Greenback to the Future

We have a lot of ground to cover today: The Dow at 14,000…a housing slump…the dollar…the gold price…oil…youth…China…the existence of God…the biggest bargain in the financial world…

…and yes, dear reader…in today’s Daily Reckoning we even tell you how to conquer time…death itself!

Not bad for a free publication, no?

But first a question: What is it about money that makes it so popular?

A dollar is both the past and the future. It is the past preserved…like a moth in amber…for as long as the money itself lasts. Let us imagine that you earned $100 on a fine summer day in 1997. If you took those dollars and bought gold – traditionally and naturally a reliable way to store time – that day would still be with you…and still be as valuable as it was then. And now, that day’s work you preserved in gold is still available to you…it is now in the future…and it represents things you can buy further in the future still. One hundred dollars worth of gold in 1997 is worth about $250 or $300 today. You can spend it today…or tomorrow…or if you choose, you can carry that day’s labors, from 1997, forward with you for as long as you live. And even then, you can pass it on to the next generation. Yes, oh death…don’t be so proud. Ha ha…we have you beat!

As we get older we take with us only memories and money (property). If all goes well, when we grow into middle age, the memories grow with us…and the money does too. Then, when we get older, we draw them down…remembering how life was when we were younger…using up the stored wealth from earlier days.

That is what makes money so appealing. It is a way to defeat time and death. Say you work a day in 1975. You get paid $50 for your day’s work. If you save $10, that money represents 20% of that day. It is preserved for you…for as long as you can keep it. Put it in a bank. Collect interest. Let the interest compound. And twenty years later, you can still enjoy the fruits of that day’s labor.

And that is what is so nasty about inflation. It robs us not only of money…but of the past…and the future. Our lives are emptied out by it…like a liquor store cash register cleaned out by a hold-up man.

A man without money is a man with nothing left of his past…except memories. He has nothing of the past stored up for the future. As a result, he is a prisoner of the present. Everyday, he must see to his needs…providing food and shelter for himself and his family…with no margin for error and no cushion for liberty. He cannot take a day off. He cannot buy anything more than he can get from current wages. He cannot even get sick without calling on the saved up past of strangers.

All wealth is a legacy of the past and a hope for the future. Monet paintings were done more than 100 years ago. A gallon of gas is the stored up wealth from sunlight that fell on Earth millions of years ago. Versailles was built for a king who died three centuries ago.

Bill Bonner
The Daily Reckoning
London, England
Friday, July 20, 2007

More news:


Addison Wiggin, reporting from Baltimore…

“Shipping rates have hit an all time high. ‘The Baltic Dry Index – a measure of dry bulk shipping rates for things such as coal, grains and ore – hit a new record,’ reports Chris Mayer. ‘It’s risen 5-fold since 2000 and is up 52% just this year.'”

“One reason: The world economy is on track to grow nearly 5% this year. Unless something gnarly happens, it will be the first time since the 1970s that the world economy had grown by more than 4% annually for five consecutive years.”

For the rest of this story, see today’s issue of The 5 Min. Forecast


And more thoughts…

*** The trouble with money is that it can be slippery. Give the man with no money a credit card and he can buy things he cannot afford. Give him a no-money-down mortgage and he can even buy a whole house. And give the central bank (or Treasury Department) the power to create dollars “out of thin air” – and all of a sudden past, present and future seem to run together in a hopeless confusion. In order to spend, the man with a credit card must be using up someone’s past – but whose? And what is the value of the dollar with no past at all…the dollar created out of thin air?

*** The Dow went over 14,000 yesterday. Gold hit $678. And home sales in California fell to a 12-year low.

The price of gasoline has been backing off. The last time we were in France, we paid $8 for a gallon of gas. In the United States it is around $3 – still about 30% higher than it was at the beginning of the year. Still, Americans are using more gas than ever – with consumption up 1.5% over the last year.

However, a poll done by Reuters/Zogby tells us that if the price were to get to $3.50 a gallon, drivers would finally slack off. At least, that’s what 40% of them told pollsters.

*** Americans are shocked when they come to Europe and see how much we have to pay for things. “I’ll just have to work a few extra years to pay off this vacation,” said one traveler to the New York Times. A hotel room can easily cost $500 a night. One American reported paying $12 for a can of coke at a café. Another said he paid $22 for a plate of Irish stew.

What gives? The dollar. And what analysts say is bugging the buck is the fact that, as Ben Bernanke put it to Congress yesterday, referring to the trouble in subprime lending, “it could get worse before it gets better.”

*** Gold is near a 27-year high. Even at that, it might be the best bargain in the financial world. Everywhere you look…records are being broken. Tin hit an all-time high earlier this week. The Australian dollar is at an 18-year high against the greenback…oil approaches its all-time high set last May…and China…well, in China so many records are being broken it is if a dump truck had smashed into the Mo-Town Hall of Fame.

China’s record growth – fastest pace in 12 years – accounts for some of the other records. It is drawing down a large part of the world’s stock of natural resource savings. No wonder the price of tin is going up…and the price of oil. Even the Baltic Shipping Index – which measures the demand for hauling dry goods by sea – is at a new high.

But some of the price growth – and maybe most of it – can also be a measure of the falling dollar. The more dollars in circulation, the less of the past each one should buy. A barrel of oil, in 1998, could be traded for 11 U.S. dollars. Today, you need 78 U.S. dollars to buy a barrel of oil. Gold, on the other hand, has gone up less than half that much. If gold were to go up as much as oil, an ounce of it would sell for about $1,800 today.

Why has gold not kept pace with oil? Probably because you can’t use gold to run your automobile, or generate electricity, or make steel. Gold is not as directly connected to the Greatest Economic Boom Ever as oil is. It is not a boom-time metal. It is bust-time metal, only useful as a hedge against prosperity…especially valuable when the boom turns out to be not quite as great as people hoped, there will probably be a lot of people who wished they had stored more of their past in the yellow metal.

*** This morning, Maria missed her train. She’s on her way to visit a friend in Avignon. But at 5:30 this morning, she was in crisis mode:

“Oh Daddy, I overslept…what an idiot I am…I don’t know what to do…”

Dad groggily provided the necessary reflection…Maria set off…and then he tried to go back to sleep. But sleep wouldn’t come. Instead came a teleological debate recalled from a recent dinner:

“I don’t know why I should believe in God if you can’t prove to me – or anyone can prove to me – that he exists. I mean, it seems crazy.”

We gave up on this kind of conversation about 40 years ago. But young people take up the cause from time to time…wondering what they should believe and why they should believe it.

We have nothing to add to the discussion, of course. We are just musing, this morning on our life in London with two of our children – Henry and Maria.

The other day, Maria called the office…in tears.

“Oh it was terrible,” she sobbed. “It was just awful…”

What was so awful, we wanted to know.

“Oh…I can’t believe you don’t understand…” (sniff, sob). “It was our last performance together. It was the last time we’ll all be together. The audience was wonderful of course. And the show was great too. And everyone was great. We all realized…just at the end.

“You know, we had all been so much on edge, because it’s the end of the school year…and the end of school, period. It’s our last show…of our last year…and we all seemed to realize it suddenly last night…just at the end of the show. We went out to take our bows and the audience gave us a standing ovation…it was such a wonderful feeling…you can’t imagine…you’ll never know what it is like unless you work in the theatre. And then, it struck me that we would never be so happy again…we’d never be together again, as a class I mean. And some of them, I may never see again.

“So I just couldn’t help myself…I started to cry. And then we all started to cry and hug each other. It was just so horrible…and so wonderful.”

Our household here in London is dominated by youth. Maria invites her friends from the theater…or from London’s international milieu. Lively chatter around the dinner table is almost guaranteed.

These young people have so little past in them; they are almost all future: What kind of careers will they have? Who will they marry? Will they have any money? How will they afford to live? Almost every part of their lives is followed by a question mark. They don’t know what they think…nor who they are…nor what they will become.

It is a pleasure to be around them – but a worry, too. Not all these questions are likely to draw happy answers – at least, not immediately and not all the time. Will they be as lucky as we have been – to grow up in a world that was getting richer…where people lived longer and longer…and where there was no war but those we asked for (and where the penalty for losing fell, as in Vietnam and Iraq, on someone else)? Will they be as lucky in their personal and business lives as we have been? We hope so…we hope so.


The Daily Reckoning PRESENTS: It has been said that a man is only as good as his word. Well, dear reader, the same can be said for the U.S. dollar. Since there is nothing else to support it, we must trust that it is worth what it says it is worth. Unfortunately, the dollar’s “word” may soon be worth no more than the paper it’s printed on. Read on…


It was the Chinese who invented paper “money” around the beginning of the ninth century A.D. Because it was so light it would blow out of their hands, they called it “flying money.”

The ancient Chinese were right about the lack of substance of paper currency. The greenback seems to have less substance every day. But we do not wonder why the greenback seems to be dying. We wonder why it isn’t dead already.

In search of an answer, we look back, to a case brought by the First National Bank of Montgomery, Minnesota, against one Jerome Daly in 1969.

The bank had lent Mr. Daly $14,000 in a mortgage loan. Then it tried to get its money back by foreclosing on Daly’s house. Daly took to the courts with a defense so ingenious even a Chinese banker might wish to emulate it.

You can’t enforce a mortgage contract, said he, when there was no contractual obligation. And there was no valid obligation because no “consideration” had been given by the bank. Having gotten nothing from the bank, he had nothing give back.

In support of his testimony, Mr. Daly, a lawyer, called the bank president to the stand and demanded to know if the bank had actually handed him a wad of $20 bills.

“Isn’t it true,” he began, or words to that effect, “that the bank did not actually give me a stack of $20 bills? In fact, the bank didn’t give me any bills of any sort, right?”

“Well, yes…but…” the bank president must have replied.

“Nor did the bank convey any property to me…or give me gold coins…or any other valuable, tangible thing…right?”

“Well, yes…but…” came the next reply, also cut off by Mr. Daly’s next question.

“And isn’t it true that the bank did not go out and borrow extra money so it could lend it to me…nor did it draw down its depositors’ accounts in order to give me money?”

“Yes, that is correct.”

“In fact, the so-called mortgage loan was, from your point of view, just a bookkeeping entry. Is that not right? And is it not true that the ‘money’ never existed at all…at least not in the sense that most people think of money…and that this ‘money’ was actually ‘created out of thin air’ as the economist John Maynard Keynes once described it?”

“Well, yes…but…”

By this time, both judge and jury were nodding their heads, sure that they had a combination of Charles Ponzi, John Law and Kenneth Lay on the witness stand.

“Fraud!” concluded Justice Mahoney and went on to rule that the bank had given Daly no lawful consideration, had created $14,000 out of nothing, and had done so without the backing of any U.S. law or statute.

Therefore, it followed, the bank was obliged to let Mr. Daly keep his house. And, thus it was that Mr. Daly kept his house.

Whether the reasoning behind this case was right or wrong is not at issue here. Our questions are more numerous but much simpler.

We want to know why there are not more Dalys demanding to keep their houses today. And why there are not more Mahoneys around to let them.

Why did one small court adopt this argument while it left no mark otherwise on American jurisprudence? Despite Justice Mahoney, U.S. courts have rejected every other attempt to argue that the U.S. dollar is not the lawful, valuable money everyone thinks it is. But just how valuable the U.S. dollar is, is a question not for the courts, but for the markets.

The euro, the pound, the Canadian dollar, oil and gold have been pronouncing a judgment of their own this week – all soared against the dollar. And yet not a whimper is to be heard from the great American masses. The dollar may be in trouble abroad, but at home its reputation is still spotless. Gas may cost more, heating bills may be higher, but so far milk, eggs, and beer have not soared beyond the budget of the masses. The people may have mortgaged their futures for the roof over their heads and sold their souls for a mess of credit, but with home prices still holding up and stocks pushing at all time highs, the devil has not come around for repayment yet.

Helping to postpone the day he does, the government also quietly stopped reporting M3 money in March 2006. M3 is the broadest measure of the “money supply” in the U.S. economy. As the supply of money increases, typically, consumer prices go up. Independent analysts who keep an eye on these things tell us that the green stuff is being pumped in at one of the highest rates ever – 12% per year, or four times the rate of GDP growth.

“Then why has it not gone to swell the prices of groceries yet?” you might ask.

The answer is that the people with the most money are spreading it around in places far distant from the local Superfresh. The ersatz money is circulating these days in art houses and auctions, in exotic vacation houses and rental properties, in retirement funds and pensions. Securitized and derivatized, packaged and repackaged, it is lent from one end of the globe to the other, forcing central bankers all over the world to work their own printing presses night and day to keep up with it. The resulting global “liquidity” is the bilge upon which asset prices float and make this boom so great for asset owners.

But this liquidity is no different from the non-existent “consideration” that Mr. Daly received from the First National Bank of Montgomery. It was this shaky credit that was packaged into new debt instruments like CDOs that are so intricate that teams of mathematicians cannot fathom all the ramifications and complications thereof. In a miracle rivaling any by the Galilean, these same oily pretzels of debt were twisted into Triple A rated bonds and sold to pension funds and institutional investors. Now the buyers are finding that the grease has turned rancid: Last week, the three leading rating agencies downgraded debt linked to the shakiest part of the housing market – the subprime loans. And following swiftly, one hedge fund at Bear Stearns took ill and passed away altogether while a third gave up 91% of its returns.

Ben Bernanke would like to boost rates to support the dollar and help American tourists, but faced with a liquidity crisis in the $500 trillion derivatives market, he’ll have to think thrice before doing so. But rates are going up with or without him. Lenders are finally growing wary.

Afraid of the poisonous debt packages, buyers are passing up another helping. “All but one of the 15 ABX indexes fell to a record low,” says Bloomberg news. Offers for CDOs are said to be going “no bid.” And several major debt offerings had to be withdrawn or rescheduled as promoters were afraid that they, too, would go “no bid.”

We don’t know if the First National Bank of Montgomery still exists. But if it does, we wouldn’t be surprised to learn that it is growing more cautious about lending. And dollar holders all over the world are tightening their grip, fearing that their flying money might fly away.

Bill Bonner and Lila Rajiva
for The Daily Reckoning
July 20, 2007

Editor’s Note: Don’t forget – you can hear Bill (along with all of your favorite DR editors) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is “Rim of Fire: Crisis & Opportunity in the New Asian Era” – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt