A Lack of Financial Indpendence

Today is America’s national holiday. But we’ve always been indifferent to the appeal of patriotism and idleness. So, we put on our tie and raise our standards just as we do every other day.

Reckoning is our métier. And there is always something to be reckoned with – even on holidays. Today, we reckon with a familiar subject, but in a new way.

On this day, 232 years ago, a sweaty group of rich lawyers and planters gathered in Philadelphia, plotting mischief. They were determined, they announced, to overthrow the lawful government of the American colonies and replace it with something more to their liking. They acted, not in the name of their own self interest, they said, but on behalf of liberty and independence, which they all claimed to cherish more highly than life itself.

What they wished to do was to give up one George in London in favor of another George in Virginia. This was no sure thing; George III was not going to give up without a fight. George Washington would have to raise an army and boot him out…or else the signers of the Declaration of Independence would probably hang.

“We must hang together,” remarked Franklin, “or we will surely all hang separately.”

Luck was with them. None of them hung. Instead, Franklin himself went to Paris and convinced the French to help. They gave them money to buy war materiel. More importantly, a French squadron blockaded the entrance to the Chesapeake Bay, cutting off the British troops from their lines of supply. The British commander had no choice; he had to capitulate. And so, America became independent of England.

But there is nothing like a long stretch of good luck to ruin a nation. Americans went from strength to strength, victory to victory, coast to coast – always struggling to preserve and extend their precious independence. And now, here we are, more than two centuries later. We have a new George in the White House…and Americans have never been more dependent on others. But now it is not to the English that they are bound…but to their creditors.

On Monday, the dollar fell near to a 26-year low against the English pound. Against the euro, it dropped to near its lowest level ever. Why this should be happening is both a long story and a short one. The short story is that currencies go up and down all the time; the long story is the subject of so many of these Daily Reckonings that readers are getting bored with them.

Dollars are losing their appeal, generally, because there are so many of them. One of the great laws of economics is that quality and quantity vary inversely in many things, not the least of which is money. Each paper dollar represents an I.O.U. from the U.S.A. As the United States increases the quantity of dollars, their credit quality comes into question. Logically, each new dollar is worth less than the last one.

This little insight has not been particularly useful to dollar bears. Many have lost their shirts, their girlfriends and their minds waiting for the laws of economics to be enforced. Today, we are not predicting when or how law and order will be restored to the world’s markets. But in the last couple of weeks, at least it looked as though the sheriff was back in town.

What also makes the dollar suspect is that Americans, themselves, seem to be in such a hurry to get rid of them. Piles, mountains, Himalayas of them are building up overseas. China may have almost a trillion dollars in its reserves. Russia’s foreign exchange reserves – mostly dollars – are growing at an astonishing rate of 63% per year. At the present rate, Russia will accumulate additional reserves of more than $200 billion in 2007.

These I.O.U.’s are stacking up outside of the United States because Americans can’t keep them at home. Every day, U.S. consumers spend $2 billion more on overseas products and services than they receive in payment for their own exports. This leaves the typical American household a little short of cash. It has to borrow to fill the gap between income and outflow. Since it saves almost nothing, it depends on the savings of foreigners.

The balance of investment income – the difference between what U.S. investors receive from overseas and what the U.S. pays out in interest and dividends to foreigners – also turned negative last year, for the first time since 1915.

“Foreigners now earn more on their U.S. investments than we do on our investments abroad,” Warren Buffett explained “In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience ‘reverse compounding’ as we pay ever-increasing amounts of interest on interest.”

Whole books have been written on this subject – at least one of them by your author (with Addison Wiggin)…they all tell the same story – that there aren’t many people on the planet who can afford Americans’ luxury lifestyle…not even Americans themselves!

Debt and dependence stalk young and old. Back in the late ’70s the cost of college began to rise sharply. Lenders rushed to provide credit to help the masses pay tuition. Educational debt exploded…rising more in the ’90s than it had in the three previous decades, and three times faster than college costs. By 2007 the average student graduates with about $19,000 worth of student debt…and $2,000 in credit card debt.

Even before they are out of school, they are trussed up with debt like a pervert in a cheap motel. Credit card debt almost tripled between ’85 and ’05. Now, the average family owes about $9,000 on its plastic “safety net.”

But the biggest increase has come in mortgage debt. It’s been increasing at a half-trillion dollars per year. Never have so many homeowners owned so little of their own homes. Even during the biggest boom in housing prices in history, Americans took money out of their equity so fast that the ratio of mortgage debt to housing value dropped – from 70% in the early ’90s to 52% in 2007.

Meanwhile, U.S. government debt has grown at a sprinter’s pace too. By our calculation each and every American household has the weight of half of million in extra debt on its back – its share of the U.S. “financing gap,” an amount that includes not only the official debt, but also the present value of future commitments less anticipated revenues.

All of which is to say, that this Independence Day finds Americans less independent than ever before. They count on the Arabs for energy. And they depend on the Asians for money to pay for it. Soon, they will not be able to go to the bathroom without out asking permission from their Chinese creditors.

But for you, dear reader, the situation is not hopeless. You have an edge on Joe Average American – after all, you suffer through this missive on a daily basis, and so you must heed some of our economic warnings and forecasts. Why not use them to your advantage? Turn a nice profit…or at least protect your portfolio from whatever today’s volatile market throws at us next.

Bill Bonner
The Daily Reckoning
London, England
Wednesday, July 4, 2007

More news:


Happy 4th of July!


And more thoughts…

*** We have never had a strong attachment to the United States of America. The place is too big…too diverse…too changeable. It would be like trying to have a love affair with the entire graduating class of St. Mary’s school for girls. There are many things that we would like about many of them; but the whole bunch of them is too varied for an intense relationship.

Even our old romance with Maryland had its limits. We felt out of place as soon as we left the Tidewater area. Driving west, when we got to Prince Georges County we became indifferent; by the time we reached Allegheny County, we felt as though we were among strangers; and by the time we got near to West Virginia we looked at the locals as though they were another life form.

That Maryland was even a part of the U.S.A. was always a source of regret. It was on the verge of pulling out in 1861, but Lincoln sent in troops and arrested everyone who might oppose him – judges, newspaper editors, members of the state assembly. Then when the war was lost, so was Maryland’s hope for independence. Too bad. It might have been a nice little place if could have run its own affairs…and sealed the border with Washington, D.C. But the bureaucrats flooded in like runoff from storm drains. Soon, Annapolis was swamped…and then the whole western shore of the Chesapeake. Naturally, they brought with them their own soggy culture…and soon, the foundations of Tidewater culture – growing tobacco and dredging oysters – were adrift…and in danger of being outlawed.

*** Last night, we went to see a musical – King Kaiser – in which our own daughter played a leading role. It was a delight. Singing. Dancing. Everyone seemed to have a good time.

“I was overwhelmed,” said Elizabeth after the show was over. “It was so good. So professional. I can barely believe it. Maria was just a little girl…it seemed such a short time ago. And now, there she is…on the London stage…an adult…with a career. I was so proud of her, I cried at the end.

“And I realize how her life is coming together…and how my life is coming apart. I’ve spent the last 20 years raising children…now they’re almost all raised. I’m wondering what I will do with myself. It’s exciting in some ways…I mean I have an opportunity to do something new. But it is a little scary too.”


The Daily Reckoning PRESENTS:Today is the day we celebrate the unique American experience with “pomp and parade, with shows, games, sports, guns, bells and illuminations.” But, in this DR Classique, first published on the Fourth of July, 2003, Bill Bonner can’t help but notice that America has changed quite a bit since the Declaration of Independence was signed…


“This is a society of true believers. The belief in democracy, market economics and the importance of religion is far more pervasive here than Marxism ever was in Russia.”

Michael Ignatieff,
in The Daily Telegraph

It is the Fourth of July. Should we hang out the red, white, and blue bunting from our office balcony…or the black crepe? Should we whine about the America we have lost, or give a whoop for what we have left of it?

That star-spangled banner still waves, but does it still fly over the land of the free, we ask? Or over a country with a spy camera on every street corner…a nation so deeply in debt that freedom has become a luxury it can no longer afford?

Whatever direction we take, we trip over a contradiction. Things always seem to be black and white at the same time.

That is why we took up tango, dear reader. People who dance the tango or write poems don’t let contradictions bother them. They glide across the floor and enjoy themselves. As far as we know, no serious tango dancer has ever committed suicide. It’s the mathematicians and engineers who blow their brains out.

An ideologue or a mathematician cannot tolerate contradiction. His little world has to fit together neatly, like a crossword puzzle. It is ‘cat’ in one direction and ‘day’ in the other. Each intersection has to work perfectly.

But that is not the way real life or real people work. A healthy woman loves her husband, but often hates him too. She has two eyes, and sees a slightly different view of him with each of them. What is wrong with that? Likewise, even a man with only a single eye cannot help but notice that the world is menaced by inflation and deflation at the same time…and that America is both free and un-free at exactly the same moment.

What we have come to dislike about the neo-conservatives is not that their view of the world is right or wrong – for how could we know? – but that it is so small. They are true believers in a very tiny world…one with no room for mystery, contradiction, ignorance or humility. It has to be small; otherwise they could not understand it.

Neo-cons think they can see what no mortal has ever seen: the future. That is the twisted genius of the ‘Preemptive Attack’; they stop the criminal before he has committed his crime!

They think they can know what no mortal has ever known: not only what is good for himself and his country…but what is good for the entire world. And they intend to give it to them, whether they want it or not. In today’s email box, for example, George W. Bush himself sends us the following message:

“…liberty is God’s gift to humanity, the birthright of every individual. The American creed remains powerful today because it represents the universal hope of all mankind.”

Here we will take a wild guess: there are probably more than a few bipeds hobbling around the planet for whom the “American creed” is not so much a hope as a dread.

But the president continues:

“We are winning the war against enemies of freedom, yet more work remains. We will prevail in this noble mission. Liberty has the power to turn hatred into hope.”

“America is a force for good in the world,” continues the leader of the world’s only super-duper power, “and the compassionate spirit of America remains a living faith. Drawing on the courage of our Founding Fathers and the resolve of our citizens, we willingly embrace the challenges before us.”

America’s citizens, meanwhile, are deeply in debt. They see little choice but to back the system, such as it is. Free or un-free, they could care less. Just keep the money flowing. They have come to rely on government. They need Fannie Mae…and unemployment insurance…and social security…and jobs…and the Fed…and fiscal stimulus. Or, at least, they think they do.

After 50 years of the Dollar Standard boom, the average American finds himself less free than ever. He is a slave to the highest government spending and biggest public debt burden in history…and to the heaviest mortgage and other private debt load ever. He has mortgaged up his house…he has taken the bait of credit-card lenders. Now he has no freedom left; he must keep a job…he must pay attention to the Fed’s rates…he must have an interest in George Bush’s government (for now he depends on it)!

“July 4 should be about celebrating freedom and independence,” wrote Richard Benson, published in this week’s Barron’s, “yet the bankers are the only people jumping for joy. Never have Americans owed so much in terms of their total debt, the ratio of total debt to income and the amount of cash flow the debt needs to serve it. Americans used to believe that if they were debt-free, they were free. Today, Americans just want the freedom to borrow more, even if it means they are on the way to becoming enslaved by their debt.”

The average citizen is only a few paychecks from getting put out of his house. He no longer has the freedom to step back…to reflect…to think…to wonder about things…or enjoy the contradictions. Instead, he must listen to the words of economists as if they meant something…and bow before the politicians who control his livelihood…and place himself at the beck and call of every government agency with a dollar to spend.

The message from George W. Bush concludes with an endearing personal note, in which “Laura joins me in sending our best wishes for a safe and joyous Independence Day…”

Laura who, we wondered? Oh yes…the First Lady.

How we got to be on a first-name basis with the woman, we don’t know. We have never even met her. Why she should wish us a happy day, we don’t understand. But these are the peculiar, baroque eccentricities of America that make it such an endearing place to its citizens and such a rich treasure for contemporary ethnologists and stand-up comics.

They, too, will wonder about the contradictions. Why do Americans celebrate “freedom” ever more loudly, while becoming ever less free…? How can they crow about the “home of the brave” when they attack pitiful, third world nations that can’t defend themselves? How can they ballyhoo their own independence when their armies occupy two foreign nations?

Most people will ignore the contradictions altogether. Many will see them as hypocrisy. Some will be outraged. And a few will hear the off-tempo tango beat, and enjoy the holiday anyway.

Your editor,

Bill Bonner
July 4, 2007

Editor’s Note: 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).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt

The Daily Reckoning