Market Review: Freedom Press

"Amid economic ruin, US attempting to sow revival" reads a front page story on the Saturday edition of the Baltimore Sun.

At the Daily Reckoning, we have been wondering — given a falling dollar and rising debt loads (both public and private), an historic trade deficit, rising unemployment and a litany of
economic time bombs at home — how will the US government proposes to foot the bill in Iraq?

After all, the economy is in shambles. The Iraqi one, I mean.

"What little industry existed before the 1991 Persian Gulf War," the Sun tells us, "has mostly vanished — starved and isolated by trade restrictions. The once bountiful fields of barley, tobacco and vegetables have lain largely fallow. Well over half the 30 million date trees that once served as a source of national pride are dead. A net exporter of agricultural products for centuries, Iraq now receives 70 percent of its food from other countries."

In order to "sow revival" the administration has appointed Peter McPherson, a former Reagan Treasury official, to serve as "financial coordinator" for the Office of Reconstruction and Humanitarian Aid (ORHA). His goals, says the paper, are modest: "he hopes to stabilize the national currency, write a budget for government workers and pensioners, and perhaps repair a banking system ravaged by looting and war." And, of course, get the oil flowing again.

But here’s where the story gets interesting. What do you suppose the two main problems McPherson and the Iraqi economy face? Would you be surprised if I told you a plummeting currency and a staggering debt-load? The parallels are uncanny.

"Most of the government was financed by money creation," the article quotes a Treasury wonk, "they just printed money when they needed it." Saddam apparently, set monetary policy "on a whim… printing bills to pay salaries and bribes and establishing interest rates to suit his needs."

Looking from they vantage point of the Fed or the Treasury, or course, you might be tempted to say: "Yeah, so what’s the problem?" Alas, what’s supposed to be good for the gander — will apparently kill the goose.

McPherson is perfectly suited for the job. He "boasts a long career devoted to money and capitalism." For example, he spent three years "managing international activities" for the Bank of America and served six years… with the IRS!!! Wow.

Not that the Bush administration has been knocking down our door for input recently, but here we offer some gratuitous advice anyway: If you’re serious about wanting to build a free-market economy you need movers and shakers, entrepreneurs and businessmen. These guys? They send in a tax-collector.

They’re clearly devoted to the money.

The capitalism part, on the other hand, still seems a little murky. According to the sun article, the officials on the ground, while paying lip service to protecting private property rights and preventing assets from being seized by the government, don’t plan to build businesses at all.

Rather, they plan "to encourage [conditions for economic] growth by… paying government workers and repairing the public transportation system."

With what? Sales from the oil, right? Duh.

Not so fast. "Restricted or not," says the Sun, "Iraqi oil wells are in such poor condition that analysts say it could take three years and $5 billion to rebuild the industry to its pre-1991
production levels. And even if the industry were at full capacity, generating $24 billion a year, nearly half the money would be needed to pay off debt," which Saddam simply ignored for the past 12 years.

Well, as you might expect, the Iraqi dinar has been widely fluctuating in value. In fact, we’d heard one report that in the week following the war jumped in value from roughly 4,50O dinars to the US dollar to 1,500/US$1. But it’s unreliable and on the way back down… so until the national currency is stabilized, Iraqi government employees will be paid in US dollars.

Where will they come from? For starters, the US has seized $1.7 billion from various palaces owned by the Hussein family. Plus,the authorities are still hopeful they will catch up with
Saddam’s sons who made off with three trailer loads of cash –some $1 billion US dollars – from the Iraqi Central Bank. That money is supposed to help out until they can get restrictions lifted and the oil revenue starts making everyone breathe a little easier.

If all else fails, perhaps Mr. Bernanke will lend Mr. McPherson the keys to that nifty little invention we have back here in the States. Then he can just print more money when he needs it.

Lord help us all,

Addison Wiggin,
The Daily Reckoning
May 17-18, 2003

P.S. "May you live in interesting times," says the Chinese proverb. I think it was meant as a threat.

I arrived in Baltimore late last night. We’re gathering at the Agora headquarters here on Monday to talk about the Internet, the economy, terror and their effect on our business. We’ll keep you posted if we learn anything interesting…

The site off Agora’s Baltimore campus is the historic Mt. Vernon,which sports the first monument erected to George Washington.

Sitting in front of the Washington monument, facing downtown, is a statue of the French general La Fayette riding gallantly on a horse. La Fayette was widely considered the hero of the American Revolution, having saved the Americans from certain defeat at the
hands of the British.

I passed the statue this morning, on my way down to visit my old friends at the Mid-Town Yacht Club, a fine watering hole on Center Street. While having breakfast, I was served a delicious cup of coffee from a "Freedom" press… rather than a French Press. The woman behind the bar went out of her way to make sureI heard her.

The Baltimore Sun also featured an article this morning  with this almost impenetrable lead sentence: "France wants clarifications from the United States in response to Frenchallegations that US officials are encouraging Anti-France news…"

Meanwhile, the forever war continues. Al Qeada was implicated this week in two bombings — one in Riyadh and another in Casablanca. In Casablanca, Belgian and Spanish interests were targeted.

*** Perhaps it was just my mistake for trying to glean insight from the newspaper… but the incessant bickering between governments amid news of the bombings only served to remind me of comments made by Anatole Kalentsky following an OECD summit in Paris a few weeks back:

If war, terror and economic malaise continue to be the order of the day, we reported, "then the entire global system of free trade, free capital markets and free movement of people will beat risk…"

*** Ed note: If you’re interested in learning how to protect yourself — even profit — during these "interesting times" you may want to join us in San Francisco this August.

"Threats, Deficits, Tension, Devaluation and Disorder" — they all promise to play a key role in the conversation. Join us…

The Agora Wealth Symposium
San Francisco
August 13-17, 2003


By Bill Bonner

"…As in Argentina a few years ago, for every dollar’s worth ofgoods and services America sells overseas, nearly two dollars ofimports come into the nation’s ports. So great is the imbalancethat thousands of empty containers pile up in New Jersey; (theycame full, but there is nothing to ship back in them) andtrillions of dollars pile up in overseas bank accounts. How could a system of globalized free trade — in which one must presumablygive as much as one gets – get so out of whack?…"

By John Mauldin

"…Until the rest of the world and especially Asia can weanthemselves from dependence upon the American consumer – [or theU.S. consumer gets tapped out] — the dollar will remainartificially high. That is not to say it will not continue itsdecline. It will. It is just that it will take longer than itwould without the artificial factors…"

DEBASING (05/14/03)
By Andrew Kashdan

"…With all due respects to our friends in Paris, let me saythis: not only is the risk of a protracted Japan-style deflationoverblown, but so too is the prospect of any significantdisinflation from here. In other words, prices are likely to stay where they are, or go up…the latter being the more probable ofthe two scenarios…"

By James Davidson

"…Notwithstanding the stark evidence of [U.S.] success [in thewar in Iraq], the anti-war core of the Democratic Party in theU.S. continues to oppose the war and criticize U.S. aims incleaning up Iraq. As an investor, you should not let the mediabias confuse you about the impact of the war. It is far morepositive than you would be led to believe…"

By Doug Casey

"…I don’t know how [the "peace" in Iraq] will end, any morethan does Bush or Rumsfeld. But my prediction is: badly. Timingis the real question in my mind, although even that is not soterribly critical. The important thing is to be on the right side of the trend. Stay on the right side of these trends over thenext few years, and you’re likely to not only preserve capital,but even make a killing…"


The Gold Bear Is Back? Bull!
by John Myers