Fin De Bubble, 2005

In "Squanderville," in the midst of real estate mania, Americans are ready and willing to believe anything…that their homes will always rise in value, that their debt will never catch up with them, and that the American empire is unshakable. Bill Bonner wonders what will happen when reality sets in…

The heat came down on London yesterday like a hot iron. It took the wrinkles out, leaving the whole city as flat and limp as an old pair of pants.

We walked along the river in Southwark and sat down on one of the benches looking out towards Charing Cross station on the other bank. The water was low. Everyone outside shuffled along like a sluggish tide. Lines formed to get into restaurants. Strollers bumped into each other. Out on the river, a party was taking place on one of the tourist boats; the sounds of a jazz saxophone floated down the river like litter.

All of a sudden, we felt the same odd sensation that we recall from the late ’90s…the fin de bubble feeling… that too many people were enjoying themselves too much. We sat down at a sidewalk cafe where you had to serve yourself. The two of us each had a salad and a glass of white wine. The bill came to 26 pounds – or nearly $50. Our modest bachelor pad in a nearby building costs over $3,000 per month. Elizabeth is looking for an apartment; she believes it will cost nearly $15,000 per month to move the whole family to London. Where do people get so much money?

American Economic Bubble: Delusions of Mediocrity

But that too is a typical fin de bubble hallucination – that money will always be there when you need it.

Americans have delusions of mediocrity. This is a point we’ve made before. We make it here again, because the things that were extraordinary a year ago are even more extraordinary now. Things that would have been taken for absurd a generation ago are now taken for granted.

As a bubble expands, the celebration that began as a little cocktail reception turns into a wild party, with guests dancing on tables and throwing up outside. Soon, it gets out of hand.

At the end of a bubble, the delusions and distortions swell up to grotesque proportions. People seem ready to believe anything as long as it fits their own fantasies. The hallucinations become so extravagant that they blow up.

The Economist, for example, reports, "A recent survey of buyers in Los Angeles indicated that they expected their homes to increase in value by a whopping 22% a year over the next decade. This would put the median price per house over $3 million. At current increases in income, the median family will only have $54,535."

How is a family earning $54,535 going to buy a $3 million house? Even if the whole thing were financed at 5%, it would still mean monthly payments of $12,500, or nearly three times total monthly earnings. Can it happen? No. It is close enough to impossible that it can smell what it had for dinner. Only a fool would bet on it. And yet, it appears that millions of people not only take the wager – they stake their entire financial futures on it.

On the front page of today’s Daily Mail is a story about a man who convinced people that he was a spy, that they were in danger, and that they needed him for protection from terrorists. He then took money from his victims – stealing nearly $2 million by one guess. In such circumstances, explained a professor from the University of Birminghan, "captors can wield immense power over their victims who will do almost anything to please them." One of his victims, a young man, even allowed himself to be beaten regularly so that it would "toughen him up."

In another context, the man could be running for President of the United States or perhaps FBI director. The game is the same – persuading people that they are in great danger and getting them to hand over their money and their liberty. But the poor fellow was a lone operator, a freelancer and an amateur in the protection racket; he botched his business and now faces a long stay in the hoosegow.

American Economic Bubble: The "War on Terror" Hustle

The real pros are still at it, with their own "war on terror" hustle. We remind dear readers of the big picture: after the collapse of the Soviet Union, the American imperators needed a new enemy. The nation faced no substantial military threat; so the best they could come up with was a shadow enemy, terrorists. Trouble was, there were barely enough real terrorists to fill a small movie theatre. They needed more to provide a credible reason to spend hundreds of billions of dollars and continue to expand the empire. The core business of an empire after all is protection. But it only works if you have something to protect against.

Thus developed the war against Iraq – a country with no terrorists and no apparent connection to them. In fact, since the Gulf War, Iraq – which had once been a client state of the United States – had been a hotbed of peace. Still, attacking Iraq seemed like a good idea at the time. Since then, the results have been predictably bad for Americans, but good for the empire. As reported in today’s Daily Mail, "Iraq war is spawning a breed of ruthless ‘holy warriors’ says the CIA." In other words, the strategy is working: terrorists are multiplying.

"They are regarded as more deadly than their Afghan counterparts and are said to be highly trained in assassinations, kidnapping, car bombing and urban warfare," continues the Daily Mail’s report. "The CIA’s report, leaded to the New York Times, came as America’s commander in the Gulf, General John Abizaid, said the insurgency had grown stronger, not weaker, and more foreign fighters were entering Iraq.

"Many are expected to carry out attacks in Western Europe, according to the report, while others will return to their native countries in the Middle East – particularly Saudi Arabia, where it is believed they will attempt to destabilize national governments. The report, which has gone to the White House, concludes that Iraq is serving as a real-world laboratory for urban combat."

Iraq had never seen a suicide bombing before the American occupation. Now, they are as common as drunks at an English wedding. The whole country has been turned into a recruitment and training center for terrorists. This is good news for America’s empire industry; now, it has something to provide protection against.

The bad news for the empire is that its business model is nutty. The more protection it provides, the more it loses money. That is to say, its homeland supporters become poorer. It must be galling for those few who understand what it really going on: they lose money-minting terrorists in Iraq…and then lose money fighting them.

But at a certain point, the logic of a bubble – whether in markets or in politics – is the logic of self-destruction. People do stranger and stranger things, not because they are trying to avoid their own ruin, but because they are trying to bring it on.

American Economic Bubble: Death by Credit

The Daily Mail is a wealth of grist for our mill today. Elsewhere in the paper is the story of Mr. Mark McDonald, 43, of Norfolk. The poor man suffered what the paper called "Death by credit." Like your editor, the man was a writer. Like your editor, he was not particularly well paid. But unlike your editor, he had a great number of credit cards. His debt rose to about $120,000 – on which, he made minimum payments as long as he was able. But the burden of it got to be too great, and the father of two decided he would rather place himself on the rails in front of the 7:09 to London instead of remaining in the ranks of those living with enormous, unsustainable debt levels.

"Mr. McDonald’s death was the fifth known suicide due to debt in the past two years," says the Daily Mail.

McDonald’s wife blasted the credit industry: "They are just interested in making money," said the woman. But who isn’t? And five suicides in two years seem like a small price to pay for the benefits of unlimited consumer credit. Besides, the whole empire rests on nothing more than the sand of credit. The entire U.S. military budget – great as it is – is still less than the amount of net lending to America. Without loans from overseas, the empire itself, as we have known it, is finished.

The Daily News report had a certain fin de bubble tone to it. Twice as many people are calling for credit counseling this year as the year before, the paper noted. Twenty five thousand picked up the phone last month. For every decisive writer like McDonald there must be thousands of wishy-washy plumbers and dough bakers who can’t make up their minds. They muddle through…and hoping that their debts never catch up with them.

Bill Bonner
The Daily Reckoning

June 24, 2005 — London, England

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).

One of the conceits of Late Empire is that the rest of the world longs to be like the homeland. The imperial race flatters itself. Out on the periphery there is a certain amount of envy and emulation. But it is superficial. London never became quite like Rome. Nor did Baghdad.

But now Americans are convinced that China is becoming just like us. "China’s New Revolution," is the cover line on this week’s TIME magazine. Inside, we learn that the PRC has "embraced the modern world." Every aspect of this new hug is explained as though it were familiar to us. Chinese are shown working for American companies, making American products, wearing American clothes, and doing American-style business. Wal-Mart has become "a force for change," says the magazine, which presumes that every change is in our direction.

"All over China, peasants are speaking out on grass-roots concerns…and building a new civil society," says TIME, breathlessly. There’s the Chinese Donald Trump on page 45. There’s the political activist on the same page. A gay lawyer is on the next page…along with a "hot new filmmaker."

"But will China ever really be free?" asks TIME. Of course, the only "free" TIME’s reporters can imagine is a freedom that Americans enjoy – the freedom to vote…and do what they are told.

We are convinced that China is booming. We are not convinced that Americans will make any money out of it.

An interesting book, "Mr. China," a memoir by Tim Clissold, explains that there are a lot of illusions in China…just as there are in America.

Beware.

More news, from our team at The Rude Awakening…

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Justice Litle, reporting from Nevada:

"It’s going to take a long time for new technologies to make a dent in the rapacious demand for crude oil that exists here and now, and at least in northern Nevada – I see at least two or three fuel-hog Hummer H2s for every one fuel-efficient Toyota Prius on the road. Gasoline demand has actually risen in the United States from this point last year."

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Bill Bonner, with more views…

*** Crude oil prices set record highs this week – but there has been, surprisingly, no rioting in the streets, no lines at the gas pumps. We can’t help but wonder: how high will the price have to go before consumers revolt?

We posed the question to an expert on the subject – Resource Trader Alert’s Kevin Kerr…

"I am constantly asked that, in fact, it came up again yesterday in a TV interview on Marketwatch. And while the energy markets are once again creating fear and loathing for consumers, there has been no outright revolt – yet.

"There is no easy answer to what price will be the straw that breaks the consumers back…for a long time we thought the price of crude oil would be above $45 a barrel…then $50 had to be it…then $55 and now – $60. The point is that the ‘Pricing Pain Threshold’ has not yet been reached. In other words, nobody is choosing to stop driving or traveling, etc. I just filled up one of my cars, a Jeep Cherokee, and it cost me over $45, when it used to only cost around $28. Now, will that impact my life considerably? No! But it may well cause me not to spend on other items…

"The real victims being affected right now are the midsize trucking and shipping companies who can’t reduce their spending on fuel. For every 10 cent-increase in diesel fuel, around 1000 of these types of companies go bust. The other companies pass along the extra cost to – you guessed it -you and me…the consumers.

"The pain is coming, we may just not be feeling quite yet."

*** "I know it is expensive," began today’s telephone conversation. "But it is a great opportunity. We should take advantage of it."

What began as an inconvenience has become an opportunity to spend money. Your editor works in London. His family lives in Paris. This arrangement seemed to suit everyone until both husband and wife noticed that each other was enjoying his forced, weekly separation. A decision was made to move everyone to London. A French school was found in London. A riding stable was identified. All that remained was to find a place to live. But London prices are far above those in Paris. The couple hesitates…is family togetherness worth the price, they wonder?

*** "Daddy," Maria opened up last night, "the kids in school think I’m a spoiled rich girl. Well, they don’t think that so much now, but they did when I arrived. Because I live in Paris I guess. And because, I must have a snobby air about me…when you first meet me. I don’t mean to seem snobby. And I’m not really. I think it comes from all that modeling I did. I think I just carry myself in a way that seems snobby to other people. And it is true…I am judgmental and critical, like the French.

"Also when I go back to Paris for holidays…and we go to Nicaragua…and you have your little flat in London. People get the idea that we have a lot of money. Sometimes, I don’t know what to think myself. Because I know you’re such a cheapskate. No, I don’t mean a cheapskate…I just mean you don’t like to spend money…you fix the plumbing yourself and things like that. But now you’re talking about moving everyone to London and I know it’s very expensive over there in South Kensington where Mommy is looking for an apartment. I just hope you’re not overdoing it…you know, spending too much money. I hope you’re not going to spend so much money you start to worry about it and get depressed…"

"Don’t bother to think about it at all," replied Father Knows Best. "Money is all relative. Compared to the average guy in China, we are rich. Compared to people who are really rich, we are poor. The truth is, after a certain level, it doesn’t matter how much money you have. You can live well on $50,000. You can live badly on $500,000. It’s all a matter of taste and style. There are places in the American Midwest where you can live very well on practically nothing. You can buy a four-bedroom house in a nice community for less than $200,000. Here, $200,000 won’t buy a one-bedroom apartment. But we prefer to live the way we do – as long as we can afford it – even though we’d probably be just as happy in somewhere else."

"Well, I’m glad we’re here…and I’m glad you can afford it. Now, can I have some money for this weekend?"