“There is a crack in everything God made…”

– Ralph Waldo Emerson

“No man ever had a point of pride that wasn’t injurious to him,” was another of Emerson’s remarks. And by the end of the 20th century, Americans had discovered enough points of pride to practically annihilate themselves. They had the most magnificent military machine the world had ever seen. They had the world’s most dynamic and resilient economy. They had Microsoft and Hollywood. And Howard Stern. And Will & Grace.

For the last couple of weeks, we have been comparing America and France. Our point has been that the two nations are not nearly as far apart as they think:

In France, a much larger percentage of the GDP is spent by the government than in the U.S. – 53% compared to 32%. But the difference is smaller than it appears, because in France, health and education are almost exclusively run by the government, and workers in these industries are on the government payroll. Government also has a big position in the transportation industry in France. The trains, the metro…even some trucking business is done by state employees.

And here we run into one of those delicious little confusions that keep life interesting. The average person in France would say that health and schooling are ‘free’ in France, but expensive in America. Whereas the average intellectual in America would say that they are ‘free’ in America but state-monopolies in France. In both cases, the word ‘free’ makes them sound like a good thing. But in both usages, it would be a complete lie. For in France, the services are hardly free; they are paid for by taxpayers. Nor are they free in America, in the American sense; both health and education have so many government strings attached that they resemble state-run industries. Just talk to a doctor or to a school teacher. You will find few differences between one in Paris, France and one in Paris, Texas. Both take the guff of centralized bureaucrats and do as they are told.

America’s Dollar Standard: No Clear Winner

And which system is better? Your editors have tried both. We have sent our children to French schools and American ones. “The hospital here was much better than the one in Baltimore,” says Addison, whose wife just had a baby in Paris. “But it was the American Hospital.”

We see differences, but no clear winners. Maybe the U.S. health system is more advanced, but the French live longer.

When the costs of health care and education are added to government spending in America, the resulting percentage of GDP is within a few percentage points of the French total. Americans spend about 14% of their GDP on health. They spend nearly another 3% or so on post-secondary education. They don’t spend much on train tickets, because the trains in America don’t trundle anywhere Americans want to go.

Government debt in America is 70% of GDP. In France, it is 60%. Private debt, by contrast, is 162% of GDP in America. We don’t know how much it is in France, the number seems impossible to find, but we’ll bet it’s a lot lower. The French don’t even have credit cards; they use debit cards. And the idea of refinancing a mortgage in France is almost absurd.

On one side of the Atlantic, the newspapers rant about the ‘ruthlessness’ of American capitalism. On the other, the papers rag about the ‘rigidity’ of French socialism. But on both sides of the great oceans, throughout the entire 20th century, the high tides of central planning, paper money, debt and social-welfare promises slapped the shore in the same corrosive way. The maligned ideas of German intellectuals and French philosophers drifted across the North Atlantic in a matter of weeks. Soon, both continents were drenched in politics…until every sod in the nation depended on the runoff of money from Paris or Washington, and was ready to vote for whichever clod promised more.

America’s Dollar Standard: For Every Act, a Regulation

Almost no matter where you are in the modern world, for every transaction, there is a tax. For every act, there is a regulation. And for every idea held by the masses, there is a massive fraud. “It’s the whole system of social protection put in place by Bismarck at the end of the 19th century that we have to take a look at,” professor Peter Losche of the University of Göttingen was quoted in Le Monde, explaining why the whole shebang is doomed.

“If we change nothing, it will be necessary to pay 2/3rds of our salaries in order to support the [government’s] health, retirement and unemployment systems.”

And thus we come back to the printing press in Washington’s basement and America’s unique situation at the debut of the 21st century. It is the Dollar Standard that separates the U.S. from France, and gives Americans an immeasurable boost towards ruination. While California and France are being forced to come to terms – honestly or dishonestly – with their predicaments, the U.S. still has the world’s reserve currency.

Americans have had the rest of the planet bamboozled; the foreigners sent them nearly $2 billion worth of goods and services, every day, even though Americans couldn’t afford them and had nothing to give in return except little pieces of green paper. The poor huns, frogs and wogs…it cost the U.S. Bureau of Printing and Engraving less than a penny to produce a dollar bill, but the foreigners took it as though it were worth a hundred of them.

The dollar undergirded all of America’s good fortune. Upon it rested the whole hullabaloo – the lopsided trade, its effervescent markets, its national and private debt. An entire generation of Americans had come of age with the strong dollar. They took it for granted that the strong dollar, like the Rolling Stones, was neither cyclical nor circumstantial, but eternal.

America’s Dollar Standard: Nothing Like It in History

The American dollar broke records. There was nothing else like it in the world. There was nothing like it in history. It seemed even to defy God Himself. For God had planted his own ‘money’ in the Earth, scattering a bit on the surface and more deep down, where it was hard to get out. For thousands of years, ever since there was money, gold had served as money. And who complained about it? The yellow metal couldn’t be bribed, flattered, seduced, or flimflammed. Nor did it interrupt dinner with moronic, self-serving announcements. It said nothing. It went nowhere. It held no press conferences and no opinions. For centuries, it just sat there, as quiet and serviceable as a graveyard.

But since 1971, Americans seemed to have no use for it; they had invented something better.

Men had previously appreciated gold because it was hard to come by – in fact, the world’s supply of it increased almost in exact proportion to the growth in the world’s other goods and services. In the time of Christ, a Roman could buy a respectable suit of clothes for about an ounce of gold coin. So could an American 2000 years later.

But the dollar was an improvement on gold, they believed, for precisely the opposite reason: because they could create an infinite quantity of them. In effect, Americans thought the dollar gave them a line of credit that was inexhaustible…and a credit card that never had to be paid off.

America’s Dollar Standard: The World’s Mouth

America has become “the world’s mouth,” said a source quoted by James Grant – the ultimate consumer, ready to eat up the world’s excess production like a fat man going to work on a pile of cream puffs.

“We can pay off anybody by running a printing press,” said Thomas Gale Moore, a member of the president’s Council of Economic Advisers. He was speaking in the late ’80s, just about the time the U.S. net international investment position slipped below the waterline separating debtor from creditor. In the beginning of the great boom in 1980, the U.S. enjoyed a net positive investment position of about 7% of GDP. By the end of the century, the nation was soaked in debt, with a net negative position equal to 25% of GDP. “Frankly,” Moore continued, with Bernanke-like candor, “it’s not clear to me how bad that is.”

Here at the Daily Reckoning, it is not clear to us either. But give us time. Our hunch is that the cracks in this Dollar Standard system are spreading. Within another 10 years or so, the whole thing may fall apart.

Already, dollars spent by Americans end up stimulating economic development – not in the homeland, but abroad. Overseas competitors, with much lower labor costs, little debt and few of Bismarck’s promises to keep, become more and more able competitors with every dollar spent. Meanwhile, Americans sink deeper and deeper into the debts they thought they’d never have to pay.

But every bill gets paid somehow. If not by the borrower…then by the lender.

Bill Bonner
July 25, 2003


Oh là là… What a wicked, wonderful, wacky world it is.

We don’t have any specific reason for saying that. It’s just that it’s Friday morning…we’re in a light-hearted mood…and we’ve been so impressed lately by the elegant perversity of it. No sooner does someone think he’s got the world by the tail than it turns around and bites him on the derrière.

Next to exterminating male members of the Hussein line, the Bush administration has made economic recovery a top priority. To that end, it has given the nation a tax cut, expected to provide an economic stimulus equivalent to 1.6% of GDP.

Too bad so much of the stimulating is done overseas, particularly in China.

For if an American consumer has an extra dollar in his pocket, about 2 and a half cents of it will end up in Chinese hands. That may not seem like a lot of money, but it is more than the return from money market funds, more than the inflation rate, more than twice the Fed funds rate…and more than $200 billion dollars a year.

And the Chinese know how to get even more money; they just have to build more factories, hire more people and produce more and better goods – all the things that the tax cut was supposed to stimulate in America.

Likewise, lower interest rates were supposed to stimulate a recovery in America. What they have actually stimulated is mortgage refinancing…which permitted Americans to spend more…which allowed them to buy more goods from China…which put more money in Chinese hands, stimulating their businessmen to compete even more with U.S. enterprises…!

Oh là là, dear reader…what have we come to? We don’t know…but we’ll find out together. More below…

Here’s Eric’s news:


Eric Fry in New York…

– “Rosy Outlook Excites U.S. Stocks,” a CBSMarketwatch headline cheerily observed yesterday morning. But the rosy outlook did not excite stocks for long. It’s true that stocks surged higher immediately after the opening bell. But by the close of trading, the market was looking a little downcast, as the Dow drooped 82 points to 9,113 and the Nasdaq slumped 1% to 1,701.

– Nor did the “rosy outlook” thrill the bond market. The Treasury’s 10-year note fell about half a point, driving its yield up to 4.18% from 4.11% on Wednesday. Nothing excites the bond market these days, except the closing bell. Nearly every day, bond prices fall and yields rise…and that’s not very thrilling for bond investors. The 10-year note has tumbled about 10% since hitting its peak on June 16th.

– Before too much longer, we suspect, the manic stock market will find it very difficult to cohabitate happily with the depressive bond market. Soon stock investors will begin to share the bond investors’ pain. For the moment, however, denial prevails in the stock market.

– “Don’t worry about rising bond yields!” say the stock market bulls. “Interest rates ALWAYS rise when the economy is recovering. The recent spike in long-term interest rates, while painful for our bond market buddies, is a good sign – a hopeful omen.” We are dubious, mostly because the U.S. economy has been relying almost entirely upon consumer spending, which has been relying almost entirely upon generational low interest rates.

– The millennial U.S. economy differs markedly from its 20th century counterpart in a couple of very important respects. For one thing, 21st-century consumer demand is opportunistic and “want based” rather than “need based.” In other words, the consumer’s mind-set is approximately, “If you are giving it to me, I will take it.”

– Secondly, Americans have learned to neither expect nor tolerate recessions. We may thank chairman Greenspan for nurturing both of these socio-economic phenomena. Remember, the 20th century economy struggled through 87 arduous years WITHOUT the visionary, new-age guidance of Alan Greenspan as chairman of the Federal Reserve. Greenspan became the Fed chairman in 1987, which means that the 20th century economy benefited from Greenspan’s stewardship for only 13% of its existence.

– By contrast, fully 100% of the 21st century U.S. economy has operated under Greenspan’s stewardship…Vive la difference: the 20th century included the Great Depression, while the 21st century, so far, has seen only one itty- bitty pathetic-excuse-for-a-recession. During this statistical slow-down, housing prices soared, expensive restaurants never lacked for customers and the share price of Porsche AG hit a new all-time high.

– Is it any wonder that with Greenspan at the helm, Americans have learned to expect nothing but full-time prosperity? Bear markets, recessions and rainy weather are thought to be fleeting aberrations, which can be eliminated swiftly by lowering the fed funds rate by just the right amount at just the right time – that’s Greenspan’s job.

– Under Greenspan, Americans have also learned that stocks always go up in the long run, and that interest rates will forever remain low enough to facilitate home-buying. As a by-product of the Greenspan era’s “new economics,” most folks have come to believe in a corresponding “new geopolitics.” America may flex its military might whenever and wherever it pleases. And if any country dares to stand in its way, America will exact revenge by seeing to it that an American citizen cycles to victory in the offending country’s most prestigious national sport…

– Net-net, the legacy of the Greenspan years has been to convince an entire generation of Americans that, yes, there is a free lunch, and if you hang around long enough, there will be a free dinner and dessert as well.

– But one downside of a recession-free economy is that it is also a recovery-free economy. And that’s why rising rates may inflict a great deal of pain during this particular recovery attempt. Since low interest rates alone have been sustaining the U.S. economy, there is no pent-up demand for goods and services, merely “opportunistic demand.” When interest rates rise, the opportunistic, debt- financed buying will vanish.

– Hence, GM has managed to sell cars only because it pays its customers more than $3,000 each to drive them off the lot, or because it offers 0% financing for five years…or both. But the task of enticing buyers to borrow money and buy things they don’t need is becoming ever more difficult.

– Now that interest rates are rising briskly, thereby increasing the cost of debt-financed consumption, we suspect that Opportunistic Demand will take a seat on the front-porch rocking chair, right next to Pent-up Demand…and while these two consumption-drivers while away the days, America’s economy will drift off into a deep sleep.


Bill Bonner, back in Paris…

*** The U.S. economy may still retain the odor of sushi, but bond buyers believe they smell inflation. For the first time in a long while, the spread between inflation-adjusted TIPS and regular 10-year Treasury bonds has risen over 2%.

*** Mortgage rates are rising, too. Last week’s increase was the 5th in a row.

*** But new unemployment claims dropped below 400,000 for the first time in a long while, too. The major trend may still be negative, however. A chart of weekly hours worked shows a decline that has been going on for 32 months. Never before has there been such a decline. The closest thing to it was a 17-month fall-off in the recession of ’74-’75.

*** Our last tango in Paris passed without bodily injury. “Thanks for taking the lessons with me,” your editor said to his daughter as we left the studio. The “tango-in-5- easy-lessons” program has come to an end. We are not quite ready for competitions, but at least we can do a salida or two.

“It was kind of fun,” she replied. But she had not acted as though it was fun, especially after our little group was joined by an Adonis-like young man, with slicked-back, blond hair and a pleasant smile; he looked like a poster figure of the master race, but tangoed like a Fred Astaire of the pampas.

“What’s the matter?”

“Well, I feel like such a dork, dancing with Dad.”

*** What have we become, dear reader? Non-Americans don’t seem to mind telling us. Here is a short sample of emails recently received at the Daily Reckoning headquarters:

From the Far East:

“Another thing that I have noticed is that in all my travels abroad you can always spot an American from a mile away. So typical of the Far Side comic strip these tourist families stick out like a sore thumb. Chubby flubby mom and pop and ill behaved children wear their t-shirts and shorts like little school children ready for the day at the beach.

“Bitchin’ and moaning how they have to walk so much and comparing everything to America and why no one speaks English and why do these people do this and that and how strange this is etc. How disgusting I can’t possibly eat that…Why can’t I get proper service bla bla bla. All the while dressed like and acting like children. All the while not knowing the local custom would dictate that any self respecting local person would at least attempt to dress proper when going out to eat and a night on the town.

“Oh yes we are Americans big fat naive slobs with no social grace and yes my ears are broken cause I never listen to what other people say, just like to hear myself talk about whatever opinionated American centric b.s. I parrot from CNN and CNBC and yes what I say is right and I don’t listen to you cause like I said my ears are broken.”

And another, from Australia:

“Very amusing your notes on US tourists. I work for a small airline in Oz flying 36 seater Dash 8’s, and yep you can spot ’em a mile away as they trundle along the tarmac with not only their shirts, their weight, their kids & their noise, but their 5 freakin’ items of massive hand luggage…each!!

“What do they keep in there? McFood I suspect. “Oh but I just caaammme oorrrff the 7-forty-7 and it was all OK on there, why you gotta take it oorrff us now?” A very typical question we deal with on a very regular basis when it comes to our US friends.”

The Daily Reckoning