Crab Cake Illusions

The Daily Reckoning
Weekend Edition
June 12-13, 2004
Paris, France
By Addison Wiggin and Tom Dyson

Out over the Chesapeake, the gray clouds gather. Rain is coming and the wind is beginning to whip the water into a chop. The distant islands are enshrouded in mist and cloud, and are now barely visible. In the foreground, the American Flag is flying at half-mast. The markets are closed; Ronald Reagan is dead.

25 years ago, at Ronald Reagan’s 1st inaugural ball, dignitaries would have been treated to Maryland crab
cakes. 25 years ago, Maryland crab cakes actually came from Maryland – they were trapped in the Chesapeake Bay. Not any more. Times have changed.

25 years ago, America was a very different place too, and Americans were very different people. But it was in
this era, we argue, that the shift took place. The sea was about to change, and the new president would be the catalyst.

We look back to a previous generation. We look to an American who worked hard, who invested his sweat and time into building a great country…the greatest country. This was an American who saved his money and avoided debt. He understood stocks were risky and left them to the sharps on Wall Street. He was frugal – luxury was scorned in favor of security.

But as a new decade came around, and a new president was sworn in, one generation passed the baton onto the next. The war generation was nearing retirement while the baby boomers were coming of age.

“Cutting the tax lifeline of federal economic policy practice during the 1980s was as effective a conservative strategy of political retrenchment as it was manipulation of public sentiment,” notes Michael
Bernstein in his recently-published essay: ‘Cold War triumphalism and the deformation of the American
economy.’ “It also utilized a supreme conceit – that victory in the cold war somehow proved that a
traditional capitalism was the best of all possible worlds – indifferent to the fact that it was a uniquely
nontraditional capitalist system that had made the nation so prosperous after World War II.”

It was during the 80s that the young pretenders assumed power and control of the nation, and with them, a new legacy was born. A legacy of ‘trickle-down’ taxes and a new trend to debt, waste and consumption. Gone was thrift, gone was saving, gone was toil. Gone was Rosie the Riveter, enter Sally the SUV soccer mom.

No longer could the American live without air-conditioning, or giant cars, or giant plates of food that not even the hungriest of men could clean. Your editor was woken up last night by the cold, shivering on one of the hottest nights of the year…the temperature in his hotel room had been set to 50 degrees. He then had to plead with a hotel employee not to wash the bed linen or towels after just one use.

Reagan’s supply-side economics just supplied the nation with credit. “During the first Reagan term,” continues Bernstein, “the annual federal deficit grew from 2.7% to 5.2% of GDP. If fiscal balance had been the central promise of the new departures in policy practice undertaken in 1981, the federal ledger became, by 1983, an indelible record of failure. By 1989, the total national debt stood at some $2 trillion; in this regard Ronald Reagan stood alone as one of the most profligate peacetime spenders in the history of the republic.” Today, the national debt stands at $7.2 trillion.

A new mindset had been created – let us splurge and squander. Reagan’s election marked the beginning of a
new bull market in stocks, bonds and houses. Could his death mark the death of his legacy and the death of the credit bubble? We know not, dear reader, but we shall see.

The dollar was the biggest market story of the week, gaining over 3 cents against the euro. On Friday, 1.20
was briefly breached before the euro settled at 1.2015. Most of the move occurred on Wednesday, in a reaction to Greenspan’s assurance that the Fed would do whatever was necessary to keep inflation under control. Is this really news? Would you expect the Fed to say anything else, dear reader? We didn’t think so. It’s pure nonsense designed to keep the bond market happy.

“‘The Fed’s goal,’ mocks the Speculative Investor, imitating what Greenspan would have said if it were
being honest, ‘since it was created in 1913, has been to promote inflation whilst managing inflation
expectations, and that’s exactly what it will continue to do. We at the Fed will therefore continue to inflate
like there was no tomorrow, but in order to prevent the bond market from collapsing we will, from time to time, pretend to fight inflation.’ Now THAT would be news!”

Gold fell $3.50. A drop was to be expected, of course, given the dollar strength. However, the fall was particularly mild…but then, gold investors know better than to listen to the Greenspeak.

Stock markets had a positive week; the Dow added 167 to close at 10,410 on Thursday evening, a gain of 1.6%. The Nasdaq added 21 points or 1%, to close just a whisker shy of 2,000.

Enjoy the weekend!


Addison Wiggin
for The Daily Reckoning
June 12, 2004


By Bill Bonner

“…Bob said he had never seen evidence of God. But God could not have missed Bob. He used his heart and brain fully…working so hard he must have worn them out. He never backed down from an idea, never abandoned a friend, and never surrendered. If God was going to take him, He would have to fight for him…”

By James Boric

“…Singh was one of the central figures in modernizing the Indian economy in the last 15 years – lobbying for state-run businesses to privatize, improving India’s central bank situation, opening the country up for
foreign investment and encouraging free trade with outside countries. And with him leading the new Indian
government, I expect the economy will continue to grow…”

By Marc Faber

“…Last year, China replaced Japan as the world’s second largest importer of crude oil. Soon after taking
over power, a year ago, President Hu Jiantao and Premier Wen Jiabao decided that, “securing reliable supplies of petroleum and other scarce resources was not only crucial to sustained economic development, but integral to China’s national security…”

By John Myers

“…And it seems doubtful that the Saudi military will remain loyal if there were an internal uprising or a
foreign invasion. Their ranks are filled with tribes conquered by the royals when they seized power. The top
officers were born into the house of Saud, and most have Swiss bank accounts…”

by The Mogambo Guru

“…Now, of course, this immediately sent me in paroxysms of rage, and the next thing I know I am being
roughly held down, while priests mumble Latin prayers while sprinkling Holy water on me and I am screaming “It burns! It burns!” and panicky Emergency Room people are trying to insert an IV needle into my arm and my wife is in the corner yelling “Pull the plug on him! Pull the plug…!”



All Bark and No Bite?
by John Myers

“…At best, the CPI calculation is bad methodology. At its worst, it is downright deception. At a Senate hearing, Democratic Sen. Bob Graham of Florida said that using the CPI to determine inflation was like “using a thermometer to measure distance…”

by Vadim Pokhlbkin

In another sign that Western Europe is feeling less inclusive in 2004, émigrés increasingly get a cold
shoulder. (This despite the fact that, in the long run, most countries in Western Europe need more immigrants to counter diminishing birth rates, a topic discussed in the April 2004 European Financial Forecast.)

The Daily Reckoning