A Grand Illusion

“It turns out that the self-interest that Vauban has called the ‘father of war’ becomes, according to Wayne Angell, the principal rampart of peace.”

– John U. Nef

“In 1910, a book that had already had great success in England was translated and distributed in 11 different countries,” writes a French economist, Philippe Simonnot. The author was Norman Angell, an economist with a worldwide reputation and a hot idea.

War, wrote Angell, was nothing more than a “great illusion.” The illusion, according to Angell, was the “belief that steel and firepower alone protect people, whereas it is the force of Universal Credit that really muzzles the canon.”

Much good has been attributed to credit. Recently, it is said to have saved the republic…indeed the entire world economy…from getting what it deserved. But nearly a century ago, Angell believed it could do what no balance of power, technology, nor treaty had ever been able to do – maintain peace.

Angell had a bestseller. He was, as subsequent events were to show, either at least 100 years ahead of his time…or out to lunch forever.

Norman Angell: Logical, Reasonable, Preposterous

His argument was logical, reasonable…and preposterous. People made war, he thought, for economic reasons. They sought to get richer by taking something away from somebody else. But modern economies had become too complex and interdependent, he said; that strategy would no longer pay off.

“Wealth in the civilized world,” he wrote, “rests on a base of credit and commercial contracts.” If these are confiscated by a victor, the wealth, which depends on credit, not merely evaporates, leaving the victor nothing in exchange for his efforts, but it also pulls him down.

“It is impossible for a nation to enrich itself by subjugating another country,” Angell explained. In fact, the only way he could avoid being dragged into an economic decline along with his defeated enemy would be “by scrupulously respecting the enemy’s property”. Why then risk war?

Mr. Angell was an exception – even for an economist; he was such a good thinker he was dangerous.

Peek into the average brain and what you find is a collection of empty phrases and hollow ideas – strung together as though they were Christmas lights…illuminating about as much. A man may say that he is “for free trade”, or that he is “against political correctness”, or that he believes in democracy or value investing.

Polls show, for example, that nearly 100% of the population favors “education” and almost as many want to see more money spent on it. But few people actually take the time to learn anything. Instead, given a choice between watching television and studying…99.9% of the American population will choose TV.

Norman Angell: Making the Same Mistake Twice

Nobody believes that you can get rich by borrowing money…but almost everyone with an opinion on the subject seems to agree that low interest rates from the Fed boost the national economy and make people wealthier. And even staunch supporters of “free trade” can find dozens of reasons to make an exception – when the loot finds its way to their own pockets.

Put a man behind the wheel of an automobile – even a Democrat or a Gypsy – and you can usually trust his judgment. His miscalculations are few…and self-limiting. On the A-10 headed out of Paris on Friday night, for example – where the average speed is probably about 90 miles an hour in bumper-to-bumper traffic – drivers never make the same mistake twice.

But pluck him from his auto, put him in the State Department, on the Editorial Page desk or an Internet chat-line, or at the Fed, and he is almost immediately transformed into a menacing idiot. He can go on for many, many years…rising in prestige and rank…based on the silliest and most puerile claptrap.

Which doesn’t mean he stops thinking. But it’s a different kind of thinking…about things he knows nothing about. Instead of thinking about how he’s going to get to work, how he’s going to balance his checkbook, or what he’s going to have for lunch…he begins to gab about foreign policy, credit patterns, military strategy, housing bubbles and the designated hitter rule…

Of course, that’s what we do here everyday, too – kibitz about things we cannot see and cannot really know. At least we learned a long time ago that we do so with modest expectations. We cannot command, nor even predict, future events. But we must admit that it is fun to try. Surely it was fun for Mr. Angell too. He gained an international reputation for providing a valuable service – he gave people a reason to believe what they wanted to believe. According to his logic, there was no further reason to spend money on national defense. “Modern wealth has no need to be defended,” he wrote, “since it can’t be confiscated.”

He pointed out that even if Germany took over Holland intact, “not a single German citizen – except for the bureaucrats – would be enriched by a single pfennig.” In fact, they’d be worse off, since they’d then have to compete with the Dutch merchants!

Norman Angell: Globalization Will End War

And what about getting tribute from the vanquished nation? Angell recalled that after the war of 1870, France had to pay huge penalties to Germany. What was the effect? The money could practically only be used to buy goods from France. So, “the war indemnities permitted the French to increase her exports to Germany…to the detriment of German industries,” Simonnot elaborates. “Bismarck himself had commented on it and was publicly mortified.”

What was the root cause of this astounding transformation? People had always made war; what was new? “The incredible progress of communications,” Angell answered. And globalization! Only very recently, he explained, rapid mail delivery, as well as the instantaneous diffusion of financial and commercial information by telegraph, had changed the world. All of a sudden, people were manufacturing, buying and selling all over the world…with all sorts of different people. From the Hottentots of the Cape to the far away tribes in Borneo. Tea, tobacco, textiles, railroads – products were coming from nearly everywhere and nearly everybody seemed to be getting richer.

Who would want to disturb this peace and prosperity?

The German general, Bernhardi, complained about it. Pacifism was growing. People seemed unwilling to go to war…or even to think of it. “Growing wealth,” he wrote, “causes us to live in the present; we no longer have the courage to sacrifice our pleasure for the realization of grand ideas.”

Angell predicted peace. There was no longer any reason for war, he noted. But war, like love and markets, has a logic of its own. “War needs no particular motive,” wrote Kant on the subject. “It seems to have its roots deep in human nature, appearing as a noble undertaking which brings both love and glory, but without any special benefit for anyone.”

Four years after Angell’s book appeared, the worst war in human history began.

Your editor,

Bill Bonner
March 26, 2003


There is no set “timetable” for the war.

A confident American soldier was shown on the BBC this morning in London suggesting that military operations don’t operate on pre-determined time schedules. The only thing “certain” about this conflict, they say, is victory. It’s war after all, and it will take some time to rout the Fedayeen…

Fair enough. In the short term, however, the lack of a defined time frame has confounded investors and analysts alike.

“War in Iraq Could Bring U.S. Recession, or Economic Growth” the NYTimes stated boldly this morning – a prediction even your editors at the Daily Reckoning would be proud of.

Trouble is, it’s not likely the war – whatever its managers’ timetable – is the draining force beneath the sagging markets or the drooping economy. “The truth about the three-year decline in stock prices and the hot-and- cold-running economy,” says Jim Grant in an editorial, also published by the NYTimes, “is that they have their roots in prosperity, not in war.”

“The paradox is easily explained,” Grant explains. “High stock prices invite capital investment. Ultrahigh stock prices invite redundant capital investment. Stock prices higher even than those on the eve of the 1929 crash invite titanically redundant capital investment.

“In the manic phase of the bull market, capital was essentially free. The frittering away of American savings wasn’t intentional. It happened inadvertently, through investing: in telecommunications equipment, semiconductor manufacturing plants, computer servers, power generators, office furniture, Internet initiatives, etc. We invested more than we should have – in fact, more than we had. We borrowed to invest, from creditors both domestic and foreign.”

Despite having seen their savings swallowed up by the stock market…their 401k’s shriveling…and their credit card balances causing alarm, investors have continued to rely on the one really big purchase of their lifetimes to prop up their spending habits. Home equity borrowing, reports the Federal Reserve, is not slowing. Homeowners raised $130 billion in 2002 through home equity loans and lines of credit – nearly double the 2001 total.

As long as home prices continue to rise…it’s not likely to cause a problem. But fissures are appearing in the foundation. According to the American Mortgage Association, home foreclosures reached a record high in the 4th quarter of 2002.

“The war,” Grant reminds us, “is not to blame for this sequence of events, which was set in motion years before 9/11. But the cost of the war (and future wars, pacifications and occupations) may prove burdensome in ways that Americans have been privileged not to have to worry about.”

But that’s just the thing with a bear market. Mr. Market’s ‘victory’ over excess debt is, at least historically speaking, all but certain. It’s the fact that there is no set “timetable” that is so confounding.

Eric, how did investors fare yesterday?


Eric Fry, reporting from Wall Street…(you can catch Eric, by the way, on the TV this week. He’s hosting CNNfn’s morning show today, Thursday and Friday, from 9:30 to 11:30 AM Eastern Standard time.)

– The stock market took flight again yesterday…like a damaged Apache helicopter. The market managed to gain and sustain altitude, but it seemed to lack the menacing power it displayed last week. The Dow climbed 66 points to 8,280 and the Nasdaq rose 1.5% to 1,391. Meanwhile, the dollar remained grounded on the tarmac all day, falling slightly against the euro. Gold and government bonds also dipped slightly.

– The Pentagon continues to assure the nation that the campaign to liberate Iraq is proceeding about as well as planned…and who are we to doubt the expert opinion of America’s top brass? But the battle for economic recovery on the home front is encountering fierce resistance. The casualties are numerous, and the obstacles to victory well entrenched.

– This battle seems likely to rage for a while longer. Our employment roles, for example, are sustaining heavy casualties. The Conference Board’s Consumer Confidence Index dropped to 62.5 in March from 64.8 in February, as pessimism about job opportunities continued to climb. The percentage of consumers reporting that jobs are hard to get rose to 32.3 percent from 30.0 percent.

– “The end of the Gulf War in 1991 produced a surge in confidence, but labor market conditions quickly diminished the spark,” remarked Lynn Franco, Director of The Conference Board’s Consumer Research Center. “So if history repeats itself, the current job scenario will do little to maintain any post-war surge in confidence.”

– The fact remains that most companies are still far more interested in trimming expenses than they are in taking on the cost of new hires. Illustrative of the new corporate austerity, joblessness continues to soar at the epicenter of the bubble economy – Silicon Valley.

– “Michael Rolle, a veteran of Oracle Corp. and Cisco Systems Inc., who trained at the Massachusetts Institute of Technology and Stanford, has started a new job: umpiring junior varsity high school softball for $20 a game,” the Los Angeles Times reports. “As the Silicon Valley cave-in enters its third year, thousands of Michael Rolles are emerging, pinching pennies instead of responding to every Internet job posting. Thousands more keep slogging away, attending workshops on resume writing and interviewing skills.”

– Santa Clara County, which includes Silicon Valley, has lost a stunning 175,000 jobs since 2000 – or 16% of all jobs in the county outside of farming. “Silicon Valley’s fall is unmatched in California history since the Great Depression,” the Times notes. “What’s more, the new statistics show that the number of people working in Silicon Valley has fallen back to the level of 1996, when the dot-com boom was new. The scale of the disaster foretells a longer road to recovery.”

– Unfortunately, the sluggish tech sector continues to shed jobs from coast to coast. “Last week,” CNN/Money reports, “the AeA, an industry trade group formerly known as the American Electronics Association, released a study that showed that there were 560,000 fewer high-tech jobs at the end of 2002 than at the beginning of 2001.” (Optimists may take comfort in the fact that the RATE of job losses seems to be slowing. Challenger, Gray & Christmas, an employee outplacement firm, says that the number of layoffs in the telecom industry during the first two months of 2003 dropped 78% from a year ago).

– Despite the abundant signs of a tech non-recovery, investors seem to be banking on a brisk revival. The Nasdaq has bounced about 25% from its early October lows, and trades for about 30 times optimistic earnings estimates for 2003.

– “To be sure,” CNN/Money continues, “analysts are predicting 28 percent earnings growth for the S&P technology sector in 2003. But revenues for the S&P tech sector are only expected to increase 2 percent this year. So the strong earnings outlook for tech is predicated more on lower expenses, not an increase in demand. And many techs are running out of room on the cost-cutting side.”

– 30 times earnings is a pricey PE multiple under the best of circumstances. But when the earnings growth relies on cost-cutting moves rather than revenue growth, 30 times earnings seems pricier still…

– One thing of which we’re reasonably certain: it’s pretty tough to grow by shrinking.


Back in London…

*** More evidence yesterday suggests that the timetable for post-bubble debt burn-off is anything but predictable. The Japanese, (who, by the way, amended their laws to allow a small expeditionary force to set sail for Iraq this week) have been battling their own gulf of debt… for over a decade.

Land prices in Japan have dropped for the 12th straight year. And the Bank of Japan announced yesterday it plans to triple its budget for outright buying of bank stocks. In an effort to “make the financial institutions less vulnerable to falls in stock prices and prevent a possible sizable sell-off of bank shareholdings from weakening equities markets”, the BoJ now plans to spend up to 3 trillion yen.

*** The U.S. Congress, practicing a stylized version of Sushi economics all its own, has suggested they may include a ‘bail out’ package for U.S. airlines with yesterday’s $75 billion war budget proposal. The theory being, we presume, that the U.S. taxpayers are responsible for lackluster airline profits, since they refuse to book travel in the face of the increased terrorist threats caused by the Iraqi invasion. Hmmmnn…

We’re inclined to agree Lynn Carpenter, who, on Monday, suggested with respect to failing airlines: “let ’em go”.

*** Seeing clearly in the dusts of America’s deserts, Nevada senators are reported to have suggested that taxes on precious metals, such as gold, be reclassified as investments, rather than collectibles. The reclassification would lower taxes on sales of these assets significantly. No word on what Senators from Massachusetts, New York or Maryland have to say.

Addison Wiggin

PS. George Bush says he’s been sleeping like a baby. How about you? This May, you could learn 65 innovative ways to safeguard your assets…increase your privacy and safety…and even boost profits despite “geopolitical uncertainty” at: The 18th Annual Premier Offshore Advantage Seminar, to be held in Panama on May 14-18, 2003.

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