There is far more in question for the U.S. economy than just the possibility of a conventional recession. At stake is whether the whole U.S. new paradigm economy has ever been for real or just a Wall Street hoax and marketing story.
Dr. Kurt Richebacher
Today, the most powerful man who ever lived will take center stage…or perhaps ring center…speaking not to a dignified audience of paying theatre goers, but to a circus of the US Congress.
I speak of the illustrious chairman of the world’s most successful banking cartel – the Federal Reserve, which is not federal and has no reserves.
Of course, most people will take no notice. I will do my work as always. Mr. Deshais will splice and dice the various fruit tree cuttings that he gathered yesterday. Indeed, billions of people will go about their business as they always have.
And yet, Mr. Greenspan, it is believed, has the power to make us all rich by adding trillions of dollars to our collective net worth. Merely by manipulating a few simple levers of interest rate and monetary policy, the Fed chairman can induce people – at the margin – to borrow money that they might not otherwise have borrowed….and to spend money that they might otherwise have saved. And upon these actions – again, at the margin – the entire world economy hangs in the balance.
For if the U.S. falls into a deep, prolonged fit of financial rectitude, in which its citizens forebear from spending money they don’t have, the whole world is doomed. Who will buy the surplus autos of Japanese automakers? Who will take on the burden of purchasing the designer jeans stitched in Asian sweatshops?
Consumer spending is softening. Banks are tightening lending requirements. The Nasdaq, which rose so splendidly following his surprise rate cut on January 3rd, has now given back all its gains. The capital gains, which disguised and offset so much bad news – negative savings, marginal income gains, reckless spending, weakening balance sheets – have now disappeared. People still have faith in Greenspan and in stocks. But they are beginning to worry. At the margin, they are beginning to become more cautious.
The great man is on the spot. Two thirds of his ‘committee to save the world’ have gone on to other pursuits. He must now save the world single-handedly.
Today, Mr. Greenspan will repeat his commitment to fight this upsurge in financial responsibility. He will propose to combat it with the same weapons he used to create the boom in the first place – making more money available.
But how is it possible, dear reader, that with no additional effort on our part we can become richer merely by decree of a banking cartel?
The burden of today’s letters – as of so many recently – is to prove that it is not possible. Looking for symmetry in all things natural, we suspect that the U.S. boom of the last 10 years is as bogus as the Japanese bust.
What does it take to create wealth? Time. Work. Imagination. Skill. And real savings.
But the Fed has none of these things. It can no more increase the amount of time available to us than it can improve our skills.
All it can do is to offer us mock ‘savings’ upon which to draw for capital investment. The trouble is that the resulting boom is as fraudulent as the savings upon which it is built.
You may recall the explanation of Dr. Frank Shostak of what savings really are – a “pool of funding” that allows us to invest in new, more productive industry. “Essentially,” writes Shostak, “the pool of funding is the quantity of goods available in an economy to support future production.”
These resources are real – not imaginary. Real production requires real investment – of time, material, skills and so forth.
“When a saver lends money, what he in fact lends to a borrower,” Shostak elaborates, “is the goods he hasn’t consumed. Credit then means that unconsumed goods are loaned by one productive individual to another, to be repaid out of future production.”
“The existence of a central bank and fractional reserve banking permits commercial banks to generate credit that isn’t backed up by real funding – i.e. credit out of ‘thin air.'”
“Trouble erupts,” Shostak explains, “whenever the banking system makes it appear that the pool of funding is larger than it really is. When a central bank expands the money stock, it doesn’t enlarge the pool of funding. It gives rise to consumption of goods, not preceded by production. It leads to less means of sustenance.”
“Loose monetary policies give the impression that they can boost economic activity. That this is not the case becomes apparent as soon as the [real] pool of funding begins to stagnate or shrink. Once this happens, the economy begins its downward plunge. The most aggressive loosening of money won’t reverse the plunge [fictitious money cannot miraculously create real resources].”
Thanks to the biggest expansion of credit in history, the U.S. economy enjoyed an unprecedented boom. But it was a boom of a strange sort. Families were able to maintain their standards of living – and enjoy the illusion of financial progress only by going more deeply into debt and working harder.
At its peak, Americans could look at their stock portfolios and think themselves rich. But at the same time, debt levels were at record highs. Americans – believing themselves on top of the world, like the Japanese in 1989 – bid up asset prices to absurd levels. But unlike the Japanese, they also allowed themselves to become the world’s biggest debtors, owing more money to more people than any nation there ever was.
Incomes barely increased during the whole boom period – and still, in real, after-tax terms personal incomes are lower than they were more than 20 years ago. Americans work more hours for less pay than the citizens of Japan and several European countries. And more couples than ever before require both spouses to work in order to maintain their standards of living.
Meanwhile, corporations practiced what Dr. Richebacher calls “late, degenerate capitalism.” Instead of investing in new plant and equipment to produce future profits, U.S. corporations slashed costs and engaged in various forms of financial engineering to bring profits forward at the expense of the balance sheet. Like consumers, they went deeply into debt, often purchasing their own shares at outrageous prices, in order to provide the illusion of growing, current profits.
Phony credits introduced by the Fed encouraged consumption and bad investment decisions, both of which ate into the real ‘pool of funding’ available for future growth. This, combined with the collapse of earnings, savings, and capital gains means that the resources available for growth and development actually shrank during the boom…and may actually be smaller today than when the boom began.
Thanks to the Fed, Americans are poorer than they would be otherwise, not richer. The boom was a sham.
Your correspondent, on semi-vacation in the beautiful French countryside,
Bill Bonner Ouzilly, France February 13, 2001
*** “Let’s Hope Americans Don’t Copy the Japanese” says a headline in the NY Post. “If we suddenly become cautious savers, like the Japanese,” writes John Crudele, “the tax cut won’t make us go on a shopping spree…the folks in Washington would like Americans to remain spendthrifts.”
*** Japan’s banks disclosed that their loan balances fell again – for the 37th month in a row. People in Japan just don’t want to borrow. And who can blame them? With stocks down and the economy limping along – why take chances?
*** But are Americans really spendthrifts? Many economists argued that the saving rate did not tell the whole story. For while Americans did not put much money in banks – they enjoyed capital gains from their stocks that replaced traditional savings. Thus adjusted, savings rates were said to be about as high in ’99 as they were in ’92 – about 8% of income.
*** But then the stock gains disappeared, says the Dismal Scientist at Economy.com, and “even when adjusted for realized capital gains, the saving rate is declining and declining at the fastest pace in recent memory.”
*** “Another factor that is driving the saving rate down:” continues the Dismal Scientist: “energy prices. Households have been spending more and more of their income on gasoline and home fuel since 1999 when energy prices began escalating. In 2000 alone, consumer outlays on energy goods and services and on gasoline fuel have soared by over 20%, increasing by $89 billion to $504 billion. Additional spending on fuel accounted for 18% of the increase in consumer expenditures last year, while fuel outlays comprise less than 5% of total expenditures.”
“While the worst may be over for fuel price inflation, income growth will slow and the stock market is unlikely to go far. Indeed, Economy.com expects realized capital gains to decline this year and next. Thus, unless consumers stay on their more sober path of spending of the last quarter, the saving rate could actually decline further, with very negative implications for household balance sheets.”
*** What’s so bad about not having any savings? See “Phantom Boom”…below…
*** Reuters reports the obvious – “Consumer Credit Quality to Worsen on Layoffs.” People who lose their jobs find it harder to repay loans.
*** Even though Greenspan & Co. are trying to encourage Americans to remain spendthrifts, the dynamics of a deflation work in the other direction. People don’t want to borrow if they think they are going to lose their jobs; and lenders are reluctant to make loans. Without anyone wanting it, Americans may begin to ‘copy the Japanese.’
*** The Dow rose 164 points yesterday. GE rose 4%. Walmart also had a good day – up $3.
*** 3 stocks rose on the NYSE for every one that fell. Even Cisco managed a bit of a comeback – up 5.8%. Cisco sold at a P/E of 20 from ’93 to ’98. Now its forward P/E ratio is 44.
*** Earnings are collapsing – with many companies taking big write-offs and posting big losses. This has the curious effect of boosting P/E ratios.
*** Floyd Norris reports in the New York Times that the Nasdaq 100 now sells for an astounding 811 times the combined earnings of the group. The P/E for the Nasdaq 100 was only 127 at the end of December and has never before exceeded 165.
*** The index itself has fallen more than 50% since last March. But the problem isn’t in the numerator, it’s the denominator – reflecting big losses among the tech and Internets that make up the index. In fact, net earnings for the entire index could even go negative. If so, it will be the first time since 1933, the bottom of the oh-so-Great Depression, when a major index (the Dow) posted a net loss.
*** “Companies are buying garbage,” said Bruce R. Bent of Reserve Funds. He was quoted in a NY TIMES article with the headline: “Defaults Sound Alarm About Money Funds.” Money market funds hold $644 billion of commercial paper – such as loans to California utilities. AMEX Cash Management, for example, has 91% of its assets in commercial paper.
*** “To get a sense of the current economic slowdown,” write the Grant’s Investor duo Rose Ann Tortura and Mary Levai, “one need only pick up a slimmed-down Sunday edition of The New York Times — heavyweight, as always, in editorial content, but lighter in ad pages. … of all those suddenly haunted by the specter of declining ad revenues, the New York Times Co. occupies the position of greatest esteem, making its predicament of more than passing interest.”
*** Oil fell 50 cents. Gold fell 70 cents. And the euro climbed back over 93 cents.
*** Alan Greenspan will go before Congress today. All eyes will be on the great man as he repeats his confidence in a policy of destroying the dollar and encouraging Americans to spend more than they can afford.
*** The big excitement yesterday was in the biotech area, after Celera Genomics announced that there were only 30,000 genes to deal with in the human body…of which only 800 seemed to different from one person to the next. The implication of this is that it will be easier to find the critical genes.
*** Science, though, like stock prices, goes in cycles. Each breakthrough discovery leads eventually to the realization that we haven’t a clue.
*** “The moon is the moon,” said Mr. Deshais, our gardener, yesterday. He is becoming agitated, nervously walking around while talking to himself. He’s worried that he won’t be able to finish his grafting before the moon changes her favorable regard. “If it doesn’t get done right away…it will have to wait until next year,” he told me.
*** So, I stopped my own work in order to drive him around the countryside (his driver’s license was taken away by the local gendarmes in the interest of public safety). “Stop here,” he ordered, as we drove along deserted country lanes. Mr. Deshais got out…let out his little dog, Tina… and hopped over a fence to clip a few branches… and then got back in the car with his twigs. This scene was repeated several times – until we had enough kindling to start an orchard…and we turned homeward. You can’t argue with the moon.