11/13/09 Rome, Italy – The raw news: the Dow fell 93 points yesterday. Gold held above $1,100. There’s no sign of panic. But we keep our Crash Alert flag flying anyway; you never know.
We’re in Rome…actually in the airport…on our way back to London. Alitalia offered the best deal to Buenos Aires. But the plane was a disappointment. The food was good; the hostesses were pretty; but the seats in business class didn’t fully recline. After the first 10 hours, we were very uncomfortable. And pity the poor folks in economy!
But if you want to be an “international man,” as our friend Doug Casey termed it, you have put up with some inconvenience. Why would you want to be an “international man?” As another old friend, Marc Faber, observes, it pays to travel. You get a broader perspective. And you realize that many things your compatriots take for granted others take for absurd. “The more you look, the more you see,” is our dictum.
One thing Americans take for granted is that they will always be the richest, most successful people on earth. They think that because that is what they have always known. The US economy became the biggest in the world before 1900. Americans had just what it took to become the richest people on the planet. They worked hard. They saved their money. They had little government interference. They had the industrial revolution at their backs…and nothing in their way. And they had a dollar that was ‘as good as gold.’ By the time the baby boomers were born the US had such a big lead over the rest of the world, it seemed like nothing could stop it. Free enterprise guaranteed new innovations and new wealth. Democracy guaranteed a political system that would adapt to the needs of the evolving economy.
But nothing lasts forever. As it matured, the US economy and its political system became more and more rigid and more and more costly, with handouts and bailouts…at every level. Large companies are protected. Millions of people are encouraged not to work. The whole financial industry is dipped in honey. And the whole population is urged not to save, but to spend. Why bother to save for retirement; there’s Social Security. Why bother to save for health care emergencies; there’s the government’s new overhaul of the medical system! Why bother to save at all; the government has fixed short-term rates so low you get nothing for your trouble.
On our travels what we notice is that there are a lot of smart people in the world. And they’re all sweating, striving, and angling to get ahead. You never know who will win the race, but you can be sure that no one will stay in the lead forever.
“US Wages Out of Balance,” says The New York Times. It is pointing out the obvious. Americans are paid too much, compared to other people in the world who work just as hard and who now – thanks largely to the feds – have as much or more capital than we do.
Wages in the US will come down – probably thanks to unemployment and inflation. So will US living standards compared to the rest of the world.
Meanwhile…back in Germany…
Generations of German central bankers learned their lesson. They saw what happened when hyperinflation ran wild in the ’20s. The middle class was wiped out in a matter of days. People lost faith, not only in the Deutsche Mark, but in Germany itself…and in all the old values. The next thing they knew, the Chancellor was wearing a silly uniform and they were on the road to Hell.
More recently, the last generation of German central bankers worried about the euro. They had no doubt about themselves. They had the backbone to protect their new currency. But what about the Italians? And the Greeks? And the Irish?
Well, they can fret no more. Now, the German deficit is higher than the Italian deficit.
Why would they do such a thing? They have the usual poppycock explanations – countercyclical spending, the need to maintain social services as tax revenues fall, the need to bailout the East, (see below) etc. But the real reason is that the old German economists are dead. One of the last of them was our colleague Kurt Richebächer.
Every time we saw him, Kurt would complain about American and English economists.
“Ya…you Anglo-Saxon economists are ruining the world,” he would say. Kurt had no truck with Keynesianism. Or monetarism. Or any other of the fads in economics. Besides, he had lived through Germany’s hyperinflation, the rise of National Socialism, WWII, partition, and finally, reunion. He knew that there were no free lunches…no easy fixes…and no panaceas. He knew too that people who promised miracles were dangerous frauds. Wealth is created by work…saving…innovation…investment…and perseverance. There are no miracles. No short cuts.
While wealth is created by work and saving, it is destroyed by consumption and debt. When you borrow money, you have to pay it back. Then, you must draw down your wealth…reduce your living standard…and cut into the capital you laid away in years past. You can try to squirm and dodge…but you just make the situation worse.
Kurt was right.
But now Kurt is dead. A new generation of economists has taken over. Born after the war, they know hard times only from movies and history books. They haven’t forgotten the old truths; they never learned them. Instead, they probably did their training at Harvard or Chicago…and studied nonsense…such as the Efficient Market Hypothesis and Modern Portfolio Theory.
They think the key to prosperity is spending. Consumers spend until they can’t go on. Then it’s up to the government. That’s why the Germans are running such a high deficit. The think they need to keep up spending – at all costs – in order to boost the economy. As Kurt used to point out, it makes no sense theoretically…and there’s no evidence that it works in practice either. Every time governments have intervened with large dollops of countercyclical spending they have made a mess of things…either by stimulating the private sector to further acts of reckless insolvency…or by blocking the process of correction.
It’s all claptrap. Angela, you should be ashamed of yourself.
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Angela will never be ashamed of anything. Remember, she is the daughter of a preacher. And then, your explanations are way too complex. The whole thing is much easier. They are spending their butts off not because of some ridiculous economic theory but because they hate to have to allow and admit rising unemployment figures. They are just hoping that the economy restarts sooner or later on its own power. That is all. When it comes to debt and deficits, no government cares because they do not think long term. If and when the whole house of cards breaks down the responsible politicians are long retired and those who are in power will say that it is not their fault pointing fingers to the retired ones. Call it the political circle.
And the political cycle.
The one thing no one seems to discuss is that America is made up of people from all over the world. If one looks at man as a creature which is evolving. Then there is a certain beauty to everything that is happening. Perhaps creating wealth out of poverty is not such a bad thing.
Where is Harry to tell you that you’re all wrong?
This tree is going to grow to the sky.
That gold is up over 4 times in the past decade is an anomaly.
Kidding aside, I spoke to someone who lived near Casey’s super-retirement community in Argentina. Guy said Casey was full of crap, trying to turn a buck, and that the place, like much of Argentina, was dangerous unless you had the bucks to afford your own security detail. I always take the intelligent Casey’s words and advice with a grain of salt. Anyone who badmouths Warren Buffet deserves as much. Your milage may vary.
Keep up the good writing, Bill.
“After the first 10 hours, we were very uncomfortable.”
________________________________________
stop it, I’m starting to puddle
Why does this guy seem to get it as well? Because he reads under the headline and sees the true facts not the whining you see here.
“To recap, the overall economy is now growing robustly, the housing market continues to recover steadily, earnings news continues to be extremely positive, and it now appears that we’ve seen the early concrete indications of employment growth.
While there continues to be fallout from the deep recession earlier in the year, it is becoming clearer by the day that upward economic momentum will persist and that this will not be a jobless recovery.”
Most americans are so brain-washed by their absurd propaganda they actually believe it.
Communism as an ideal is about sharing wealth created collectively by society, not stolen by the rich from the poor.
The German Democratic Republic (East Germany) was a consequence of the division of Germany by the allied powers after WW2.
Spies there where, as I’m sure they exist in the U.S. aplenty. A much less sophisticated propaganda system than in the U.S. existed, again because everyone knew who was in charge (government, as oposed to the oligachs from finance and media running the game from backstage).
As for “gulags” in East Germany (or any other Soviet Bloc state after Stalin) you can either be joking or ignorant. I prefer to consider you the former.
Those whom you refer to as “guinea pigs” acttually lived there and CAN MAKE A DIRECT COMPARISON between then and now in their own lives.
So to can Americans over forty in their own standard of living after the fall of the Soviets counterweight that kept capitalism’s extremes in check.
Attempting to compare the corrupt capitalist system we live in, where the rich through speculation get richer and the ones doing the actual production (work you know, building Audis and Louis Vuittons…), and the social liberation attempt that was communism puts you in a very sad place intellectually-wise.
Finally, the Soviet system came crashing down due to pressures (mainly the arms-race) from “the free-world” (free as in capitalist jungle as most people in the east where soon to find), but foremost because Gorbachev (the ad man…) was an western mole who ended the destruction work that Krutchev began in the 50’s.
That a country that suffered so much during WW2 and lost 23 MILLION of it’s citizens in the life and death struggle against nazism, and was totally wrecked by 1945 was able to recover so quickly and take to space only a few years later was a remarkable achievement and irrefutable proof that communism can deliver economomicaly and do it with far more justice than whatever form of “capitalism” you care to offer.
That the U.S. was the ONLY country in the world to use TWO atomic devices agaist unnarmed civilians just to try and scare off the “commies” is irrefutable proof of capitalism’s despicability from an ethical and moral standpoint.
But then, ever more inhabitants of “the free world” are getting a chance to see it’s true collors nowadays.
Bill, go study some History and try to do something usefull for society in the form of work, starting by censoring your lack of knowledge (or malice).
Have a nice day
A WESTERN European
Sorry to be pedantic but pre DDR / BRD the currency was the Reichmark. I recall reading a book called ‘In the Ruins of the Reich’ in the ’80s which – if my memory serves me – suggested that the D-Mark was introduced in the West (by the US, 1948?) to prevent the Soviets from printing money to pay for their occupation (I think this action was partly responsible for commies getting upset and blockading Berlin). In a similar way the next Gov. in the UK will get the bill for the current Gov.’s profligate, non-productive spending.
tsst Harry… I have a secret to tell you
The US govt is technically broke : o)
Before talking try to figure for yourself the utter, unstoppable stupidity of the keynesian theoretical crap that the feds use to justify their dirty work. Then maybe you’ll be on the road to slowly understand, “the emperor is naked”.
See you l8r in the Democratik Republik of the United States.