Dark Clouds Loom Over Low Society


“Just sitting here watching the wheels go round and round…”

Mondo Money keeps spinning and turning.

In the West at least, “them that has, gits.” Lehman (NYSE:LEH) announced that its profits are up 27% in the last quarter. The whole financial industry is enjoying its moment of glory. No business is more profitable. And no business is more a la mode. More than a third of Harvard Business School graduates, Class of ’07, are going into hedge funds or private equity funds. These Willie Sutton Memorial Scholars are following the money; and the money is not in creating wealth…it is in redistributing it.

Meanwhile, Bill Gross, who runs the world’s largest bond fund – Pimco – sold his stamp collection for $9.1 million. He bought the stamps – including rare “Penny Blacks,” Britain’s first postage stamps – over the last 10 years. At auction this week, the stamps sold for 4 to 10 times what he paid for them. Gross doesn’t need the money, so he donated the proceeds to Doctors Without Borders, a French charity that sends volunteer doctors to wherever they are needed.

Lower down on the socio-economic ladder, “them that hasn’t, gitteth not.” People on the lower rungs of society don’t own shares in financial companies, they don’t go to Harvard Business School, and they don’t have million-dollar stamp collections. What they do have is debt – and they have a lot of it.

As long as house prices were rising and interest rates were going down, debt was no problem. The lumpen could refinance at lower rates and end up with more money to spend. But now, house prices are going down and interest rates are moving up.

The latest study, reported in the San Diego paper, tells us that the housing slump will last well into 2008. Even these guys are overly optimistic, in our opinion. “The force of a correction is equal and opposite to the delusion the preceded it,” we recall saying. The biggest housing boom in a hundred years is likely to be followed by more than a couple years of bust and more than a 2% or 3% decline, we think.

And the papers seem to agree. The latest news from Bloomberg tells us, “Mortgage default rates rose 90% in May.” Of course, June, July, August, September and all the rest are still ahead…

And yesterday, bonds fell again, pushing up the yield on a 10-year Treasury note to 5.24% – bad news for debtors, homeowners, and the housing industry.

Another couple of reports hint that Booboisie Americanus is feeling the pressure. For the first time ever, the species is expected to drive fewer miles this year than the last, for example. And now we hear, from the Houston Chronicle, that “Boomers [are] delaying retirement.”

Here at The Daily Reckoning, we don’t approve of retirement or vacations. Stop showing up for work and your employers are likely to realize that you weren’t really doing anything anyway. Besides, once you stop doing whatever it was you were doing, you go into a decline. It’s easier by far to pretend you are doing something useful at work than to pretend you are enjoying not doing anything at all.

Nevertheless, we doubt that America’s boomers are delaying retirement just to participate in the work force longer; more likely, they are working longer hours because they have to, not because they want to. Nor are they driving less because to protect the environment from CO2 emissions; more likely, they are reacting to the price of gasoline.

This bifurcation of the U.S. population – with the rich gittin’ richer and the poor gittin’ poorer – bothers a lot of people. Bill Gates says he expects to devote much of his time and fortune to solving the problem. And the New York Times came out with a predictable squawk on the subject. It says we need more “equality” in the United States. Why do we need more equality? The NYT doesn’t seem to think it needs to explain. And it admits that it doesn’t know how you get equality either. So, it falls back on a “solution,” which even it knows is half humbug and half soothing lie. What we need, it says, is for “more Americans to enroll in and complete college.”

Well, that’s the beauty of being a NYT newsman. You rarely have to think. Take a look at the people who actually create wealth. Bill Gates, for example. He didn’t complete college. Nor did many other people who come up with new inventions and new businesses. For them, college is often irrelevant – unless you are deep into the sciences. Besides, the Times seems not have to noticed that the gap between the rich and poor opened up only after the 1970s – that is, after more people began going to college.

Still, on one thing the paper is right. Harvard B-school grads do know where the money is. The money, today, is made by people who have assets that are going up in price…or the hustlers who hustle them – contemporary artists, fancy restaurants, and hedge fund maestros…the money-shifters. Like the NYT, they too are all for equalizing and redistributing wealth. Yes, by offering rich people ways to get rid of their spare change, they redistribute it – to themselves.

Come the day when all of us go off to HBS and learn how to shuffle money. We can hardly wait.

Bill Bonner
The Daily Reckoning
London, England
Wednesday, June 13, 2007

More news:

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Addison Wiggin, reporting from Baltimore…

“‘Why is it so shocking that the Canadian dollar will be on an even par with the US dollar? The same for $100,000+ teacher salaries?’ asked a reader. ‘The US dollar is going to the dogs like the 1923 German marks did. The loony has backing. The dollar does not. The US will have to open the printing presses sooner or later pay the national debt or else repudiate it and really cause chaos.’

“You don’t say. What do you think of the title ‘I.O.U.S.A.’ for the documentary we’re making? Let us know…write Short Fuse and tell here what you think ( kincontrera@dailyreckoning.com)”

For more insights from Addison in today’s extra-long version of the 5 Min. Forecast

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And more views:

*** Advances in medical science keep coming. Last Friday, Elizabeth set up an appointment for us at a skin doctor in Paris.

“Why do we need to go to the doctor?” we wondered.

“It’s just a precaution. You have a lot of freckles and other spots on you. You never know…you’d better have them checked out.”

We got there and found the prettiest doctor we have ever seen – small, well shaped, with a coquettish manner about her.

“Let’s see…hmmm…hmmm…”

“What do you think, doc?”

“Well, you have a lot of freckles. Some age spots. Nothing to worry about. But your wife must have wanted some improvement, so I don’t want to send you home the way you are. I’ll take a few of these off.”

She proceeded to dip into a vat of what appeared to be liquid CO2, like dry ice. She dabbed some on various spots. The stuff felt cold, but didn’t hurt. After a few minutes of this, the whole thing was over.

“There – done,” she announced. “That will be 60 euros.”

*** “What happened to you?” said Maria when she saw us on Tuesday.

“We just had some spots removed…”

“Well you look like you got in a fight…and lost.”

*** Last night, we walked home from the office at about 9 PM. The sun was still out and the waterfront on the South Bank of the Thames was crowded. Couples walked along, arm in arm or cooed to each other on the benches overlooking the river. Young men and old women…young women and old men…young women and young women…young men and young men…old men and old men – many were the combinations. But everyone seemed delighted with the summery weather. The restaurants were packed. Bicycles zipped past…people on roller blades swooped by…joggers huffed and puffed.

What a great time to be alive…what a great place to be alive in!

*** Finally, a Dear Reader writes:

“You have expressed doubts and concerns about climate change. If you are uncertain, then the only rational course would seem to be to play the odds…I would ask, if you feel that climate change has only a 10% chance of happening – well, would you still fly if 10% of airplanes crashed and burned? How about one in 50? It’s about how you reckon the odds, and can you bear the downside if you’re wrong? Even if you think the probability is low, are you sure that you could bear the downside?”

To which we offer this humble reply: We don’t know for sure that the world is heating up or even if it will continue to do so. Nor do we have much confidence in the climate models that claim to be able to predict weather patterns far into the future. But our lack of confidence in meteorologists is nothing compared to our lack of confidence in the politicians who purport to be able to save us from the evil of rising temperature. Can they protect us from the downside? It will be a cold day in hell when we believe that.

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The Daily Reckoning PRESENTS: Like many of you, Mark Skousen has been watching the Republican and Democrat candidates debate the issues, and he’s already tired of the haranguing. What we really need is a candidate who has experience, wisdom, and sound thinking – like worldly philosopher Benjamin Franklin! Read on…

BEN FRANKLIN FOR PRESIDENT IN ’08

In 1790, the year founding father Benjamin Franklin died, John Adams wrote with biting sarcasm, “The history of our revolution will be one continued lie from one end to the other. The essence of the whole will be that Dr. Franklin’s electrical rod smote the earth and out sprung General Washington. That Franklin electrified him with his rod – and thence forward these two conducted all the policy, negotiations, legislatures, and war.”

Today history may confirm that there was more truth to Adams’s “lie” than previously thought. Having updated Franklin’s Autobiography for modern times, including the remaining 33 years of his illustrious career, I conclude that Franklin can feel a certain degree of responsibility for America’s growth machine. Throughout his life and writings, he did more than anyone else to lay the groundwork for wealth creation in our emerging nation.

Moreover, the record seems to indicate that Franklin’s diplomatic genius was indispensable in the American Revolution. Washington may have won the war at home, but Franklin won the war abroad. Without his brilliant diplomacy, the French might never have provided the military and financial aid – over one billion dollars! – essential to achieve American independence from the British. Finally, Franklin was played a vital role in fashioning the compromises necessary in creating the new constitution of the United State in 1787.

Franklin anticipated the incredible material and technological progress since our founding. An incurable optimist, Franklin was always bullish on America, and life in general. At the end of the War for Independence, he predicted, “America will, with God’s blessing, become a great and happy country.” The United States, he said, is “an immense territory, favored by nature with all advantages of climate, soil, great navigable rivers and lakes….[and] destined to become a great country, populous and mighty.” He told potential European immigrants, that the country “affords to strangers….good laws, just and cheap government, with all the liberties, civil and religious, that reasonable men can wish for.” (He underlined the word “cheap.”)

Franklin might be considered the first dean of colonial America’s business school. He chronicled much of his business success in his Autobiography, creating the first “rags to riches” story in American history. Business luminaries from Andrew Carnegie to Lee Iacocca to Warren Buffett have publicly expressed their admiration of Franklin. In his “Advice to a Young Tradesman,” Franklin wrote, “In short, the way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality; that is, waste neither time nor money, but make the best use of both. Without industry and frugality, nothing will do, and with them everything.”

Franklin knew how to succeed in business and became one of the wealthiest men of his day. He favored the entrepreneurial can-do spirit of Americans in his Autobiography and, in later writings, lambasted public offices of privilege and aristocracies by birth. In an open letter to European immigrants, he wrote, “I told them those bear no prices in our markets. In America, people do not inquire concerning a stranger, What is he? but What can he do?” The author of Poor Richard’s Almanac and “The Way to Wealth,” Franklin preached throughout his life the virtues of “industry, thrift and prudence” as universal principles of success. Undoubtedly he would castigate today’s Americans for indulging in undersaving, overspending and excessive debt. “No revenue is sufficient without economy,” he warned. “A man’s industry and frugality will pay his debts and get him forward in the world…. Business not well managed ruins one faster than no business.”

He made his fortune as an innovative publisher, producing the country’s best-selling newspaper and almanac and profiting from a chain of printing partnerships up and down the Atlantic seaboard. Franklin was also a practical inventor (Franklin stove, the lightning rod, bifocals, etc.), but being publicly minded never collected royalties or trademarks from these ventures. The maxims contained in the pages of his Poor Richard’s Almanac served to educate a nation of craftsmen, farmers, and shopkeepers as to how to succeed in business. For certain, he would be pleased with the state of higher education in America – especially our nation’s business and professional schools. Prior to Franklin helping found the University of Pennsylvania, the only colleges in existence were established for the purpose of training clergy. With Penn, Franklin promoted a more radical model of a public university where science and the professions were given their due. Since that innovation, professional schools turn out the talent that fuels and leads our nation’s economy.

In the Autobiography, Franklin dared to declare his 13 principles of virtuous living essential to lasting prosperity. “Only a virtuous people are capable of freedom. As nations become corrupt and vicious, they have more need of masters,” he warned. Nevertheless, he remained upbeat. “America is too enlightened to be enslaved.” Franklin used his autobiography and maxims to promote such virtues as honesty, hard work, thrift, doing good to others, and the power of a good reputation. He more often than not utilized the power of reward in getting others to cooperate rather than relying on the power of punishment. “A spoonful of honey will catch more flies than a gallon of vinegar,” said Poor Richard. As such, Franklin is an ideal role model for modern American entrepreneurs who constantly manage the tension to compete and cooperate in any given business situation. He counsels us to protect our interests and guard against foolish risks while at the same time helping others to succeed. Rather than counsel us to dominate the game like Machiavelli, Franklin shows us how to lift the boats of those around us – as well as our own.

Although not a church-goer, Franklin supported a pragmatic religion that favored good works and charity more than simple faith and hope. “I mean real good works, works of kindness, charity, mercy, and public spirit; not holiday-keeping, sermon-reading or hearing, performing church ceremonies, or making long prayers, filled with flatteries and compliments, despised even by wise men, and much less capable of pleasing the Deity.” Franklin was famous for engaging in innumerable civic and charitable causes throughout his adult life–and into the afterlife, with his perpetual fund for young tradesmen in Boston (as established in his will).

On the dark side, Franklin, ever the opportunist, was never above seeking government privilege for him and his relatives. He printed currency for several states, “a profitable job.” In 1753, he landed a lucrative position as the Crown’s deputy postmaster general of North America. While in England, he convinced the British leaders to appoint his son William royal governor of New Jersey. After Franklin left for Paris in 1776, he appointed his son-in-law to take over his job as postmaster of the United States. For years, he actively sought a land grant from the Crown in Ohio. But the American Revolution soured his attitude toward public privilege and corporate welfarism. He failed to obtain a land grant. His royalist son abandoned him during the war and they never reconciled. He trained his grandson Benny to be a printer rather than a government agent, telling a friend, “I am of the opinion that almost any profession a man has been educated in is preferable to an office held at pleasure, as rendering him more independent, more a freeman and less subject to the caprices of superiors.”

The rift between father and son is one reason Franklin often said, “There never was a good war or a bad peace.” It destroyed forever his close relationship with his son William, as well as his friendships with many other British and American confidants. Another reason why Franklin considered wars at best a necessary evil is that it kept him from his first love: his inventions and scientific pursuits. He constantly complained in England and France how little time he had to correspond with fellow scientists and to pursue his own creations. When the war was over, he immediately tried to pick up where he left off, working on several inventions, such as the long arm to withdraw books from high up on a shelf. But he felt the war cut short his dreams of technological revolution, and his ability to discover and create innovations.

What were Franklin’s politics? He was no social libertarian, despite his image as a libertine and religious free thinker. While he is famous for reading books in the nude, frequenting the salacious Hell-Fire Club in London, and flirting with French ladies in Paris, he wrote stern letters to his daughter Sally chastising her for wanting to wear the latest fashions while a war was going on, and refused to buy his grandson Benny a gold watch while in France. He dressed plainly and constantly preached economy. He promoted at all times frugality and industry in both public and private life. Readers might be surprised by Franklin’s attack on the growth of taverns in Philadelphia upon his return from England in 1762. He hated mobs of any kind, and though a defender of free speech, railed against scurrilous newspaper reports.

In many ways, he was politically ahead of his time among founding fathers. That he was a radical democrat is clear from his support of a unicameral legislature. Actively involved in the creation of the three major documents of American government (the Declaration of Independence, the Articles of Confederation and US Constitution), Franklin was an advocate of a limited central government. “A virtuous and laborious people may be cheaply governed,” he declared. He was a disciple of Adam Smith and free trade, and was enamored with the laissez faire policies of the French physiocrats (Turgot, Condorcet, et al.). “Laissez nous faire: Let us alone….Pas trop gouverner: Not to govern too strictly.”

He defended the rich, and worried about how incentives for the poor would be affected if the state adopted a welfare system. He opposed a minimum wage law, and wrote in favor of free immigration and fast population growth (he was no Malthusian). He rejected any form of state religion or mandatory religious oaths of office, and demanded that slavery be abolished in the new nation – in 1789. And he learned by sad experience (through his son and grandson) that public service is less rewarding than private business. His foreign policy anticipated George Washington’s farewell address by nearly 20 years, when he wrote in 1778: “The system of America is to have commerce with all, and war with none.”

Yet Franklin was no free-thinking anarchist. In economics, he favored paper money and an inflationary monetary policy beyond specie, though “no more than commerce requires”; easy money would stimulate trade, he wrote, and even rapid inflation during the war paid for itself through its power of indirect taxation. (His likeness on the $100 bill – the highest denomination – of an irredeemable American paper currency would greatly please his vanity.) He was a strong supporter of central banking and an investor in the Bank of North America. He argued that the state should be actively engaged in the free education of youth and other public services, and in dispelling ignorance of public fads and superstitions. From several sources, it appears that Franklin was in league with Jefferson in emphasize the theme of “life, liberty, and the pursuit of happiness” as the goal of government, downplaying the Locke’s inalienable right to property. Property, he wrote, is purely a “creature of society” and can be legitimately taxed to pay for civil society. He was quite critical of Americans unwilling to pay their fair share of society’s “dues.”

Finally, Franklin was ahead of his time in financing good causes with his business profits. He was civil minded early in his career, helping to finance the first fire company, the nation’s oldest property insurance company, and Philadelphia’s own hospital, library and militia. “America’s first entrepreneur may well be our finest one,” concludes John Bogle.

Business executives would do well to live up to the epitaph Franklin once described to a friend: “The years roll round and the last will come; when I would rather have it said, He lived usefully, than he died rich.”

Regards,

Mark Skousen
for The Daily Reckoning
June 13, 2007

P.S. I am happy to announce that Regnery Publishing has just released a new two-volume set of Franklin’s Autobiography, edited by me with a new introduction. Volume 1 is the original Autobiography, covering Franklin’s life from 1706 until 1757. Volume 2 is the Compleated Autobiography, covering Franklin’s memoirs from 1957 until his death in 1790. Both are in paperback, and sell for $19.95 each. If you buy both volumes, the price is $39, and we pay the shipping. To order, call Eagle Publishing at 1-800-211-7661. Hardback copies of The Compleated Autobiography by Benjamin Franklin are also available for $25 postpaid.

Editor’s Note: Mark Skousen is editor of Forecasts & Strategies, and editor of a new free e-letter called “The Worldly Philosophers.” For details, go to www.worldlyphilosophers.com. He also is the producer of FreedomFest, cosponsored by Agora Financial, the world’s largest libertarian conference, scheduled July 5-7, in Las Vegas. For details, go to www.freedomfest.com, or call Tami Holland at 1-866-266-5101. Where will you be on 07-07-07? Make it memorable.