As We Go Marching

The roots of Italian fascism…as a case study for modern governments facing (er, taking advantage of) tough economic times.

"The mind thus turned loose, thus emancipated from facts, took unexpected directions…"

– John T. Flynn

"One of the funny things about the situation…" Alexander Chancellor began a sentence, speaking of the war in Iraq, "is the way the Germans have come through this…

"They took the same position as the French – they didn’t want to get involved. But the American press focused on the French as traitors and cowards…and hardly mentioned the Germans."

The Germans occupy a special place in recent world history.

"Give a German a gun and he heads for France," was a common expression in the last century.

"The Hun is either at your throat or at your feet," was another.

People wondered what it was about the Germans that had made them so ready to go to war…and so willing to go along with ghastly deeds on a national scale. Was it something in their blood, in their culture…or in their water?

Now, of course, the Hun has been tamed; the Kraut has become a pacifist. America urges him to join the war against Iraq, but he demurs; he has had his fill of war.

And so the question is more puzzling than ever. Has his blood changed? His Kultur? Or his economy?

The Origins of Fascism: John T. Flynn

We raise the question after beginning a marvelous little book by John T. Flynn, "As We Go Marching," written during WWII.

Flynn argues that fascism had no particular connection to the Germans themselves…nor was there anything in the Teuton spirit that made them especially susceptible. Instead, he points out that the creed was largely developed by an Italian opportunist, Benito Mussolini. It was the fat Italian who figured out the main parts – including the glorious theatrical elements. The Germans merely added their own corruptions and attached a peculiarly vicious policy of persecuting, and later exterminating, Jews.

But it is Flynn’s description of the economic circumstances in Italy in the late 19th and early 20th centuries – the fertile soil in which fascism took root and flourished – that caught our attention.

Italy went to war, in the month of September, 1911, against Turkey. The war was over 12 months later and soon forgotten by everyone.

But the impulse that drove the Italians to war in the first place…and led to their next move…was the focus of Flynn’s attention:

"The vengeance of the Italian spirit upon Fate was not appeased. Instead, the appetite for glory was whetted. And once more glory did its work upon the budget. But once more peace – dreadful and realistic peace – peace the bill collector, heavy with her old problems – was back in Rome. The deficits were larger. The debt was greater…the various economic planners were more relentless than ever in their determination to subject the capitalist system to control."

The Origins of Fascism: Any Absurd Initiative

Perhaps they should have lowered interest rates. Or pressured China to raise its currency. Any policy initiative, no matter how absurd, could be considered. As Flynn puts it: "Out of Italy [as out of America currently] had gone definitely any important party committed to the theory that the economic system should be free."

Italy had dug herself into a deep hole of debt. Between 1859 – when the centralized Italian state came into being – and 1925, the government ran deficits more than twice as often as it ran surpluses. Politicians, who depended upon giving away other people’s money, found themselves with little left to give away.

"All the old evils were growing in malignance," writes Flynn. "The national debt was rising ominously. The army, navy, and social services were absorbing half the revenues of the nation. Italy was the most heavily taxed nation in proportion to her wealth in Europe."

Of course, there followed many episodes of financial risorgimento and many pledges to put the books in order. None of it stuck for long. Italian politicians were soon making promises again.

When grand promises must be fulfilled, debt creeps higher…and so does the resistance of taxpayers and lenders, especially from conservative groups.

"Hence it becomes increasingly difficult to go on spending in the presence of persisting deficits and rising debt," writes Flynn. "Some form of spending must be found that will command the support of conservative groups. Political leaders, embarrassed by their subsidies to the poor, soon learned that one of the easiest ways to spend money is on military establishments and armaments, because it commands the support of the groups most opposed to spending."

The origins of Fascism: False Impressions

Military spending gives an economy the false impression of growth and prosperity. People are put to work building expensive military hardware. Assembly lines roll and smoke stacks smoke. Plus, the spending goes into the domestic economy. Americans, for example, may buy their gee-gaws from China, but their tanks are homemade.

Military adventures not only seem to stimulate the domestic economy; they also goose up popular support for government. Soon, "it was a time for greatness…" as Flynn describes the approach of war. War, Giovanni Papini raved, was "the great anvil of fire and blood on which strong peoples are hammered."

The romantic appeal of war…and the political pull of military spending…the economic delusion…the polished brass and boots…it was all too much to resist. Despite a disastrous experience in WWI, under Mussolini’s leadership, even the fun-loving Italians were soon marching around like popinjays and getting out maps of Abysinnia.

Even Americans were impressed. "He is something new and vital in the sluggish old veins of European politics," said Sol Bloom, then chairman of the House Foreign Relations Committee in 1926. "It will be a great thing not only for Italy but for all of us if he succeeds."

In investments, as in war, an early defeat is often more rewarding than a later one. Fortunately for the Italians, the African campaign was a fiasco. In a few years, Mussolini was hanging from a meat hook and Italians went back to making shoes, handbags and pasta.

Bill Bonner

September 19, 2003 —  London, England

P.S. Mussolini was the perfect fascist. Like America’s leading neo-cons, he was really a leftist…who saw an opportunity. And also like America’s neo-cons, he was an admirer of Machiavelli, who believed that the ruler "must suppose all men bad and exploit the evil qualities in their nature whenever suitable occasion offers."

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons) available…as of this morning!

The war against deflation…who’s winning?

Each week, the U.S. fires off another $20 billion or so in ammunition; that is the amount by which the money supply (M3) has been rising recently.

Some prices are rising…natural gas, for example…stocks…houses…

"No wonder it takes so many more dollars to buy a decent house these days," says a message from the Internet. "Today’s $250,000 house would have cost you only $95,000 in 1971!

"Unfortunately, the outlook for your dollars is not getting any better. Not with the government printing dollars around the clock to pay for the escalating costs of the war in Iraq as well a multitude of voter-pleaser projects in advance of next year’s elections."

But, continues our correspondent, "the global currency market, the largest and most liquid financial market in the world, is beginning to smell blood. In fact, between February 2002 and September 1, 2003 alone, the U.S. dollar lost 22% against the Swiss franc, 27% against the euro, 39% against the New Zealand dollar. The list goes on…"

Gold, we add. And here is the curious thing. While the dollar is falling against foreign currencies…houses and stocks…and gold…it is rising against other commodities. Oil, for example, fell below $27 dollars yesterday. And the bond market’s guess about inflation – as measured by the difference between what investors are willing to pay for 10-year Treasury notes and similar bonds that are indexed to inflation (TIPS) – fell below 2%. Looking 10 years into the future, bond investors do not see inflation as a threat. Or, they are just stupid.

We suspect it is a little of both. It is the dumb money driving this market. Who else would buy stocks at these prices? Who else would lend money to the Bush administration at the same rates it asked in Eisenhower’s term? Back then, the nation was the world biggest creditor; now it is the world’s biggest debtor. Then, the U.S. ran a large trade surplus; now it aches under the biggest trade deficit ever recorded. In the ’50s, the nation was just recovering from a major war and depression; now it is near the end of a major boom and bubble. The conservative Eisenhower team produced government surpluses; the pseudo- conservative Bush bunch comes up with the worst deficits in history.

Even buying bonds in the ’50s – when the nation’s finances were solid – was no ticket to easy wealth. Eisenhower was succeeded by Kennedy and he by Johnson. Guns and Butter became the formula for re-election…and interest rates rose along with inflation. Bond buyers suffered losses on both fronts…their bonds dropped in value while their coupons lost purchasing power.

Here at the Daily Reckoning, we are connoisseurs of absurdity. But the spectacle of today’s lenders and stock buyers is almost too much, even for us. Not that we know whether they will make money…or lose it. Or, whether they are really smart or really stupid.

We just don’t know. But on the evidence, perhaps they are neither. Instead, they may have sunk into a CNBC-induced stupor. Without thinking at all, they seem to believe that, somehow, everything will muddle through and come out all right.

In fact, these investors may not be dumb after all, but brain-dead. Maybe we should check for a pulse…or hold a mirror under their noses?

Let’s find out what Eric thinks…

But first, a side note: Addison sends word that our book, Financial Reckoning Day, is already in its second printing. How very odd…it was our understanding that the book was delivered to Wiley’s warehouses just this morning!

"Orders keep coming in," writes Addison. " is so fired up about it, they’re offering readers a 35% discount." There’s deflation for you, dear reader; our book has yet to grace store shelves, and it is already being sold at a discount.


Eric Fry with the latest news:

– A storm surge of buy orders on Thursday lifted the Dow Jones Industrial Average to a 15-month high-tide, tossing the Nasdaq above the 1,900 mark for the first time in 18 months. The blue chips rose 113 points to 9,659, while the Nasdaq rallied 1.4 percent to 1,909.

– Neither the arrival of Hurricane Isabel, nor the departure of NYSE chairman Richard Grasso troubled stock market investors. They lined up to buy stocks, just like they’ve been doing every day for the last several months. As a result, the Nasdaq Composite is enjoying a nice little ‘echo bubble’ that has carried the index to its highest level since March, 2002 – a stunning 70% above its lows of last year.

– But the Nasdaq echo-bubble is only one little star in the constellation of financial bubbles that illumines the global macroeconomic firmament. This dazzling constellation – also known as ‘Greenspan’s Belt’ – features many celestial marvels, both great and small. There are numerous ‘lesser lights’ like the ‘executive-NYSE-chairman- compensation bubble,’ ‘the zero-percent financing bubble’ and the ‘Eliot Spitzer investigations bubble.’

– And there are also several ‘greater lights’ – easily visible to the naked eye – like the ‘Fannie Mae, mortgage- refi bubble,’ the ‘U.S. dollar bubble’ and, of course, the ‘unilateral-U.S.-military-action-against-presumed- terrorist-nations bubble.’

– Then too, the macro-economic heavens are dotted with innumerable black holes: bubbles from earlier financial epochs that shone brilliantly for a time, before flaming out like supernovas – the most infamous recent example being the ‘Nasdaq-Y2K bubble.’

– Recently, a few amateur monetary astronomers announced they believed they’d discovered a new light in the heavens: the so-called ‘China bubble.’ Is it, or isn’t it? No one can say for certain. Perhaps it is merely a high-flying surveillance plane or a low-flying UFO. But it does possess bubble-like characteristics, as the Daily Reckoning’s Paris office has been noting frequently of late.

– However, here in the New York bureau, the China bubble is scarcely visible at all. Perhaps that’s because the blinding glow of financial excess in this big city make it difficult to see any of the lesser, distant lights. (Remember, a ‘stretch limo’ in Peoria is merely a ‘car service’ in New York). Compared to the spectacular bubbles that the U.S. financial markets spawn on a regular basis, the China bubble hardly bears mentioning.

– Even so, it strikes your New York editor that all the bubbles in the constellation – the China bubble included – lead to one very specific hedge: short the dollar.

– If the mortgage market collapses or the stock market tumbles or the bond market implodes or Fannie Mae tests the too-big-to-fail doctrine, or Iraqi terrorists prolong their bloody resistance to becoming the 51st state, the dollar will suffer…a lot.

– Likewise, if the Chinese economic juggernaut were to discontinue recycling its excess dollars into U.S. government bonds and Fannie Mae debt, the dollar would suffer mightily. Selling the U.S. dollar, therefore, seems like the all-season, all-country, all-market hedge.

– Shorting the dollar is, perhaps, not a great ‘trade’ or speculation, because bubbles always endure far longer than any bear can imagine, and can take their sweet time deflating, once pricked. But as a hedge against the global financial system’s most plausible debacles, shorting the U.S. dollar could be the hedge par excellence.

– "From the American vantage point on transpacific debtor- creditor relations, there is nothing to be improved upon," writes James Grant, editor of Grant’s Interest Rate Observer. "Asians produce; Americans consume. Asians ship merchandise east; Americans move dollars west. And then something even more wonderful happens. The same American dollars rapidly move east again, there to be invested in U.S. Treasurys, Fannies and Freddies (it’s as if the money never left!)…"

– This state of affairs is a delicious privilege for our savings-lite, consumption-heavy nation. So delicious, in fact, that no politician could possibly resist trying to mess it up…and that is precisely what our lawmakers are trying to do by proposing steep tariffs on most Chinese imports.

– "After all," our elected representatives reason, "China’s undervalued currency is making it harder for us to produce competitively priced products here at home. So if China won’t revalue the yuan of its own accord, we will revalue it for them by slapping 27% tariffs on their products."

– It is the Bush-Rumsfeld geopolitical doctrine applied to the foreign exchange markets. But instead of seeking out and punishing nations that may be harboring terrorists, Congress is advocating seeking out and punishing nations that may be harboring currencies of mass destruction.

– "It was inevitable that this witch-hunt would arrive at China’s doorstep," observes Stephanie Pomboy of MacroMavens.

– But Pomboy explains that the ill-conceived attempt to force a Yuan revaluation will do more harm than good to the U.S. economy, to U.S. consumers and to the U.S. currency – the beloved and well-traveled greenback…More to come in the Daily Reckoning’s Weekend Edition!


Bill Bonner, back in London…

*** Peter Jones, writing in the Times of London, reminds us that real democracy has little in common with modern elections.

"The ancient Athenians provide the answer. It all has to do with their unique invention – real democracy. It lasted from 508 BC until 322 BC, never to be repeated. In ancient Athens all male citizens over 18 took all political decisions. They were put into effect by executive officials. With a few exceptions, these were not elected. Greeks understood that elections are not democratic because elections are meritocracy, i.e., designed to choose the best.

"The only way democratically to appoint people is by lot…"

A House of Lords chosen by lot – that is, by chance rather than by fraud – "could, just possibly, restore to this country some faith in the democratic process," Jones concludes.

*** Today’s news suggests that campaign to win the hearts and minds of Iraqis may not be going as well as hoped:

"It was obvious that the Americans were dead," the Times of London quotes a taxi driver who witnessed an attack on a U.S. convoy. "You could tell from the way they dragged them away along the road. I am very happy about it and every Muslim, every Iraqi feels the same. Tell the coalition that Iraq will become a mass grave for the Americans."

"As the sun set," continues the Times report, "a convoy of U.S. tanks, armored cars, a crane and a truck escorted the burnt-out shell of one of the trucks back to base. Young Iraqis raced to the site of the first attack, carrying a framed portrait of Saddam Hussein.

"Passing cars sounded their horns in celebration, young men danced around the smoldering remains of the truck’s tires, and boys gathered up scraps of charred metal and cartridge cases.

"I will keep this and do you know why?" asked one teenager carrying an un-exploded grenade. "Tomorrow I will drop it myself on an armored car."

*** And a recent press release from the Independent Institute:

"Two years after the 9/11 terrorist attacks, the Bush administration is earning mostly failing grades in the war on terrorism," according to Ivan Eland, director of the Independent Institute’s Center on Peace & Liberty. In a report-card-style op-ed released last week, Eland gives the administration a letter grade of "F" in five out of seven categories and mediocre grades in the remaining two categories – a failing grade overall.

"To date, the biggest accomplishment – the elimination of Afghanistan’s Taliban regime that was harboring al Qaeda – has been significantly diminished by the al Qaeda leadership’s escape and by the nascent quagmire there that is embroiling the United States," said Eland. "Remnants of the Taliban are now using the continued U.S. military presence in the country as a rallying cry for a Chechnya- style guerilla war against the U.S. client government of Hamid Karzai."

The administration’s performance falls from mediocre to failing when the war outside of Afghanistan is considered, according to Eland. The U.S. war in Iraq, one of the countries Bush designated as part of the "axis of evil," has made Iraqis even worse off than under Saddam Hussein and has emboldened other countries to accelerate their weapons programs, Eland argues.

Rather than "make Americans safer and impede the proliferation of WMDs to rogue states and terrorist groups," the administration’s broadening of the war on terrorism to include groups other than al Qaeda "has drawn a bull’s eye on the American people and undoubtedly caused rogue states to speed their weapons programs," writes Eland.

"In the war on terrorism, I believe the president deserves an ‘F’ on his report card."

The following is Ivan Eland’s Report Card on U.S. War on Terrorism:

1. Removing al Qaeda haven in Afghanistan and neutralizing the group’s leadership: Grade: B-

2. Avoiding a quagmire in Afghanistan: Grade: C-

3. Finding weapons of mass destruction (WMD) in Iraq: Grade: F

4. Making Iraq better off by eliminating Saddam: Grade: F

5. Reducing proliferation of WMD to rogue states and terrorist groups: Grade: F

6. Adopting a more "humble" foreign policy to prevent overstretch of U.S. military: Grade: F

7. Making U.S. citizens and territory safer from terrorism and bringing 9/11 conspiracy to justice: Grade: F

The Daily Reckoning