Democracy in America

"The sovereignty of the people is an abstract principle…one can use it for good or for evil. If the interests of the nation require it, no sacrifice is too great. The terror of the Bolsheviks was done in the name of ‘the people.’ Fascism and nazism also invoked the name of ‘the people.’ And the ‘democratic’ wars, which bloodied the world for two centuries (incomparably more deadly than the ‘aristocratic’ wars of the past), found their justification in the same high principle…"

Lucien Boia
The Myth of Democracy

"We’re saved," said a newspaper in Paris, commenting on last Sunday’s elections, in which Jacques Chirac trounced Jean-Marie Le Pen. "France is still a democratic nation…at least we’ll be able to vote."

Never once in our entire lives, have we ever heard anyone exclaim: "It’s such a beautiful day…I feel like voting today!" Nor has anyone but a fool ever willingly passed up an opportunity for a good meal in order to stand in line at the polling station.

And from personal experience, not once did we ever look forward to entering the voting booth, nor ever regret the passing of election day.

And yet, voting is a "civic duty," we are told. It is the way in which citizens of a democratic nation get to express themselves, it is argued…perhaps not always getting what they want…but at least what they deserve.

Not that there was ever any chance that Jean-Marie Le Pen could close the voting booths. The old coot has been accused of many things, but even if he had wanted to, there was little likelihood that he could restore the Bourbon monarchy…or install himself as dictator. And even if he had been able to do so – would it really make any difference?

In politics, as in so many other things, the Daily Reckoning recognizes that it is at odds with popular opinion. The burden of proof rests with us; we will not shrug it off. Instead, we will turn to a recent book by Lucien Boia, The Myth of Democracy, to help make our case.

We wish readers to know that we do not take these positions merely to be contrary or to cause mischief. Nope. We are completely earnest. Or at least as earnest as you can be when you are offering market commentary for free on the internet.

Our market perspective comes not from studying charts, graphs or econometric models – but from a reckless frolic in the mushy interior of the human heart. There, we find all manner of absurdity…and can’t help commenting on it. And so today, fresh from Mark Skousen’s Foundation for Economic Education convention in Las Vegas, we find ourselves back in Paris, our suitcases bulging with absurd souvenirs and mementos of our trip.

Seated at the FEE gala dinner, I had the good fortune to find an old friend, a charming woman who had recently gotten out of jail.

"What was the worse thing about life in prison?" I wanted to know.

"It was being bossed around by morons…people who have to stand on tip-toes to reach the bottom rung of the I.Q. scale."

"Do you notice much change on the outside?" I asked. For I had just given my speech on how individual liberty in America had given way to the needs of empire. I thought this might stir her up.

"Americans are increasingly bossed around," I had observed. Then, explaining why I had moved to France…"Curiously, an American in Paris seems to have fewer people telling him what to do."

There are surely as many meddlers and pettifogging functionaries in one country as the other. In fact, there are probably more in France. But at least when you are a foreigner you don’t notice them as much.

The trend of the entire Western world since the American Revolution has been toward more voting and less liberty. "Give me liberty or give me death," said Patrick Henry, at a time when government regulations were almost non- existent and the total tax take was less than 3%. What could he have been thinking?

Perhaps he was referring to the liberty of a people to decide who gets to boss them around. Mussolini described the concept better than Henry. "Fascism," he explained, "is for liberty. And for the only liberty which can be a real thing, the liberty of the State and of the individual within the State. Therefore, for the Fascist, everything is in the State, and nothing human or spiritual exists, much less has value, outside the State. Fascism…the synthesis and unity of all values, interprets, develops and gives strength to the whole life of the people."

People exercise this collective liberty by voting. That is what Democracy is all about. At first, in America and elsewhere, only a few people voted – white, male, landowners. New Zealand was the first country to allow women to vote – in 1898. Since then, more and more people have received the liberty to cast ballots.

Early in the last century, it was thought that voting was the key to peace, prosperity and freedom. Even today, most people believe this – after a century of evidence to the contrary. In WWI, the major combatants had already instituted universal manhood suffrage. Fat lot of good it did them. And after the war, it was almost universally believed that the spread of democracy would prevent future wars. Hardly a decade after the Armistice, people in Germany voted Hitler into office, while Italian voters gave Mussolini their highest post.

Nor does democracy make people richer. One of the greatest economic success stories of the post-war era was Hong Kong – whose residents never had the right to vote for anybody.

Are people who live in democracies more free? Not on the evidence.

But it is not just the evidence that is damning…it is the theory too.

Question: What is a democracy?

It is a country in which people get to decide for themselves who gets to boss them around.

How do they decide?

By voting.

But who votes? On what? When? How? Is it a democracy when fewer than 10% of the people can vote – as in Classical Athens? Or, when almost everyone votes and all votes are recorded for the same person, as in the Soviet Union? Or, when only one person gets to vote?

"Whole libraries have been written on the subject [of what is a democracy,]" writes Lucien Boia. "The fact is, democracy refuses to be bound in a simple, unequivocal formula. It’s a moving target, with multiple and contradictory personalities. It is not a ‘thing,’ nor even an ‘idea’; it is a mythology."

Louis 16th of France was no democrat, Boia points out. He was an "absolute monarch." He was considered almost divine, with power, so it was said, unrestrained by the popular will. It was a system of one man/one vote. And Louis was that man.

And yet, what could Louis do? He could make war. But he would have to find a way to raise money to pay for it. He could ask bankers to finance it. He could try to levy taxes, but good luck.

Louis could do none of these things without the support of a great many people in many different positions. In fact, he was hemmed in tighter than a Baptist deacon…restrained in every direction. His ministers might oppose him, or the church, or his moneylenders, or the bourgeoisie. Even a negative comment from his mistress might cause him to lose heart.

Louis could proclaim a law. But who would enforce it? He could announce a war…but whom could he get to fight?

It was said that Louis was all-powerful. In the simple- minded logic of the late 18th and early 21st centuries, if Louis had all the power, ordinary citizens must have none. But compared to today’s elected George and Jacques, Louis was barely more puissant than an American voter. And, in the end, like Tsar Nicholas II, not only could Louis not prevent a revolution, he lacked even the power to save his own life.

When the revolutionaries broke down the doors of the Bastille – considered the symbol of Louis’ repressive regime – they discovered the truth. The Bastille was almost empty. Louis could repress almost no one. Absolute monarchs disappeared from the planet not because they had too much power, but because they had too little.

Today, thanks to the blessings of democracy, citizens of the Land of the Free and other western democracies pay taxes 5 to 10 times higher than those under the absolute monarchs…and submit to rules and regulations that Louis could never have imagined.

Today, America’s prisons are full…and the president can make war on just about anyone he chooses.

But freedom and democracy are part of America’s national mythology. And who are we to complain about it?

More tomorrow…

Bill Bonner
May 09, 2002 — Paris, France

Productivity up at an 8.6% rate. GDP growing at a 5.8% rate. And now this – the Dow soared 303 points yesterday. Is this a great recovery, or what?

All that it lacks is, well, profits…employment… and capital investment. You know, the stuff that usually accompanies a real recovery.

Unemployment recently topped 6%…with the number of people working in manufacturing back to where it was in 1955. Manufacturers have a solution to this problem – lower the value of the dollar. But that raises problems of its own; a falling dollar makes U.S. assets less attractive. And the U.S. economy relies on more than $1 billion per day of imported capital to make the books balance.

Capital investment by U.S. firms has collapsed. What business wants to invest in new plant and equipment with so little hope of earning a buck on it? Cisco’s shares rose 24% yesterday…leading the worldwide rally. But even Cisco’s John Chambers notes that people in the business of supplying capital equipment have a long way to go to full recovery. "CEOs will wait to spend until after their own revenues and profits pick up."

And that might be a while. Consumers, we keep mentioning, are not exactly flush. And as companies trim payrolls in order to try to salvage profits, it is not at all clear where new buying might come from – if anywhere.

But except for the profits, investment and jobs…the recovery is great.

Right, Eric?


– Apparently, Bill, all is right with the world once again – the stock market says so. A spectacular rally on Wall Street rocketed the Dow more than 300 points higher to 10,142. The Nasdaq, for its part, soared a breathtaking 7.8% – or 122 points – to 1,696.

– Thank Cisco for the pyrotechnics!

– A "positive" earnings report from Cisco Systems on Tuesday evening kicked off a global stock market rally, culminating in yesterday’s bull-fest on Wall Street…It all seemed SO 1999!

– Eerily reminiscent of the Internet bubble era, the story line went something like this: Cisco surprises analysts after the close of trading Tuesday by reporting earnings that are two "pro forma" cents per share better than the consensus estimate. These two humble pennies incited a frenzy of buying in Cisco shares in after- market trading.

– The frenzy carried over into Asian trading where the Japanese Nikkei Index jumped almost 2%. Jubilant European investors joined the party by bidding stocks higher as well. By the time New York trading reopened Wednesday morning, investors in every time zone had whipped themselves into a stock-buying lather.

– When the opening bell rang in New York, buy orders swamped the trading desks. Six and one half hours later, the market wrapped up the day with massive gains.

– Like the butterfly wings that caused a tornado on the other side of the world, Cisco’s two little pro forma pennies "above expectations" caused the global stock market capitalization to grow by several hundred billion dollars. Cisco alone gained more than $18 billion of market capitalization.

– For now, we’ll consider yesterday’s bullish feeding frenzy to be the exception, rather than the rule. But the rally was not a complete surprise.

– As faithful Daily Reckoning readers may recall, Monday’s edition anticipated yesterday’s rally. We remarked: "Even though things are looking a little rough for the economy at the moment, a short-term stock market rally would not be a total surprise. That’s because many of the short-term sentiment indicators like the ‘Bullish Consensus’ and the ‘MarketVane’ are registering fairly extreme bearish readings, which, from a contrarian standpoint, is bullish."

– By contrast, we observed, "The opposite phenomenon is occurring in the gold market. Suddenly, everyone seems to be bullish on gold…which therefore, is bearish." 48 hours later…voil……stocks soared and gold faded. The yellow metal slipped $3.40 an ounce to $308.50.

– But yesterday’s explosive stock market rally looks every bit the classic bear market variety – sudden, sensational and short-lived. So far, we have witnessed only the sudden and sensational parts. Stay tuned for the short-lived part.

– Cisco’s earnings report attracted buyers to Wall Street like a spilled Coca-Cola attracts ants – the little bugs just can’t seem to stay away from that sweet, syrupy stuff. But I’m guessing that the bear market will return before too long, and it will look an awful lot like an anteater – or as my 3-year-old calls them, "eat-anters." Either way, the ant loses.

– Among the conspicuous minority of losers yesterday was Greenpoint Financial, which also happens to be one of Apogee Research’s current short sale recommendations. Shares of Greenpoint, a mortgage lender, dropped about 1%. Perhaps the stock fell because the 10-year Treasury bond yield jumped yesterday to 5.21% from 5.05%.

– Generally, mortgage lenders do poorly when long-term interest rates are rising. As it happens, long-term rates have been rising for a while and that’s been causing Greenpoint some problems.

– "GreenPoint Financial Corp. may be about to run out of luck," Apogee Research predicts, "The crumbling state of the refinance business is apparent in a comment made by E-Loan Inc. in its recent first-quarter earnings release: ‘[M]ortgage refinance demand dropped steeply in mid-March and has remained low for most of the period since…We believe that there is a reasonable probability that the boom level of refinance demand is over.’"

– Furthermore, the Mortgage Bankers Association predicts that mortgage refinance loan volumes will drop 71% from the end of the first quarter through the end of the year.

– "Is there any way GreenPoint might escape these punishing trends?" Apogee wonders. "Not that we can see. As we noted a few weeks ago, GreenPoint’s first-quarter mortgage originations slid 24% from the previous quarter, and loans in the pipeline dropped 20%. Earnings are starting to reflect the weakness and will probably continue to do so."


Back in Paris…

*** Another holiday in Paris – it’s Ascension Day. Typically, if a holiday falls on a Thursday or Tuesday, French workers "faire le pont" – bridge the holiday to the weekend to give themselves a four-day vacation. This week, VE day fell on Wednesday and now, with Ascension Day today, many people have taken the whole week off. "Forget the bridge…now it’s viaducts," says a neighbor.

*** But not the staff of the Daily Reckoning. Probably contradicting dozens of work rules and employment laws, we’re manning our positions…but ready to surrender if anyone asks us.

*** Michael O’Higgins, the money manager credited with creating the "Dogs of the Dow" strategy, reports that he is making money in this market, with his portfolios up an average of 19% this year. How’s he doing it? He’s buying gold stocks!

*** O’Higgins notes that the smart money is leaving the Big Cap stocks. Insiders are selling 4 times as many stocks as they are buying. And Wall Street strategists are recommending that you put nearly 70% of your money in equities. The "conditions preceding the big slide late last summer have returned," he says.