Last Man Standing

A DR Classique originally broadcast September 13, 2002…and an inspiration for themes explored in Chapter 5 of Financial Reckoning Day.


We had asked Lord Rees-Mogg what he thought of Alan Greenspan’s speech in Wyoming.

We hate to bring it up again, dear reader. You must be getting tired of hearing about it. But we can’t resist. Here at the Daily Reckoning we are connoisseurs of absurdity. And here we have the man who – in an unusually lucid moment – described stock market investors as ‘irrationally exuberant’ in ’96, claiming he could see nothing untoward 5 years later, even with the Dow 100% higher. He would not know a bubble if it blew up in his face, he seemed to say; he would have to wait and check in the mirror for bruise marks.

And even if he had been able to spot the bubble expanding, the Fed chairman continued, he would not have been able to find a pin or even to duck. The hundreds of economists at the Fed were powerless, "confronted with forces that none of us had personally experienced…aside from the recent experience of Japan, only history books and musty archives gave us clues to the appropriate stance for policy."

In today’s letter, we revisit our Fed chief. We do so partly for the pure baroque mischief of it – like offering an immensely fat person a second helping of dessert – and partly because we have an investment insight that might be worth sharing.

Alan Greenspan: Last of the New Era Heroes

You see, we have come to believe that Alan Greenspan is one of the last of the New Era heroes. As long as he still stands, we think, the delusion of greater wealth through greater borrowing stands, too. Yesterday brought news that the current account deficit hit a new record in the second quarter [of 2002] – internationally, Americans continued to spend more than they earned – $130 billion more. And, as reported above, consumers stood in line to borrow even more money on their homes – even as mortgage delinquency rates hit new records.

But the last man standing – the only member of the ‘committee to save the world’ triumvirate still in office, the Caesar of central banking – cannot last much longer.

And now the pundits are edging his way, golden daggers in their hands. Paul Krugman in the New York Times…Abelson in Barron’s…they’re escalating their attacks, from criticism to open contempt.

When Greenspan’s reputation gives way…we think…so will the dollar, and the consumer. Yesterday, the price of gold rose to $320. We’re willing to bet that when the bubble in Greenspan’s reputation finally bursts, many more people will want to trade 320 of the chairman’s paper dollars for an ounce of gold. Then, it might be too late.

The photo in today’s Daily Telegraph shows the titan of central banking looking a little tired. Even an hour soaking in his bubbles does not seem to be enough. Speaking before Congress must be a wearying job, of course. Neither Congresspersons nor their many apparatchiks are likely to understand what he is talking about. Of course, the chairman himself may not know what he is talking about – that was the implication of his testimony which, in the little bits reported in today’s paper, made absolutely no sense…maybe he is becoming confused. But absurdity takes energy. The Fed chairman rested his chin against his arm, as if he was running low.

Alan Greenspan: What Happened?

The minutes of past meetings of the Fed’s Open Market committee reveal a surprisingly more confident and energetic chairman. In September ’96, for example, Mr. Greenspan told his fellow central bankers: "I recognize there is a stock market bubble at this point." Then, referring to a suggestion that margin requirements be raised to dampen speculation: "I guarantee that if you want to get rid of the bubble, whatever it is, that will do it."

What became of these insights? What became of the Alan Greenspan of that era? He is no Volcker; the former Fed chief was made of sturdier stuff and was willing to go against the mob. Greenspan bent.

The Fed chief had already re-invented himself to suit his ambitions. Had not the gold-buggish Ayn Rand devotee remade himself into the greatest paper-money monger the world had ever seen…increasing the supply of dollars more than all the other Fed chiefs and U.S. Treasury secretaries combined? Had not the man who once wrote that gold was the only honest money already betrayed his own beliefs as well as the nation’s currency?

Now what can he say…now that the only thing still keeping the world economy growing is the willingness of the poor, hapless consumer to keep ‘extracting equity’ from his home – that is, going deeper and deeper into debt – in order to continue spending?

Can Greenspan admit that he has done the nation a great disservice…allowing the debt bubble to expand, wafting the hot air of ‘productivity miracles’ into it…and turning up the gas with below-market interest rates? Or will he try to keep the consumers borrowing even more – as the Japanese did – with still lower rates and even more confident hokum? "He’ll end up as the most hated man since Herbert Hoover," continued Lord Rees-Mogg over dinner. "He gave America the ‘Clinton Boom.’ Clinton is gone. But Greenspan is still there. He’ll be the one left holding the bag."

Your correspondent,

Bill Bonner

November 05, 2003

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).

Donora, Pennsylvania…

Even in the 1960s the place looked decrepit. The old houses were clad in an asphalt-based product which was intended to look like brick – from a far distance…to a near-sighted half-wit.

It had probably been put on in the 20s or 30s…or maybe the 40s. By the ’60s it had cracked and warped like a neglected packing lot.

When owners went to replace the asphalt, they typically put on aluminum siding…which almost looked good for a year or two…until it became dented and faded.

Like Argentina, Russia, and Baltimore…Donora did what now seems almost impossible. For most of the 20th century, the real value of its property went down. Americans can hardly believe it; but real estate can go down in price for very long periods of time.

From Los Angeles comes news that house prices have been rising at 8.3% for the last 34 years. The numbers lean a bit, bent in a favorable direction by the warm winds of the last couple of years. Over the last 12 months, for example, prices in LA County rose 24%.

House prices…like stock prices…are rising on a trillion-dollar gust of hot air from the Feds. Lower rates and greater government spending have encouraged the illusion of a boom. People borrow and spend as if they had not a care in the world. In the Here and Now of the 3rd quarter, GDP was said to be increasing at more than 7% annualized. The dollar was recently seen – rising! And stocks are still going up.

So, what if we’re wrong? What if the recovery is for real? What if things don’t work the way we think, after all? What if there IS such a thing as a free lunch…and you NEVER have to pay the piper…and a stitch in time really does save something?

We leave the questions unanswered. For if there is no moral to the story, we’re not interested; it becomes like a tale told by an idiot, full of sound and fury, but signifying nothing. So let us push on, as if the world still turned on its axis in the old familiar way…

Total debt levels have doubled in the last 5 years – up from $16 trillion to $32 trillion. Debt is now rising at 8% per year – about the same rate as real estate prices. Mortgage debt is going up almost twice as fast. And the federal government is adding debt at the rate of more than a half-trillion per year.

Debt is often dismissed with the words ‘we owe it to ourselves.’ Franklin Roosevelt referred to it as "our national bond," making debt sound vaguely respectable, even patriotic. But in August, when the Feds borrowed $42 billion to fund the deficit, the buyers were not ourselves at all. 81% of the new government securities were taken up by foreigners. The national bond has become a ball and chain…with foreigners holding the keys.

Still, people don’t seem to care that their mortgages are held by foreigners. And what difference does it make, anyway? For the last 17 years, the U.S. has relied upon the kindness of strangers to finance its living expenses. What could go wrong?

So sure are people that house prices will sell for more and more money that they bet their financial futures on it. The median house sells for $374,000 in LA. Were it not for unusually low interest rates, the median family would find it very difficult to buy a house at all. And should rates rise – which they surely will – those who bought houses using adjustable rate mortgages might wish they hadn’t.

Still, people can barely believe that house prices do anything but go up. We suggest a trip to Argentina…or Donora.

*** The markets must have forgotten their rose-tinted glasses yesterday…by day’s end, the Dow had fallen 20 points to 9,839, while the Nasdaq slid 10 to 1,958. Outplacement firm Challenger Gray & Christmas came out with the sad, sad news that layoff levels leapt 125 percent last month, after three months of declines. 171,874 pink slips were given out at U.S. companies during October – the highest monthly total in a year.

Gold added 90 cents to $378, after losing nearly $8 on Monday. The dollar slipped following its recent mini-rally: the euro was up 0.3% at $1.1498 by yesterday’s close.

*** Real estate prices in downtown Baltimore peaked out in the 1920s. But after a bear market that lasted 8 decades…they seem to be coming back.

"Are you kidding," said a friend last night, "real estate is booming in Baltimore."

It seemed so. All around the harbor, at least, Baltimore looked almost alive – except for the absence of people.

*** "It’s our own little mini bubble," we told colleagues last night.

We were referring to our own business. New readers to the Daily Reckoning might not realize it, but your editor is also the owner of a publishing business. Not only do we give away advice, opinions and sundry annoying observations here on the Daily Reckoning, we also sell investment ideas. Recently, people are so eager to for investment ideas that business has been booming.

In fact, we’ve been contacted by venture capital groups…

"This is the time to sell," said one, "while the business is doing well. You don’t get this kind of opportunity very often."

"You’re right," we meant to reply. "But we look upon our business in the same way we think of our marriage. We’ve stuck with it for so long…we think we’ll stick with it a bit longer. It’s an adventure, after all; we want to see how it turns out."

*** Down in New Orleans, your editor signed copies of his new book. He was pleased to see a line form and pleased to hear from many Dear Readers…

"You know," said one, "I’ve bought so much stuff from your company over the years…I’ve probably paid for your daughter’s college education."

"Thank you," came the reply. "Keep buying. I’ve got four more still at home."

*** About the book, this kind reader writes to say:

"Now that I am enjoying my 60th year in Wall Street I can say with a decent background of credibility that your fine work – Financial Reckoning Day – should be required reading for anyone who signs up for Economics 101 – Congratulations!"

Arthur Gray, Jr. Senior Managing Director Carret & Company

Thank you, Arthur.

Bill Bonner The Daily Reckoning

P.S. For more on the book, don’t miss:

"The best investment book I have ever read…"

P.P.S. How does it all end, we keep wondering? If debt cannot build up forever…there must come a time of recognition and solution. What happens?

We reprise comments from Austrian economist Hans Sennholz made in these pages yesterday:

"Our debt generation is a sad generation misguided by false notions and doctrines, and preoccupied with its own needs and wants. When economic conditions begin to deteriorate it may grow ever more egocentric and wretched, which tends to aggravate the social tension and strife. Clinging tenaciously to its transfer claims and rights, the unhappy society thus may deteriorate into a militant assembly of diverse pressure groups feuding and fighting each other.

"When the political conflict finally explodes into violence, the transfer society urgently needs a peacemaker who is prepared to suppress violence with superior violence. In the end, a society that can no longer work together in peace must submit to the dictates of a strong president armed with an array of emergency powers. In other places, at other times, he would be called Caesar."