Imperial Over-Stretch Marks
The Dollar Standard System – and perhaps American preeminence – is on the way out. But you can’t say we didn’t tell you so. This DR Classique was originally aired on 14 October 2002.
"America remains the unrivaled leader of the world – the big power…without which nothing good happens."
– Thomas L. Friedman, hallucinating
America is the "single surviving model of human progress," said George Bush the younger, to the West Point graduating class, perhaps exaggerating just a little. He might have conceded, if he’d thought about it, that there are elements to the American model that might not yet have attained perfection.
The American model of human progress, it turns out, depends heavily on the kindness (or naïveté) of strangers: America prints money; foreigners make products. The foreigners send their products to the U.S.; Americans send their dollars abroad.
Alert readers will notice the defect immediately…for what would happen if foreigners changed their minds? Then who will pay so that Americans can continue living beyond their means? And who will finance the U.S. budget deficit, expected to rise about $400 billion thanks to increased military spending? [Ed note: This year, the budget deficit is projected to reach $521bn…]
The system survives as long as foreigners are willing to accept U.S. paper assets for more tangible ones. We don’t know how long that will be, but we note that the value of paper tends to vary inversely with the amount of it available. No Fed chief provided so much American paper as Alan Greenspan. In fact, as reported here on several occasions (we keep mentioning it because we can barely believe it) Greenspan has increased the world’s supply of dollars more than all the Fed chairmen and all the Treasury secretaries in U.S. history.
Dollar Depreciation: The Dollar will Snap
Still, the foreigners schlep and sweat and gratefully take surplus dollars in payment – about $1.5 billion per day. Typically, when a nation’s trade deficit rises to 5% of GDP, something has to give. What usually gives is the nation’s currency; it goes down, making imports more expensive and exports more attractive. So far, this has not happened, we are told, because the dollar is no ordinary currency – but an imperial currency, the leading brand of the world’s only remaining super, superpower. How that protects it from the age-old cycles of over-stretch and regret, we don’t know. More likely, the dollar will eventually do what all over-stretched currencies do, imperial or otherwise; it will snap.
"I see one possible way out," writes Stephen Roach, " a sharp depreciation of the US dollar…a significant depreciation of the dollar – at least 15% to 20% on trade-weighted basis, in my view, would go a long way in cracking the mold of US-centric global growth…"
[Ed note: Since this essay was penned, the dollar has fallen as much as 30%, and is still 24% down. Yet there is still a long ways to go…]
"Oh no, I guess this means Mr. Bush will begin his war soon," said a neighbor this weekend. She was a woman of about 70, in a hunting get-up, with knee socks and a big brown sweater. Her low voice, mannish hair and bright red face was slightly comical. But she was also carrying a 44-caliber pistol and waving it around the room. "But, heck, what’s life without wars," she roared. "Every so often, maybe we need a war. I just hope the price of gas doesn’t go up."
What set off my neighbor was the news that Congress has given the go-ahead, not by declaring war as required by the constitution, but by passing the buck to the president; Bush is free to attack America’s enemy du jour – Iraq. How Iraq achieved this honor is anybody’s guess. But enemies come and go…along with models of human progress.
In the 40s, Germany and Japan were our enemies and the Soviet Union was our friend. Then, the roles reversed for the ’50s and ’60s. And then, in the ’70s, Iraq was our friend and Iran was an enemy. And, of course, Cuba, North Vietnam and North Korea… were our enemies at various times.
But who knows? Maybe a change of government will do as much good for Iraq in 2002 as it did for England in 1066. Today, we write not to criticize the president’s war plans…nor Congress’s pusillanimous dereliction – it may all work out for the better, for all we know. Instead, we merely wallow in the absurdity of it all.
Dollar Depreciation: With God on Our Side
The durability of Christianity, we thought to ourselves during this Sunday’s sermon, comes not just from the enormous promise that it makes, but also from its adaptability. Christians believe that if they can just get God on their side, everything will work out. Even dying is nothing to worry about; "Even unto the grave, Halleluiah" we chant, with faith that death leads to a better life without mortgages or election campaigns. And in the meantime, people are free to do almost any lunatic thing they want.
Jean Mayol de Lupe was an army chaplain in the French army in WWII. He was wounded, held prisoner by the Germans and eventually decorated with the same award later given to Alan Greenspan – the Legion of Honor. Greenspan, a cynic might say, got his "cravate" for proving that you could inflate the currency and get away with it…Mayol de Lupe proved that you don’t have to be an analyst or a politician to be a fool.
The 1930s were a great time to be a fool…there was a bull market in foolishness such as the world had never seen. It seemed as though nearly half the world was keeping company with socialism, communism or fascism. Mayol de Lupe was convinced that bolshevism was a great threat to Catholicism…and that the only thing that might save it was Hitler’s national socialism. After France had surrendered, he organized a voluntary corps of French soldiers to go to help the Germans in their war against the Soviet Union. Already 66 years old, he nevertheless went to the Eastern front himself along with his troops. The priest wore a SS Waffen uniform, ended his sermons with "in the name of our Holy Father Pious 12th and our Führer Adolf Hitler," and described the French volunteers’ work…"what a beautiful mystery, a wonderful tale, that our boys write with the points of their bayonettes."
In Mayol de Lupe’s eyes, the Soviet Union was the Iraq of the hour…and Nazi Germany the world’s superpower. Many in Europe – including many in France and England – felt that the dynamic new Germany represented the force of the future, that it was "the only surviving model of human progress."
And so the poor old coot stretched on the Nazi uniform and went to war.
March 5, 2004
P.S. After the war, Jean Mayol de Lupe was arrested and jailed for notorious collaboration.
The half-a-trillion dollar trade deficit?
The $1.5 billion-per-day federal deficit?
Consumer debt-to-income levels the highest in history?
Total debt levels at 350% of GDP?
Jobs outsourced to India…lost to China…?
Dollar down 25% last year?
Gasoline rising 3 cents/gal. per week?
Does anything matter?
Well, nothing matters…until it matters. Or, as Bill Gross suggests, it never rains in sunny California, either…until it pours.
Nothing matters now, according to the Financial Times, thanks to largely to one man, Zembei Mizoguchi.
Without Zimbei…or someone like him…the dollar would have fallen a lot more than 25%…gasoline would be much more expensive than it is now…the U.S. wouldn’t be able to finance its trade and federal deficits, homeowners wouldn’t be able to refinance their houses, and consumers wouldn’t be able to continue borrowing and spending…and George W. Bush would be sweating re-election far more than he is now.
"Mr. Mizoguchi is not a campaign strategist, U.S. Federal Reserve chairman or even an online pundit," the FT explains. But he is the man who matters more to preserving Americans’ self-delusions than the president himself.
"He is vice-minister in Japan’s Ministry of Finance…" the report continues. "Mr. Mizoguchi decides how many American dollars Japan will buy each week. Every dollar he buys has a direct impact on long-term interest rates in the U.S. And long-term rates this year will go a long way towards deciding who walks into the Oval Office next January.
"If you think this is an exaggeration, consider that, in January alone, Mr. Mizoguchi bought a record $70bn and poured nearly all of it into the U.S. bond market. He has the authority to buy $100bn more this year and a bill moving through Japan’s parliament would double that figure – more than enough to cover even the wildest estimates of next year’s U.S. budget deficit.
And that is exactly what is happening. Without Mr. Mizoguchi, U.S. rates would have to rise sharply in search of other buyers."
Last year, Mr. Mizoguchi spent $250 billion. His goal was merely to keep the yen down…so Americans would continue buying Japanese products. The effect was to coax them further into debt and stimulate a hiring boom in China.
Of course, the debt doesn’t matter now. Nor the dollar. Nor the job losses in America. None of it matters…until Mr. Mizoguchi decides that it should matter. Then, it will matter a lot to a lot of people.
But not to us, dear reader. It will be the end-of-the-world-as-we-have-known-it. But it was a fraud anyway. Good riddance.
More thoughts…from Addison…
Addison Wiggin covering the day’s financial news, or lack thereof…
– Nothing much happened yesterday. The European Central Bank left rates at 4%. The Bank of England, too, left rates unchanged. Still, the dollar rose about a penny. Gold rose too – 50 cents. The Dow barely budged. Nobody said anything especially amusing or ridiculous.
– The world is waiting. Will the non-farm payroll numbers validate the Fed’s goose-and-pray stimulus strategy? Not likely, we think.
– Here’s a good example of why. We spent the better part of last week traveling to and from Puerto Vallarta. The sleepy little resort village in the Mexican sun is a long way from the chilly, rain-drenched streets of Paris. But we didn’t go for the sun; we went to check out a meeting of The Supper Club – an exclusive gathering of accredited investors who vet venture capital deals…and occasionally invest in them.
– One of the companies presenting a deal to SC members had developed an innovative software package. Their proposed platform would be able to introduce Congress’ newly approved Health Savings Accounts (HSAs) into the network of health insurance options already out there. Their company would lose money in their first and second years, they said; but they would make roughly $20 million in gross revenue by the end of the fifth year.
– Whether the financial projections were realistic or not was the subject of much debate among the members, as you might expect. But watch how their plan unfolds.
– The company employs six people. Three were present at the meeting…the CEO, CFO and VP of Marketing. The first two were straight out financial guys, quite fluent in the language of venture capital. The third was a specialist in all things human-resource related (We sat next to her at dinner, so we know. If we never hear another word about "consumer-directed health care," we will shed no tears.)
– The key IT guy, who developed the software they plan to market, stayed back at their home office. Two other employees do the grunt work. Six in all. But in their financial plan – even as the company plans to grow to $21 million – they don’t plan to hire a single employee. They already outsource any kind of programming support they need to a firm in India…and customer service is next. In other words, the company will presumably add $20-$35 million to GDP over the next 3-5 years, but they will not create a single job.
– Please recall that, two weeks ago to the day, Easy Al and the Fed’s team of superhero governors came out to deliver once again the same old sermon: jobs will come, jobs will come! In his particular version of the homily, Greenspan told the nation’s workers they would have to be willing to retrain at higher skill-levels to secure work, but that the reward would be higher pay.
– The company presenting the HSA plan to the Supper Club gives us a candid glimpse of the kind of economy Greenspan has in mind. Each of the "employees" in the company has a key skill that cannot be outsourced. They are primarily actors in the "financial" economy. One of the directors suggested they couldn’t afford to outsource the "architecture" work – the actual design of the program. But the rest is expendable, expensable…and much, much cheaper in the land of curry and rice.
– The story wasn’t much different for the other deals on the table, either. One company made automatic ice chains, deployable on the fly, for large commercial trucks. Of course, the parts are manufactured and assembled in China. Another – a manufacturer of snowboards and bindings – had as part of its unique selling proposition a "Made In The USA" tag; but they share a parts outsourcer in Taiwan with the ice chain guys. The third deal was a couple of attorneys who’d figured out a way to make big bucks investing in lawsuits…not exactly a labor intensive enterprise.
– The fourth was a real estate development deal in Puerto Vallarta itself…where the land is selling for $5,000 an acre. Try getting that price anywhere on the coast of California! It’s not only labor that’s expensive in America; it’s the very land itself.
– These companies are on the front-line of the "growth economy." Our pedantic question for day: what happens if you’re not highly skilled in IT or financial services, and you lose your job? One thing is for sure…your person won’t end up as a stat on the fictitious jobs list being created by the great stimulus boom of 2003.
[Ed note: By the way, the Supper Club is THE perfect forum for finding fast-growing companies, miles – literally thousands of miles – away from Wall Street. To join, you must be an accredited investor, which means among other things that you need investable funds in excess of a million dollars. If you’re looking for ground-floor opportunities in fast-growing (if not jobs-producing) companies, call John Wilkinson at 410-454-0416 or 800-251-1537 or e-mail him at email@example.com…Tell him Addison sent you.]
Bill Bonner, back in Paris…
*** Forget the Navigator – buy a Hummer! Sales of the beast are down 21% over last year. GM has been forced to offer more EZ credit terms – no money down, pay nothing at settlement, 48 months of payments.
*** A DR reader wrote to say that he had invented the term "indeflation" and that we should at least give him credit for it. Instead, we return it to him; we didn’t much care for it anyway.
*** What happened? No trains blew up. The SNCF called off its search of the rail lines. No more bombs were found. The terrorist group, AZF, ‘went silent,’ say the news reports.
*** A reader comment: "Americans pride themselves on being free, but how can we possibly be free if we have debt? We are bound to our creditors.
"If so, what happens when the U.S. goes bust? Is the country, the land, and the people the collateral? Could the debtor claim us or our country? Who or what is the collateral?
"I’ve heard religious prophecy claim in the end times there will be an invasion from the ‘East’ and a big war.
"It occurred to me that biggest holders of U.S. dollars are the countries in the east: China, Japan, Russia and all the Arab oil-exporting countries.
"What if this war is just on their side and they are just claiming their legal right?
"The US debt is often described as X [sic] amount of dollars per man, woman and child in America – they actually state that. If we have a social security number and are "U.S. Citizens," we must be the surety. Is it not our future earnings (tax receipts) that guarantee the loan?
"If this is correct, then we are slaves.
"I feel that I am both Morpheous and Neo, telling myself that I am a slave!
"It says in the end times, anyone with the mark (Charagma – slave number) cannot buy or sell, we are almost there now. Without a SSN you almost cannot buy or sell, get a bank account, a driver’s license or even get work…"
*** And an update from colleague Dan Ferris:
"You may recall the message I wrote below, back in October. That’s when I first started saying that Countrywide Financial, the #3 mortgage lender behind Washington Mutual and Wells Fargo, was going to have some real problems, since the refinancing boom had come to an end.
"Now, six months later, we know at least one sort of the ‘problems’ I was talking about, even though I didn’t even really know it at the time.
"Countrywide reported profits of $2.4 billion on $8.5 billion in revenue in 2003, an astounding performance by any business of this size. You don’t have to look very long or hard to figure out what’s wrong with these numbers.
"Countrywide reported $6.1 billion in gains from the sale of loans and securities in 2003. Trouble is, these gains – if you can call them that – are mostly future gains the company expects to make from collecting mortgage payments and tracking down deadbeats.
"Turns out that counting future profits (‘servicing revenue’) is a typical practice in the mortgage business. I suspect the inevitable abuse of that practice will be the undoing of many a post-boom mortgage servicing firm.
"Lacking a crystal ball, the mortgage lenders must make estimates about how much they’re going to make on a given loan. You and I normally refer to estimates as guesses.
"So it’s perfectly legal to book your guesses about how much you’re going to make from a given mortgage.
"If Countrywide turns out to be world-class guessers, I’d be all wet saying that they’re looking at bad times. But they took $1.9 billion in write-downs in the first nine months of 2003…so, I guess they’re lousy guessers. Washington Mutual aren’t much better guessers. They took $1.1 billion worth of write-downs in the past two years, about 18% of its $6.2 billion in mortgage assets at the beginning of 2002.
"The Mortgage Bankers Association guesses that overall mortgage issuance will fall nearly in half this year, to $2 trillion from last year’s $3.8 trillion."