Kudzu in Alabama

The Daily Reckoning PRESENTS: In the United States, we work and fight neither for our children nor our ancestors, but only for the next quarterly report and until the Social Security checks begin. So, why would the next generation want to pay our debts? Today, Bill takes a socio-biological approach this question. Read on…

KUDZU IN ALABAMA

Many times man lives and dies
Between his two eternities,
That of race and that of soul,
And ancient Ireland knew it all.
Whether man die in his bed
Or the rifle knocks him dead,
A brief parting from those dear
Is the worst man has to fear.
Though grave-diggers’ toil is long,
Sharp their spades, their muscles strong.
They but thrust their buried men
Back in the human mind again.

– Under Ben Bulben, W.B. Yeats

Politics rest on myths. Myths that once served the nation-state, and now serve the empire. The myth of the nation-state was that it was a territory occupied by people who were akin to each other. People who shared “race and soul.” It was that which made possible the collective sacrifice demanded of the nation. Kinship among its people; not allegiance to its rulers.

Few people, for instance, could have wanted to risk their lives for Louis XV. Instead, the man had to borrow from abroad to pay his armies – usually made of an assortment of riff-raff from all over the continent, few of whom felt any real kinship with the monarch. But for La Patrie, it was a different story. The citizen soldiers of Napoleon’s Grande Armee swept all before them. Why? Because they were no longer merely Poitevins or Auvergnats. They were all Frenchmen now, sharing the same language, the same flag, the same government and the same blood. Sacrifice made sense. Many actually volunteered to defend the nation.

The socio-biologists explain it even more directly. Why will a man risk his own life for his country? “Because that is where his genes reside.” A man is twice as likely to give up his life to protect his children, as he is to save his grandchildren, they say, since his grandchildren have only half as many of his genes.

What counts is genetics, says the socio-biologist. Man is not the crown of creation, but a tramp steamer hauling genes from one generation to the next.

Science and pseudo-science have provided us with much entertainment. Why are there no short-necked giraffes, for example? Because the short-necked giraffes couldn’t eat the high leaves, comes the answer. Yet, in truth, we don’t know. For, evolution is ultimately a “what” theory, not a “why” theory. All we know is that the giraffes with genes for short necks did not survive. They were losers.

Or another question: Why are men the way they are? Because those who were different did not survive. We can guess about the “why” of it, but we can never really know. Why are most men jealous, for example? Because those who weren’t jealous let other men at their women. The genes of the non-jealous men got crowded out.

Socio-biology had its applications in politics long before it was written in best sellers. The nation-state owes its success to it. Without it, taxes could hardly have been raised so effectively. But with biology on their side, political leaders found that they could squeeze more blood out of more turnips. Let the people believe that they were in control. The peoples’ representatives vote for a spending proposition; how can the people refuse to pay for it?

Thus did the humbug of modern democratic government take root throughout the world – like kudzu in Alabama. In certain places, such as the Soviet Union, the weed covered everything – with the government demanding nearly 100% of all production, and claiming title to every piece of capital equipment. Of course, it overdid it, choking the economy on which it depended.

And thus throughout the Western world – including Japan – have taxes risen along with public spending. And thus have new citizens taken to government checks like dipsomaniacs to Happy Hour. But when it comes time to pay the new taxes, then the citizens of the state drag their feet. The gap between income and expense widens. Debts rise. And we end up with a problem little different from the once faced by Louis to begin with. Only, in the full-fledged modern, democratic state, the scale is much larger. The debts of Louis XIV were a trifle compared to those of Bush II. Louis promised no social security payments, no Medicaid, no Medicare, no short buses, no subsidies to farmers, no billion-dollar consulting contracts to campaign contributors. With the exception of a handful of mistresses, gardeners, sculptors, builders, and hangers-on, Louis sent out checks to no one.

Bush II, by contrast, has expanded federal largesse so far (you don’t get votes for nothing)that there is scarcely a postbox in America without a check coming to it. And he has his wars to provide cover for increasing the number and the amounts. The instinct bred into the lumpen is to support their nation at war, no matter how absurd the war is. As soon as the drums begin beating, the patriots run for their rifles and wallets…as if savages were chasing their daughters through the cornfields.

Bush only takes his cue from the last century, from Benito Mussolini. Il Duce found that he could outflank conservative opposition by shifting from social welfare to open warfare; the conservatives who baulked at spending for the peace at home would now allow him to spend for a war abroad. He attacked, of all places, Abyssinia! Whilst in this the next century, we’ve been witness to Mr. Bush’s attack of Babylonia.

But even though Italy and every other nascent or full-fledged empire was eventually defeated or driven into bankruptcy by profligate spending, in the United States of America debts continue to rise. To the illusion of the nation-state “we are all kin,” we have added another: “We owe it to ourselves.” In the New World, of course, the first premise of the nation-state was never obtained. Indeed, it was downright preposterous, because Americans are a varied bunch, genetically. It really doesn’t make much sense, from a socio-biological point of view, for the Lutheran Swede from Minnesota to support the drug habits of a Cuban family in Miami. Nor does the son of a Mexican laborer in California have much interest in sending his hard-earned money to pay for a retired, Anglo postal worker in Connecticut.

We are not a united race; our buried bodies stay in the ground. We work and fight neither for our children nor our ancestors, but only for the next quarterly report and until the Social Security checks begin.

In the world of public spectacle, the foundation lie always works to the advantage of the present, while disfavoring the future. A trumped-up war tends to increase a ruler’s popularity – at first. A budget deficit brings a warm and friendly feeling in the year it is incurred.

But as in every public spectacle, the suffering, regret and disillusionment, are pushed off into the future, after the farce runs to its inevitable conclusion. This is especially so in the matter of the U.S. deficit. While the drugs, retirement checks, subsidies, public works, wars and other spending programs are taken up like free drinks by the present generation, the generations still to come will get stuck with the bar tab. Just for the sake of math that we can do on the back of an envelope, let’s say tomorrow Congress and the president came to their senses and decided that henceforth, people will pay for what they get. From this moment forward, the U.S. government would work on a “pay as you go” basis – effectively fixing the present “fiscal gap” at its current level, $65.9 trillion. It is to go no higher.

And then, let’s say that the next generation was put to work to pay down this burden to zero, so that future generations would come into this life on at least as good terms as past ones – with nothing. And let us stipulate that the total number of people in this next generation is 100 million. That leaves each of them with $659,000 to pay off. Assuming a working life of 40 years, that’s $16,000 per year…in principal alone.

With interest, annual payments could be twice that much – or about the entire after-tax income of the typical worker (inflation has been set aside for these calculations). In other words, this entire generation would have to work its entire life just to pull the country out of the debt that its parents and grandparents built up.

And to these figures must be added a thought. Like the debt of Louis, it is not owed to ourselves at all. Seventy-five percent of federal borrowing in the last five years has come from overseas lenders.

The papers this week heralded the fact that the budget deficits were falling. George W. Bush, himself, has pledged to cut the deficit in half. Tax revenues are coming in stronger than expected, but are still $100 billion less than the Bush administration forecast five years ago. And the deficit, expected to be $318 billion, will still be between $280 and $300 billion. Meanwhile, the real debt of the U.S. government continues to soar in ways and amounts that are barely noticed and rarely counted.

And so, we turn to the point of today’s reflection: it is not who will pay our debt, but why should anyone want to?

In a 1789 letter to James Madison, Thomas Jefferson posed that question and answered it himself:

“The question Whether one generation of men has a right to bind another, seems never to have been started either on this or our side of the water. Yet it is a question of such consequences as not only to merit decision, but place also, among the fundamental principles of every government. The course of reflection in which we are immersed here on the elementary principles of society has presented this question to my mind; and that no such obligation can be so transmitted I think very capable of proof.–I set out on this ground, which I suppose to be self evident, “that the earth belongs in usufruct to the living”: that the dead have neither powers nor rights over it.

“To render this conclusion palpable by example, suppose that Louis XIV. and XV. had contracted debts in the name of the French nation to the amount of 10,000 milliards of livres, and that the whole had been contracted in Genoa. The interest of this sum would be 500. milliards, which is said to be the whole rent roll or nett proceeds of the territory of France. Must the present generation of men have retired from the territory in which nature produced them, and ceded it to the Genoese creditors? No. They have the same rights over the soil on which they were produced, as the preceding generations had. They derive these rights not from their predecessors, but from nature. They then and their soil are by nature clear of the debts of their predecessors.”

Jefferson has given us his question and his answer. Now, we will pose two more:

Why would the next generation want to pay our debts? A son would not even want to pay his own father’s bar tab.

Why would today’s young people be willing to do so for complete strangers?

Or, if the next generation really were our own, why would we want them to?

Bill Bonner
The Daily Reckoning
July 21, 2006

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

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:

The Most Feared Book in Washington!

If you have two SUVs in the driveway, notes USA Today, you have to count on spending $1,500 more per year to keep your tanks full. In June, gasoline consumption in America rose to 9.5 million barrels per day. So far, Americans are not cutting back their use of fuel. The American military – the single biggest user of petroleum products in the world – is using more than ever, too. Oil is still priced at nearly $75 a barrel, despite what was billed as a major pullback for commodities.

The expense seems to be forcing cuts in other areas. USA Today also reports that “casual dining” restaurants are suffering. Applebees, Outback Steakhouse, and Red Lobster, to give some examples, are where Middle America eats. They are not real restaurants – in the sense that there is no real chef, no wine list, and nothing that could be mistaken for fine cuisine. But, at least, you get to sit down, and pay up. And, judged by the numbers, either Middle America is sitting down less, or paying up somewhere else. Red Lobster says its sales went down 5% in June. Industry experts say they’ve never seen anything like it.

USA Today mentions the price of gas, increased competition from the fast-food places, and the rise in credit card minimum payments as reasons for the falloff in casual dining. Our guess is that real estate figures in it, too. People who dine at Red Lobster often have houses with mortgages, and in the country’s hottest markets, four out of five of the mortgages written on new houses in the last two years had adjustable rates. Those rates are now being adjusted – upwards. And then there are also those “soaring property taxes” to pay, say the papers.

Meanwhile, the whole zeitgeist of the housing market has changed. “For sale signs multiply across U.S.,” says the Wall Street Journal. Out here on our farm, we’ve seen how cows multiply. We’ve seen how chickens and rabbits multiply. We’ve never actually caught two “for -sale” signs in the act, but it must be going on. The number of houses waiting to be taken to a good home is at a record level.

More news from our currency counselor…

————–

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

“I guess he felt as though he had better come clean ahead of the minutes of the last FOMC meeting. Those minutes were printed yesterday, and they stated: “inflation was seen by most participants as likely to edge down.”

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

————–

And more thoughts of all sorts…

*** In September of 2001, a small but daring terrorist group led an attack on the United States. In turn, George W. Bush declared a “war on terrorism.” But finding no terrorists against whom it could deploy its conventional armed forces, the United States attacked two sovereign nations: Afghanistan and then Iraq – the latter with no connection whatever to the terrorists.

In July 2006, Israel too was attacked by a daring group of terrorists. It finds itself in the same position as the United States and responds similarly. Unable to target its terrorist enemies, it bombs Lebanon, a country that neither poses a threat to Israel, nor had any particular quarrel with it.

Here at The Daily Reckoning, money is our beat. We are not interested in politics, yet we can’t help but wonder: what next? The nation-state was the best innovation of the last 500 years. Initially, it was well marketed, but is it now becoming irrelevant? More below…

*** Last week, an item in our own MoneyWeek caught our eye. The fund management group, New Star, did a study to see how well professional fund managers actually performed. “After looking at the number of fund managers who outperformed the median over the last three and five successive years, it found that only one in eight had done so over three year. The number was even smaller over the last five year, when only one in 34 did so.”

Why pay the fees, New Star wondered? Investors would have been a lot better off in an index tracking ETF, for example.

And along comes a manuscript from dear Daily Reckoning reader Barry J. Dyke, who has written a new book on the subject. He provides us with a helpful quotation:

“While the shareholder wealth consumed by the managers of corporate America has been far from trivial, the shareholder wealth consumed by the managers of mutual fund America has been enormous. More then one-fifth of the robust annual gross returns generated for investors in the financial markets – stock, bond, and money market alike – during the pas two decades has been siphoned off by fund managers. The awesome magic of compounding returns has been overwhelmed by the tyranny of compounding costs. Without a major reduction in the share of market returns arrogated to themselves by our mutual fund intermediaries, more than three-quarters of the future cumulative financial wealth produced by stocks over an investment lifetime will be consumed by fund managers, leaving less than 25% for the investors. Yet is the investors themselves who put up 100% of the capital and assume 100% of the risk.”

We are in an age of decadent capitalism. The capitalists are now at the mercy of the proletariat. Corporate managers take hundreds of millions in salaries and options, while the shareholders earn a pittance. Shares have gone nowhere for the last eight years, while paying out dividends less than the inflation rate. Apparatchiks in government, and foundation wonks, too, do well instead of good. Their salaries and benefits rise, while middle- and lower-class Americans lose ground. And here are the money managers managing to make a fortune for themselves, while the real owners of the money they manage make nothing. It is an economy for the managers, by the managers…and of the managers.

Ned Johnson and his daughter Abigail, of Fidelity, have accumulated a fortune estimated at $18-$20 billion. Mario Gabelli took home about $55 million in 2004. In the five years, ’99 to ’04, his total compensation was around $325 million. “During that time,” writes Dyke, “the compensation Mario took home almost surpassed the entire amount that was made for his companies.

“The average mutual fund manager makes $436,000 for managing other people’s money. The top 10% of fund managers make around $1.7 million per year.”

*** Heat. It was blamed for two train delays your editor suffered yesterday – once, coming back from London and the other going out to Normandy to have a look at his latest investment disaster.

Yes, he knew it was coming…and it has come. The property he bought in Normandy has gone from bad to worse. Inspectors…permits…licenses…regulations. Every level of government has its requirements. One wants an elevator for the handicapped. Another requires an evacuation system for smoke in case of fire. Still another insists that no cement be used in the making of new balusters; they must be cut from stone just like the originals. And then, there are the contractors.

We import our plumbers from Poland, our woodworkers from the Czech Republic, and our painters from Greece. We can’t understand a word they say. And, it seems they are at war with one another. The Poles say the Czechs cut their pipes. The Greeks say the Poles damaged their paint. The Czechs say both the Poles and the Greeks stole their tools. One expense has been added to another until the sum far surpasses anything we had imagined putting into the place. And now, we go out to inspect the place not like Bonaparte at Austerlitz, but like von Paulus at Stalingrad.

“If only we had stayed home,” we mutter to ourself.

*** The drive back from Normandy was a great pleasure. The heat has cooked up the earth and made it release its private scents. We drove along with the windows open. The smells of freshly cut hay, fields of wheat and barley – of grass and linden trees. We looked out on the stone farmhouses…the elegant chateaux…the rows of chestnut trees along the road.

France is a horrible place to do business. But what a pretty place to live.