Impoverishment: Then and Now

Erstwhile Strategic Investment contributor, Marc Faber, introduced this writer as supremely elegant and insightful. Here is the second extract from Fred Sheehan’s complete work, which, by the way, is posted at our site. (A must-read…if you can stomach it!)

The methodical impoverishment of the American people, particularly those who are living on the edge, has been one of the few U.S. government success stories. Flooding the world with dollar bills to support a moribund economy has performed as all such operations begin. The flows have not been channeled towards productive enterprise, but towards speculation, and the speculation is not always by choice.

Statistics may show that 80-year-olds are buying and speculating like the baby boomers, but they are caught in the pitiable condition of not being able to live on 1% interest; the disincentive to save has been energetically promoted with a short-term yield of microscopic content.

A previous 1% rate era was ripe for the leadership of a madman; the 1930s could have been far worse in America.

With 6 million jobless one year after the crash and 1 million unemployed walking the streets of New York by 1932, it is surprising that no fascist or communist uprising took root. Franklin Roosevelt deserves credit, but at the cost of some highhanded populist measures. Whether his means were necessary is not a matter to debate here; it is the precedent we can study and the sort of nonsense that goes mainstream when in extremis. My guide here is James P. Warburg (son of Paul Warburg), who wrote The Money Muddle in 1934, after he had resigned as President Roosevelt’s chief economic adviser.

Warburg wrote of the immediate pressure FDR confronted from the Committee for the Nation. This mix of industrial leaders and college professors wanted – no, demanded – that the dollar-gold exchange rate be recklessly devalued. These successors to the Committee of Public Safety held rallies in Madison Square Garden and allied themselves with the arch-propagandist Father Charles Coughlin, the "Radio Priest," who, in rebutting the Sound Money Committee, "in less than half an hour of blazing oratory…undid months of hard work by the opposition".

Whether or not this cabal complained that precious metals were only found in the secondary arts, the tendencies are similar. Roosevelt decided that he must act before Eleanor wrote a newspaper column demanding his resignation. Well, no – just checking to see if you’re still paying attention.

Impoverishment: Repudiating the Gold Clause

Returning to fact, all banks were shut for four days; the government decided which could reopen, according to rules the administration defined; the Thomas Amendment "gave the president practically unlimited power to inflate the currency by printing greenbacks"; FDR repudiated the gold clause of U.S. government securities. This rescinded the right for the bearer to redeem Treasury securities in gold (TIPS rescinded today?); the Banking Act guaranteed deposits by the government; to accomplish this, all banks were forced to sell preferred stock or capital notes to the U.S. government (to fund the government’s entrée into the banking business); legislation was proposed to create a Federal Monetary Authority and "completely kill the Federal Reserve System" which would "put the power to create money under purely political control"; and all persons were required to deliver to the treasurer of the United States "any and all gold coin, gold bullion, and gold certificates."

Warburg recalls his Oval Office debates and admits that the inflationists had the better arguments. Mirabeau could have taught him that. So could Greenspan. When a plan of action was required, Warburg’s contingent did not have one.

"We admitted that we had…no program…suited to the immediate business needs…and we doubted whether there could be any monetary cure for troubles that we believed were not monetary in nature." This was no way to convince the president at a time when Sen. Thomas pronounced that his amendment would "transfer that $200 billion in the hands of persons who now have it [Thomas planned to first confiscate bank deposits – ed. note], who did not buy it, who did not earn it, who do not deserve it, who must not retain it, back to the other side, the debtor class of the Republic, the people who owe the mass debts of the nation." These malefactors of greed included 67 million holders of life insurance policies and 44 million savings depositors. It is interesting to think that this populist appeal to self-pity and greed was coincident to Goebbels’ propagandist synthesis distilled at Nuremberg. All we know is the outcome that occurred; there are many other routes the Great Depression may have followed.

Looking ahead, words of our wise board of governors and those of the Bush (or Kerry) administration will boomerang on the promoters. I predict – knowing full well the chairman’s invincibility despite his incoherency – that the Federal Reserve Board will be lynched, figuratively speaking, although, to cover the waterfront of historical precedents, a fair number of the advocates for assignat inflation in the French Assembly went to the guillotine. There will be no getting around the fact that the Fed promoted overconsumption on credit that the homeowner could never repay. You might argue that it was the consumer who decided to borrow and spend, but just as safe banks were nationalized along with bad banks in the 1930s, I’m afraid that those who have acted responsibly will win no good citizen awards. Recalling English Hitler historian Alan Bullock: "The unique quality of economic catastrophe [is] reaching down and touching every single member of the community in a way in which no political event can."

Impoverishment: Join Hands and Buy an SUV

But let’s forget about truth, since the inversion of the truth already predominates. Evidence of encouragement "by those guys" to commit financial suicide is ubiquitous. My favorite call to arms was the workmanship of Federal Reserve Governor Bob McTeer, who urged all Americans to "join hands and buy a new SUV." And so they did, and continue to spend more than they earn. The chairman was well aware that consumer spending was the catalyst for the great boom. In 1999, he averred: "While discussions of consumer spending often continue to emphasize current income from labor and capital as the primary sources of funds, during the 1990s, capital gains, which reflect the valuation of future incomes, have taken on a more prominent role in driving our economy."

He gave such testimony with a straight face, but inflating assets are the artificial stimulant to an artificial boom. The chairman knew the score. In a May 8, 2000, Wall Street Journal critique of his evolving rationalizing of the stock market, we read: "The buzzword inside the Fed [in 1999] became the ‘wealth effect’ – how riches generated by stocks and real estate were changing the psychology of investors, leading them to spend more of their wages and salaries and putting a smaller portion in savings."

Alas: "Legislators are as powerless to abrogate moral and economic laws as they are to abrogate physical laws. They cannot convert wrong into right…."

The chairman testified in Congress on February 11, 2004, "'[We] at this stage are not overly concerned that there are debt burdens which are very difficult for the American public to handle.’ Mr. Greenspan’s view is that the household balance sheets are ‘in good shape,’ and perhaps stronger than ever, because the value of people’s houses and stock portfolios have risen faster than their debts." And people believe this stuff.

Federal Reserve governor Donald Kohn held forth with a more explicit description of the master plan: "Under the influence of increased wealth and low borrowing costs, households have bought more and larger houses and cars, have taken on more debt, and generally have spent more than would have been the case if interest rates had been higher…[These are] by and large the intended and logical consequences of the Federal Reserve’s effort to reduce economic slack through low interest rates." A job well done, I must say.

Just as only "few in number" harbored the same foreboding of Morand, Fitzgerald and White, the masses will need the explicit crash to illuminate their world. Then, we must consider the possibility of the capstone to inflationary destruction: the Napoleon precedent. The strongmen who took the scepter and crown before can all be adequately described by their talents as extolled by Goebbels.

Impoverishment: Dude, Where’s My Country?

Janet Maslin, in The New York Times, wrote a review of Dude, Where’s My Country? by one Michael Moore. Moore identifies himself as the perfect political candidate. Maslin remains aloof. She writes: "When ‘we, the people’ enters the vocabulary of someone who likes giving marching orders, watch out." Moore has "a penchant for demagoguery, someone who thinks that the present political structure needs ‘to be brought down and removed and replaced with a whole new system that we control.’"

Moore adopts the voice of God in one chapter and invites the reader to join Mike’s Militia in another. He gives out instructions as "your commander in chief". Maslin concludes, "Mr. Moore has marshaled an often impassioned political bluster…[into] a bumper sticker that doubles as a book."

Mr. Moore strikes me as more a twerp than a leader of the people, but his book remained on The New York Times best-seller list for several weeks. His acrimonious agitprop has been succeeded by several other angry books (I premise this from reading summary descriptions) from authors who want to hang President Bush, or, by those who want to hang those who want to hang President Bush. Among the top 15 books are those by Messrs. Clarke, Hughes, Dean, Hannity, Franken, Unger, Phillips and Suskind. This seems an unusual concentration of hatred that is being gobbled up by a restive public.

As much as this Michael Moore seems an odd People’s Choice, Alan Greenspan is an equally improbable leader, though Walter Bagehot may have explained the phenomenon. In Lombard Street (1873), Bagehot anticipated such a creature: "A permanent Governor of the Bank of England would be one of the greatest men in England. He would be a little ‘monarch’ in the City…. He would be the personal embodiment of the Bank of England; he would be constantly clothed with an almost indefinite prestige. Everybody in business would bow down before him [because]…a day might come when his favor might mean prosperity, and his distrust might mean ruin…practical men would be apt to say that it was better than the Prime Ministership, for it would have greater jurisdiction over that which practical men most covet – money."

Greenspan is Bagehot’s icon – is the moment of the iconoclasts at hand? "Practical men" now extends to "every single member of the community" who will look elsewhere for leadership, far afield from those whom they so innocently, indolently and irresponsibly trusted.


Fred Sheehan
for The Daily Reckoning
August 12, 2004

Editor’s Note: This essay was taken from Marc Faber’s Gloom, Doom and Boom Report

Gold is still over $400. Stocks bounced yesterday…but the Dow is still below 10,000…and probably breaking down. At least that’s our guess.

The poor consumer has run out of money, out of time and out of luck. New jobs are few. Real incomes are falling. Tax refunds have been spent. And now interest rates are going up.

To make matters worse, he has more debt than ever before. At the previous peak, credit market debt rose to over 250% of GDP. Now, it is over 300%. What choice does the poor consumer have, except to take a break…stop spending and pay off some debts?

This is exactly what he should do. He’s getting deeper and deeper into debt each month. He needs to stop making things worse for himself…he needs to save himself – if he still can.

But this is the opposite of what the Bush administration or the Greenspan Fed wants him to do. A sluggish economy could cost Bush a second term. And Alan Greenspan knows better than almost anyone that a slowdown could be hard to stop. Japan tried to turn its slump around for 14 years. Only now does it appear to be coming out of it.

Oh, we forgot…Japanese central bankers are idiots.

But we’ll give you a prediction you can take to the bank: In the years ahead, American central bankers will turn out to be idiots too.

There is the smart money…and the dumb money. But Warren Buffett’s money must be a genius. And now comes news that Buffett has increased his holdings of non-U.S. money to $19 billion. Until the last few years, Buffett had never before bet against the dollar. And no one ever bet more.

We’re betting he’s right.

As an aside, Addison reports that things are getting underway in Vancouver. The Supper Club finished yesterday, and the first salvos of the symposium have already been fired. Our man on the scene Addison Wiggin talked all about it with Tom Jeffries on
Eric, what’s the news from New York?


Eric Fry, from the corner of Wall and Broad…

– "Weapons of Mass Delusion" continue to beset the American investor. The most potent of these financial WMDs is the delusion that the economy has embarked upon a "sustainable" recovery – the corollary delusion being that share prices had embarked upon a "sustainable" advance.

– Now that an inconveniently contrary reality has exploded these twin WMDs, the lumpeninvestoriat is nursing a battalion of badly wounded portfolios. Yesterday, the lumps took more shrapnel, as the Nasdaq tumbled 26 points, to 1,782, and the Dow dropped 6 points, to 9,938. Conditions have become so treacherous in the financial markets that friendly fire from the gold market is also claiming victims. Yesterday, the safe-haven metal fell $4.40, to $397.90, wounding many stock market refugees.

– Greenspan’s marvelous monetary machinations are proving to be much less marvelous down on the economic battlefield than Wall Street strategists had confidently proclaimed. His mighty little interest rate that once inspired heroic stock buying and courageous acts of consumer spending now seems like a monetary BB gun. His interest rate can neither lead a stock market charge nor ward off the forces of inevitable economic slowdowns. As such, investors find themselves defenseless against the assault of cyclical economic forces.

– Tuesday, the Fed declared, "The economy…appears poised to resume a stronger pace of expansion going forward." For a fleeting moment, investors believed the story. For a fleeting moment, they embraced the Fed’s latest WMD as gospel truth and charged into the market to push share prices sharply higher. Come Wednesday morning, however, the Fed’s hopeful message had been obliterated by salvos from the technology front. Cisco Systems’ head honcho, John Chambers, warned, "Most of the CEOs I talk with view the economy as growing at a modest level and are a little more cautious than they were a quarter ago."

– Truth prevailed over delusion, pushing share prices lower. The Dow pulled back more than 100 points Wednesday morning, and the Nasdaq more than 45 points, before stabilizing midmorning and regaining lost ground during the final hours of trading.

– What next? Should investors retreat now, with only modest causalities, or charge ahead into the fray, knowing that they face a formidable battery of rising oil prices and slumping corporate profits?

– We don’t know what’s next, but we can imagine one possible scenari The mutual fund-toting foot soldiers lose their morale and turn tail. They tire of the daily, weekly and monthly losses that they are enduring…and, eventually, they sell their tired, huddled masses of mutual fund shares. Their selling begets more selling and, before you know it, a real-life bear market ensues…then one day in the distant future, the only folks stepping in to buy stocks are the ones who sold their stocks in February 2000 – the Warren Buffet’s of 2020.

– "Why would anyone want to own stocks right now?" one hedge fund professional quizzed your New York editor yesterday. "There’s just no reason to own ’em right now…unless you think the war in Iraq will end tomorrow, that oil is heading to $35 a barrel and that President Bush’s popularity will jump about 30 points in next week’s poll…

– "This is a time to stand aside and let the fools rush in…have you seen the Intel chart? It looks like death." Happily, your editor has no firsthand experience with death, and therefore lacks a frame of reference by which to assess Intel’s price chart. But it’s true that Intel’s price chart is as terrifying as Hieronymus Bosch’s Hell.

– At this point, most investors would be happy to reside in a kind of stock market purgatory, where share prices do not rise, but neither do they fall…Unfortunately, the lumps may not get so lucky, if the oil market maintains its surprising strength. The price of crude oil, which has touched intraday record highs on eight of the last nine days, gained 28 cents yesterday, to $44.80, despite a "major announcement" (according to CNBC) from the Saudis in which the oil-rich country promised to pump more oil.

– Oil traders yawned at the minor announcement…A major announcement would have been something like, "Saudis Buy Yukos, Promise to Satisfy Tax Debts." Now THAT would have caused a stir in the oil-trading pits.

– "Multiple threats to supply around the world," warns oil analyst John Kilduff of Fimat USA, "while not producing apocalyptic contractions in supply yet, have produced in participants’ minds the potential doomsday scenario that might occur if all these threats came to fruition."

– Remember when the world was "awash in oil"…one more Weapon of Mass Delusion destroyed. [Ed. Note: E-Day! The coming energy crisis…the new report is ready.


Bill Bonner, with more thoughts from the road…

*** "Isn’t the Earth going into another warm period?" asked Henry after his mother improved him with the knowledge of a Permian-era hot spell.

"Where did you hear that?" his father wanted to know.

"That’s what I learned in school. People are using so many cars…it’s heating up the world. And the North Pole is going to melt down."

"Bolshie claptrap…"

Global warming is just a hypothesis. Yet it is taught in school as though it were fact.

"What we know from the geological record," Elizabeth explained, "is that the Earth goes through periods of heating up and then periods of cooling off. No one knows why…"

What we also know is that you can make a buck in America by shaking down big companies with preposterous lawsuits.

"The attorneys general (AGs) of eight states – California,
Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont and Wisconsin – filed a lawsuit last month against five large electric utilities," says an e-mail from The Independent Institute.

"The AGs’ argument is not that these utilities, which operate 174 power plants, are producing toxic substances or are in violation of the Clean Air Act…the AGs are prosecuting the utilities for emitting a substance that their power plants are actually designed and legally permitted to emit – nontoxic, odorless, colorless carbon dioxide.

"The AGs’ main argument (apart from the breathtaking claim that the provision of energy is, somehow, a ‘nuisance’) is that CO2 contributes to ‘greenhouse warming,’" write Independent Institute research fellows Michael I. Krauss and S. Fred Singer in an Op-Ed published in the August 3 edition of The Wall Street Journal.

Yet, say Krauss and Singer: "Two recent studies from the Universities of Rochester and Virginia demonstrate that the global warming claim is not supported by observational evidence."

*** "This is amazing," said Henry, as we entered the Venetian. "It’s too bad we have to go back to France. It’s so boring there…"

We have been traveling in the United States for five weeks. This was the first time one of the children made a comment like this. Generally, they have been critical…or blasé.

"You’re snobs, the whole bunch of you," Jules had charged. Throughout the trip, we have all complained about the food, the architecture, the newspapers, the people, the way they talk, they way they act, the way they dress…

"It’s not snobbishness," his mother explained. "We’re just critical and demanding. I guess some of that we picked up in Europe. But snobbishness is when you feel you’re superior to other people, often for no good reason. Being critical is different. It’s making distinctions that help you improve. Separating good from bad…right from wrong…and so on. If the winemakers didn’t have a critical judgment…all the wine would taste terrible. That’s true of the food…and everything else. That’s why there is such good food and wine in France, because the French are so critical and demanding…"

We got our room keys and found our way to the 11th floor. After a long time, a small porter arrived with a big pile of our luggage.

"They don’t usually put people back here," he began. We were at the end of a long corridor, where we had two rooms – one for the adults, another for the children.

"Why not?"

"People complain about the long walk down out here…it’s so far from the elevator.

"So they usually put Chinese people here; they never complain. Never."


"Yeah, the Chinese are good. They spend money. Never say a word. But you put Americans out here and they’re liable to say something…you know, make some comment or call the front desk and ask for another room. Especially if they’re rich. You know, it’s people with a lot of money who squawk the most. You put a poor guy out here and he’s just happy to be here. But you put in some rich people – especially Jewish people…I probably shouldn’t say that…"

He probably shouldn’t have said any of that, because it made us feel like schmucks for accepting a room that no one else wanted. But though we are critical, it hadn’t occurred to us to dislike the room.

"What about the French?" we asked mischievously.

"Oh…them…well…they’re all right. But if they don’t like something, they’ll tell you. And they don’t tip very much. None of the Europeans tip well. The middle-aged guys coming here with their girlfriends…from L.A., usually…they’re the big tippers. Showing off, I guess."

"Hey, this is better than the real thing," Henry continued. We were walking along the Grand Canal and had arrived in St. Mark’s. There are no pigeons. No trash."

"And no Italians," Jules added.

"I like Las Vegas," was Elizabeth’s judgment. "It’s lively, quirky and entertaining. What I don’t care for are all the slot machines. They’re tacky."

Las Vegas without slots would be like a bar without alcohol or a brothel without women; what would be the point?

Later that night, we went out to dinner at Delmonico – an austere, noisy restaurant in the hotel.

"Hi, my name is Naomi. I’ll be taking care of you tonight. Along with me will be Robert and Tyrell, who will help with your orders…"

After the waiter, wine steward, manager, busboy, window washer and insurance agent were all introduced, we settled down to big hunks of meat as if we were Dobermans.

"It’s funny how the hotel [the Venetian] puts a thin veneer of culture over a very seedy, lowbrow business. They must have spent a fortune to create this ersatz Venice. And they’ve done a good job of it. Look at the details; they’re really rather impressive. They’ve even painted the ceilings to look like paintings by Titian or Raphael. But the guests don’t look like they have a clue. They don’t come here for culture; they come to gamble and have a good time. You wonder why the hotel bothered with such an elaborate facade."

People do not come to Las Vegas to improve themselves, in other words. Au contraire, most are lucky to leave in as good shape – financially and morally – as they arrived. Elizabeth did not say it, but the expression "pearls before swine" must have crossed her mind.

The Daily Reckoning