Dead Men Talking

“Tradition…is the democracy of the dead.”

– G.K. Chesterton

Yesterday’s news brought word from deputy Defense Secretary Wolfowitz that U.S. troops would be in Iraq for the next 10 years. Also came an estimate of the cost: an extra $3 billion would have to be added to the defense budget for Iraq…and an extra $1.5 billion for Afghanistan.

“Avoid foreign entanglements,” cautioned the father of the country. But corpses have no voice and no vote, neither in markets nor in politics. They might as well be dead.

George W. Bush is undoubtedly better informed than George Washington…and, heck, it’s a new era; having foreign entanglements is just what the times seem to call for. George W. Bush may not have the wisdom of a Washington…nor the brain…but at least he has a pulse.

Few people complain about this tyranny of the living. Most accept it as a fact of life. They would not want people to be excluded from the pleasures of life because of an ‘accident of birth.’ But they are perfectly happy to have the oldest and wisest of our citizens systematically barred from the polling stations and the trading floors by an accident of death. The departed shut up forever, leaving behind them their car keys and their stocks, and their voter registrations…that is all there is to it. Goodbye and good riddance. It is as if they had learned nothing useful…noticed nothing…and had no ideas that might be worth having, as if each generation were smarter than the one that preceded…and every son’s thoughts – even the present ‘culture of the moron’ – improved upon those of his father.

Sage Advice: The Cleverest Humans Who Have Ever Lived

Oh, progress! Thou art forever making things better, aren’t thou? Throw out the sacred books – for what are they, but the thoughts of imbeciles? Forget the old rules…the old wives’ tales…the traditions…habits of generations…the old timers’ superstitions…the old fuddy-duddies doubts! We are the cleverest humans that have ever lived, right?

Maybe. But in today’s Daily Reckoning, we convene a council from the spirit world; we invite the dead to have their say. Our aim is not to kvetch on behalf of our ancestors…but to warn the living: the corpses may have a point.

Many times have we referred to old timers’ wisdom in these letters. The old timers wanted more from a stock than just the hope that someone might come along who was willing to pay more for it. They wanted a stock that paid a dividend…out of earnings. That was what investing was all about.

But by the 1990s, the old-timers on Wall Street had almost all died off. Stock buyers no longer cared how much the company earned or how much of a dividend it paid. All they cared about was that some greater fool would come along and take the stock off their hands at a higher price. And so they did. And now the market is full of them…greater and greater fools who think the stock market is there to make them rich.

In the space of 20 years, the character of the American economy and its markets changed so dramatically, the old- timers would scarcely recognize them. We mentioned yesterday how, in the mid-’80s, the U.S. slipped below the water line separating the net-creditors from the net- debtors. But almost no one noticed or cared. By then, the old-timers were already in Florida shuffling along, like the Mogambo Guru, waiting for someone to adjust their medication.

Sage Advice: Too Much, Too Much, Too Much

“In 1981,” Marc Faber explains, “stock market capitalization as a percentage of GDP was less than 40%, and total credit market debt as a percentage of GDP was 130%. By contrast, at present, the stock market capitalization and total credit market debt have risen to more than 100% and 300% of GDP respectively.”

We have wondered how this ends. Not well, is our guess. Too much debt and credit, too much capacity, too many dollars, too many bad investments, too much spending, too many deficits and too much confidence…What is the solution? ‘Less’ is our recommendation. “More,” say Bernanke, Greenspan, Bush, and everyone else in a position to do something about it…

And so the whole thing rolls forward…towards its inevitable destruction. Because, and here the dead back us up 100%, all paper currencies sooner or later come to grief. The “if” question is settled. “When…and how” remain open.

And so, we turn to ancestors…and ask for advice.

“The state’s need of money increased rapidly,” says one of them, Bresciani-Turroni, describing the scene in Germany 80 years ago. “Private banks, besieged by their clients, found it impossible to meet the demand for money….”

Sage Advice: “Less.” “More.”

As the situation heated up in the summer of 1923, there were some who gave our advice: “Less,” they said.

But officials were in roughly the same situation as Bernanke and Bush today. “More,” said they.

One, named Helfferich, the finance minister, explained:

“To follow the good counsel of stopping the printing of notes would mean – as long as the causes which are upsetting the German exchange continue to operate – refusing to give economic life to the circulating medium necessary for transactions, payments of salaries and wages, etc., it would mean that in a very short time the entire public, and above all the Reich, could no longer pay merchants, employees, or workers. In a few weeks, besides the printing of notes, factories, mines, railways and post office, national and local governments, in short, all national and economic life would be stopped.”

When an economy comes to depend on more and more credit…it must get more and more of it…or it will come to a stop. A man who has borrowed heavily to finance a lifestyle he cannot really afford…must continue borrowing in order to keep up appearances. Or else he must stop. In market manias, love, politics, war…people rarely stop until they are forced to.

Sage Advice: Tormenting the Dead

In Germany, once the Great Inflation got started, there was no stopping it until it had run its course. In 1921, a dollar would buy 276 marks. By August of 1923, it would buy 5 million of them. Middle-class savers were wiped out.

If only we could roust Herr Helfferich from his eternal sleep! We would like to shake the dust off his wormy cadaver and ask some questions. (And here, we think not of praising the dead, but of tormenting them.) What fun it would be to show him what his policies – the same, by and and large, as are now put forward by Greenspan, Bernanke and Bush – provoked. How gratifying it would be to see the little kraut squirm under an intense interrogation: what was he thinking, after all? Why did he think that more of the dreadful printing press money would undo the harm that had already been done by too much?

Bresciani-Turoni continues:

“The inflation retarded the crisis for some time, but this broke out later, throwing millions out of employment. At first inflation stimulated production…but later…it annihilated thrift; it made reform of the national budget impossible for years; it obstructed the solution of the Reparations question; it destroyed incalculable moral and intellectual values. It provoked a serious revolution in social classes, a few people accumulating wealth and forming a class of usurpers of national property, whilst millions of individuals were thrown into poverty. It was a distressing preoccupation and constant torment of innumerable families; it poisoned the German people by spreading among all classes the spirit of speculation and by diverting them from proper and regular work, and it was the cause of incessant political and moral disturbance. it is indeed easy enough to understand why the record of the sad years 1919-23 always weighs like a nightmare on the German people.”

There, the dead have had their say.

Bill Bonner
June 20, 2003


“Love reading the Daily Rec. and agree with much that is written,” begins a nice letter from a fan, “It would be nice, however, if along with all the downside written about the Market and the Dollar, if someone could put forth a solution, or even give us non-economic types some idea if anything can be done…or are we just doomed?”

We began yesterday wondering where we were. In the 32nd year of the Dollar Standard period, we noted. But every year that passes brings more dollars and lower standards. Sooner or later there will a regime change in the world’s monetary system. How and when that happens is, broadly speaking, the biggest financial story not-yet-told…and the long-term sotto voce storyline of the Daily Reckoning.

So, yes, we are just doomed.

We race down the road to monetary Hell with nowhere to turn around. But what torments we will suffer on our journey we do not know. Nor do we know when. We are perhaps at the beginning of the end…or maybe at the end of the beginning. But that there will be an end, as there was a beginning, we have no doubt.

Not that we particularly care. Because even though the dollar is doomed, you, dear reader, are not. You can still do what the Chinese government is doing – build up your own stock of real money, gold – and watch the whole sorry spectacle with a song in your heart and a trace of a smile on your lips.

More below…

In the meantime, Eric Fry with the latest news:


Mr. Fry chiming in from the Street…

– The stock market slumped again yesterday, as the Dow dropped 114 points to 9,179 and the Nasdaq tumbled 1.7% to 1,649. Long-dated Treasury bonds also fell, as the 30-year government bond stretched its losing streak to four straight sessions, pushing its yield up to 4.41%.

– The Conference Board served up a bite-sized bit of hopeful economic news yesterday by announcing that its index of leading economic indicators (LEI) jumped 1% in May.

– However, before toasting the recovery’s long-awaited arrival, investors should bear in mind that the increase was largely due to touchy-feely components of the index, like stock prices and consumer expectations. The heavyweight empirical components like vendor performance and manufacturing hours showed much smaller gains.

– “On a fundamental basis, business is still difficult in most industries,” observes Robert Marcin, writing for “Capacity utilization is low at 74% and deteriorating. Initial unemployment claims are high and rising as companies continue to cut costs. The bubble of capital investment and personal consumption has yet to be fully digested. Who needs a new car or new computer these days? How many companies need a new factory or office space? Excess capacity and intense global competition should keep corporate profit margins under pressure for quite some time.”

– Also, we should not forget that weekly jobless claims – a relevant macro-economic data point from the here and now – remain stubbornly above 400,000 per week. That’s not a healthy number. Not surprisingly, therefore, the consumer continues to stagger like a round-15 bantamweight.

– “Total consumer debt represents 90% of personal income – the highest level 50 years,” Avera Global Partners observes. “Additionally, the debt service burden (interest and principal payments as a percent of personal income) stands near an all-time high despite the dramatic decline in interest rates over the past 24 months. There are two risks with such a high level of debt outstanding. One is higher interest rates. If the economy recovers and the yield curve begins to shift upward, the impact on disposable income at the household level would be potentially crippling. The second risk is an overextended consumer and the subsequent impact on consumer spending trends.”

– Wouldn’t it suck to be a termite?…Especially a terminal termite? Who could fathom existence as one of those hapless insects, marked as sparrow-food from the moment they hatch? The thought crossed your New York correspondent’s mind yesterday as he was standing on a train platform, waiting for an express to Manhattan. While staring down at the tracks, he noticed a sparrow gobbling up newly hatched termites, just as they crawled out from under one of the railroad ties.

– These hapless little critters, by simply following their instincts, passed directly from birth to death…bummer. Your New York correspondent was reminded instantly of the lumpeninvestoriat – that phyla of investors whose primitive instincts lead them so often to an untimely demise. Instinctively, they buy when others are buying and sell when others are selling – exposing themselves in the process to the whims of the stock market’s appetite. Sometimes, like a hungry sparrow, the stock market feasts on a banquet of hopeful, trusting lumps. At other moments, a satiated and contented stock market allows the lumps to scuttle about unmolested.

– Most investors simply cannot help themselves; their instinct to follow the crowd is too strong to withstand. “Oppressively high is the psychological burden of not being part of a popular mass movement,” writes James Grant.

– The irony, dear reader, is that we are all termites — utterly defenseless in the presence of hungry sparrows. Savvy investors recognize their vulnerability and do not expose themselves to unnecessary peril, like paying 50 times earnings for a stock, simply because it has been rising for weeks.

– Better to munch away at the soggy cellulose of 1% CD rates or the musty dry-rot of value stocks, in order to live a long and prosperous financial life…


Bill Bonner, back in Paris…

*** How will it all end? Like Japan? Or Argentina?

Or Zimbabwe?!!!

“The United States may go under,” said Seth Glickenhaus to Barron’s. “Look at Zimbabwe…there is 300% inflation…

“You can’t be suggesting that we’ll end up like Zimbabwe,” replied the Barron’s reporter.

“I’m suggesting we may end up like Zimbabwe…We are in for a very long period when the economy will not grow very much. This is intensified on a world basis by the deteriorating caliber of our political leaders. Bush has no fiscal sense whatsoever and is radical in his approach… The Democrats have no leaders or leadership and are barely conscious of the major issues of the day…”

But what is happening in Zimbabwe, where the government is targeting a 96% inflation rate?

Our correspondent in South Africa, Evan Pickworth, sends more details: “…The black market price for Zimbabwean dollars is at 2,300 to the dollar – nearly three times the official rate of 800.

“This isn’t too surprising, as analysts expect inflation to actually hit 450% by year-end. With food inflation rocketing up 334.6%, the poor, already starving, Zimbabwean consumers aren’t just going to need gas masks at that altitude, they’re going to need full space gear.”

*** “The gold standard acted as a silent watchdog to prevent unlimited public spending,” said Howard Buffett, Warren’s dad, when he was a U.S. Congressman back in the 1940s. “I can find no evidence to support a hope that our fiat paper money venture will fare better ultimately than such experiments in other lands. Because of our economic strength the paper money disease here may take many years to run its course…But we can be approaching the critical stage. When that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife.”

Strangely prescient of the man, no? “There was a time in America when the political parties debated the nature of money,” adds our own Dan Denning. “Not how much to spend. But money itself. Given the ‘printing press’ posture of the Fed…that time is coming again. Gold has always been seen as a safe haven during times of extreme uncertainty.

“Of course, it’s no secret we expect a falling dollar will help put a new sheen on the midas metal again,” Denning adds. “But that may be only the beginning of the story when it comes to investing in the gold market. A new financial asset being proposed by the World Gold Council and the NYSE could provide the gold market with the liquidity it needs to rocket into the stratosphere.”

“…The entire gold mining sector of the market sports a market capitalization of less than $60 billion – roughly $10 billion LESS than Oracle, the software company. You might say gold is undercapitalized. Or, perhaps, simply not liquid enough. But this new asset could give the gold market the liquidity boost its so desperately needs…”

*** We began today’s notes with a letter from a reader. We end them in the same manner:

“Being a ‘financial adviser’ in New Zealand, I have subscribed for some time. The last three years has been harrowing – the party line is things will get better etc, and now of course these are the signs of recovery! It is getting rather tedious…

“I was more interested today in your comments about Henry – what a lovely boy he sounds. I am the mother of two lovely boys (15 and 12) and way down under we too are subject to some of the unsavory behaviors and trends of modern youth. How is it, do you think that the French (and likely many other European schools) have been relatively unaffected by this ghastly ‘culture of the moron’ (a term recently coined in one of your National newspapers in an article questioning why girls are outperfoming boys at school now)? So, my comment is this – the markets will be with us forever (drat!) our kids will only be kids once!”

The Daily Reckoning