The Daily Reckoning PRESENTS: Today, Bill Bonner takes a moment to marvel at one of the grandest public spectacles of all time; an epic of massive betrayal disguised as public-spirited action. Read on…
“The Buck Starts Here,” was a sign that sat on Alan Greenspan’s desk when he was still at the Fed.
It was the maestro’s witty response to Harry S. Truman’s famous quip: “the buck stops here.” Mr. Truman’s line referred not to monetary policy but to governmental responsibility. The president acknowledged that he bore the ultimate responsibility for what happened on his watch.
Mr. Greenspan’s desktop motto has another sort of punch line hidden in it, though. More dollars came to birth while he was the nation’s top banker than under all the other fed chiefs combined. Yet, the winner of the Enron Prize accepted no responsibility for his fecundity. Nor is anyone rubbing his nose in it. For there is no “it” in which to rub. Yet. So far, to most of the world, the former Fed chairman’s curricula vitae has a fair and fetching look to it. Except for attentive readers of The Daily Reckoning – both of them – the rest of mankind still views Mr. Greenspan as a genius, and the dollar still has street cred.
But today we come neither to praise the man nor to bury him. Instead, we merely take a moment to marvel at one of the grandest public spectacles of all time: an epic of massive betrayal disguised as public-spirited action. A story of pure bull-headed stupidity, masquerading as enlightened science. It is a tale as sweeping and panoramic as Ben Hur or Gone With the Wind, with all the decent characters removed.
And yet, as a tale, it is a comedy, not a tragedy. A farce. And its cast of fools and knaves are as entertaining as any we have come across, whether in Family Guy or the Old Testament.
But by now, our faithful readers are probably wondering why we bother with it. Haven’t we told the story of Alan Greenspan ad nauseum? How he turned his back on his youthful principles to be a big shot in Washington, how from once hating paper money, he created more of it than any vertebrate on two legs, and how he corrupted the whole world economy with cheap thrills dispensed by its own straight-laced central bankers. By the end of it all, simple working stiffs were treating their roof and four walls like chips on a blackjack table. All the Speculation Nation needed to do for full disclosure was to replace the stars on Old Glory with a roulette wheel; visitors would recognize the country’s business immediately.
Serious speculators like Goldman Sachs could of course borrow money for less than nothing. They lent it out at scarcely more, and could still pocket a fat margin of profit. The trouble really began when the middle-class man thought that he could get into the racket, too. He could buy mutual funds or condos and feel like Warren Buffett or George Soros. Suddenly, he could become smart about money: he could live on credit cards or get a Neg Am mortgage, a diabolical monster which instead of going down over the years like a regular mortgage, actually gets bigger. But global liquidity got less coverage than global warming, even though the Greenback Gases had as visible an effect all over the world. Everyone was in on it. People watched their stocks rise on Wall Street, in Paris, and in Beijing and Jakarta.
But the little guys were making a gamble much different from that of the Goldman crew. They were not speculating with other peoples’ money. Nor with money they could afford to lose. Instead, they were putting it all on the line: their retirements, their financial freedom, their solvency, and even the roofs over their heads. And they didn’t even know it.
But as with any great tale, there was one more poignant twist, one more perverse chapter, one more swindle in store.
When the stock market headed down in the year 2000, the losses were suffered by people who could afford it: middle-class investors and speculators. But then, Mr. Greenspan making it up to them, turned around and gave the lumpen what looked like the perfect gift: lending rates below the rate of inflation. Soon, the low rates were bringing in the rubes like a two-headed sow at a county fair. Business boomed. Spending boomed. The economy was spared the rod it badly needed and George W. Bush was re-elected. Alan Greenspan, the bearer of this wooden horse, went down in the history books as a genius.
As far as we can tell, Mr. Bernanke is no Alan Greenspan. So much the better. But the professor from Princeton is an economist. Which is to say he has made his professional reputation by misunderstanding how markets work. With Mr. Greenspan, a tower of sniveling insincerity hides a clever man. With Mr. Bernanke, a tower of academic respectability conceals a clueless one. If Mr. Bernanke knew anything, he would never have taken the job. That he has taken it tells us he cannot handle it.
Still, Mr. Greenspan has undoubtedly been advising his successor. “Reload the gun,” he must have said, for the former head of the Princeton economics department has been stockpiling ammunition ever since he stepped into public life. He has been talking about inflation, and interest rates are rising all over the world. Lending rates are going up. Liquidity is said to be disappearing.
Of course, this is supposed to be the way the Fed works. When inflation comes around, it is supposed to run it off. When deflation threatens, it is supposed to reach for its gun and blast interest rates to bits. But the humbug of it all is that it is far too late to blow inflation away. The voters do not live with inflation…they live IN it. Their houses have been inflated by it for a decade by Alan Greenspan’s Fed. So, Mister Bernanke, Princeton Prof., can gas about inflation all he wants, but the Bank of Bernanke, with its Greenspan Put, is not going to blow the roofs off of the houses of Democrats or shoot out the windows of Republicans.
No, Bernanke is not reloading to fight consumer price inflation. He’s not reloading to protect the dollar. He is reloading to destroy it. When the hard times come, he will treat the buck like an Eskimo widow or a Spartan child. It will be exposed, naked to the howling winds and freezing rains of Mother Nature…and it will perish.
The Daily Reckoning
June 23, 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:
“I got plenty of nuttin’…an’ nuttin’s plenty for me…”
Our essay today is on nothing…in particular.
We’ve mentioned earlier that often the best thing you can do is nothing. Inaction is an underrated virtue and an unappreciated skill. How do you lose weight? Just don’t eat. How do you save money? Just don’t spend. How do you avoid getting involved in a costly war against nobody in the Middle East? Just don’t go there. How do you live to a ripe old age? Just don’t die. How do you remain faithful to your spouse? Just don’t…well, never mind, you know as well as we do.
What we like about gold is the very thing that makes it a bad investment. It doesn’t do anything. You can build a house, rent it out…and you will get a return on your investment. Or, you can buy a stock. There, too, if the company makes money you may get something extra from the money you put in. But gold? No, it is inactive. It is faithful. It cannot give you a return because it does nothing to earn it. It doesn’t take chances. It doesn’t fool around. Then again, it won’t cheat on you or mislead you. It is what it appears to be and nothing more. You get what you see – an inert, rare place setting on the periodic table.
The price of gold hit our target price last week…and just kept going. Now, it is back up and we are buyers.
It would have been nice if gold had broken through $500 on the way down and given us the clear-cut, no-questions-about-it correction that we had been waiting for. It would have caused despair among casual buyers and shaken off speculators. It would have given us a chance to buy at an even better price!
But while markets always do what they’re “supposed” to do, they never quite do what you expect. So, we’ll take what we can get. Gold is going up because it is supposed to go up. Because even though it is not perfect, it is the best money mankind never invented. It is money in the sense that it is a convenient reliable proxy for real wealth. And because there is a lot more of the other kind of money – the kind you make from trees – than there used to be.
In the short term, compared to green money, yellow money tends to go up and down. But, over the very long term, it has proven to be more reliable than anything else. You can buy a suit of clothes for an ounce of gold today – just as you could during the reign of Julius Caesar.
But why wouldn’t it be better to invest your money rather than hold it in such a lethargic form? Because there are times when inaction is better than action…when doing nothing with your money is better than doing something. When investments are overpriced, for example. Or, when the risks are under-appreciated. In the late ’70s, for example, the price of gold soared when it became apparent that the risk of consumer price inflation had been widely ignored.
That is not the case now. No, if you read the papers you get the impression that financial authorities all over the world are staying up at night worrying about consumer price inflation. Another 25 basis point increase in the Fed’s key lending rate is expected next week. There is talk of another one in August. Japan is tightening up lending. China is mopping up liquidity. The European central bank is raising rates. There are so many inflation hawks that their flapping practically eclipses the sun.
Yet the actual evidence of consumer price inflation is as skimpy as a Brazilian bikini. The feds’ bogus measure of housing costs – owner’s equivalent rent, which makes up almost 40% of core CPI – overstates the actual cost of having a roof over your head. Without the housing figure, core CPI has not moved one way or another since the middle of 2004.
And whoever else is, investors clearly aren’t worried about inflation. When the asset sell-off began a few weeks ago, speculators were busy selling off the very things they should have been buying: commodities and gold.
No, the danger comes not from consumer price inflation, but from asset price inflation. That is the risk that is under-estimated and un-hedged. In fact, the typical investor judges it no risk at all.
Asset price inflation is typically followed by asset price deflation. That is the part investors don’t like. It is when they find that they can exchange their houses, their stocks, their bonds for fewer paper dollars than before. It is likely to make them rather tearful when they do so; we think they may turn to gold for comfort.
The other kind of risk investors appear not to notice is the risk that the paper dollar will fall against other paper currencies. Warren Buffett may be concerned, but there are few Warren Buffetts in the marketplace. The typical investor barely thinks about it. He pays his bills in dollars. He spares no care for those of us here in Europe…lowly servants of U.S.-based businesses…sent off to foreign courts and overseas counting houses so that we may grub for money in foreign soil, and expand the great commercial empire’s reach.
But the exchange rate is a risk, too. And when it is discovered by the mob, they are likely to discover gold.
More news from our currency counselor…
Chuck Butler, reporting from the EverBank world-currency trading desk in St. Louis:
“The dollar index chart for the dollar, since 1971, looks like the backside of a mountain, with the top being 1971, and the bottom – well, we haven’t reached the bottom yet. But its downward slope brings us to today.”
For the rest of this story, and for more insights into the currency markets, see The Daily Pfennig
And illuminating more views from the City of Lights…
*** Oh, the travails we endure on your behalf, dear reader. While you sit comfortably at home, we tour the world. Yesterday, we visited our colleagues in Madrid. Today, we are in Paris.
While you eat well at your own familiar table, we are forced into fancy restaurants. While you sleep like babes in your own cushy bed, we have to toss and turn in expensive hotel rooms. And while you enjoy the affection of your own wife and children around you, we have only young secretaries, models and aspiring actresses for companionship.
How we envy you!
But what can we find out by staying at home? No, we have to get out and look around.
Yesterday, we landed at Madrid’s new airport. It is an impressive place, with a swooping roofline…glass, polished steel, marble…and enough different levels, blind alleys, and corridors to keep you walking for an hour before you finally find the exit.
And now, we read in the paper that the U.S. Congress has voted to increase our taxes. We haven’t lived in the United States for a decade. We get no use of its roads, its courts, its police and fire departments. And we have no use for its politicians, Congress, assemblies, legislatures, councils and assorted windbag conflabs.
Yet, we pay taxes to the United States as if we lived there. And to England, too.
*** But for our money, the English at least give us something – the London papers are usually a reliable source of absurdities committed by our fellow men; and they didn’t let us down yesterday.
On the front page of the Times, for example, is the remarkable story of Andrew Hawkins. The man, a descendant of Sir John Hawkins, is pictured kneeling in chains in front of a crowd of 25,000 Africans. What has the poor man done? Nothing. He is merely asking “forgiveness” for a crime he did not commit from a group of people upon whom it was not committed. And to make it even more ridiculous, it is a crime that hasn’t been committed by anyone – at least in the Western world – for five generations. Unless Mr. Hawkins knows something we don’t, he is wasting his time. Even if he were guilty of the crime, a crowd of modern Africans hardly has the power of “forgiveness.” It would have made more sense to at least ask forgiveness of people who had some relationship, even if preposterously remote, to the crime. He should have gone to the corner of Whitelock and Madison in Baltimore.
*** Meanwhile, on page five, we find that the Scots are still a wild and heathen race. “A seven-year-old boy and his father, and a 41-year-old disabled man have been injured,” says the paper, “in two separate attacks in two Scottish cities because they were wearing England tops.”
We don’t know what an England top is, but we presume it has something to do with the World Cup, now going on in Germany, in which the English team is participating. English supporters are painting their faces, wearing red and white, and flying the cross of St. George from their automobiles and rooftops. Apparently, some Scots still think the English should keep their colors south of the River Tweed.
The disabled man, the paper reports, was pulled from his car and beaten up in the street.
*** And finally, there is the obligatory article proving, once again, that Americans are idiots. In this Americans themselves, many of who really are idiots, give them plenty of help.
The idiot yanks featured in yesterday’s Times are those who make up the hierarchy of our own dearly beloved Episcopal church. The old church, part of the worldwide Anglican community, has been doing all it can in recent years to exterminate itself. We have been going to church for more than half a century. We regard it as an act of penance. We have almost never heard a sensible, moving or uplifting sermon come from the mouth of an Episcopalian minister.
Our brother-in-law, a Southern Baptist minister, somehow never fails to give us something to chew on in his sermons. But the leaders of our own faith always leave us hungry. The reason for this, we believe, is that the majority of Episcopalian ministers are neither people of great faith nor great intelligence. Instead, they are social workers manqué…eager to wear a uniform and meddle in others’ lives. Their sermons rarely refer to the Bible, but they turn to the DaVinci Code or Harry Potter for spiritual guidance. They are more likely to call upon the Great Earth Mother than on Jahweh, and more likely to remind their parishioners to use condoms and recycle their rubbish than to avoid mortal sin.
As to the Great Truth Of It All, we are as ignorant as the next man. We only know we don’t like any of it.
Now, here come the Episcopalians again making a public spectacle. The heirs to the Councils of Nicaea and Constantinople meet in solemn session with pink buttons on their lapels, glorying in what they consider the greatest achievement in Christendom since the resurrection: the election of a church primate without facial hair.
The Right Reverend Katherine Schori, the “girl” to whom pink badges referred, spoke of “Mother Jesus,” a thought new to us and so confusing, we just have to ignore it. Here at The Daily Reckoning, we have every preference, prejudice, and stubbornly prehistoric opinion a man should have. Still, we don’t really care whether church leaders shave or what they do in bed; we don’t think about it. What bothers us is that the church hierarchy seems to think of little else.