Land of the Free

Today is the day we celebrate the unique American experience with "pomp and parade, with shows, games, sports, guns, bells and illuminations." But, in this DR Classique, first published on the Fourth of July, 2003, Bill Bonner can’t help but notice that America has changed quite a bit since the Declaration of Independence was signed…

"This is a society of true believers. The belief in democracy, market economics and the importance of religion is far more pervasive here than Marxism ever was in Russia."
– Michael Ignatieff, The Daily Telegraph

It is the Fourth of July. Should we hang out the red, white, and blue bunting from our office balcony…or the black crepe? Should we whine about the America we have lost, or give a whoop for what we have left of it?

That star-spangled banner still waves, but does it still fly over the land of the free, we ask? Or over a country with a spy camera on every street corner…a nation so deeply in debt that freedom has become a luxury it can no longer afford?

Whatever direction we take, we trip over a contradiction. Things always seem to be black and white at the same time.

That is why we took up tango, dear reader. People who dance the tango or write poems don’t let contradictions bother them. They glide across the floor and enjoy themselves. As far as we know, no serious tango dancer has ever committed suicide. It’s the mathematicians and engineers who blow their brains out.

An ideologue or a mathematician cannot tolerate contradiction. His little world has to fit together neatly, like a crossword puzzle. It is ‘cat’ in one direction and ‘day’ in the other. Each intersection has to work perfectly.

But that is not the way real life or real people work. A healthy woman loves her husband, but often hates him too. She has two eyes, and sees a slightly different view of him with each of them. What is wrong with that? Likewise, even a man with only a single eye cannot help but notice that the world is menaced by inflation and deflation at the same time…and that America is both free and un-free at exactly the same moment.

What we have come to dislike about the neo-conservatives is not that their view of the world is right or wrong – for how could we know? – but that it is so small. They are true believers in a very tiny world…one with no room for mystery, contradiction, ignorance or humility. It has to be small; otherwise they could not understand it.

Neo-cons think they can see what no mortal has ever seen: the future. That is the twisted genius of the ‘Preemptive Attack’; they stop the criminal before he has committed his crime!

They think they can know what no mortal has ever known: not only what is good for himself and his country…but what is good for the entire world. And they intend to give it to them, whether they want it or not. In today’s email box, for example, George W. Bush himself sends us the following message:

"…liberty is God’s gift to humanity, the birthright of every individual. The American creed remains powerful today because it represents the universal hope of all mankind."

Here we will take a wild guess: there are probably more than a few bipeds hobbling around the planet for whom the "American creed" is not so much a hope as a dread.

But the president continues:

"We are winning the war against enemies of freedom, yet more work remains. We will prevail in this noble mission. Liberty has the power to turn hatred into hope."

"America is a force for good in the world," continues the leader of the world’s only super-duper power, "and the compassionate spirit of America remains a living faith. Drawing on the courage of our Founding Fathers and the resolve of our citizens, we willingly embrace the challenges before us."

America’s citizens, meanwhile, are deeply in debt. They see little choice but to back the system, such as it is. Free or un-free, they could care less. Just keep the money flowing. They have come to rely on government. They need Fannie Mae…and unemployment insurance…and social security…and jobs…and the Fed…and fiscal stimulus. Or, at least, they think they do.

After 50 years of the Dollar Standard boom, the average American finds himself less free than ever. He is a slave to the highest government spending and biggest public debt burden in history…and to the heaviest mortgage and other private debt load ever. He has mortgaged up his house…he has taken the bait of credit-card lenders. Now he has no freedom left; he must keep a job…he must pay attention to the Fed’s rates…he must have an interest in George Bush’s government (for now he depends on it)!

"July 4 should be about celebrating freedom and independence," wrote Richard Benson, published in this week’s Barron’s, "yet the bankers are the only people jumping for joy. Never have Americans owed so much in terms of their total debt, the ratio of total debt to income and the amount of cash flow the debt needs to serve it. Americans used to believe that if they were debt-free, they were free. Today, Americans just want the freedom to borrow more, even if it means they are on the way to becoming enslaved by their debt."

The average citizen is only a few paychecks from getting put out of his house. He no longer has the freedom to step back…to reflect…to think…to wonder about things…or enjoy the contradictions. Instead, he must listen to the words of economists as if they meant something…and bow before the politicians who control his livelihood…and place himself at the beck and call of every government agency with a dollar to spend.

The message from George W. Bush concludes with an endearing personal note, in which "Laura joins me in sending our best wishes for a safe and joyous Independence Day…"

Laura who, we wondered? Oh yes…the First Lady.

How we got to be on a first-name basis with the woman, we don’t know. We have never even met her. Why she should wish us a happy day, we don’t understand. But these are the peculiar, baroque eccentricities of America that make it such an endearing place to its citizens and such a rich treasure for contemporary ethnologists and stand-up comics.

They, too, will wonder about the contradictions. Why do Americans celebrate "freedom" ever more loudly, while becoming ever less free…? How can they crow about the "home of the brave" when they attack pitiful, third world nations that can’t defend themselves? How can they ballyhoo their own independence when their armies occupy two foreign nations?

Most people will ignore the contradictions altogether. Many will see them as hypocrisy. Some will be outraged. And a few will hear the off-tempo tango beat, and enjoy the holiday anyway.

Your editor,

Bill Bonner
The Daily Reckoning

July 4, 2008 — Paris, France

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

We’re in Charles de Gaulle airport, escorting Edward, 14, off to summer camp. A loud siren has gone off. We looked up. No one reacted to it. And then the siren came from another part of the airport. Still, no reaction. Occasionally, people look up from their papers…soldiers with automatic rifles continue their patrols.

Then, we heard a chant. This was not an airport alarm, this was a group of protestors…trying to disrupt the airport. Why? We never figured it out…

It is Independence Day…and Americans have never been more dependent on the kindness of strangers. The foreigners have some $4.8 trillion on currency reserves – most of it dollars.

Most Americans are enjoying their picnics and fireworks today. But here at The Daily Reckoning headquarters in Europe, we recognize no national holidays and only take a break when we can’t get an Internet signal. There’s always something to reckon with.

Today, for example, marks the 232nd anniversary of the day when colonists in North America decided to bite the hand that fed them. Supported by the English crown…defended against the French and the Indians by English soldiers and English money, nevertheless these traitors, rebels, and terrorists wanted to decide for themselves how they would be misgoverned.

"No taxation without representation," was their beef.

Too bad they couldn’t have lived long enough to see the mess their descendants made of the place. Taxation with representation turned out to be much worse. From an estimated tax rate of less than 5%…the current lifetime rate – when you add up the accumulated effect of federal, state, and local income, sales taxes, road taxes, death taxes, capital gains taxes…and other taxes – is well over 50%.

But times change. And people come to think what they need to think when they need to think it. Less than three generations after declaring independence, the yankees decided they would rather kill their brethren in the South than permit them the same liberty. And now, 5 generations later, the United States has become the world’s leading empire…and reserves to itself the right to decide what form of government other nations will have – even those half-way around the world.

Alas, the Brits found that bossing others around was an expensive enterprise. The British Empire provided order all over the world – which was a boon to commerce. But under the protective wing of the empire, other economies – without the expense of such a huge military establishment – proliferated like lice. By the beginning of the 20th century, both the American and German economies were bigger than Britain and growing faster.

Now, America bears the expense of policing the world. And its rivals take advantage of Pax Americana to pile up dollars and steal market share.

T. Boone Pickens calls it the "greatest transfer of wealth in history." He’s referring to the oil market, where Americans take money out of their pockets and use it to buy gasoline; the cash ends up in the hands of the oil exporters – notably Russia, Venezuela and the Arab states. But the transfer of wealth goes back further than today’s high energy prices…

It began with the easy money policies of the Fed following the crash of ’87…and the free-spending habits of the American people and their government. The more Americans borrowed and spent…the more money ended up in the hands of foreigners. Normally, the mountains of American cash building up overseas would have caused inflation at home and landslides in the currency markets. But Asian exporters could make things cheaper and faster than American manufacturers. This, combined with technological improvements and just-in-time inventory techniques, tended to hold prices down. Prices looked so stable, central bankers thought they were geniuses and continued to pump out cash and credit. Then too, the strangers were exceptionally kind; normally they would have dumped their dollars on the world market – provoking a currency crisis. Instead, the Asians lent the cash back to the United States – thereby giving Americans even more rope to hang themselves. They could use the credit to buy more stuff – from the Asians. They didn’t need more stuff. They didn’t need bigger houses. And they didn’t need big SUVs to drive them to distant jobs and shopping malls. But that’s what over-reaching is all about – buying things you don’t really need with money you don’t really have.

Gradually, the Chinese developed more industries and more infrastructure. Soon, they were competing not merely on price…but on quality too, just as the Japanese had before them. And then, as they accumulated more and more money, they began to compete with the developed countries not only far raw materials – but for food. First, the price of oil shot up. And then, Americans (and Brazilians) tried to replace fossil fuel with fuel made from corn and sugar cane. This pushed up the price of grains. Corn has risen 64% in 2008 alone. Soybeans are up 37%. Oil itself is 50% more expensive. (Yesterday’s trading left it unchanged – at $144 a gallon.)

"This whole economic phase is about taking Americans down a notch," we told a friend over a glass of wine yesterday afternoon. It really is a classic case of imperial over-stretch…where Americans reached too far…spent too much…borrowed too much…and lived too high. Now, they’re facing a major correction – with falling living standards, falling wealth, falling power, and falling prestige. There’s no way out…the best they can do is to take their medicine as gracefully as possible. There are no magic levers Ben Bernanke can yank. No miracle knobs he can turn."

We should add that it’s not only Americans who are being taken down. The British too are facing a correction of their own.

"British economy falling into an American-style slump," says the headline in the International Herald Tribune.

No wonder. The Brits borrowed even more than Americans and now have more debt than we do.

*** Yesterday, the bank of the Europeans, led by Jean-Claude Trichet, decided to fight inflation, albeit in a modest way. The ECB raised rates a quarter of a point, just as it had threatened to do, bringing its key rate to 2.25% higher than its U.S. equivalent.

This puts the Anglo-Saxon economies in a tighter bind. Their economies are weakening rapidly. But higher interest rates in Europe make it tough for them to cut rates further in the United States and Britain.

The U.K. stock market is down nearly 20% over the last 12 months. Consumer confidence is at its lowest point in 18 years. And Charlie Bean, deputy governor of the Bank of England says Britain faces "the most challenging set of circumstances since at least the early 1990s and possibly earlier."

Houses are falling in price in Britain. Banks are tottering. Building companies are being written down.

This report from the Sovereign Society provides more details:

"Residential mortgage debt as a percentage of the economy is at a record 51% in the U.K. In Denmark and even in famously ‘conservative’ Switzerland, it is near or just above 100%.

"And you can bet this housing mania spread into other parts of the European economies. In Britain, consumer debt now totals $1.4 trillion pounds, more than in any other country in the world – including the U.S., with five times the population. At the same time, British home owners now owe 164% of disposable income, compared to only 138% for the U.S.

"The European housing boom has also dug deep into the financial markets. Even at the real estate peak, for instance, Residential Mortgage Backed Securities totaled less than 1% of GDP in the U.S. Yet in Portugal, Spain, the Netherlands, Ireland, and Britain they range between 3% and 7.5%.

"And yet Denmark, Spain, the U.K. and Ireland have begun to register falling housing prices, with projections of as much as 9% losses this year. No wonder Denmark became the first European economy yesterday to announce that it has officially fallen into recession. More may soon follow suit – especially Ireland, Britain and Spain."

Meanwhile, over on the western shore of the Atlantic, the Dow rallied slightly yesterday…up 72 points. The dollar managed a little bounce too (it’s fallen 41% since George W. Bush came to the White House). And gold trading left the yellow metal down $11 at $935.

"US jobs disappear and wages stagnate," is another headline in today’s IHT.

Job losses have continued for 6 months straight. For those still working, salaries are going down, says the IHT, "just as workers face record-high prices for gasoline and food."

Barack Obama said the problem illustrated the "failed economic policies of the past eight years." He should have gone back further. The problem began 25 years ago – or even further back. Americans got the idea that if they called themselves ‘free,’ they would be free…and if they called their economy a ‘free enterprise economy’ it would make them rich – no matter what they did.

What makes people rich is not free enterprise, but what you do with it. And here, we let you in on the secret. If you want to get wealthy, work hard…and make sure your expenses are LESS than your income. Yes, less. That’s the way it works.

*** Finally, police in Kentucky arrested a woman and charged her with trading sex for gasoline. The local prosecutor said it saddened him to see people selling their bodies for gasoline. She was charged with conducting a business without a proper license.

The Daily Reckoning