Dead Presidents

For those readers who are less hip than your editor, if that is possible, ‘dead presidents’ is street talk for money.

And for those readers who are unfamiliar with inner city public schools, in certain areas children may pass from the 1st grade through the 12th without ever having much grasp of reading, writing or arithmetic. In an innumerate society, dead presidents substitute for the decimal system, as in, “Gimme a Lincoln and I’ll give you a rock.”

Anyone who has lived in the inner city of a metropolis such as Baltimore or Newark knows that for all the talk of poverty, the scarcity of dead presidents is not the problem.

Just the contrary, the days after the welfare checks come out are the worst. Drunks get drunk. Addicts get high. Children, untended, play on the sidewalk until 2am. Fights break out. Deals go bad. People get shot.

The burden of today’s letter is that what is true for the ghetto dwellers may be true for everyone else: More money does not make people richer. It makes them poorer.

What brought this to mind was yesterday’s insight from Peter Bernstein’s book, The Power of Gold.

“One might think that Spain in the middle of the sixteenth century should have been the richest nation in Europe by a wide margin,” writes Bernstein. “It was not. The impact of this immense and sudden addition to monetary wealth was felt throughout the rest of Europe and even out to the Far East, but in Spain no lasting payoff remained form the spectacular exploits of the conquerors and the fountains of blood that flowed from white men and Indians.”

“Once the gold began arriving in quantity,” he continues, “the Spanish were far more proficient at spending than at producing.”

The new-found gold had the same effect on the Spanish as a welfare check:

“The massive imports of gold and silver stimulated the spending skills at the same time that they stifled Spaniards’ incentive to produce. Spain acted like a poor man who makes a great windfall at the gambling tables but comes to believe that the money is his destiny rather than a non-recurring event.”

Gold bugs, if there are any still living, will be disappointed to learn that any unearned increase in the supply of money – whether it is hard or soft…paper or precious metal – will have the same effect. Bernstein continues with a quote from the Spanish popular assembly, the Cortes:

“Though our kingdoms should be the richest in the world…they are the poorest, for they are only a bridge for the [gold and silver] to go the kingdoms of our enemies.”

Money passed through. But no new wealth was created. Fields and workshops were abandoned. In Spain, “agriculture laid down the plough, clothed herself in silk, and softened her work-calloused hands.”

In 16th century Spain, as in inner city ghettos, idleness was not accompanied by tranquility. Charles V and his son, Philip, used his money to go to war with Francis 1st of France…to try to subdue the Dutch and Belgians…and even to send the Spanish Armada to England in hopes of toppling Queen Elizabeth 1st.

All of this cost money. And typical of people who get something for nothing – there is never quite enough. “Instead of transforming the gold and silver into new productive wealth,” writes Bernstein, “the Spaniards paid the precious metals out to other countries, and spent so much that debts to foreigners soared.”

This may trigger the same synapse connection in your brain, dear reader, as it did in mine. A flood of new money will have the same general effect – whether it is hard money in a 16th century backwater economy…welfare payments in a miserable inner city ghetto…or a vast new supply of purchasing power in the most advanced economy on earth.

For the last few years, America has been rehearsing Spain’s 16th century role. Let me count the ways…

Instead of gold and silver from the New World, U.S. spending power expanded with the money and credit from the conquistadors of the New Economy.

This additional spending power did not really lead to an increase in America’s productive capacity. Actual investment, productivity, and wages in non-information parts of the economy have been stagnant for at least the last two years. Instead, the ‘money’ is spent on foreign- made products…and then reinvested in American assets. While America has been supposedly enjoying a great economic boom, more and more of America’s assets have gone to foreign owners. Merger and acquisition efforts by foreign telecoms alone, for example, accounted for some $70 billion last year.

Foreigners have taken up the new money with the same enthusiasm as the world took Spain’s new-found gold and silver. Approximately $7 trillion now circulates outside of the U.S. itself. American corporations have borrowed this money back…along with yen and euros too. Federally- sponsored agencies – such as Fannie Mae and Freddie Mac – borrowed $255 billion in 1999 and are on track to borrow even more this year.

Thanks partly to this source of funds, home mortgages in the U.S. have increased by $1.5 trillion since 1995.

I will spare you more figures. As I explained yesterday, when Americans borrow overseas, it increases demand for dollars on world markets, boosting the value of the dollar – thus further increasing the purchasing power of dead presidents. The circle appears virtuous. But it is as vice- ridden as a Chicago polling station. Debt levels increase. Savings disappear. The whole country gets poorer.

A sharp observer of Spain’s economy, Pedro de Valencia, wrote in 1608, “So much silver and money…always has been fatal poison to republics and cities. They believe money will keep them and it is not true: plowed fields, pastures, and fisheries are what give sustenance.”

The flow of new money dried up in the second half of the 16th century. In July of 1576, King Philip of Spain did what sovereign nations as well as individuals do from time to time: he went bankrupt. His army of mercenaries mutinied. “It was said,” writes Bernstein, “that at one point the captain general [of Philip’s army] did not have enough money for lunch.”

Your correspondent…on his way to lunch…

Bill Bonner

Paris, France November 8, 2000

*** Yesterday, the nation’s attention turned away from Wall Street and towards Washington. Rich and poor, humble and proud – all good citizens shambled like sheep to their nearest polling places to decide by whom they would be sheared. Would it be the rich and pampered son of a major political figure and product of the Eastern Elite Establishment who is completely committed to the status quo…or the rich and pampered son of a major political figure and product of the Eastern Elite Establishment who is completely committed to the status quo?

*** Unable to find any difference that anybody seemed to care about, the media concentrated on caricatures of the candidates. One was supposed to be smart…the other was supposed to be convivial.

*** It’s 6AM EST, the race for president seems to hinge on the votes of a few hundred people in Florida. Who will be the victor? With no guidance from the mass media, The Daily Reckoning will make its own projection: The rich dumb guy will win.

*** But the most interesting and encouraging election news comes from the great state of Missouri where over a million people voted for a corpse. Though many members of the Senate have appeared to be in various stages of rigor mortis while in office, no Senator has ever taken his post in that condition. Americans are willing to overlook almost any handicap it seems – stupidity, cupidity, or terminal rigidity.

*** Polls showed that what voters really wanted from the election was continued gridlock in Washington. In that regard, what could be better than a Senator whose every joint was locked… permanently. Surely voters are also fed up with fast-talking political spin-meisters. Again, the junior Senator from the show-me state will be a model – being incapable of speech at any speed and whose only opportunity for spin will be in the grave.

*** Turning now, from dead senators to dead presidents… that is, from politics to markets… Wall Street had anticipated the Bush victory and had already run up prices for Microsoft (thinking a Bush justice department would lay off), and Philip Morris (Bush is supposed to be pro- tobacco). Both companies edged higher yesterday.

*** But there was little action or excitement on Wall Street, pending the election results.

*** Not that it seemed to make much difference. “No matter who wins,” the Reuters newswire informed us, “the stock market should go up, experts said.”

*** One of the experts: “It will be a rally either way.”

*** Maybe it will. But if the market is destined to go up today, and everyone knows it, why didn’t it go up yesterday?

*** Instead, the Dow fell 25 points and the Nasdaq was unchanged in yesterday’s trading.

*** Cisco ‘beat its numbers’ in the last quarter. But the closer analysts looked at the numbers, the less they seemed to like them. The problem with Cisco’s numbers is the same problem with the entire economy’s numbers. Operating statements look okay – but balance sheets seem to get weaker and weaker. Receivables rose twice as fast as sales. And inventories increased at nearly the same pace – dollar for dollar – as sales.

*** Cisco said it would reduce inventories next year. This was not good news to the people who make the products that crowd Cisco’s shelves. Broadcom fell 19% yesterday. Other chipmakers were similarly affected.

*** Oracle fell more than $1. The company is plagued by weak sales growth, and rumors of management distress.

*** GM fell too – 6%. GM is not a major supplier to Cisco, but it is a major supplier of light trucks, the market for which seems to have softened. Honda announced a 12% decline in its profits.

*** Oil rose 54 cents to $33.40.

*** And the dollar index fell slightly. But then, when the election news from Florida was announced – the euro fell, though it is still above 86 cents. Who knows what effect the next flash update will have.

*** “In the first three years of the Blair administration, the British pound behaved more like a dollar-based currency than a satellite of the deutschemark/euro,” writes the Fleet Street Letter’s Brian Durrant. “It had appreciated by 25% against the euro – while simultaneously tracking the dollar in an approximate range of $1.55 to $1.67… But this relationship has broken down since May 2000 with sterling tumbling to $1.40 and actually weakening against the euro. A de-rating of the British pound is now taking place…”

*** Gold fell 60 cents to $265.40.

*** “Pets.com leaves pile on Amazon’s carpet,” said the tag-line of an email message I received yesterday. The accompanying note informed me that Pets.com had turned into a dog. After spending $25 million to purchase the company, it now looks as though it will have to be put to sleep. The pet store on-line is “winding down operations.” Analyst Holly Guthrie of Janney Montgomery Scott says AMZN stock is a “sell” and worries that its commerce partners are “slowly disappearing.”

*** “My dog, having been raised in Asia,” writes Marc Faber, noting investors’ Pavlovian tendency to buy stocks when interest rates go down, “has a slightly different reaction to declining interest rates. He knows that a decline in interest rates after an economic boom financed by excessive credit growth signals a period of mounting bad loans – a la Japan after 1989 and the rest of Asia after 1997.”

*** “This time last year,” Barron’s reports, 196 computer and electronic new issues returned on average 86% on their first day.” In the following weeks, they rose an additional 88.6% – on average.

*** But this year, according to Comm-Scan, an investment banking service, the average computer and electronic IPO has gone up 74% on the first day…only to fall an average of 54% afterwards.

*** “Global Warming is a Fact,” declared a headline on the editorial page of the International Herald Tribune. The source of this fact is a report from U.N.’s Intergovernmental Panel on Climate Change.

“There’s just one problem,” writes atmospheric physicist S. Fred Singer, research fellow at The Independent Institute. “In spite of what the IPCC summary implies, temperature hasn’t warmed appreciably in the last 60 years, since showing a major rise between about 1880 and 1940.”

“Overwhelming evidence, from well-controlled weather stations, satellites, balloon-borne radiosondes, and from proxy data and ice observations, speaks against those surface data that show a recent warming trend. Several of us, as official reviewers for the IPCC report, have raised these points but our arguments have evidently been ignored by the controlling group that wrote the summary,” Singer continues.