Victims of Success

Throughout history, it is clear that becoming successful is hardly ever easy. Often times it takes a great deal of fortitude, and it can even be very dangerous. But as Bill Bonner explains in this DR Classique (originally publish on May 4th of last year), without these inherent dangers, our lives as we know them might be completely different.

Our labors here at The Daily Reckoning can scarcely be called labor at all. Our role is nothing more than to point a finger and laugh. And our biggest challenge each week is merely to decide what to laugh at first. Clowns to the left of us…jokers to the right…and here we are.

As always, we are spoiled for choice. Nothing is droller than watching people in a desperate race to get rich. They are like pioneers in a land rush, riding hell for leather across the Great Plains. They jettison anything that will slow them down…tossing off dignity, common sense and caution as if they were pianos being thrown off top-heavy wagons along the Oregon Trail.

Of course, when they finally get their stakes into the ground the whole romance of it fades fast. They actually have to sweat to turn the earth and make something out of the land they’ve claimed. No wonder they prefer the rich, flying hopes of the mad dash itself. It’s not the lure of the hard work and gritty production at the end that attracts them, but the heady illusion that they will somehow get rich without working at all…as if the land will fructify on its own, like the fabled Land of Milk and Honey that kept Moses wandering around the desert for 40 years.

Almost all of modern finance is based on similar propositions, propositions that couldn’t possibly be true. Of course, that is precisely what makes them endlessly appealing to so many people. The truth, on the other hand, is disappointing, like a bathing suit on an aging man. It is not at all what people want to look at. They’d much prefer to leave some things in the dark and imagine them as they wish they were – that they can get rich without saving…or that their economy can flourish without anyone actually making anything.

Everyone hopes to get something for nothing; and the worst thing that can happen to them is actually getting it.

But there were other sorts of travel – indulged in not by those racing to get rich, but by those who were already rich. The Grand Tour was a feature principally of the 18th and 19th centuries. It was a kind of finishing school for the wealthy and the intellectually ambitious. Typically – as if it were possible to find a typical pattern – a young man or woman with a certain social standing would leave England or America in order to explore the continent.

At the beginning, this traveling was not only hard, it was dangerous. There were thieves and kidnappers all along the route…as well as rude inns, where travelers would likely get bitten by fleas…or come down with a serious illness. Many were the travelers who set off on the Grand Tour and never came back.

Why did they bother? Because they thought the past – particularly the classical period – had something to it that was worth learning. History may not repeat itself line for line, they realized, but the themes of the past tend to recur. Besides, if you are looking for a way to understand the present and guess about the future, what else do you have to go on other than the experience and lessons of the past?

Gradually, over the two centuries, conditions of travel had improved so much that towards the end of it – even into the early 20th century – young ladies from good American families made the trip with their maiden aunts or tutors and wrote romantic essays and novels about the travels.

One of the most important stops along the tour, for example, was the Coliseum, which for most of that time was a neglected ruin.

It is in the shadows of the Coliseum that a story by Edith Wharton, called "Roman Fever," takes place – in which two American matrons, Mrs. Slade and Mrs. Ansley, experience a little contretemps. The latter of the two conceives her lovely daughter, Barbara, in some moonlit corner of the ruin – with Mrs. Slade’s husband!

But the Grand Tour was more than an opportunity for hanky-panky. It was an opportunity to discover the roots of our western civilization. The theory is that by discovering the roots, we better understand the tree…and its fruits.

If Julius Caesar had not won the battle of Alesia against Vercingetorix, whom he brought back to Rome in chains, he probably never would have crossed the Rubicon or made himself emperor. Nor would he have subdued Gaul. And if he had not subdued Gaul, he could not have conquered England. And if England and France had not been conquered, Europe might never have been Romanized…and there would not have been a Dark Age…or a Renaissance. Which means that the culture that flourished in Western Europe…and was carried on the Mayflower to the New World…would never have developed. We don’t know what the world would be like without that, but it wouldn’t be the same world we have today.

Thank God the frogs lost, says Jacques Bainville, author of a history of France. But what Bainville forgets is that the patterns of history are only seen clearly in retrospect, and even then, people don’t learn much from them. Napoleon had the disastrous history of Sweden’s invasion of Russia by Gustavus Adolphus to teach him. But that didn’t stop him from making the same mistake.

This basic plot line was described best by Marcus Aurelius:

"Consider the time of Vespasian. You will see the same thing: men marrying, begetting children, being ill, dying, fighting wars, celebrating, trading, farming, death of others, grumbling at their present lot…coveting a consulate, coveting a kingdom. Then, turn to the times of Trajan: again everything is the same, and that life too is dead…"

So even if, as people say, we Americans have no history…what of it? And then, while the typical American may not know much history, that doesn’t mean he has none. His country did not spring forth out of nothing; in fact, it has thousands of years of history, and its first and most celebrated citizens knew it.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

May 2, 2008 — Ouzilly, France

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.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

Yesterday, the Dow rose a big 189 points. Gold fell a big $14.

Readers will note that these trends are opposite to the way we think things ought to be going. For the entire decade, we’ve been long gold and short stocks. We’re going to stay in that position for the rest of the decade too – unless we lose all our money or think of a convincing reason to change.

So far, neither has happened. The price of gold has more than tripled. Stocks have mostly gone nowhere. And nothing has happened to make us think that the fundamentals are different today than they were in 2000.

The debt bubble has been only partially deflated. Americans are still living beyond their means. And the people who run America’s central bank and its central government are still numbskulls.

What then, to make of yesterday’s price trends? Maybe the Bernanke Fed and the Bush feds have won the battle; maybe they’ve succeeded in keeping the economy growing. Maybe the dollar will strengthen. Maybe gold will continue its death march, back down to where it began the decade – under $300. Maybe we’re the numbskulls.

Yes, and remember the feds "rebate" program? This week they began sending money they don’t have to people who didn’t earn it. It’s supposed to encourage consumers – who’ve been spending too much already – to spend more. Maybe it will work after all.

And the Fed’s latest interest rate cut – down to 2%…maybe that will work too.

And maybe enlightened public officials really can improve the world. When people have made errors – as they inevitably do – the feds can somehow make the errors disappear. They can pass laws and jiggle policies…and abracadabra, instead of suffering a correction…the whole thing is forgotten and it’s on to bigger and better things.

Which makes us wonder what went wrong in ancient Rome and modern Japan. The Romans tried every trick – from price controls to inflation to giving away bread (similar to the ‘tax rebate’ program). Still, the economy deteriorated. From the period which Gibbon considered the happiest and most prosperous of man’s history – the age of the Antonine Caesars – the empire slipped and slid…and finally collapsed into the Dark Ages, which lasted nearly a thousand years. Of course, the Romans did not have modern central banking. But the Japanese did. Their central bankers read the same books as ours do. They believe the same theories and have the same wrenches and pliers in their tool belts. How come they couldn’t fix whatever ailed Japan Inc.?

We don’t know. But yesterday, it looked like the U.S. authorities had things in hand. The U.S. economy is still growing, though barely. General Motors’ (NYSE:GM) stock rose…and Citigroup (NYSE:C) found that it could raise even more money than expected.

Gold, meanwhile, continued its correction.

"What the wise man does at the beginning the fool does at the end," says Warren Buffett. No doubt, the wise man bought gold below $300. But were they fools who bought over $900? We don’t think so. As near as we can tell, we are not at the end…we are still at the beginning of a monumental trend.

The credit bubble developed a major leak last year. Banks wobbled. Credits plunged. Hedge funds went broke. And the feds panicked. Bernanke and Co. pushed $200 billion in new cash and credits into the marketplace…and cut rates seven times. It was clear that the authorities had no interest in protecting the value of the dollar; they were desperately trying to avoid a serious correction. Naturally, gold went up.

Then, the markets calmed. It began to look as if the Bernanke & Bush team might win. Martin Feldstein, head of the National Bureau of Economic Research and a close friend of Ben Bernanke, said on television that 2% would probably mark the end of the Fed’s rate cuts. With no more rate cuts in sight…and an economy that seemed to have survived the crisis…speculators thought it was time to lighten up on gold. Silver too.

But what has changed? Oil is still over $100. The Chinese economy is still booming – with the manufacturing sector reportedly expanding at a record rate. Emerging market demand is so strong, it is holding key commodity prices up – even as demand from the United States eases off. In America, people are switching to smaller cars…but in other places, they’re buying so many new cars that gasoline use is still going up.

Which puts Americans in an even tighter jamb. A slowdown in the U.S. economy used to bring a bit of relief. Americans earned less…but prices fell too. For example, when Paul Volcker put up rates in the early ’80s, it caused a major recession. But it brought good news too – the higher rates rewarded savers. Higher rates also attracted money to the dollar; the greenback rose, which lowered prices.

Now, unemployment in the United States has reached a four-year high…but prices are still going up. Oh, dear reader, what have our geniuses really wrought? Americans’ earnings and assets are going down…while their consumer prices are going up – and their leaders congratulate themselves on having saved the economy from a correction.

A correction is just what the economy most needs, in our humble opinion…and what it is still going to get.

*** The French earn more than Americans…but Europeans pay higher prices than Americans, for almost everything. And prices have been going up four times as fast as incomes. In Europe, as in America, more and more people are being squeezed out of the middle classes. They either get richer…or poorer. A study in Germany, for example, found that middle-range salaries were earned by 62% of the population in 2000, but that by 2007, only 54% of wage earners were in the middle category.

In Rome, we went out for breakfast on the Piazza di Navona. It was a beautiful spot to begin the day, with the sun on our faces…while watching the Italians open up their restaurants and set up their artwork on the piazza. The piazza preserves the shape of Domitian’s circus…an oval form, about 100 yards wide and twice as long, In the center, artists display their paintings, jugglers entertain, and a few madmen and pickpockets wander around. One of the strangest characters in the square was a woman – a bag lady, carrying two large bags in each hand. She appeared early in the morning, while we were having our caffe latte, wearing a purple padded coat and a knit hat. Her hair had been colored bright orange and stuck out on both sides of her head like a clown. Her face was painted a bright red. While we watched, she said nothing. Instead, she merely ambled around…not appearing to notice anyone in particular…and not appearing to have any particular destination. When we passed through the piazza later in the day, she was still there…doing exactly as she had been doing all day.

Meanwhile, a jogger was running around the track. He was a middle-aged man wearing a Colgate University tee shirt. The people at the neighboring table, French, noticed him.

"He must be an American," one man said to the others. "Who else would run around like that at this hour of the morning?"

After a few laps…

"I think he’s speeding up. I’m going to time him…"

Then, a few laps later…

"Yes, he’s speeding up. You’d think he’d go slower. That’s a long way around the piazza. And he’s an old guy. But he’s doing each lap a little faster…"

Then, as we all began to wonder how fast he would go…he peeled off to the right down a side street.

Amid all this entertainment, the waiter brought the bill for breakfast. We had had two coffees, two croissants, and two glasses of orange juice. The bill: 35 euros…or about $52.

"This isn’t the All-You-Can-Eat Early Bird Special in Lubbock, Texas," said Elizabeth.