Deadweight Losses

“I ought to go upright and vital, and speak the rude truth in all ways. If malice and vanity wear the coat of philanthropy, shall that pass? If an angry bigot assumes this bountiful cause of Abolition, and comes to me with his last news from Barbados, why should I not say to him, ‘Go love thy infant; love thy wood-chopper: be good natured and modest: have that grace, and never varnish your hard, uncharitable ambition with this incredible tenderness for black folk a thousand miles off. Thy love afar is spite at home.”

Ralph Waldo Emerson

Baltimore, once known as the ‘Monumental City,’ has edifices honoring soldiers on both sides of the war between the states. Here at the Daily Reckoning, we have little doubt they died valiantly, or at least honestly…no matter which fool’s errand they were on at the time.

But the whole undertaking turned out to be a deadweight loss for America, like the ‘Cultural Revolution’ in China in the 1960s…or the campaigns of Bonaparte for France. Or the purges and liquidations in the Soviet Union.

On a per-capita basis, the United States suffered a loss 6 times higher than WWII. Gettysburg alone produced more casualties than all previous U.S. wars.

And for what? Except for a bloody slave revolt in Haiti, slavery was eliminated throughout the rest of the Americas without much violence or expense. The peculiar institution simply dissolved, like the Soviet Union in the 1980s. Brazil, for example, outlawed slavery peacefully in 1888. There was no need for reconstruction. No carpet baggers. No scalawags. No Ku Klux Klan. No Jim Crow.

Mr. Lincoln’s hard, uncharitable ambition looked to the outside world like a civil war, but it was really a revolution. The principles of limited government, self- reliance, and liberty were overthrown. Lincoln had shown that he could do pretty much anything he pleased – and get away with it. Few future presidents or Congresses missed the lesson.

This revolution has been recognized by historians, but misinterpreted. They see the philanthropy and miss the malice.

It is frequently said that the U.S. Constitution rests on two incompatible principles – liberty and equality – and that prior to Mr. Lincoln, liberty was dominant. Post-Lincoln, equality has been emphasized. Thus historians flatter force – dressing up violence to make it look respectable, like putting a tuxedo on a mass murderer.

When a man willingly exchanges a sack of potatoes for a chicken, both he and the person he trades with come out ahead. Each gets something he wants.

But when a thief steals a chicken… or a government confiscates it in the name of income redistribution… the entire society is poorer. The chicken thief contributes nothing. And the farmer spends time and effort trying to avoid another theft – instead of raising more chickens. If enough chickens are taken from him, he may even decide to begin stealing chickens himself.

Roughly, the more violence and theft in a society, the more primitive, poor and barbaric the people are. The Soviet Union demonstrated how this works. Claiming to make citizens equal, the Bolsheviks seized almost all the resources and output of the country and distributed them as they saw fit. Anyone who resisted or got in their way was liquidated.

But the gap between rich and poor did not disappear – it widened. Party bosses and top-level apparatchiks controlled more wealth, proportionally, than the ‘robber barons’ of the U.S. They had their dachas on the Black Sea…their fleets of chauffeured limousines and airplanes…their support staffs.

And just like a Gates or a Carnegie, they could ‘invest’ resources in huge, capital-intensive projects – dams, railroads, factories. The only difference was they didn’t have to show a profit, compete for customers, or answer to investors.

“War is the health of the state,’ it is said. But war does almost no one else any good. Lincoln left a healthy state – after 4 years of America’s most costly war, while the deadweight of government over the next 135 years did nothing to increase equality.

People are less free since Lincoln’s war. But how are they more equal? Do men enjoy the charms of the beautiful women more democratically? Do people eat the same mush in the fancy restaurants as in the cheap ones? Do they pay the same tax rates?

Or is ‘equality’ merely the coat of philanthropy… tossed over the shoulders of a grasping politician?

More tomorrow…as I return to money, I promise!

Bill Bonner
Baltimore, Maryland
July 19, 2001

It is sad.

Alan Greenspan – a man who should be enjoying his retirement…dandling grandchildren on his knee…or going to the lake with an old sweater on his back and a fishing rod in his hand – is instead setting himself up for public humiliation.

It has been 7 months since Greenspan began cutting interest rates. Then, the world cocked its ear toward every Greenspan whisper, cough and muddled phrase… Would he cut rates? When? How much?

Now, the Fed chief promises more rate cuts and nobody really cares. People are losing faith in rate cuts.

“Pressures on profit margins have been unrelenting….” Greenspan told Congress yesterday, “…weakness is evident virtually across the board.”

Across the map, in fact. The entire world economy seems to be melting down. And the Fed chairman’s only ice cubes – rate cuts – seem to evaporate as soon as they are taken out of the freezer.

But let’s get more details on yesterday’s Wall Street action from Eric:


– Chairman Greenspan seemed almost mortal yesterday. Not only did the stock market defy him by falling, even while he was yacking away to Congress, but also, “Al the Omnipotent” seemed a little less sure of his power over the economy.

– In his testimony – from the twice-yearly speech formerly known as Humphrey-Hawkins, but now known as the “central tendencies” report – Greenspan cautioned, “The uncertainties surrounding the current economic situation are considerable, and until we see more concrete evidence that the adjustments of inventories and capital spending are well along, the risks would seem to remain mostly tilted toward weakness in the economy.”

– And again: “The period of sub-par economic performance…is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated…”

– Mr. Market didn’t like what he was hearing. The Nasdaq fell 51 points to 2016. The Dow managed to recover from triple-digit losses early in the day to finish down only 36.5 points.

– Thanks to the Chairman’s unsettling commentary, bonds, historically a beneficiary of slow economic growth, were one of the day’s sexier performers. The 30-year Treasury bond’s price jumped 1 3/32 points to 97 31/32 – sending yields sharply lower to 5.51%, down from 5.60% a day earlier.

– No Greenspan testimony would be complete, of course, until both sides of his mouth had had a chance to speak. So, despite his mostly doleful outlook, he did say, “The rate of deterioration is slowing quite clearly, and there are the first signs that something of a positive nature is developing.”

– Nice thoughts, but it may require more than a quarter or two for “something of a positive nature” to blossom into meaningful economic growth. In fact, it may require years.

– The problem with financial bubbles is that they never burst, they deflate. In other words, it takes years to unwind and work off the excesses. The Japanese bubble has been deflating for 12 years, and it ain’t over yet.

– The Nikkei Weekly reports, “Losses on golf-club memberships disposed of by 391 listed [Japanese] companies came to 139.4 billion yen ($1.1 billion) for the fiscal year ended March, up 250% from a year earlier…”

– The Japanese paper continues: “A nationwide index compiled by the Nihon Keizai Shimbum showed membership prices down 91% in March 2000 from the peak of March 1990.”

– After the close of the trading session yesterday, IBM reported its latest earnings. In keeping with the latest fashion on Wall Street, the computer giant matched earnings estimates but then warned of hard times to come. CEO Lou Gerstner said, “We also were not immune from [sic] some of the problems that affected many of our competitors in the second quarter…[W]e are now seeing signs of slowing in our microelectronics business as our [electronic-manufacturing] customers reduce purchases.”

– In all, the news from IBM was not great. Happily for Big Blue and for the stock market in general, investors these days have become a pretty forgiving lot. They are adapting remarkably quickly to the new low-earnings environment. A headline from yesterday’s NY Post says it all: INTEL PROFIT OFF 94% – WHAT A RELIEF!

– For now. “The moment of truth” for the U.S. consumer, says Stephen Roach, will come in the first quarter of next year. So many people now have ‘flexible compensation’ – based on stock options and year-end bonuses – that it now shows up in spending patterns. Typically, consumer spending rises in the first quarter – because of this end-of-the-year compensation. But this year, earnings and stock prices – which determine the size of these bonuses – are off. Spending is likely to drop, too.

– The big question, as always, is: in the face of slowing spending, declining share prices and a general economic malaise, where should one invest? Well… let’s check in with the DR Blue Team. “Even for a hard-core bear,” says Marc Faber, “there is a price at which the purchase of any market can be justified.”

– Dr. Faber: “Natural resource-producing sectors of countries such as Malaysia, Indonesia, Vietnam, Australia, and New Zealand will do well, soon, as China will one day become the world’s largest importer of commodities – such as coffee, cocoa, copper, plywood, timber, grains, meat, etc. New Zealand rural properties are another bargain, which are increasingly attracting the attention of some well-known value investors.” As these markets have been hammered down 50% or more recently, it may be time to take a look.


Back to Bill:

*** Sirens began wailing about 5 pm in Baltimore. It sounded as if a riot had broken out downtown. I was about to bolt out the door, join the mob and try to pick up a pair of pants or a TV set, until I learned the real cause of the excitement: a chemical spill in a nearby train tunnel.

*** Thousands of gallons of hydrochloric acid were said to be pouring out of the old tunnel entrance near Mt. Royal Terrace. Suddenly, public servants in all manner of uniform sprang to action. Lights flashed. Sirens screamed. A scene that would have cost Hollywood $2 million to stage was acted out live – before our eyes – at a cost of only $5 million or so.

*** Hazmat bureaucrats wait years, maybe decades, for an opportunity like this – to rush to the scene, step before the cameras, and persuade more taxpayer money to flow in their direction.

*** In our neighborhood, grown men and women walked around with paper towels over the faces – following the instructions of some public health official or local wiseacre. People claimed to be able to smell the lethal vapors…but I saw no one dissolve on Mt. Vernon square.

*** But even clouds of poisonous gas have their silverous linings. Eric and I walked up to that new restaurant from which we were turned away last week – and got a table, no problem.

The Daily Reckoning