Blinded by the Divine Light of Capitalism

Another rainy day! More kvetching about the weather, and other things, below…

But first, there is the financial world…the world of money, moolah, lucre, cash, dead presidents, bread, green, and dough to be reckoned with.

And yes, we are still on vacation…but we spare a little time each morning to reckon anyway.

If we weren’t on vacation we’d be wondering how people could still believe in this boom. Yesterday, the Dow rose 145 points. The believers bought stock.

What were they thinking?

Our guess is that they are not thinking at all…but reacting to such a long, long run of good news; they can no longer imagine that anything bad could ever happen.

The crowd always wants to believe that everything will work out…but history (and good sense) proves this just isn’t so. This dangerous and destructive way of thinking is the topic of our latest book, Mobs, Messiahs and Markets – and it’s available for preorder now…

But we digress. This new Theology of Capitalism is based on blind faith…in the dollar…in modern economies…and in the central bankers who manipulate them both.

Fortune magazine recently called this boom the “Greatest Economic Boom Ever.”

Robert J. Samuelson describes it more fully in Newsweek:

“From 1990 to 2005, trade rose 133 percent. Supply chains are increasingly global. Since 1985, imported components as a share of worldwide manufacturing output have doubled, to almost 30 percent. Cross-border money flows (for stocks, bonds, loans, real estate, entire companies) are huge: $6 trillion in 2005, says the International Monetary Fund. Finally, the boom has reduced acute poverty. The share of the world’s population living on $1 a day or less has dropped from 40 percent in 1981 to 18 percent in 2004, the World Bank estimates.”

Roughly during the same period, the average American homeowner enjoyed a 52% real increase in the price of his house. This increase added substantially to his wealth; too bad he spent the money – all of it – and then some! Yes, take away the net increase in debt, and the poor fellow is actually in the hole for the period.

But it gets worse…because his income fell for the first five years of the present century. (These are the only figures we have…we suspect that his real income/hour worked fell during the entire period…but we have no reliable figures to back it up.)

How did the average citizen of the world’s most dynamic, wealth-producing economy actually lose ground during the “Greatest Economic Boom Ever?” That is the question no one seems to care to pose…or answer. And how can you have a genuine boom when most people don’t really increase their spending power?

Which is why we have to keep reckoning…even on our vacation…! No one else will do it.

Samuelson recalled what might have been the greatest economic boom ever, until now:

“From 1896 to 1913, trade roughly doubled. Declining steamship and telegraph costs were melding countries together. ‘There was something close to an integrated world market for most goods,’ Harvard political scientist Jeffry Frieden writes in his book Global Capitalism. In 1870, wheat prices in Liverpool were about 60 percent higher than in Chicago; by 1913, the gap was 16 percent. European investors eagerly bought bonds of then-developing societies-Argentina, Australia, the United States.”

But that boom was very different. That was the boom that put the United States of America not only on the economic map…but at the center of it. In 1910 – thanks to savings rates and GDP growth rates comparable to present-day China – the United States became the world’s number one economy. Wages rose quickly and average people – not merely Wall Street speculators – became much wealthier. Consumer credit had barely been invented and the dollar was still backed by gold; gains enjoyed by working men and women were substantial…and the boom was real.

Maybe the present boom is real for China, as we discussed at length at our symposium in Vancouver. For the U.S.A. it is a fraud.

We are getting depressed. Maybe it is the weather. Maybe it is the end of summer. Maybe it is personal.

“This summer has been the worst I can remember,” said a friend at dinner last night. “The only thing good about it is that the rainy weather has produced the biggest crop of plums we’ve ever seen. Everything else is a disaster.”

Yesterday, we found an old photo where we were standing with our daughter, Maria, our arms wrapped around each other. Alas, Maria seems to have a new man in her life…we worry that we have lost her forever.

Our new book arrived yesterday. It is a good-looking book; we are pleased with it. Jules picked it up and began reading in front of the fire; we were pleased, too, to see him chuckle.

It is a great book in some ways. In our humble opinion, there are profoundly interesting ideas hidden beneath our usually superficial commentary. How they got there, we’re not sure…accidents, probably. If you write enough, sooner or later, by pure chance, you’ll write something decent.

More depressing news: A dear, old friend has been diagnosed with lung cancer.

“I think it’s over for me,” he said on the phone. “There isn’t much the doctors can do. Maybe I have only a month left.”

Our friend never smoked a day in his life. He would have been better off as a smoker; at least he would have gotten the pleasure of smoking in compensation for the pain of lung cancer.

“You never know why some things happen,” he remarked from his hospital bed.

No you don’t.

Meanwhile, from South America comes happy news. Your editor is going to be a grandfather for the first time. In February, by our rough calculations…

So you see, dear reader, we sit in our octagonal office…here in the French countryside…and the great circle of life goes on all around us. Through one window…we see love bestirring itself… Through another, we see young love bearing fruit…a whole new life coming into being… Through a third, is the product of our middle-aged labor; glorious this morning…it will be forgotten before lunchtime. Through a fourth, we see the inevitable denouement…we see where our death-going tribe ends up…when we finally droop unto death…and make way for new life…

…it is as if we were looking at all the seasons of man…right out of our office windows.


Bill Bonner
The Daily Reckoning
August 23, 2007

P.S. And here is a little note from Harper’s Weekly:

“The CIA was editing Wikipedia; one CIA entry concerned lyrics in a song from the television show “Buffy the Vampire Slayer.” A CIA spokesperson responding to queries about the edits stated, “I cannot confirm that the traffic you cite came from agency computers. I’d like in any case to underscore a far larger and more significant point that no one should doubt or forget: The CIA has a vital mission in protecting the United States, and the focus of this agency is there, on that decisive work.”

Ha ha…those spooks. What a sense of humor!

And now…

…over to Short Fuse in Los Angeles…


Views from the Fuse:

*** The nation’s four largest banks have tapped on the Fed’s “discount window” and EACH borrowed $500 million to help ease the pain of the “credit crunch”.

Bloomberg reports:

“Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp. said they used the Fed’s so-called discount window five days after the central bank lowered the interest rate it charges banks and encouraged them to tap the resource.

“All four companies, which have access to cheaper funds, said they were borrowing from the Fed as an incentive for financial institutions that need the money more to do the same.”

This is getting a bit ridiculous…Dave Gonigam on the DR’s blog, the Desidooru Saloon, quips, “The big boys on Wall Street are looking to the Fed to pull their rear ends out of the wringer. Yes, it was the Fed’s monetary expansion that put their keisters there in the first place, but these are the big boys and they ought to know better. Certainly they ought to know better than the poor saps at the bottom of the totem pole who took out mortgage loans they couldn’t afford.”

Hmmm…does anyone notice a vicious cycle happening here?

“‘Liquidity’ remains a very scarce commodity throughout the credit markets. Hmmm…despite the Fed’s best efforts, America’s nasty credit crisis might hang around for a while longer,” writes Dan Amoss in today’s guest essay.

“The world of exchange traded funds (or ETFS), essentially mutual funds that trade like stocks, is always an interesting window into what is becoming hot with investors. For example, water ETFs have proliferated since the first one arrived in late 2005/early 2006 and as investors key in on the water story.”

“‘This new agribusiness ETF will appear soon on the AMEX under the ticker MOO. The ETF, sponsored by Van Eck’s Global Market Vectors, will track the DAX Global Agribusiness Index, which is made up of 40 publicly traded companies involved in agricultural operations, chemicals, equipment, ethanol and bio diesel and livestock operations,'” Chris Mayer, “a believer in the short term future of the agricultural business,” tells our friends at The 5.

“‘What’s always interesting is that these ETFs create steady buyers of the stocks in the Index, especially as the ETF gets popular and accumulates assets (the first water ETF, for example has nearly $2 billion in assets).'”

In other words, not only will the ETF’s shares rise with investor buying, but so will the stocks within its portfolio. Chris’ Mayer’s Special Situations subscribers are uniquely positioned to take advantage of this new ETF.

*** Gold and silver are up on dollar weakness, and let’s face it, no one has that much faith in the markets right now – at least in the long-term.

“(Gold will) benefit from further investment demand…as investors add safe-haven protection to their portfolios,” said analyst, James Moore.

We’ve always advised readers to take advantage of the yellow metal’s reticence – it’s not going anywhere, and unlike those greenbacks that are filling your wallet, it can’t be produced out of thin air. Think of it as ‘wealth insurance’…

Until tomorrow,

Short Fuse
The Daily Reckoning

P.S. Many people are confused, or feel intimidated by the thought of investing in gold. Don’t worry, you aren’t required to dig a hole in your backyard, or start stocking up your bunker a la The Mogambo with bars of the precious metal. In fact, it’s much, much easier than that – and the best part about this wealth insurance is there is zero downside…if gold goes down, you won’t lose a dime.

The Daily Reckoning