Altered State Of The Union

The Daily Reckoning PRESENTS: “We came, we saw, we borrowed,” seems to be the unofficial U.S. motto…as we recently found that there has been more public debt added during Bush’s reign than all the administrations that came before – combined. Bill Bonner explores…


Neither Democrats nor Republicans, neither liberals nor conservatives will admit it. They’ve all been in on the swindle. Fed budgets and budget deficits are a bi-partisan flim-flam. Together, the two parties have connived to add more to U.S. public debt in the two Bush administrations than in all the administrations and all the Congresses that came before them put together.

Even the Bush-friendly Heritage Foundation tattles that federal deficits are expected to rise to $1 trillion per year in the next decade; the national debt is expected to triple to $16 trillion.

Much of this debt can be traced to the never-ending war in Iraq. It has already gone on longer than America’s participation in World War II. And now two professors, one from Harvard and the other from MIT, put the cost at four times as much – as much as $2 trillion, or about $20,000 per homeland family.

“We came, we saw, we borrowed,” says our very own Texas Tiberius. Americans want things they cannot afford. They have no choice; they have to borrow. Debt levels have soared: public debt, private debt, student debt, credit card debt, mortgage debt, and business debt. Still, many, many economists believe the nation is better off in 2006 than it was in 2000. Indeed, there are so many of them that if you laid them all end to end, it would be a good thing. That the nation is not the same as it was when George W. Bush entered the Oval Office, no one doubts. That it is worse off is the burden of this little memo.

The American empire, circa 2006, is a grotesque and remarkable thing. It has troops stationed all over the world and a military budget greater than all the rest of the world combined. The expense is worth it, say supporters; without it the world economy could not expand. “The hidden hand of the market will never work without a hidden fist – McDonald’s cannot flourish without McDonnell Douglas, the designer of the F-15,” as imperial cheerleader, Thomas L. Friedman explains.

But for all the money spent, America’s commerce actually loses market share (the trade deficit hit a new record in 2005; experts expect it to top $800 billion in 2006). And Americans themselves grow poorer.

Don’t hold your breath; neither party will say so. But the typical U.S. worker is losing ground. Not only are fewer new jobs being created, wages are falling for those who have jobs. Stephen Roach reports that the U.S. economy is about 11 million jobs short of what should be expected at this stage of an expansion. Currently, only about a third as many new jobs as usual are being created. And wage growth in private industry is at the lowest level ever recorded in the 25 years of measuring it. Roach estimates that workers earned $335 billion less last year than they should have…leaving them with less real spending power than the year before. In fact, by some measures, the typical workingman earns less now per hour than he would have earned during the Carter administration.

How is it possible? Why would people living in the homeland of the greatest, most entrepreneurial empire the world has ever seen lose purchasing power at the very peak of the empire’s power?

We have an answer. As the empire brought more and more of the world into its protective embrace, people in far-off places entered the global workforce in greater and greater numbers. First, they built things out of steel and plastic – forcing down assembly-line wages in the U.S. Then, they began doing accounting, architectural design, legal work, marketing and many other things. That is why real wages rise in Asia; they are stagnant in America.

But the American workingman cannot believe it. He put his wife to work years ago. Then, under the easy money/big spending policies of the Bush/Greenspan team, he sold off his house…a room at a time. Roach estimates that U.S. householders “took out” as much as $600 billion from their houses in mortgage debt last year. It was more than enough to offset the $335 billion they should have earned. But it was a different kind of money; they have to pay it back. With falling incomes, how will the U.S. wage earner be able? And how will the nation squeeze enough money out of these poor working stiffs to pay its trillion dollar debts overseas, let alone make good on its promises to its own people?

It’s not the same nation…or the same empire…we used to know. It owes more money to more people and is less able to pay.

Bill Bonner
The Daily Reckoning
Ouzilly, France
January 13, 2006

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:

“Now Perhaps Someone Will Listen!”

This year, you can hardly throw a stone in any direction without hitting an economist who tells you why the dollar will continue to be strong. Our advice: throw it good and hard.

We recall more than a year ago or so, we thought the dollar should go down. What bothered us was that so many other people thought so too.

We have never seen a line of people we wanted to join. In the investment world, crowds cause you to lose your money. In the rest of the world, they cause you to lose your dignity, and occasionally, as illustrated by the recent news from Mecca, your life.

The “crowded trade” is one you want to avoid, because if it is too popular, the profit has already been taken out by the people who go there before you. They’ve bid up the price so you’re no longer getting a bargain. And if your side of the trade is crowded, who is left to take the other side? If there are no fools ready to buy what you are selling, or sell what you are buying, then you are the fool.

We remember being bothered by the fact that too many people thought the dollar would go down. Markets do not usually reward the crowd; they punish it. But how could the crowd of people who thought the dollar would go down be punished? The dollar was almost certain to go down, we figured. Where was the surprise? What would happen that investors did not expect, which caught most of them off guard?

Either the dollar would not go down, we figured, or it would go down a lot further and a lot faster than expected. In the first scenario, almost everyone would be surprised – including Warren Buffett, who was short. In the second, those who expected a graceful decline in the greenback would have been delighted and satisfied with a 10% drop. They would have congratulated themselves and taken their profits; then, the dollar might have slipped 10% more. One way or another, there had to be a surprise coming.

There was. And it surprised us. The dollar rallied. From under 130 to the euro, the buck rose to over 120. (That is, you got fewer dollars per euro.) It happened because the Fed was raising rates, and because the news from Europe was discouraging; the euro bottomed out after the French failed to ratify the new European constitution.

Now, the rate increases are just about over (only another 25 basis points are expected). The cars have stopped burning in France. The Germans have a new person at the head of government. Europe has a positive trade balance, and it isn’t spending a trillion dollars trying to bring the desert tribes under control.

And so, the euro gains.

Meanwhile, Japan finally seems on the mend after 15 years of collapsing asset prices and consumer price deflation. Foreign investors are going back into the Japanese market and pushing on the yen.

And, from America, the news is worse than ever. The United States has the biggest trade deficits ever, with a $1 trillion federal deficit projected, and a soaring money supply. The world has never seen so much wonderful money sloshing around, nor so many claims against it.

Once again, the dollar seems sure to go down. But now, investors seem not to notice. “Buffett was wrong,” they say to one another. See, the big dope isn’t so smart after all. Buffett has always said, “You can never make money betting against America.”

The world is full of surprises. In the financial world, there are so many of them that we are surprised when we are not surprised. Last year, investors were surprised when the dollar didn’t fall. This year, we may be surprised by how much it does.

More news from our currency counselor…

Bill Bonner, back in Ouzilly with more thoughts…

*** “One of my friends teaches economics at Gaithersburg High School He invited me to speak to his students about investing,” Chris Mayer told us today. “One of the hardest lessons to learn is to think independently and not get caught up in what the crowd is doing.”

“I asked them what they thought was a hot market people were interested in these days. ‘China!’ came the reply, just as I had hoped. Then I told them that the top three best performing markets last year (among those included in the Dow Jones Global Indexes) was South Korea, followed by Brazil and Mexico. China was the second worst. Only Venezuela’s market fared worse (in dollar terms).

The students asked good questions. I tried to impress upon them that a good formal education was just the beginning. Most of what I’ve learned about investing has been at the knees of the greats, so to speak, and outside what is taught in school. And I have an MBA. You’ve got to love this stuff to be any good at, I told them.

[Ed. Note: Chris’ Capital &Crisis readers were well positioned in two of the top three best performing markets last year. Their Brazilian investment is up 90% since April! And they’ve got two Mexican stocks, up 25% and 30%. What’s the next hot market? Chris has some ideas, and has found the only stock you’ll need to own over the next ten years.

*** While the dollar rose against foreign currencies last year, it fell sharply versus the “real money” against which all currencies are ultimately measured: gold. Financial risks are inversely correlated to the perception of them. When people see no clouds on the horizon, watch out. It is sure to rain.

The average investor’s appreciation for risk seems to be at an epochal low. He looks right. He looks left. Nowhere does he see anything to worry about.

He must have his eyes closed. For on both sides, as well as in front and behind, are the biggest financial risks in history – never has so much money and credit gushed into the world financial system…including an estimated $200 trillion in derivative contracts.

So far, only gold seems to see the risks. The price has doubled since George W. Bush became president. Our guess is that it will double again before he leaves office.

Again, there are always surprises. No one knows what gold will do, but all know what it will not do. It will not disappear as a store of value.

*** We took the train down from Paris last night. Then, we drove to the airport in Limoges to pick up Maria and her friends. This weekend is Maria’s 20th birthday. She wanted to come to the country in France to celebrate.

Driving down to Limoges, the fog was so thick we could barely make out the car in front of us. We were sure were wasting our time; the airport would be closed. No pilot would land in this fog, we thought. Then, when we arrived at the airport, gauzed as it was in dense fog, there was barely a sign of life. It looked as though the whole place had closed up and everyone had gone home.

The airport is very small and very relaxed. There are no security announcements…and no police patrolling with automatic weapons. There is not even a parking guard. We pulled up in front of the terminal, turned off the engine and walked inside. Almost everything was closed, but there at the bar, we saw Maria’s smiling face.

“How did the plane land in all this fog?” we wanted to know.

“I don’t know, Daddy. I looked out the window and I thought we were still up in the clouds. And then it banged down on the runway. We couldn’t even see the runway lights.”

Ryanair. One of Europe’s upstart discount airlines: London to Limoges, roundtrip for less than 40 pounds. Pray for them.

The Daily Reckoning