"Can Do" Money

The Daily Reckoning PRESENTS: It’s

How do you ensure yourself a position at the Fed? Take a cue from Greenspan: keep breathing – and keep creating money out of thin air. Bill Bonner explains in this DR Classique, first published on April 25, 2003…


“As long as you’re pumping out money at a faster rate than demand for money is rising, you’re going to stimulate spending. I think it would be kind of fun to fight deflation, actually.”

– Robert “Let’s hold hands an buy an SUV” McTeer

Robert McTeer must be something of an amateur magician. His idea of a good time, we guess from his remark from February, is creating money out of thin air.

We are not particularly shocked by this. For it has long been apparent that central bankers everywhere – McTeer is president of the Dallas Fed – must like inflating the currency, during working hours at any rate. We are pleased to see that Mr. McTeer enjoys his work.

What is shocking and new is that he would say so. Clipping coins used to be something bankers did when no one was looking, like going to the bathroom or sneaking into porno shops. John Law – when he still had his wits about him – threatened his subordinates with death…if they printed money without proper backing. He may not have had any particular interest in protecting the public’s money. But he knew what was good for him…and if the public ever caught on to the fact that his bank’s currency had nothing of value behind it, he would be ruined.

But now, it really must be a new era – of sorts. McTeer and Bernanke openly discuss the methods they intend to use to make sure the dollar does not rise in value. And the capo di tutti capi of central bankers, who is not coincidentally responsible for creating more money out of thin air than any central banker who ever lived – Alan Greenspan – has just been offered a new term at the head of the Fed. At 77 years, all he has to do is to keep breathing…and keep inflating…and he is assured employment.

Fed officials, from Greenspan on down, have made it clear that they will do “whatever is necessary” to avoid a Japan- style deflationary slump, including interfering with interest rates on both ends of the yield curve. If setting very short-term rates does not do the job, the Fed will distort the long rates too. “If asset prices don’t adjust sufficiently to stimulate spending,” explained Vincent Reinhart, of the Fed’s Open Market Committee, “then open market purchases of long-term Treasurys in sizable quantities can more term premiums lower.”

Here we yield to James Grant for a translation: “We take that to mean,” writes Grant, “that if stock prices (or house prices, or other prices yet to be named) don’t do what they’re supposed to do, the Fed will cap the yields of longer-dated Treasurys in a bid to depreciate the value of the dollar.”

And now one further translation:

“The Fed will keep interest rates low – no matter what it takes.”

Meanwhile, half a world away, another government employee brings the same spirit of optimism and determination to the sands of Mesopotamia. Jay Garner, proconsul, says he will stay “as long as necessary” in order to prevent things from regressing to their natural state in Iraq, while his boss, George Bush, affirms that his administration will do “whatever it takes” to bring peace and prosperity to the desert tribes.

In today’s letter, we offer no critique of either department – Defense nor Treasury. We merely marvel at the ‘can-do’ spirit that animates them…in the same way we once admired Evil Knievel for bouncing over the Snake River Canyon on a motorcycle. It was madness, but it was entertaining.

Here in Europe, people do not so much marvel as sneer. Where Americans see benefits, Europeans see problems… risks…dangers…complications. What if the whole Middle East is de-stabilized, they ask? What if more terrorists are incited to action…what if the Americans target us next?!

How the world has changed!

“We had our period of madness too,” Sylvie explained during our French lesson. “Oh là là…if you had lived through that period…1914 through 1945…you wouldn’t want to do that again.”

Sylvie might have gone further. She might have gone back centuries. Every problem…every difference…every border in Europe seemed to lead to war. Catholic or protestant… German or French…Fascist or Communist…no difference was so slight as not to be worth fighting over. It was the period of Machtpolitik…when Europe was strong militarily and every problem was thought to yield to the force of arms. For hundreds of years, armies marched in Europe…getting bigger and bigger, more and more deadly. Then, in the 20th century, Europe’s wars seemed to reach a level of such deadliness that it must have felt terminal.

In 1914…and then again in 1939…the Europeans marched readily into battle…each nation sure of itself, with a ‘can do’ attitude. Americans, meanwhile, hesitated. Not getting involved in foreign wars was thought to be a national virtue. Protected by two oceans, America’s military was relatively weak. And so, the nation favored negotiation…hesitation…discussion. In WWI and again in WWII, Americans waited years – until the major combatants had already exhausted themselves, said critics – before getting involved.

During those years…indeed, since the beginnings of the republic…American can-doism was largely focused on commerce, religion and other civil pursuits. Europeans marched…but Americans worked. And American factories from Trenton to San Diego profited by selling shoes, oil, guns…everything the Europeans wanted to buy.

But now it is the Americans who put their faith in machtpolitik and the Europeans – protected by an ocean of U.S. military expenditures – who sell them things. “Negotiate,” say the Europeans…rely on the UN…talk… trade. The Europeans no longer have faith in ‘can do’ foreign policies; they barely have any foreign policies at all.

People learn more from defeat than from victory, we believe. Americans’ military interventions have been, largely, successful. Europeans’ have been mostly disastrous.

Likewise, too many devaluations…too many ‘new’ currencies…and too much inflation have squelched the Europeans’ can-do spirit in central banking. France has had two currencies and a one 100-to-1 devaluation since WWII. In the ’20s, Germany suffered an inflation so severe that a thousand marks in the morning were almost worthless by the day’s end. They do not want to do that again.

While the Fed cut rates 12 times – by 525 basis points – since the beginning of the slump, the European central bank has merely jiggled its rates up and down very cautiously. On the first of January 1999, the best ECB lending rate was 3%. Now it is 2.5%.

While the Fed program is aggressive, activist, and forward looking, the European central banker reacts slowly and deliberately, as if were less sure of himself…and more modest. And where Alan Greenspan is known throughout the world – a greater celebrity than Michael Jackson – who can cite the name of the ECB’s chief, let alone identify him in a police lineup? Wim Duisenberg is almost a nonentity.

But his currency is rising.

Bill Bonner
The Daily Reckoning
April 27, 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!”

We felt as though we had had no rest, but we were lucky; the horses hadn’t even had a drink of water.

After a quick meal of sausage, red wine, and biscuits, we set off again up the valley, Jorge leading the way. We followed single file along the banks of the Rio, a small, swiftly running stream barely 10 feet across. Weaving our way up the valley, we had to cross and re-cross stream.

Edward, who rarely stops chattering, gave a whoop every time we went into the water. Usually, we just splashed through a thin stream, but occasionally the horses sank up to their bellies. On either side of the valley were dry rock hillsides rising from the road steeply, with nothing but cactus growing out of them. Down in the valley, gnarly old quebracho trees grew near the stream, along with thick clumps of pampas grass. Wherever the valley widened out, green fields of alfalfa filled the space.

“It reminds me of Santa Fe, New Mexico – or as it might have been 500 years ago,” said Elizabeth. “But it is much prettier here.”

It was a very narrow valley. In some places, from one side to the other – where the vegetation stopped and the rocks rose up into the mountains – it measured as little as 50 feet. Then, suddenly, it would widen out into a rich field of alfalfa.

“How do you ever get tractors in here to work the fields?” we wondered aloud to Jorge.

“We don’t use tractors. We do it all by hand, and then we load the hay onto a horsecart. That big, grey Percheron that Henry is riding pulls it down the river and we rick it up there for winter, ” Jorge replied.

We had been riding for about an hour. The stream had gotten smaller and smaller so that it was now only about a yard across, with barely any grass or trees on either side. Then, Jorge left it all together. With no apparent movement, he urged his horse up the bank. Now the animals were going to have to work, for the mountainside was steep and stony.

Each step required consideration – the horses didn’t want to step either onto a sharp rock or into a cactus plant. We wondered how they kept track of all four feet at once. At first, this was purely a matter of curiosity. But soon, it became a matter of life and death when we gained altitude and found ourselves picking our way along the edge of a cliff. A single mistake would have been fatal to both the horse and its rider. The reckless, incompetent horses must have been eliminated from the gene pool many centuries before, we reasoned, giving thanks for natural selection.

Still, we wondered. Maybe the Peruvians were surefooted, but what about Henry’s big Percheron? In the rolling hills of La Perche, in France, what were eliminated were the horses too weak to pull a plow or a wagon – or carry a knight into battle. There would be no way for nature to know which animal couldn’t negotiate a mountain trail in the Andes.

At one point, the little trail itself seemed to give way to the urge to fall into the gorge. There was nothing left of it, except some loose stones and a 200-foot drop. Still, no horse and no rider hesitated; we all slipped forward without casualty.

“Look,” said Francisco, turning around in the saddle when we reached a level area.

We had been so concentrated on the path that we had barely raised our heads. Now, we saw that we were in the middle of an area of tumbled-down stonewalls – acres of them.

“Los Indios,” Jorge explained.

“What Indios?” Henry asked.

“Well…my ancestors,” said Jorge

We have already described Jorge to you. Our guidebook describes him further:

“The indigenous peoples of the Calchaquies valley are very pleasant and friendly, with broad faces and exceptionally white teeth. They are descended from a local tribe which probably had its roots among the peoples of Patagonia and became vassal to the Inca Empire before the arrival of the Spanish invaders.”

According to politically correct history, America was not “discovered” by Columbus, it was “invaded” by foreigners who exterminated several enlightened and promising civilizations. One book we looked at in a Buenos Aires bookshop, told us that the Aztecs, when they weren’t actually ripping out the hearts of their children or their prisoners of war, “respected both old and young…and lived in harmony with nature.” So, you see, dear reader, there are two sides to every story – usually equally absurd.

“These were all terrace gardens,” Francisco explained. “They grew their crops up here.”

We looked around. Except for the piles of rocks, laid out in rough semicircles, there was nothing here, but high, parched, barren ground. The only vegetation it seemed willing to support was the cactus – and even those were small. Majestic “cardone” cacti grew down at lower elevations; up here, there were mostly small, ground-hugging plants with sharp needles growing out of flat, paddle-like green pulp.

Why would the locals live in such a place? Why would they want to climb up this barren mountain, when the bottomland is so much richer and more hospitable?

“A team of archeologists came up here and looked at it,” Jorge explained, “but they still don’t know very much.”

While we were looking around at the Indian ruins, we noticed what looked like a green, fertile, and inviting oasis on a nearby mountainside. There, against a background of more dry rocks, was a verdant meadow and large trees. Under the trees was what looked like a stone house.

“That’s where one of my cousins lived,” Jorge told us. “I don’t see him very often.”

We were surprised he ever saw him.

“Is there any way up there?” your editor asked.

“Yes, of course, there’s a little trail. Not as good as this one, of course, but you can get up there,” said Jorge.

Jorge made a yelping sound at the top of his voice: “Ooo-ooohhh!”

He explained, ” I’m calling him. We don’t have time to go all the way, but in these mountains, sound carries a long way. He’ll hear me and come out. Besides, I should ask about how he’s feeling.”

“Why?” we inquired.

“He’s dying,” Jorge responded.

“Oh…has he been to the doctor? What’s wrong with him?” we asked.

“To the doctor? He’s never seen a doctor in his life. He’s just ready to die. He’s 95 years old – or something like that,” Jorge told us.

Jorge yelped a couple more times, but there was no sign of life from the other side of the valley.

More to come…

Now, for the news from our team at The Rude Awakening…


Eric Fry, reporting from Wall Street:

“Bill Miller’s mutual fund has topped the returns of the S&P 500 Index for 15 straight years…But year sixteen might be tricky.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.


Back in “The City That Reads”…

*** Today marked the deadline for Tehran to put a stop to their nuclear enrichment program. So far, Iran has vowed to go on purifying uranium, no matter what the global backlash.

The BBC reports that Iranian President Mahmoud Ahmadinejad has said his country “does not give a damn” about U.N. resolutions that seek to stop it from enriching uranium because of fears the country is planning to develop nuclear weapons. Since recommencing its research program a few months ago, Iran has maintained that it is aiming to generate power for civilian purposes only.

The geopolitical tensions continue to support the price of gold. Futures for the yellow metal hit a more-than 25-year high today, climbing up to $655.50 an ounce on the NYMEX.

“The per-ounce price of $700 is now achievable for May,” said GoldSeek.com analyst, Peter Spina.

*** And for more precious metal news: Silver prices climbed up as much as 9 percent today, as Barclays Global Investors launched the first silver ETF, iShares Silver Trust.

“If you were not born with a silver spoon in your mouth, you now have an easy way to access the silver market with the first and only silver ETF,” says Christine Hudacko, a spokeswoman for BGI.

*** Baltimore was recently voted on of the top 10 cities to feel the impact of the housing bust. The DR’s junior editor, Craig Collins-Young, offers some anecdotal evidence…

“Every morning, I hop in my rundown VW and drive from my skid row-looking house to make the under-four-mile jaunt to the DR HQ in Mt. Vernon.

“Fait Avenue is one of the longest parts of my drive, and it runs through the neighborhood of Canton. Canton is home to bars and yuppies, and on top of those over-inflated egos, you have over-inflated house prices.

“In a mere eights blocks, I counted 15 houses on sojourn from being someone’s home. Many are products of renovation and have vacant for more than a month. A recent CNN Money report showed the average selling price for Baltimore City was $513,425.00. With many areas of Baltimore having little to no value at all (much of the northeast and parts of the west), Canton is one the neighborhoods pushing that number to such an absurd level.

“I suppose what keeps my spirits up is that old expression ‘he who laughs last, laughs best.’ Fifteen houses in eight blocks, all wanting to become homes – it’s a good sign that the market might in fact be in the midst of a housing deluge. As interest rates climb and people realize paying $200,000 for a shell of a house is madness, I imagine prices will return to reasonable levels.”

The Daily Reckoning