what the rising dollar price of gold means.

The rise in gold prices from $250 per ounce in 2001 to over $600 today has drawn investors and speculators into the precious metals market. Though many already have made handsome profits, buying gold per se should not be touted as a good investment. After all, gold earns no interest and its quality never changes. It’s static, and does not grow as sound investments should.

It’s more accurate to say that one might invest in a gold or silver mining company, where management, labor costs, and the nature of new discoveries all play a vital role in determining the quality of the investment and the profits made.

Buying gold and holding it is somewhat analogous to converting one’s savings into one hundred dollar bills and hiding them under the mattress – yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. There’s a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, i.e. gold, however, goes up if the government devalues the circulating fiat currency.

Holding gold is protection or insurance against government’s proclivity to debase its currency. The purchasing power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our current situation, that means the dollar.

One of the characteristics of commodity money – one that originated naturally in the marketplace – is that it must serve as a store of value. Gold and silver meet that test – paper does not. Because of this profound difference, the incentive and wisdom of holding emergency funds in the form of gold becomes attractive when the official currency is being devalued. It’s more attractive than trying to save wealth in the form of a fiat currency, even when earning some nominal interest. The lack of earned interest on gold is not a problem once people realize the purchasing power of their currency is declining faster than the interest rates they might earn. The purchasing power of gold can rise even faster than increases in the cost of living.

The point is that most who buy gold do so to protect against a depreciating currency rather than as an investment in the classical sense. Americans understand this less than citizens of other countries; some nations have suffered from severe monetary inflation that literally led to the destruction of their national currency. Though our inflation – i.e. the depreciation of the U.S. dollar – has been insidious, average Americans are unaware of how this occurs. For instance, few Americans know nor seem concerned that the 1913 pre-Federal Reserve dollar is now worth only four cents. Officially, our central bankers and our politicians express no fear that the course on which we are set is fraught with great danger to our economy and our political system. The belief that money created out of thin air can work economic miracles, if only properly “managed,” is pervasive in D.C.

In many ways we shouldn’t be surprised about this trust in such an unsound system. For at least four generations our government-run universities have systematically preached a monetary doctrine justifying the so-called wisdom of paper money over the “foolishness” of sound money. Not only that, paper money has worked surprisingly well in the past 35 years – the years the world has accepted pure paper money as currency. Alan Greenspan bragged that central bankers in these several decades have gained the knowledge necessary to make paper money respond as if it were gold. This removes the problem of obtaining gold to back currency, and hence frees politicians from the rigid discipline a gold standard imposes.

Many central bankers in the last 15 years became so confident they had achieved this milestone that they sold off large hoards of their gold reserves. At other times they tried to prove that paper works better than gold by artificially propping up the dollar by suppressing market gold prices. This recent deception failed just as it did in the 1960s, when our government tried to hold gold artificially low at $35 an ounce. But since they could not truly repeal the economic laws regarding money, just as many central bankers sold, others bought. It’s fascinating that the European central banks sold gold while Asian central banks bought it over the last several years.

Since gold has proven to be the real money of the ages, we see once again a shift in wealth from the West to the East, just as we saw a loss of our industrial base in the same direction. Though Treasury officials deny any U.S. sales or loans of our official gold holdings, no audits are permitted so no one can be certain.

The special nature of the dollar as the reserve currency of the world has allowed this game to last longer than it would have otherwise. But the fact that gold has gone from $252 per ounce to over $600 means there is concern about the future of the dollar. The higher the price for gold, the greater the concern for the dollar. Instead of dwelling on the dollar price of gold, we should be talking about the depreciation of the dollar. In 1934 a dollar was worth 1/20th of an ounce of gold; $20 bought an ounce of gold. Today a dollar is worth 1/600th of an ounce of gold, meaning it takes $600 to buy one ounce of gold.

The number of dollars created by the Federal Reserve, and through the fractional reserve banking system, is crucial in determining how the market assesses the relationship of the dollar and gold. Though there’s a strong correlation, it’s not instantaneous or perfectly predictable. There are many variables to consider, but in the long term the dollar price of gold represents past inflation of the money supply. Equally important, it represents the anticipation of how much new money will be created in the future. This introduces the factor of trust and confidence in our monetary authorities and our politicians. And these days the American people are casting a vote of “no confidence” in this regard, and for good reasons.

The incentive for central bankers to create new money out of thin air is twofold. One is to practice central economic planning through the manipulation of interest rates. The second is to monetize the escalating federal debt politicians create and thrive on.

Today no one in Washington believes for a minute that runaway deficits are going to be curtailed. In March alone, the federal government created an historic $85 billion deficit. The current supplemental bill going through Congress has grown from $92 billion to over $106 billion, and everyone knows it will not draw President Bush’s first veto. Most knowledgeable people therefore assume that inflation of the money supply is not only going to continue, but accelerate. This anticipation, plus the fact that many new dollars have been created over the past 15 years that have not yet been fully discounted, guarantees the further depreciation of the dollar in terms of gold.

There’s no single measurement that reveals what the Fed has done in the recent past or tells us exactly what it’s about to do in the future. Forget about the lip service given to transparency by new Fed Chairman Bernanke. Not only is this administration one of the most secretive across the board in our history, the current Fed firmly supports denying the most important measurement of current monetary policy to Congress, the financial community, and the American public. Because of a lack of interest and poor understanding of monetary policy, Congress has expressed essentially no concern about the significant change in reporting statistics on the money supply.

Beginning in March, though planned before Bernanke arrived at the Fed, the central bank discontinued compiling and reporting the monetary aggregate known as M3. M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation. Yet this report is no longer available to us and Congress makes no demands to receive it.

Though M3 is the most helpful statistic to track Fed activity, it by no means tells us everything we need to know about trends in monetary policy. Total bank credit, still available to us, gives us indirect information reflecting the Fed’s inflationary policies. But ultimately the markets will figure out exactly what the Fed is up to, and then individuals, financial institutions, governments, and other central bankers will act accordingly. The fact that our money supply is rising significantly cannot be hidden from the markets.

The response in time will drive the dollar down, while driving interest rates and commodity prices up. Already we see this trend developing, which surely will accelerate in the not too distant future. Part of this reaction will be from those who seek a haven to protect their wealth – not invest – by treating gold and silver as universal and historic money. This means holding fewer dollars that are decreasing in value while holding gold as it increases in value.

A soaring gold price is a vote of “no confidence” in the central bank and the dollar. This certainly was the case in 1979 and 1980. Today, gold prices reflect a growing restlessness with the increasing money supply, our budgetary and trade deficits, our unfunded liabilities, and the inability of Congress and the administration to reign in runaway spending.

Denying us statistical information, manipulating interest rates, and artificially trying to keep gold prices in check won’t help in the long run. If the markets are fooled short term, it only means the adjustments will be much more dramatic later on. And in the meantime, other market imbalances develop.

The Fed tries to keep the consumer spending spree going, not through hard work and savings, but by creating artificial wealth in stock markets bubbles and housing bubbles. When these distortions run their course and are discovered, the corrections will be quite painful.

Likewise, a fiat monetary system encourages speculation and unsound borrowing. As problems develop, scapegoats are sought and frequently found in foreign nations. This prompts many to demand altering exchange rates and protectionist measures. The sentiment for this type of solution is growing each day.

Though everyone decries inflation, trade imbalances, economic downturns, and federal deficits, few attempt a closer study of our monetary system and how these events are interrelated. Even if it were recognized that a gold standard without monetary inflation would be advantageous, few in Washington would accept the political disadvantages of living with the discipline of gold – since it serves as a check on government size and power. This is a sad commentary on the politics of today. The best analogy to our affinity for government spending, borrowing, and inflating is that of a drug addict who knows if he doesn’t quit he’ll die; yet he can’t quit because of the heavy price required to overcome the dependency. The right choice is very difficult, but remaining addicted to drugs guarantees the death of the patient, while our addiction to deficit spending, debt, and inflation guarantees the collapse of our economy.

Special interest groups, who vigorously compete for federal dollars, want to perpetuate the system rather than admit to a dangerous addiction. Those who champion welfare for the poor, entitlements for the middle class, or war contracts for the military industrial corporations, all agree on the so-called benefits bestowed by the Fed’s power to counterfeit fiat money. Bankers, who benefit from our fractional reserve system, likewise never criticize the Fed, especially since it’s the lender of last resort that bails out financial institutions when crises arise. And it’s true, special interests and bankers do benefit from the Fed, and may well get bailed out – just as we saw with the Long-Term Capital Management fund crisis a few years ago. In the past, companies like Lockheed and Chrysler benefited as well. But what the Fed cannot do is guarantee the market will maintain trust in the worthiness of the dollar. Current policy guarantees that the integrity of the dollar will be undermined. Exactly when this will occur, and the extent of the resulting damage to financial system, cannot be known for sure – but it is coming. There are plenty of indications already on the horizon.

Foreign policy plays a significant role in the economy and the value of the dollar. A foreign policy of militarism and empire building cannot be supported through direct taxation. The American people would never tolerate the taxes required to pay immediately for overseas wars, under the discipline of a gold standard. Borrowing and creating new money is much more politically palatable. It hides and delays the real costs of war, and the people are lulled into complacency – especially since the wars we fight are couched in terms of patriotism, spreading the ideas of freedom, and stamping out terrorism. Unnecessary wars and fiat currencies go hand-in-hand, while a gold standard encourages a sensible foreign policy.

To be continued next week…

Congressman Ron Paul
for The Daily Reckoning
January 18, 2007

Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535″ on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

First, there was the New Woman.

Then, there was the New Economy.

Now there is the New Inflation.

Asset inflation is as different from the regular kind as an illicit affair is from an ordinary one. It is much more agreeable when it comes in…and much more painful when it goes away.

And it is not all created by central banks or Treasury Departments.

By now, we understand central bank inflation only too well. It worms its way down to the consumer economy through the banking system. Eventually, but not immediately, prices rise. And when prices rise too steeply, voters begin to howl…businesses get jumpy…investors start to flinch…and the whole economy goes sour like old milk.

But this ‘New Inflation’ is different. It is the ‘Wave of Liquidity’ that is floating up prices of capital assets…and rich peoples’ toys…all over the planet. Yes, dear reader, the rich have done very well out of all this new liquid. It has boosted up their wealth. Their stocks, their bonds, their property…even the works of art that adorn their walls have floated up.

Where does all this money come from? Ah…that’s what is new about it. And it is why the financial industry is making so much money.

It works like this. You have a house worth $100,000. You take out a mortgage for $50,000. Then the mortgage is mixed together with other mortgages, stirred, shaken and sold to a financial house, X. There, it is used as collateral for a loan of $500,000…which is invested in a leveraged buy-out of a Company Y…which then issues bonds worth $5 million, which are taken up by hedge fund Z, that borrowed the money to buy them from the Japanese at a low interest rate, exchanged it for dollars, and now invests in these junk bonds at twice the yield.

At every step, the financial intermediaries make their commissions, their spreads, and their fees. At every step, the amount of notional ‘money’ in the world multiplies. Your income has not changed…your house is still the same…business Y makes no more profits. The real economy remains just as it was. This feverish financial activity…this ‘financialization of the economy’ adds nothing…not one jot or tittle…to the real wealth that is in the world. There are no more factories…no more diamonds…no more steak sandwiches. All this money-shuffling produces nothing but more profits for the money- shufflers and more wealth for the rich people around the table.

As long as the credit bubble expands…it also expands the values of the assets held by the rich. Their stocks, bonds…junk bonds…and all other assets, go up in price. Which means, that they are the beneficiaries of the New Inflation. When their junk bonds or houses or stocks go up in value…they have more purchasing power. They can trade financial assets for other assets. They can use them to buy a time-share in a corporate jet…or a vacation house at St. Barts. Or, they can simply buy more ‘stuff.’

We can be sure that they are not going to drive up the price of toilet paper or margarine, however. Consumer prices are, broadly speaking, unaffected. The rich don’t use more toilet paper just because they have more money. Nor do they eat more hamburgers. But insofar as they have more purchasing power, thanks to this New Inflation, they grow richer, compared to the rest of the world.

This might not make much difference, eventually, of course. Every dollar created out of thin air eventually goes back from whence it came. All this pseudo-wealth – created by the New Inflation – will eventually disappear. Credit booms are typically followed by credit busts. Junk bonds typically have their moments of glory, followed by their hours of desperation and defeat. Things that go up so spectacularly can be expected to go down in a sensational way too.

But here is where the real problem arises. While financial assets rose in price, so did the debt burden on the proletariat. The New Inflation meant new wealth to the rich; to the lumpen…the booboisie…it meant debt-financing. What the middle and lower classes got out of it was an opportunity to ruin themselves; which they took up readily.

New Inflation is sure to be followed by New Deflation. We wonder what that will feel like.

More news:

————–

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

“Unfortunately, the markets don’t appear to be too satisfied having to eat off the disappointment plates, and they have taken yen even lower to the 121 handle. OK fellas, that’s a little harsh, don’t you think?”

For the rest of this story, see today’s issue of The Daily Pfennig

————–

And more views:

*** A note from our good friend Chris Mayer:

“I recently finished a book titled From Wall Street to the Great Wall, which further brings home this point. ‘Electrical power shortages are chronic today’ in China, the authors note. ‘Blackouts are not uncommon, and manufacturing is affected directly.’

“Later, the authors quote a story from the Guardian: ‘China is on the biggest power plant building spree the world has ever seen.’ Hydroelectric dams, coal-fired generators and nuclear facilities sprout like weeds throughout China. ‘The equivalent of Britain’s entire electrical output is being added to the capacity of the country’s national grid every two years.’

“Really, the power story is only part of a bigger thread. The more you look into this sort of thing, the more you find that it is about more than just power (or just water, for that matter). It’s a combination of all of these things. What we’re talking about is infrastructure. Admittedly, infrastructure is an ugly four-syllable word that leaves a lot of room for interpretation. As with pornography, you know it when you see it.

“India, often paired up with China in these kinds of stories, has its own infrastructure problems. Wandering cows in the middle of pockmarked roads is only one of them. So notes The Wall Street Journal: ‘The nation’s capital is bedeviled by the same sort of cramped airports, rough roads and frequent power outages that recall the darker days (often literally) of China’s own economic opening.’

“These are the headline cases. At the margins, though, you see similar trends in smaller emerging markets. All of it is more fuel for the perfect storm.”

*** “Died in Burma in World War II”…”Fought in Zulu Wars”…”Victim of Rajasthan Uprising”…”Died at Verdun.”

We were taking a little tour of Canterbury Cathedral before the Matins service on Sunday morning. What was striking was how many monuments there were to fallen soldiers of the British Empire. We think of the British Empire as a commercial undertaking – and it was commercial, in the sense that the profits were realized by private companies, and not by the British government directly.

But like all empires, it needed its fighting men to maintain order and subdue the locals. The English army – with its regiments made up of soldiers from all over the British Isles and its auxiliaries drawn from its colonies and vassal territories – established a Pax Britannica. Then, the English, being in the superior position, were able to set the terms of trade.

The story of the British colonial wars is either a story of great heroism and sacrifice in the service of bringing civilization to the heathen…or a story of brutality, bamboozling and bumbling in an effort to make a buck…depending on how you look at it. Either way, many of its most illustrious participants seem to be memorialized at Canterbury Cathedral.

We haven’t been writing much about the American Empire recently. Not because we’ve changed our minds about it – we just thought you were getting tired of hearing about it.

But our visit to Canterbury rekindled our interest.

First, we note that the United States now has its soldiers garrisoned in 144 different countries. That is a far bigger empire than even the Romans had. And bigger, in some ways, than the British Empire, too.

But ours is a much funnier empire than the other two.

*** MarketWatch reports that Ben Bernanke urged Congress to put the federal budget on a long-term sustainable path. “If early and meaningful action is not taken [to lower the budget deficit], the U.S. economy could be seriously weakened, with future generations bearing much of the cost,” Bernanke said in testimony prepared for delivery to the Senate Budget Committee. Bernanke said that recent narrowing of the deficit was simply “the calm before the storm” as spending on entitlement programs will begin to climb quickly during the next decade.

Now the word is that the total cost of U.S. war in Iraq may rise to as much as $2 trillion. When it was said to be $1 trillion near the beginning of the adventure, the amount was so high that it was dismissed or ridiculed. Now, we find that the tab might be twice as much. Either way, it’s a lot of money, especially if you don’t have it.

There is one thing you have to remember about empires. They are vast public spectacles. As such, they must follow the rules of all public spectacles. They must begin with lies…develop into farces…and end in disaster. No empire has ever failed to do so. When no substantial enemy threatens it, an empire must find one; and if no rival empire can be found to destroy it, it must find a way to destroy itself.

That was what we thought was really behind the war in Iraq from the beginning. There were so few terrorists, more needed to be created. This goal seems to have been achieved.

But the point where this empire is weakest is financial. Every previous empire had found a way to make the business pay, but America has not made a profit at empire for twenty years. Its businesses are now at a competitive disadvantage; they have higher costs and no domestic source of new capital. Americans do not save.

What’s more, maintaining the empire has become an expensive business. Even Osama bin Laden saw the weakness and publicly announced his strategy – he would make America bleed cash. Now, we see that this is exactly what has happened. The war in Iraq cost $2 billion per week in direct costs. It costs $10 million for each Iraqi ‘insurgent,’ whatever that is, killed. Plus, the war on terror costs billions more.

So far, at least, if the great empire wants to ruin itself…at least it is doing what it must.

But you already know that, don’t you, dear reader? You’ve read Empire of Debt…and if you haven’t, you can buy your copy here:

The Most Feared Book in Washington!

A Vote of “No Confidence”, Part I originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

WHY ARE AMERICANS SO ANGRY? – PART II
by Hon. Ron Paul

Short wars, with well-defined victories, are tolerated by the American people even when they are misled as to the reasons for the war. Wars entered into without a proper declaration tend to be politically motivated and not for national security reasons. These wars, by their very nature, are prolonged, costly, and usually require a new administration to finally end them.

This certainly was true with the Korean and Vietnam wars. The lack of a quick military success, the loss of life and limb, and the huge economic costs of lengthy wars precipitate anger. This is overwhelmingly true when the war propaganda that stirred up illegitimate fears is exposed as a fraud. Most soon come to realize the promise of guns and butter is an illusion. They come to understand that inflation, a weak economy, and a prolonged war without real success are the reality.

The anger over the Iraq war is multifaceted. Some are angry believing they were lied to in order to gain their support at the beginning. Others are angry that the forty billion dollars we spend every year on intelligence gathering failed to provide good information. Proponents of the war too often are unable to admit the truth. They become frustrated with the progress of the war and then turn on those wanting to change course, angrily denouncing them as unpatriotic and un-American.

Those accused are quick to respond to the insulting charges made by those who want to fight on forever without regard to casualties. Proponents of the war do not hesitate to challenge the manhood of war critics, accusing them of wanting to cut and run. Some war supporters ducked military service themselves while others fought and died, only adding to the anger of those who have seen battle up close and now question our campaign in Iraq.

When people see a $600 million embassy being built in Baghdad, while funding for services here in the United States is hard to obtain, they become angry. They can’t understand why the money is being spent, especially when they are told by our government that we have no intention of remaining permanently in Iraq.

The bickering and anger will not subside soon, since victory in Iraq is not on the horizon and a change in policy is not likely either.

The neoconservative instigators of the war are angry at everyone: at the people who want to get out of Iraq; and especially at those prosecuting the war for not bombing more aggressively, sending in more troops, and expanding the war into Iran.

As our country becomes poorer due to the cost of the war, anger surely will escalate. Much of it will be justified.

It seems bizarre that it’s so unthinkable to change course if the current policy is failing. Our leaders are like a physician who makes a wrong diagnosis and prescribes the wrong medicine, but because of his ego can’t tell the patient he made a mistake. Instead he hopes the patient will get better on his own. But instead of improving, the patient gets worse from the medication wrongly prescribed. This would be abhorrent behavior in medicine, but tragically it is commonplace in politics.

If the truth is admitted, it would appear that the lives lost and the money spent have been in vain. Instead, more casualties must be sustained to prove a false premise. What a tragedy! If the truth is admitted, imagine the anger of all the families that already have suffered such a burden. That burden is softened when the families and the wounded are told their great sacrifice was worthy, and required to preserve our freedoms and our Constitution.

But no one is allowed to ask the obvious. How have the 2,500 plus deaths, and the 18,500 wounded, made us more free? What in the world does Iraq have to do with protecting our civil liberties here at home? What national security threat prompted America’s first pre-emptive war? How does our unilateral enforcement of UN resolutions enhance our freedoms?

These questions aren’t permitted. They are not politically correct. I agree that the truth hurts, and these questions are terribly hurtful to the families that have suffered so much. What a horrible thought it would be to find out the cause for which we fight is not quite so noble.

I don’t believe those who hide from the truth and refuse to face the reality of the war do so deliberately. The pain is too great. Deep down, psychologically, many are incapable of admitting such a costly and emotionally damaging error. They instead become even greater and more determined supporters of the failed policy.

I would concede that there are some – especially the die-hard neoconservatives, who believe it is our moral duty to spread American goodness through force and remake the Middle East – who neither suffer regrets nor are bothered by the casualties. They continue to argue for more war without remorse, as long as they themselves do not have to fight. Criticism is reserved for the wimps who want to “cut and run.”

Due to the psychological need to persist with the failed policy, the war proponents must remain in denial of many facts staring them in the face.

• They refuse to accept that the real reason for our invasion and occupation of Iraq was not related to terrorism.
• They deny that our military is weaker as a consequence of this war.
• They won’t admit that our invasion has served the interests of Osama Bin Laden. They continue to blame our image problems around the world on a few bad apples.
• They won’t admit that our invasion has served the interests of Iran’s radical regime.
• The cost in lives lost and dollars spent is glossed over, and the deficit spirals up without concern.
• They ridicule those who point out that our relationships with our allies have been significantly damaged.

We have provided a tremendous incentive for Russia and China, and others like Iran, to organize through the Shanghai Cooperation Organization. They entertain future challenges to our plans to dominate South East Asia, the Middle East, and all its oil.

Radicalizing the Middle East will in the long term jeopardize Israel’s security, and increase the odds of this war spreading.

War supporters cannot see that for every Iraqi killed, another family turns on us – regardless of who did the killing. We are and will continue to be blamed for every wrong done in Iraq: all deaths, illness, water problems, food shortages, and electricity outages.

As long as our political leaders persist in these denials, the war won’t end. The problem is that this is the source of the anger, because the American people are not in denial and want a change in policy.

Policy changes in wartime are difficult, for it is almost impossible for the administration to change course since so much emotional energy has been invested in the effort. That’s why Eisenhower ended the Korean War, and not Truman. That’s why Nixon ended the Vietnam War, and not LBJ. Even in the case of Vietnam the end was too slow and costly, as more then 30,000 military deaths came after Nixon’s election in 1968. It makes a lot more sense to avoid unnecessary wars than to overcome the politics involved in stopping them once started. I personally am convinced that many of our wars could be prevented by paying stricter attention to the method whereby our troops are committed to battle. I also am convinced that when Congress does not declare war, victory is unlikely.

The most important thing Congress can do to prevent needless and foolish wars is for every member to take seriously his or her oath to obey the Constitution. Wars should be entered into only after great deliberation and caution. Wars that are declared by Congress should reflect the support of the people, and the goal should be a quick and successful resolution.

Our undeclared wars over the past 65 years have dragged on without precise victories. We fight to spread American values, to enforce UN resolutions, and to slay supposed Hitlers. We forget that we once spread American values by persuasion and setting an example – not by bombs and preemptive invasions. Nowhere in the Constitution are we permitted to go to war on behalf of the United Nations at the sacrifice of our national sovereignty. We repeatedly use military force against former allies, thugs we helped empower – like Saddam Hussein and Osama bin Laden – even when they pose no danger to us.

The 2002 resolution allowing the president to decide when and if to invade Iraq is an embarrassment. The Constitution authorizes only Congress to declare war. Our refusal to declare war transferred power to the president illegally, without a constitutional amendment. Congress did this with a simple resolution, passed by majority vote. This means Congress reneged on its responsibility as a separate branch of government, and should be held accountable for the bad policy in Iraq that the majority of Americans are now upset about. Congress is every bit as much at fault as the president.

Constitutional questions aside, the American people should have demanded more answers from their government before they supported the invasion and occupation of a foreign country.

Some of the strongest supporters of the war declare that we are a Christian nation, yet use their religious beliefs to justify the war. They claim it is our Christian duty to remake the Middle East and attack the Muslim infidels. Evidently I have been reading from a different Bible. I remember something about “Blessed are the peacemakers.”

My beliefs aside, Christian teaching of nearly a thousand years reinforces the concept of “The Just War Theory.” This Christian theory emphasizes six criteria needed to justify Christian participation in war. Briefly the six points are as follows:

War should be fought only in self defense;
War should be undertaken only as a last resort;
A decision to enter war should be made only by a legitimate authority;
All military responses must be proportional to the threat;
There must be a reasonable chance of success; and
A public declaration notifying all parties concerned is required.

The war in Iraq fails to meet almost all of these requirements. This discrepancy has generated anger and division within the Christian community.

Some are angry because the war is being fought out of Christian duty, yet does not have uniform support from all Christians. Others are angry because they see Christianity as a religion as peace and forgiveness, not war and annihilation of enemies.

Constitutional and moral restraints on war should be strictly followed. It is understandable when kings, dictators, and tyrants take their people into war, since it serves their selfish interests – and those sent to fight have no say in the matter. It is more difficult to understand why democracies and democratic legislative bodies, which have a say over the issue of war, so readily submit to the executive branch of government. The determined effort of the authors of our Constitution to firmly place the power to declare war in the legislative branch has been ignored in the decades following WWII.

Many members have confided in me that they are quite comfortable with this arrangement. They flatly do not expect, in this modern age, to formally declare war ever again. Yet no one predicts there will be fewer wars fought. It is instead assumed they will be ordered by the executive branch or the United Nations– a rather sad commentary.

What about the practical arguments against war, since no one seems interested in exerting constitutional or moral restraints? Why do we continue to fight prolonged, political wars when the practical results are so bad? Our undeclared wars since 1945 have been very costly, to put it mildly. We have suffered over one hundred thousand military deaths, and even more serious casualties. Tens of thousands have suffered from serious war-related illnesses. Sadly, we as a nation express essentially no concern for the millions of civilian casualties in the countries where we fought.

The cost of war since 1945, and our military presence in over 100 countries, exceeds two trillion dollars in today’s dollars. The cost in higher taxes, debt, and persistent inflation is immeasurable. Likewise, the economic opportunities lost by diverting trillions of dollars into war is impossible to measure, but it is huge. Yet our presidents persist in picking fights with countries that pose no threat to us, refusing to participate in true diplomacy to resolve differences. Congress over the decades has never resisted the political pressures to send our troops abroad on missions that defy imagination.

When the people object to a new adventure, the propaganda machine goes into action to make sure critics are seen as unpatriotic Americans or even traitors.

The military-industrial complex we were warned about, has been transformed into a military-media-industrial-government complex that is capable of silencing the dissenters and cheerleading for war. It’s only after years of failure that people are able to overcome the propaganda for war and pressure their representatives in Congress to stop the needless killing. Many times the economic costs of war stir people to demand an end. This time around the war might be brought to a halt by our actual inability to pay the bills due to a dollar crisis. A dollar crisis will make borrowing 2.5 billion dollars per day from foreign powers like China and Japan virtually impossible, at least at affordable interest rates.

That’s when we will be forced to reassess the spending spree, both at home and abroad.

The solution to this mess is not complicated; but the changes needed are nearly impossible for political reasons. Sound free market economics, sound money, and a sensible foreign policy would all result from strict adherence to the Constitution. If the people desired it, and Congress was filled with responsible members, a smooth although challenging transition could be achieved. Since this is unlikely, we can only hope that the rule of law and the goal of liberty can be reestablished without chaos.

We must move quickly toward a more traditional American foreign policy of peace, friendship, and trade with all nations; entangling alliances with none. We must reject the notion that we can or should make the world safe for democracy. We must forget about being the world’s policeman. We should disengage from the unworkable and unforgiving task of nation building. We must reject the notion that our military should be used to protect natural resources, private investments, or serve the interest of any foreign government or the United Nations. Our military should be designed for one purpose: defending our national security. It’s time to come home now, before financial conditions or military weakness dictates it.

The major obstacle to a sensible foreign policy is the fiction about what patriotism means. Today patriotism has come to mean blind support for the government and its policies. In earlier times patriotism meant having the willingness and courage to challenge government policies regardless of popular perceptions.

Today we constantly hear innuendos and direct insults aimed at those who dare to challenge current foreign policy, no matter how flawed that policy may be. I would suggest it takes more courage to admit the truth, to admit mistakes, than to attack others as unpatriotic for disagreeing with the war in Iraq.

Remember, the original American patriots challenged the abuses of King George, and wrote and carried out the Declaration of Independence.

Yes, Mr. Speaker, there is a lot of anger in this country. Much of it is justified; some of it is totally unnecessary and misdirected. The only thing that can lessen this anger is an informed public, a better understanding of economic principles, a rejection of foreign intervention, and a strict adherence to the constitutional rule of law. This will be difficult to achieve, but it’s not impossible and well worth the effort.

Regards,

Congressman Ron Paul
for The Daily Reckoning
July 13, 2006

Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535″ on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

There is theory. And there are the facts. And often, the twain do not meet. At least, not nearly as often as they should.

We note, for example, that Nanjing Automobile, owner of what used to be MG of Birmingham, England, has decided to build a manufacturing plant in Ardmore, Oklahoma. Nanjing joins Toyota, Honda, Nissan, and Hyundai with auto manufacturing plants all over the United States. We have written more than once that high U.S. labor costs make manufacturing a losing business in America. But U.S. labor costs only seem to be a problem for U.S. companies. Apparently, everyone can make money building cars in America – except Americans.

We don’t know what to make of it, so we will leave it alone and return to facts that are more convenient.

The U.S. trade gap grew in May to $63.8 billion. But take away oil imports, and the gap actually fell. This is what we expect. Americans are running out of money. They can’t afford to continue buying oil and buying more junk, too. Something’s got to give, and it will be junk. Consumer spending, at least on the more frivolous items, will fall…we are sure.

More evidence of this comes from Las Vegas, which, according to Reuters, is feeling the pinch of higher fuel prices and squeezed family budgets. Las Vegas is a playground for Middle America. When the lumpen run short of money, Las Vegas shrivels.

We find that Disney, also nourished on the blood of the middle classes, is “slashing jobs.”

And now comes news that commodities are rising across the board. Now comes news that that nickel has hit a new high of $26,600 a metric ton, oil is over $74, and gold is trading over $650 an ounce. Corn and wheat are at 10-year highs. This, too, fits nicely into our theory. While Americans run out of dollars, foreigners have plenty of them. They’re bidding up prices on the things that are not easily “Made in China.”

We see also that the yield on the two-year note is higher than the yield on the 10-year. This inverted yield curve also suggests, foretells, or perhaps even creates a weakening economy. In America, the Bernanke Fed has already cranked hard on the tap. Rumor has it that it will give it another 25-basis-point twist next month.

How does Ben Bernanke know exactly what rate the world needs? If he could know such a thing, why not ask him to set the price of sugar, copper, and iPods, too? No, neither the chairman of the Princeton economics department nor the chairman of the Fed can know what isn’t knowable – the exact rate at which lenders would lend and borrowers would borrow if they didn’t have the Fed fixing prices.

Of course, that is not really what the Fed chief is trying to do, either. He is not figuring out an unknown, but fighting an unseen. Instead of letting the economy blow whither its lists, Bernanke has a theory of his own about whither it should be listing. He is simply not going to go along with the trend, whatever that might be. He’s fighting it, whatever it is. He’s determined to deliver a knockout blow to inflation, before it even appears. He’ll do this to reassure bond buyers, mortgage lenders and overseas dollar-holders of what he himself is unsure of. And then, as soon as his flanks are covered, he’ll march his army down to face deflation.

But if our theory is right, the poor man will succeed all too well in his first battle, and lose his second. America, finally, will follow Japan into a “lost decade.” Maybe more than a decade. Maybe a lost generation.

More news from our team at The Rude Awakening…

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Chris Mayer, reporting from Gaithersburg, Maryland:

“Sensing an opportunity, an enterprising individual by the name of Donald McKenzie assembled some investors to acquire the rights to supply the city with water. The year was 1866.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

————–

And more thoughts from between London and Paris…

*** Hank Paulson was officially sworn in a Secretary of the Treasury this past Monday – and Comptroller of the United States, David Walker, has some sound advice for him:

“The nation has gone from significant surpluses to huge deficits. Our nation’s ‘bottom line has turned bright red due to the ‘double whammy’ of rapid spending increases and significant tax cuts.

“Worse yet, over the past several years the nation’s tab has more than doubled to over $400,000 per household. That tab is for our nation’s debt and unfunded promises for things like Social Security and Medicare, including the new prescription drug bill.

“No one really knows how much longer foreign central banks and other investors will be willing to finance our excess consumption. If they cut back on investment in our debt, interest rates are likely to head up, and that’s bad news for all of us.

“To avoid this, we need meaningful budget controls on both the spending and tax sides of the ledger. We need a capable, credible and truly bipartisan entitlement and tax reform commission.

“And we need to increase transparency in our federal government’s financial reporting, budgeting and legislative processes. The poster child that makes the case for this is the Medicare prescription drug bill. Its $8 trillion price tag was never disclosed or debated before the bill became law.

“For the sake of our country, our children and our grandchildren, the President’s new economic team needs to change past policies and approaches. And the Congress needs to get more serious about our fiscal situation, too.

“Otherwise, our short-term economic gain will likely be followed by significant long-term economic pain.”

David Walker told USA Today that the United States could be likened to Rome before the fall of the empire – that the U.S. has all of the qualities is an empire on the decline.

Of course, we agree…so much so that we’ve written a book on it (you know the one), which we are subsequently turning into a documentary – and we start shooting at the upcoming Agora Financial Wealth Symposium in Vancouver.

If you are going to be attending the Wealth Symposium and have some thoughts to share on the financial state of the United States, or the fall of the U.S. Empire…or if you just want to let us know what crackpots we are for starting this project, contact Short Fuse at kincontrera@dailyreckoning.com. You could be a movie star!

*** We are headed back to Paris this morning, riding on a train line funded by unhappy investors. The EuroTunnel cannot make its debt payments. According to reports this morning, its collapse is imminent. Junior lenders can expect to get back only four cents on the dollar.

The England-France train connection – the aforementioned Eurostar – has become a critical part of our lives. We make the trip almost every week. It is comfortable. Convenient. Even pleasant, when it is not crowded with tourists.

So, we would like to thank all those hundreds of thousands of investors who saved, and then sacrificed their money so that we can ride back and forth under the English Channel at less than the actual cost. Heck, we don’t even pay for it. Instead, we trade advertising space in our English financial magazine.

And we would like a moment of silence…to remember all those millions of dollars spent building this money-losing colossus. They have all gone to money heaven. RIP

*** Remember crop circles? We read about them many years ago, but this is the first time we have actually seen one.

If we recall correctly, back in the 1970s people began to notice spots in the middle of wheat fields – in Britain – where the crop had been cut away in a perfect circle. Often, there were many circles, and sometimes other patterns. Many explanations were offered, including that the circles were made by extraterrestrials, but we never saw a definitive conclusion.

This morning, about 45 minutes after leaving London’s Waterloo Station, we looked out to our right, and there was a crop circle, about 20 feet wide, in the middle of a field of what we took to be wheat. It was striking in that it seemed to have been perfectly executed, with looping arcs of petals coming off the circle at regular intervals. Around it, there was no sign of damage or passage. Whoever did it, did it well. We don’t recall anything nearly so well-executed in the modern art world.

*** More to the head-butting story: French philosopher Bernard-Henri Levy has made a reputation for himself by writing claptrap. BHL, as he is known, is a regular on TV and in magazines. And now he explains Zinedine Zidane’s World Cup attack on Marco Materazzi as an “interior revolt,” or the “suicide of a demi-god.”

We should ask him his opinion on the bond market.

Why Are Americans So Angry? – Part II originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

WHY ARE AMERICANS SO ANGRY? – PART I

I have been involved in politics for over 30 years and have never seen the American people so angry. It’s not unusual to sense a modest amount of outrage, but it seems the anger today is unusually intense and quite possibly worse than ever. It’s not easily explained, but I have some thoughts on this matter.

Generally, anger and frustration among people are related to economic conditions; bread and butter issues. Yet today, according to government statistics, things are going well. We have low unemployment, low inflation, more homeowners than ever before, and abundant leisure with abundant luxuries. Even the poor have cell phones, televisions, and computers. Public school is free, and anyone can get free medical care at any emergency room in the country. Almost all taxes are paid by the top 50% of income earners. The lower 50% pay essentially no income taxes, yet general dissatisfaction and anger are commonplace. The old slogan “It’s the economy, stupid,” just doesn’t seem to explain things

Some say it’s the war, yet we’ve lived with war throughout the 20th century. The bigger they were the more we pulled together. And the current war, by comparison, has fewer American casualties than the rest. So it can’t just be the war itself.

People complain about corruption, but what’s new about government corruption? In the 19th century we had railroad scandals; in the 20th century we endured the Teapot Dome scandal, Watergate, Koreagate, and many others without too much anger and resentment. Yet today it seems anger is pervasive and worse than we’ve experienced in the past.

Could it be that war, vague yet persistent economic uncertainty, corruption, and the immigration problem all contribute to the anger we feel in America? Perhaps, but it’s almost as though people aren’t exactly sure why they are so uneasy. They only know that they’ve had it and aren’t going to put up with it anymore.

High gasoline prices make a lot of people angry, though there is little understanding of how deficits, inflation, and war in the Middle East all contribute to these higher prices.

Generally speaking, there are two controlling forces that determine the nature of government: the people’s concern for their economic self interests; and the philosophy of those who hold positions of power and influence in any particular government. Under Soviet Communism the workers believed their economic best interests were being served, while a few dedicated theoreticians placed themselves in positions of power. Likewise, the intellectual leaders of the American Revolution were few, but rallied the colonists to risk all to overthrow a tyrannical king.

Since there’s never a perfect understanding between these two forces, the people and the philosophical leaders, and because the motivations of the intellectual leaders vary greatly, any transition from one system of government to another is unpredictable. The communist takeover by Lenin was violent and costly; the demise of communism and the acceptance of a relatively open system in the former Soviet Union occurred in a miraculous manner. Both systems had intellectual underpinnings.

In the United States over the last century we have witnessed the coming and going of various intellectual influences by proponents of the free market, Keynesian welfarism, varieties of socialism, and supply-side economics. In foreign policy we’ve seen a transition from the founder’s vision of non-intervention in the affairs of others to internationalism, unilateral nation building, and policing the world. We now have in place a policy, driven by determined neo-conservatives, to promote American “goodness” and democracy throughout the world by military force – with particular emphasis on remaking the Middle East.

We all know that ideas do have consequences. Bad ideas, even when supported naively by the people, will have bad results. Could it be the people sense, in a profound way, that the policies of recent decades are unworkable – and thus they have instinctively lost confidence in their government leaders? This certainly happened in the final years of the Soviet system. Though not fully understood, this sense of frustration may well be the source of anger we hear expressed on a daily basis by so many.

No matter how noble the motivations of political leaders are, when they achieve positions of power the power itself inevitably becomes their driving force. Government officials too often yield to the temptations and corrupting influences of power.

But there are many others who are not bashful about using government power to do “good.” They truly believe they can make the economy fair through a redistributive tax and spending system; make the people moral by regulating personal behavior and choices; and remake the world in our image using armies. They argue that the use of force to achieve good is legitimate and proper for government – always speaking of the noble goals while ignoring the inevitable failures and evils caused by coercion.

Not only do they justify government force, they believe they have a moral obligation to do so.

Once we concede government has this “legitimate” function and can be manipulated by a majority vote, the various special interests move in quickly. They gain control to direct government largesse for their own benefit. Too often it is corporate interests who learn how to manipulate every contract, regulation and tax policy. Likewise, promoters of the “progressive” agenda, always hostile to property rights, compete for government power through safety, health, and environmental initiatives. Both groups resort to using government power – and abuse this power – in an effort to serve their narrow interests. In the meantime, constitutional limits on power and its mandate to protect liberty are totally forgotten.

Since the use of power to achieve political ends is accepted, pervasive, and ever expanding, popular support for various programs is achieved by creating fear. Sometimes the fear is concocted out of thin air, but usually it’s created by wildly exaggerating a problem or incident that does not warrant the proposed government “solution.” Often government caused the problem in the first place. The irony, of course, is that government action rarely solves any problem, but rather worsens existing problems or creates altogether new ones.

Fear is generated to garner popular support for the proposed government action, even when some liberty has to be sacrificed. This leads to a society that is systemically driven toward fear – fear that gives the monstrous government more and more authority and control over our lives and property.

Fear is constantly generated by politicians to rally the support of the people.

Environmentalists go back and forth, from warning about a coming ice age to arguing the grave dangers of global warming.

It is said that without an economic safety net – for everyone, from cradle to grave – people would starve and many would become homeless.

It is said that without government health care, the poor would not receive treatment. Medical care would be available only to the rich.

Without government insuring pensions, all private pensions would be threatened.

Without federal assistance, there would be no funds for public education, and the quality of our public schools would diminish – ignoring recent history to the contrary.

It is argued that without government surveillance of every American, even without search warrants, security cannot be achieved. The sacrifice of some liberty is required for security of our citizens, they claim.

We are constantly told that the next terrorist attack could come at any moment. Rather than questioning why we might be attacked, this atmosphere of fear instead prompts giving up liberty and privacy. 9/11 has been conveniently used to generate the fear necessary to expand both our foreign intervention and domestic surveillance.

Fear of nuclear power is used to assure shortages and highly expensive energy.

In all instances where fear is generated and used to expand government control, it’s safe to say the problems behind the fears were not caused by the free market economy, or too much privacy, or excessive liberty.

It’s easy to generate fear, fear that too often becomes excessive, unrealistic, and difficult to curb. This is important: It leads to even more demands for government action than the perpetrators of the fear actually anticipated.

Once people look to government to alleviate their fears and make them safe, expectations exceed reality. FEMA originally had a small role, but its current mission is to centrally manage every natural disaster that befalls us. This mission was exposed as a fraud during last year’s hurricanes; incompetence and corruption are now FEMA’s legacy. This generates anger among those who have to pay the bills, and among those who didn’t receive the handouts promised to them quickly enough.

Generating exaggerated fear to justify and promote attacks on private property is commonplace. It serves to inflame resentment between the producers in society and the so-called victims, whose demands grow exponentially.

The economic impossibility of this system guarantees that the harder government tries to satisfy the unlimited demands, the worse the problems become. We won’t be able to pay the bills forever, and eventually our ability to borrow and print new money must end. This dependency on government will guarantee anger when the money runs out. Today we’re still able to borrow and inflate, but budgets are getting tighter and people sense serious problems lurking in the future. This fear is legitimate. No easy solution to our fiscal problems is readily apparent, and this ignites anger and apprehension.

Disenchantment is directed at the politicians and their false promises, made in order to secure reelection and exert power that so many of them enjoy.

It is, however, in foreign affairs that governments have most abused fear to generate support for an agenda that under normal circumstances would have been rejected. For decades our administrations have targeted one supposed “Hitler” after another to gain support for military action against a particular country. Today we have three choices termed the axis of evil: Iran, Iraq or North Korea.

We recently witnessed how unfounded fear was generated concerning Saddam Hussein’s weapons of mass destruction to justify our first ever pre-emptive war. It is now universally known the fear was based on falsehoods. And yet the war goes on; the death and destruction continue.

This is not a new phenomenon. General Douglas MacArthur understood the political use of fear when he made this famous statement:

“Always there has been some terrible evil at home or some monstrous foreign power that was going to gobble us up if we did not blindly rally behind it.”

We should be ever vigilant when we hear the fear mongers preparing us for the next military conflict our young men and women will be expected to fight. We’re being told of the great danger posed by Almadinejad in Iran and Kim Jung Il in North Korea. Even Russia and China bashing is in vogue again. And we’re still not able to trade with or travel to Cuba. A constant enemy is required to expand the state. More and more news stories blame Iran for the bad results in Iraq. Does this mean Iran is next on the hit list?

The world is much too dangerous, we’re told, and therefore we must be prepared to fight at a moment’s notice, regardless of the cost. If the public could not be manipulated by politicians’ efforts to instill needless fear, fewer wars would be fought and far fewer lives would be lost.

Regards,

Congressman Ron Paul
for The Daily Reckoning
July 12, 2006

Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535″ on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

“So you think you can tell
Heaven from Hell
Blues skies from pain…?”

- Syd Barrett, RIP

Facts are nothing without theories. We were reminded of this as we perused the financial pages this morning. The reporters must have been reading each other’s stuff. Practically everywhere, “disappointing earnings” were blamed for weak stock prices yesterday. How did they know?

Well, of course they didn’t. But they had their theories…as we do. Without them, you can’t tell Heaven from Hell…or blue skies from pain. So we get theories, most of which are so imbecilic we don’t know which one to laugh at first. That is why our mission here at The Daily Reckoning is so easy. We can cover our eyes confidently, point and chortle; there is bound to be a jackass in front of us. But last week, our chuckles stopped – for a moment – when Warren Buffett and Bill Gates got together to spend their own money. It took our breath away. More about that tomorrow.

Here in the pages of The Daily Reckoning we have also been elaborating a theory of our own, trying to follow a very thin thread through a labyrinth of facts and figures. Our theory is that the American economy – and perhaps all of Western, English-speaking civilization – is forming a huge top:

The U.S. Empire is wasting itself in hugely expensive and probably counterproductive wars. The bill for the Iraq and Afghanistan wars will reach $500 billion next year, every penny of which was borrowed, and three-quarters of which was borrowed from outside the empire. An empire that relies upon “barbarians” to maintain its military campaigns is an empire in decline. A society that spends more than it earns is also in decline, even if it hasn’t woken up to the idea.

The world’s financial system – based on the U.S. dollar – is approaching the beginning of its end. It was always a system based on “faith,” a misplaced faith. Trillions of dollars worth of currency, credits, and derivative have been introduced into the world economy. This wave of liquidity was injected, intentionally, to stave off a correction of the market in 2001-2002. American financial officials, desperately afraid of following Japan into a deflationary slump, have released a tidal wave of money and credit on a scale hitherto unseen in world economic history. Tax cuts, spending increases, and below-CPI lending – combined with Japan’s own Niagara of liquidity – has had the world awash in money.

This inflation has boosted asset prices, but it has also boosted debt to a level where the whole world economy has become dangerously leveraged. It is impossible to go from extreme leverage to even more extreme leverage forever. Eventually, and with no need for any particular blunder on anyone’s part, it must un-leverage itself. That is where it will hurt and that’s what lies ahead.

America’s central bank will, of course, not sit back and let the pain take its course. No, politicians will rant. Investors will whine. The Fed will panic and attempt to inject even more “inflation.” But this time, the inflation will not go into tech stocks, nor housing. It will go into commodities…particularly gold, which will be seen as an antidote to America’s “funny” money. Foreign dollar holders – mostly central banks – will dump dollars in favor of more reliable assets. The dollar will not survive as the world’s only reserve currency.

Real interest rates in America will go up. Prices of financial assets – stocks, bonds, houses – will go down. Economic growth will at first slow, and later, probably go negative. Real earnings for most Americans will decline even more. Relative earnings, compared to people outside the empire, will slide precipitously, marking a trend that will probably last for the next half-century.

In the immediate future, “the global economy is beginning a transition to an environment of tighter monetary policies and reduced liquidity,” a London-based analyst explained to the Financial Times. “History tells us that in such a world it will be much more difficult to earn the kind of high returns on risky assets that investors have enjoyed in recent years, and that some degree of risk reduction and increased allocations to cash are appropriate.”

The advice seems solid to us.

Most directly and immediately affected by reduced liquidity should be those investments that have most depended on it. The Bank of England warns today that the epicenter of damage could be in the heart of London’s financial center: the City. The big trading houses and banking groups have made fortunes from the credit bubble. When it pops, their profits, and maybe their capital too, could be wiped out.

“The severe crystallization of credit, market and liquidity risk could plainly represent a serious shock to the U.K. financial system,” says the Bank of England. A serious shock to the U.S. financial system, too.

What to do? Sell Goldman. Buy gold.

More news from our team at The Rude Awakening:

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Eric Fry, reporting from New York…

“For those of us who trust in the long-term energy bull market, every bout of weakness creates the opportunity to increase or adjust our investments in energy stocks.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

————–

And more ideas, thoughts, and whatever else pops into our minds:

*** “British banks have recently been so profitable that the U.K treasury actually commissioned an inquiry into this extraordinary profitability,” The Global Profit Hunter’s Sala Kannan reports. ” England’s HSBC Bank (HBC) for example, had a net profit margin of 31.85%. Compare that to J.P Morgan’s 15.53% net profit margin. Barclays Bank (BCS) and Lloyds Bank (LYG) of England are also extremely profitable with margins of 22.16% and 26.02%, respectively.

“According to the study by Don Cruickshank, ‘Excess profits arise when prices are consistently above costs across the output of an economic market. These excess profits translate directly into excess profitability, measured as the rate of return on the capital employed in the production of those products and services. Thus an indicator of persistently high prices relative to costs is persistently earning a rate of profit which is higher than the cost of capital employed.’

“These banks have large economic moats to keep competition at bay – a feature that Warren Buffett always looks for in his investments. And when it comes to keeping the competition away, size again affects British banks.

“The U.K. being a physically small country, all four of its banks have branches nearly everywhere in the country. This makes it easier for them increase a customer’s cost of switching banks.

“In reality, there is nothing to be suspicious about bank profitability. If run well, it is simply a great business to be in. Especially in England. With high switching costs for customers, steady profitability and an extraordinary economic moat, banks can provide fabulous investor return in the long run.”

*** We boarded the train for London this morning with a clutch of newspapers under our arm. The Times, Telegraph, La Liberation, El Pais, the Financial Times, the Herald Tribune. Looking through the papers, we find that the world is still a wicked and dangerous place. Based on the headlines, the war on terror is a losing proposition; the terrorists are at least holding their own.

But with no financial stories in today’s papers to inspire us with their absurdity, we turn to bigger news:

First, we note sadly that Syd Barrett, the inspiring genius of Pink Floyd, has died. The poor man’s musical career did not last long; we’ve ordered pizza that took longer. But he hit some fine notes that will be remembered by fans. Henry sings his “Wish you were here” song over and over; it’s one of his favorites. But by the 1970s, Barrett had gone over the edge. Heaven and Hell came together in his brain, perhaps joined by LSD. He stood on stage and played a single note…or missed the performance all together. The band replaced him and continued to send him his royalties. Syd moved into his mother’s basement and lived there the next 30 years…muttering to himself. On Friday, he died. Rest in peace.

The other big story is in the sports page and comes in the form of a question: What did the Italian player, Marco Materazzi, say to France’s Zinedine Zidane to lead him to head-butt the man and get thrown out of the game, which probably cost France the World Cup?

The World Cup is big news in Europe. Even after losing the critical match, the French team came back to Paris as heroes. A grand welcome was staged for them in front of the Crillon Hotel, near our office. All day, the traffic inched down the street, horns blaring. Finally, in mid-afternoon, the police cleared the way so a car carrying some of the players could pass. It, too, soon got stuck in the general gridlock, whereupon fans mobbed the car in order to congratulate the soccer players. Exactly what they were congratulating the losing team for was never explained to us. Finally, the police regrouped, chased away the fans and got the car moving again.

“What could the Italian have said?” we wondered to ourselves in our office. “They don’t even speak the same language.”

“Yes, I insulted him,” Materazzi admitted. “But I said nothing about his mother. To me, a mother is sacred.

Why Are Americans So Angy? – Part I originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

THE END OF DOLLAR HEGEMONY, PART II
by Hon. Ron Paul of Texas

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars – due to their depreciation – will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble – generated by easy money – has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged – as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein – though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.

Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.

It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting “our” oil supplies has influenced our Middle East policy for decades.

But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony – it’s dominance as the world reserve currency – is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.

For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.

It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.

The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources – we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.

Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.

Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system – like Iraq, Iran and Venezuela – become targets of our plans for regime change.

Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.

But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically. That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.

It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.

The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.

But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.

Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.

And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.

Regards,

Congressman Ron Paul
for The Daily Reckoning
February 23, 2006

Editor’s Note: You can read the first part of Dr. Paul’s speech in Wednesday’s issue of The Daily Reckoning.

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535″ on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

We have very little time this morning; we’re driving up to Normandy to check on that money pit…er…chateau we bought. We’re going to have to let others do much of the worrying this morning. And there seem to be enough experts around doing just that.

Richard Berner, for instance, worries about the rate of consumption.

“Consumers went on a spending spree over the past three months, ” he notes and adds, “I estimate that real outlays jumped at close to a 10% annual rate in the November-January span, the fastest 3-month clip since the spring of 1987. That surge occurred despite rising debt and interest rates, a negative saving rate, and apparently slowing home price gains. It’s hardly an understatement to say that the pace is unsustainable.”

Among consumers in America though, it looks like “what me worry” is still the prevailing mood.

Colleague Lila Rajiva offers a quote from Bishop Berkeley to explain this insouciance about the reckless spending: “Things are as they are, and their consequences will be what they will be. Why then should we seek to be deceived?”

Why indeed? That’s the rub. How about: because we love deception. Or, how about: because it is so much more fun than the truth. You see, we are a nation of romantics, of dreamers and of wishful thinkers. We read only the upbeat part of company reports – not the footnotes, the small print, or the legal disclaimer at the bottom. We like to see our women by candlelight or under pink shades, not in the hard light of the midday sun. And we imagine that we can bring liberty, freedom and ATM machines to desert tribes in Mesopotamia.

How could anyone help loving such trusting rubes? Americans have nary a trace of Gallic cynicism, the knowing superiority of the British or even the world-weariness of the Germans. It is not even as if they were born yesterday; it is as if they hadn’t been born at all.

In the American view, progress is unstoppable, inevitable, irreversible and always benign. Creative destruction happens – they say so all the time. But hardly a single one of them imagines that it is their own economy that is being destroyed.

Right now, Americans look upon globalization as if it were a government policy – like rural electrification. Surely, it brings them only good things, they believe; otherwise, the government wouldn’t allow it. And they are sure they know what it brings. After all, don’t they see all those goodies on the shelves of Wal-Mart? Who would imagine that the importation of cheap goods from poor Third World countries would undermine the most successful economy in history?

[Ed. Note: But it is happening…and it is happening now. And the Feds are allowing us to believe that we’re in a “recovery” – but this deception can’t last that much longer. And Dr. Richebächer is making sure that his readers are fully aware of the real numbers that completely blow the American prosperity and productivity myth out of the water. For the truth about America’s economy.

More news from Aussie Joel and The Rude Awakening…

————–

Addison Wiggin, reporting from Baltimore:

“The American economy may or may not have ‘grown’ in 2005. But if traditional, time tested theories about how wealth and poverty are correct, thank God it is not growing more…”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

————–

Bill Bonner, back in France more views…

*** And continuing the discussion that we began yesterday about the port deal, Chris Mayer had this to say:

“America’s trade deficit hit an all-time high for 2005, and the country is not in the position to start dictating where foreigners can invest,” says he. “The only way the United States is able to sustain such a deficit is by getting money from abroad, by attracting investment dollars.”

“It is short-sighted protectionist measures – like the ones being pursued by the members of Congress – that helped precipitate the Great Depression,” says Mayer. “The more difficult politicians make it to do business in the United States, the more they risk triggering global depression and economic stagnation.”

The protectionists measures mean that dollar assets are not going to be as attractive to investors abroad – and that means bad things for the US dollar and the health of the economy.

“For those who say they don’t want a foreign government running our ports; well, here’s an interesting fact,” continued Mayer. “China already runs a terminal at the Port of Los Angeles. Singapore runs terminals in Oakland. The fact is, around the world this is commonplace. If the U.S. government is going to exclude foreign companies (even government-owned ones) from running its ports, it will only slip back further in the global competitive race, isolating it from the biggest and most efficient port operators in the world.”

Among emerging markets, the UAB – of which Dubai is a part – was the second largest purchaser of US companies last year, with over $1 billion dollars invested. That’s a small fraction of the Middle East’s buying power. Currently, the Middle East holds over $120 billion in US securities, excluding trillions of dollars held by foreigners in other parts of the world.

“America can either encourage the open markets it so often trumpets,” says Mayer, “or it can retreat into the ugly cocoon of protectionism – with racist overtones to boot.”

*** As we explained yesterday, we are no longer thinking after lunch. If we’re going to have any thoughts, they will have to show up before 1:00 p.m. That is all there is to it.

That doesn’t mean our brain goes completely dark after we have our soup. It just means that it switches to another mode of activity. In fact, that is probably what most people do most of the time. Gone out of our heads is any thought about the Five Big Es, the deficits, the way markets work, the past tense subjunctive form of Spanish verbs or any of the other weighty subjects that have been making us toss and turn. Instead, we put on our work clothes, pick up our trowel and go outside for a delightful afternoon of miserable manual labor.

We say “miserable” because that is how Edward and Henry see it…and how it must look to the passersby. The temperature is barely above freezing. And it is raining most of the time, which means that the work area has turned into a mud puddle worthy of a Verdun trench in 1916.

Everything is wet.

And everything hurts.

Our back hurts when we pick up rocks…so we kneel on the ground. And then, our knees hurt. Our arms and shoulders hurt from lifting the heavy rocks, and also from pushing the wheelbarrow, full of “mud,” through the mud. But most of all, it is our hands that hurt. They are not used to such rough work. The lime and water burn them and then the sharp stones cut them. They get banged up on stones and tools. By the end of the day, they are so tender we can barely wash them.

But it is amazing how this kind of work focuses the mind. When we are laying up stone, our entire attention is concentrated on the stones, the “mud,” and the wall taking shape before us. Each stone requires a kind of structural analysis: does it have a face that can be left exposed? Is it humped to the left or to the right? Is it slopped towards the inside or the outside? Is it rectangular or triangular? Where have we seen a hole that it might fit?

Socrates was a stonemason. It must have sharpened his wits to a knifepoint.

Next to laying stone, much of the work people do is a waste of time. Imagine the poor imbeciles patting down grandmothers at airports. That must be miserable work. On our last trip to the United States, one of these homeland security jacks-in-office confiscated Henry’s nail clippers. He must have known that the clippers posed a danger only to cuticles. But rules are rules, and there is never any shortage of people willing to do blockhead work for minimum wage. Still, even blockheads must know perfectly well that their work is worthless. Even jacks-in-office must at least suspect sometimes that grandmothers and nail clippers are harmless.

Or think about all the millions of people who work for government. The Feds have hundreds or thousands of agencies, departments and forgotten sinecures. Last time we checked, there was even a “Screw Thread” commission, devoted to making sure nuts and bolts go together as they should. Most of the people who work in these jobs must realize that their work is not only worthless, but also counterproductive. Still, they go through the motions. They show up on time. They try to do a good job. They deceive themselves that their work means something. But even in air-conditioned offices – with no lime on your hands – such work must be painful to the spirit.

What is surprising is that so many people put up with it without murdering their bosses or co-workers.

At least, putting up stonewalls – however hard it may be on the body – does no damage to your soul.

The End of Dollar Hegemony, Part II originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

A hundred years ago it was called "dollar diplomacy." After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into "dollar hegemony." But after all these many years of great success, our dollar dominance is coming to an end.

It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.

First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.

Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money. Sometimes governments succeeded in guaranteeing the quality and purity of gold, but in time governments learned to outspend their revenues. New or higher taxes always incurred the disapproval of the people, so it wasn’t long before Kings and Caesars learned how to inflate their currencies by reducing the amount of gold in each coin – always hoping their subjects wouldn’t discover the fraud. But the people always did, and they strenuously objected.

This helped pressure leaders to seek more gold by conquering other nations. The people became accustomed to living beyond their means, and enjoyed the circuses and bread. Financing extravagances by conquering foreign lands seemed a logical alternative to working harder and producing more. Besides, conquering nations not only brought home gold, they brought home slaves as well. Taxing the people in conquered territories also provided an incentive to build empires. This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.

That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations – those with powerful armies and gold – strived only for empire and easy fortunes to support welfare at home, those nations failed.

Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: "He who prints the money makes the rules" – at least for the time being. Although gold is not used, the goals are the same: compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.

Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people – just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.

The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.

When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules – rules no longer written by those who ran the now defunct printing press.

"Dollar Diplomacy," a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and (Teddy) Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of "Dollar Diplomacy." The significance of Roosevelt’s change was that our intervention now could be justified by the mere "appearance" that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government "obligation" to protect our commercial interests from Europeans.

This new policy came on the heels of the "gunboat" diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the "dollar diplomacy" of William Howard Taft was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors of the Constitution. And indeed they did. It wasn’t too long before dollar "diplomacy" became dollar "hegemony" in the second half of the 20th century.

This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.

Congress created the Federal Reserve System in 1913. Between then and 1971 the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress – while benefiting the special interests that influence government.

Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.

The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be "as good as gold," and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was a gold-exchange standard that from inception was doomed to fail.

The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question – until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.

It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it – not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.

Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence "backed" the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both "guns and butter."

Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.

Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money – i.e. the dollar system – to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.

In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.

Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.

Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.

Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management, price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to-all to solve the problems artificially created by deeply flawed monetary and economic systems.

Regards,

Congressman Ron Paul
for The Daily Reckoning

Editor’s Note: You can read the second part of Dr. Paul’s speech in Thursday’s issue of The Daily Reckoning.

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

We woke up this morning wondering how things could go so wrong.

Maybe it was something we ate. We were thinking of the economy and the war on terror, but one thought slipped into another like a bad dream. We probably began dreaming of being shipwrecked with buxom cheerleaders, and then it slid into a nightmare of globalization, serfdom and the decline and fall of empires.

The economy looks so healthy, so new, so high-tech, but people still get poor the old fashioned way: by spending more than they make. Yet, for some reason not quite clear to us, they actually think they are getting rich by doing it. The post-war, post-modern generation has come to believe that it can get rich without effort, automatically. This is "progress," and haven’t Americans always believed in progress? Only, today they can’t imagine any vision of progress that doesn’t include more money. So, why not spend today what they believe is guaranteed to them tomorrow?

But, across the broad, sunny Pacific, two billion people who have just entered the world economy, may put a twist into that comfortable story. The newcomers might still lack the skills and tools to be very competitive, but that is changing – and changing fast. The spending spree in America gives the foreigners piles of dollars to spend. The Middle Kingdom alone is expected to have more than $1 trillion in foreign reserves by the end of this year – and they spend it on new plants and equipment.

The new globalized capital markets are rapidly bringing both cash and technology to the place that will earn it the highest rate of return. Fifty years ago, that place was America. Now, it is Asia. So, the factories go up in Shanghai…not in Cincinnati. But still, in the Buckeye State, people hardly notice. They go about their business peacefully, even rather tickled not to have the factories. After all, that means they can now move up the socio economic ladder. Let the Asians do the sweating. They will do the thinking! The only question is, what will they think about? Most likely, it will be about how they will refinance their house, borrowing from Asian savers, in order to continue buying gadgets and gizmos, manufactured by Asian producers.

As they borrow more and more, these poor Sons of Liberty chain themselves to more and more debt. Not just theirs, but the nation’s. Two and a half trillion dollars in debt has been added to the federal government’s burden during the George W. Bush years; no president in American history has ever done more damage to the nation’s finances. Nor is this the sort of debt that will be paid off by the debtors. It is debt that will be carried forward, refinanced, and refinanced again…so that generations not yet in the womb will be shackled to millions of dollars worth of it before they even begin to toddle.

We recall a passage from Exodus, sent to us recently by a friend:

"The Lord…who forgives iniquity, transgression and sin; yet He will by no means leave the guilty unpunished, visiting the iniquity of fathers on the children and on the grandchildren to the third and fourth generations."

Oh, my…what kind of parents are we?

Even serfs in the Dark Ages were only required to labor one day in five for their lords and masters. But future citizens in the Land of the Free won’t have it so easy; they will have to work up to every other day just to pay their taxes – and service a debt incurred by strangers who died years before them. All of this laboring will be merely for cheap bread and expensive circuses. Thus, even to the third and fourth generations might our hapless heirs be punished.

And of all the expensive circuses staged by the Bush administration, one of the most expensive is the War on Terror. We say ‘circus’ because we are always looking on the bright side. And in so many ways, this war is one for the record books. It is already the longest war in U.S. history. Neither the American Revolution, nor World War I, nor America’s involvement in World War II went on for so long.

It is also the first war in American history to be financed almost exclusively with borrowed money. The federal budget was tight enough before the war was announced, but since then, the total of federal deficits roughly equals the cost of the war. The present generation may be fighting the war, but the generations to come will be paying for it.

More news from our currency counselor…

————–

Chuck Butler, reporting from the EverBank trading desk in St. Louis:

"As opposed to the news headline, Iceland’s currency was not downgraded! Instead, Fitch downgraded their currency outlook."

For the rest of this story, and for more insights into the world currency markets, see today’s issue of The Daily Pfennig

————–

Bill Bonner, back in France with more views…

*** There’s a storm brewing over port security, and this time the Bush is taking heat from both parties. The Bush administration has approved a deal that would sell control of six major U.S. Ports to a company based in the United Arab Emirates. The president is pitting himself against conservatives who think that this arrangement will put our national security in danger.

"The deal should go forward," says our friend, Chris Mayer.

"First, people should understand that DP World would not own the ports, only the concessions (or contracts) to manage the ports.

"Second, security at U.S. ports is handled by the U.S. Coast Guard and U.S. Customs Service. Management companies have little to do with security. None of this changes with the deal.

"This deal was no secret. It has been reported on extensively in the financial press, as DP World was in a bidding war for P&O, eventually beating out a Singapore-owned shipping company. The deal passed all of the normal regulatory approvals.

"Dubai, located in the United Arab Emirates, is a Middle Eastern country. It is a Muslim country and as detractors are fond of pointing out, two of the 9/11 hijackers came from the UAB. Somehow, that puts everyone related to the UAB under suspicion. Politicians, and the mainstream public, are essentially acting like bigots for holding a Middle Eastern ally to a different standard. Many of the top execs at DP World are American and the port workers are Americans – regardless of who owns the concessions.

"For those who say they don’t want a foreign government running our ports: well, I have a surprise for you. China already runs a terminal at the Port of Los Angeles. Singapore runs terminals in Oakland. The fact is that around the world this is commonplace. If the U.S. government is going to exclude foreign companies (even government-owned ones) from running its ports, it will only slip back further in the global competitive race, isolating it from the biggest and most efficient port operators in the world.

"U.S. ports are already inefficient, expensive and heavily-regulated. Hutchinson Ports, the world’s largest port operator, won’t touch the United States because of how poorly U.S. ports are managed and organized.

"All of this reflects how the United States is becoming an increasingly hostile place to do business. More and more foreign companies choose not to list their shares on American exchanges, for example. This port deal is a small piece of much larger global forces that continue eat away at America’ competitiveness abroad.

"America can either encourage the open markets it so often trumpets, or it can retreat into the ugly cocoon of protectionism – with racist overtones to boot."

*** The War on Terror is also the first war in history to be launched without an identifiable enemy. It is supposed to be a war for liberty. But who is liberty’s enemy? Terror? "Terror" is a tactic, used by almost everyone at one time or another, including the United States, which means, it is the first war ever in which there is no hope of victory. The best that be hoped for is a draw – and then, only in the short run. In the long haul, terror will be around long after the United States is past tense.

In other words, in the name of liberty the average American is enslaving himself and his children and grandchildren to debt and fighting a war, against nobody, that can’t possibly be won – all while the most dynamic and flexible capitalist economy in history makes him poorer.

Irony was what was supposed to have disappeared with the World Trade Center towers on September. Suddenly, the world was supposed to work in a more straightforward way. There were good people and bad people; things were either black and white. You were either with us or against us, said America’s president.

It’s too bad. The world was not as simple as the simpletons thought.

The End of Dollar Hegemony, Part I originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.