Lost in Space

A voyage to the moon…literally…

"We sense that we live in a time set apart."

– George W. Bush State of the Union, 2004

A remarkable combination of self-delusion and self- satisfaction seems to be driving Americans to self- destruction. Limited government…balanced budget…fewer regulations – Republican principles from the Eisenhower era might have protected them. Too bad Republicans no longer believe in them.

Never before has the nation been so deeply in debt. Yet, never before have any people been so eager to spend more. On the road to ruination…they press down on the accelerator.

Here, from Bill King, are the average annual real increases in domestic discretionary spending:

LBJ                  1965-69               4.3%

Richard Nixon   1970-75              6.8%

Gerald Ford      1976-77              8.0%

Jimmy Carter    1978-81              2.0%

Ronald Reagan  1982-89            -1.3%

George H.W. Bush 1990-93        4.0%

Bill Clinton           1994-2001       2.5%

George W. Bush   2002-04         8.2%.

(Source: Club for Growth, based on U.S. Budget, Historical Tables, 2004)

Republican Betrayal: Bush Increasing Spending More than Clinton

We are talking, of course, of the usual slimy programs. George W. Bush, the conservative republican, is increasing spending more than 300% faster than his predecessor, Bill Clinton, the liberal democrat.

But that is the charm of politics. Its shifty sands cover the creepy tracks of countless crooks and connivers. No sooner has a man piled up a few corrupt positions, policies and proposals…than the winds change, and his whole program is blown away. He re-invents himself as the opportunities present themselves.

"It’s strange how you never know what you’re going to get with a President," writes Doug Casey. "Few people remember that Franklin Roosevelt ran on what was almost a radical free market platform in 1932, decrying the tax, spend and regulate policies of Hoover. One might have thought you’d have gotten fiscal conservative with Reagan…but his policies sent the deficit through the roof. It was reasonable to anticipate a socialist disaster with Clinton, but government spending grew slower than the overall economy. Baby Bush, few now recall, made noises about personal freedom, and no more ‘nation building’ in foreign hellholes.

"I’m not sure what conclusion on can draw from all this, apart from the fact that the kind of people who survive in the game of politics long enough to become President are, almost necessarily, pathological liars."

We do not recall it, but according to legend, if not history, there was a time when republicans still might have had a claim to some small measure of integrity. The lumpen republican could hold his head high, for at least his party platform rested on what many took to be eternal verities – spend little, balance the budget, and mind your own business.

Murray Rothbard saw the sand get into the Republican gear box more than 10 years ago. He wrote:

Republican Betrayal: The Flush of the Reagan Revolution

"In the spring of 1981, conservative Republicans in the House of Representatives cried. They cried because, in the first flush of the Reagan Revolution that was supposed to bring drastic cuts in taxes and government spending, as well as a balanced budget, they were being asked by the White House and their own leadership to vote for an increase in the statutory limit on the federal public debt, which was then scraping the legal ceiling of one trillion dollars. They cried because all of their lives they had voted against an increase in public debt, and now they were being asked, by their own party and their own movement, to violate their lifelong principles. The White House and its leadership assured them that this breach in principle would be their last: that it was necessary for one last increase in the debt limit to give President Reagan a chance to bring about a balanced budget and to begin to reduce the debt. Many of these Republicans tearfully announced that they were taking this fateful step because they deeply trusted their President, who would not let them down.

"Famous last words. In a sense, the Reagan handlers were right: there were no more tears, no more complaints, because the principles themselves were quickly forgotten, swept into the dustbin of history. Deficits and the public debt have piled up mountainously since then, and few people care, least of all conservative Republicans. Every few years, the legal limit is raised automatically. By the end of the Reagan reign the federal debt was $2.6 trillion; now it is $3.5 trillion and rising rapidly [ed. Note: $7 trillion as of today, Jan. 23, 2004]. And this is the rosy side of the picture, because if you add in ‘off-budget’ loan guarantees and contingencies, the grand total federal debt is $20 trillion.

"Before the Reagan era, conservatives were clear about how they felt about deficits and the public debt: a balanced budget was good, and deficits and the public debt were bad, piled up by free-spending Keynesians and socialists, who absurdly proclaimed that there was nothing wrong or onerous about the public debt. In the famous words of the left- Keynesian apostle of ‘functional finance,’ Professor Abba Lerner, there is nothing wrong with the public debt because ‘we owe it to ourselves.’ In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether – slicing through the obfuscatory collective nouns – one is a member of the ‘we’ (the burdened taxpayer) or of the ‘ourselves’ (those living off the proceeds of taxation).

"Since Reagan, however, intellectual-political life has gone topsy-turvy. Conservatives and allegedly ‘free-market’ economists have turned handsprings trying to find new reasons why ‘deficits don’t matter.’"

Today, if you were to pose the question to the small-town republican, you might still find a faint residue of the Old Religion. But the poor man has been betrayed…by his party…by his representatives…by politics itself…and by his own fatal urges.

Republican Betrayal: Aim for the Stars

Like investors, republicans have gone a little light in the head. They no longer aim for balanced budget and modest programs; they aim for the stars.

"You can’t have a war, cut taxes, have the economy in a garbage pail and spend billions going into space," said an American quoted in the Economist. But this old-school Republican is sadly out of step with the times. The new- school conservatives are on the march…headed to buffoonery.

It is fairly late in the day of what Bank Credit Analyst refers to as the "supercycle" of credit. The idea is fairly simple. All of nature works in cycles. You are born; you die. There are the seasons, the earth’s annual movement around the sun, and its daily spin. Things go up and then they go down. The ‘hog cycle’ – in which hog prices rise and fall with production – takes only about 18 months. The presidential cycle takes 4 years. A supercycle is merely a cycle that takes a long time and includes many other mini- cycles.

The key dates for America’s supercycle of credit – also known to Daily Reckoning readers as the Dollar Standard Era – are 1913, 1933, and 1971. In 1913, the Federal Reserve was set up. In 1933, Roosevelt banned gold and brought European-style social welfare programs to America. And in 1971, Richard Nixon broke the last link with gold…creating an international monetary system based entirely on paper – or fiat – money.

Not entirely by coincidence, 1971 was also the year in which the space shuttle program was launched. Since then, in current dollars, about $150 billion has been spent on the program. That may seem like a lot of money to you, dear reader, but it is nothing compared to the cost of the next phase. President Bush plans to put up a permanent station on the moon…and to move on from there to Mars. "The sky’s the limit," says the Economist.

Thus we see the full ambition of the new conservatives – to conquer not just this tired old ball we live on…but the entire galaxy.

"This development will open new worlds; and its consequences will go a long way toward cleaning up and vastly enriching the old one. It will not be merely revolutionary: it will be Promethean."

The writer is Rod Martin of Vanguard, a republican Political Action Committee, a man who seems to have spent too much time staring at the full moon. Now, he howls:

"The only real question is who will exploit it. Will America colonize those new worlds, controlling the economic life of humanity to a degree today’s Arabs can only dream of, or will we allow others to dominate us instead?

"Will Washington and Madison’s children continue to lead in science, military power, and political dominance, or will it cede that to the socialists in Brussels, or even the totalitarians in Beijing? "That question remains to be answered. But for today, while we wait for the new Orvilles and Wilburs to do their magic, George Bush is building – at a miniscule cost – the infrastructure to give America the early lead. The day may come when we and our children owe all we have to this single act of statesmanship."

Republican Betrayal: The New Republican Manifesto

Here we have what must be the new-Republican manifesto. Gone is any trace of republican virtue…laissez-faire deference, humility, modesty, probity and thrift. Instead, we are expected not just to get along with our fellow man, but to dominate him politically…to outdo him in science…and to outspend him. Forget letting him run his own life. We are going to control "the economic life of humanity."

They might as well be democrats!

What words can stand up against this grandiose vision, dear reader? it is arrogant. It is audacious. It is proud and confident. It is loony.

Yes, that is it…or lunatic. Root = luna, the moon.

The trouble with the new republicans is that they don’t really believe in civil society or free markets. Orville and Wilbur Wright launched the airline industry without taxpayer money. Now, according to the republican guardians of the modern capitalism, it will take more than a similar act of entrepreneurship to put us in to space…but an act of statesmanship.

"I’m struck by…the grand idealism of the crowds…" writes our favorite martian, David Brooks, in the NYTimes. "It’s sort of inspiring in this cold Iowa winter to see at least some Americans who have preserved, despite decades of discouragement, a stubborn faith in politics…"

Yes, thank God the rubes haven’t caught on!

Bill Bonner
The Daily Reckoning
January 23, 2004

P.S. Overheard in a British Pub:

"Did you hear where President Bush is headed next?"


"Well, he’s decided Mars isn’t far enough. He’s going to the Sun."

"The Sun? How is that possible…wouldn’t the shuttle burn up?"

"Oh, that’s no problem…he says they’ll go at night."

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the NY Times, Wall Street Journal and international bestseller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons).

"When and how will this stupendous rig end?"

The King Report poses the question…the same question that entertains us nearly each and every day.

"That’s the multi-trillion dollar question that regularly punctuates daily conversations on The Street. While Bubblevision and Wall Street shills try to entice buying with projections of 10-15% gains, some operators are patiently but vigilantly awaiting the opportunity to make [money]…on the bursting of this historic ‘Double Bubble.’ The big money will be made on the downside."

We have climbed to the top of the mountain, dear reader. Never before have we been at such high elevations of debt, confidence, self-satisfaction and asset price inflation. Debt has reached beyond 3 times total GDP – more than twice its ‘normal’ level. Under the Bush Administration, federal spending is increasing faster than under any president in the last 50 years (see below)…while taxes are being cut. Housing prices in many parts of the country are rising 5 to 10 times as fast as inflation.

We stop here to reflect on the curious phenomenon of housing.

"Housing Keeps Driving the Economy," says a headline from yesterday. Housing starts are at levels not seen since 1978.

But how can housing drive an economy? Housing is merely a consumer item. It must mean that Americans are ‘consuming’ more housing…just as they are consuming more automobiles and more home theater systems.

When the Chinese figure out how to manufacture houses, the U.S. is in big trouble. But for the moment, a boom in housing means a boom in U.S. employment. And, of course, as houses go up in price, the householder is able to ‘take out equity’ – and spend it! Tax and interest rates make it easier for him to spend more…as long as he focuses only on cashflow, and not his balance sheet…as long as he considers only the short-run, not the long term…as long as he thinks only of having money ‘just in time’ rather than ‘just in case.’

So he consumes more of everything…making the highest monthly payments ever…going bankrupt at the fastest pace ever…while believing he is getting rich.

What to make of it? The air at these altitudes must be so thin that people have begun to hallucinate…to imagine things.

As Bill King says, the money will be made on the downside. Why? Because there is so much downside available!

Richard Russell gives us some numbers to show how much downside there really is.

At the bottom of a bear market, stocks trade at low P/Es and high dividend yields. In 1949, for example, the average stock sold for less than 6 times earnings, with a dividend yield of 7.6%. The next low was in 1974, when P/Es dropped to 7.5 and dividend yields hit 5.1%. In 1980, again stocks reached the bottom of a downside at 6.8 times earnings and a dividend yield of 5.7%. Two years later, they fell into yet another crevice with average P/Es below 8 and an average dividend yield over 6%.

Suffering from apparent oxygen deprivation, today’s investors don’t bother to look down. They believe that another important bottom was hit in October of 2002 – at a P/E of 33 and a dividend yield of 1.8%! We think, rather, it was a ledge.

We invite you, dear reader, to ease yourself over to the edge of it and look over. Hold on tight…because it’s a long way down. See those teeny, tiny little specks down there? Believe it or not…they’re the great stocks and great houses that everybody thought could never go down. But there they are…at a fraction of today’s size. When the Dow finally gets down there, it will be at only about 2,500 points above sea level. And investors, those that survive the long climb down, will have lighter portfolios…but clearer heads.

And now, here’s Addison with more news:


Addison Wiggin with commentaire générale on the markets…

– "Hope" and "Danger" battled with equal ferocity on the Street of broken dreams yesterday…and cancelled each other out. The Dow, absorbing an earnings bombshell from Microsoft, closed the day virtually even at 10,623. The S&P 500 lost 3 points to close at 1143. The Nasdaq got whacked for 23 points, but remains firmly above the 2,000 mark at 2,119.

– Gold dropped a buck ten to $410. And despite the best efforts of world’s central bankers, the dollar also fell for the third consecutive day, reaching $1.26 against the euro.

– Over the last three months, central banks around the world have colluded to prop up the crumbling dollar with $1.2 billion each and every eight-hour business day…or around $2.6 million a minute. And despite the huge $115 billion dollars piled up in 93 days on foreign central banks’ behalf at the New York Federal Reserve, the Greenback has fallen 6.5% against a basket of its major trading partners since September.

– At the current rate of spending, reports London’s MoneyWeek magazine, "Japanese intervention [in currency markets] will top Y120 trillion in 2004." That’s about $1.13 trillion, or 33 times Bill Gates’ entire net worth…in one year! Yet, since September, the Nippon nation’s trillions have limited the Yen’s rise to, oh – just 3% against the greenback.

– "Can you see why there are widely held fears outside of America," our London correspondent, Sean Corrigan, asked this morning, "that [the dollar’s] fall will become ‘disorderly,’ as the authorities call it – as in Pound Sterling’s ‘disorderly’ movement of September 1992?" Sean, a reformed Forex trader, was working a currency trading desk on the day the pound was yanked out of the European Exchange Rate Mechanism. George Soros gets all the glory for having made a billion dollars that day…but there were others, dear reader, there were others. [For Sean’s first- hand account of Black Wednesday, please see his Daily Reckoning Classique:

Black Wednesday – Ten Years On  ]

– Meanwhile, back in the homeland, Senator Charles Schumer, a Dumbass-ocrat from New York, is sponsoring legislation to impose tariffs of as much as 27.5% on Chinese imports, as a punishment – get this – for accumulating so many "zero- rate, irredeemable IOUs" – otherwise know as U.S. Dollars. (Where on earth do these guys come from?!?)

– One of the major problems facing the world’s reserve currency, we repeat with the regularity of a petulant 4- year old, is the "drunken sailor" approach to spending engaged upon by the government currently backing it. "Nationwide, this economy is strong," president Bush told students at a community college in Toledo on Tuesday night. "Housing is up, inflation is low…things are happening." Of course, things are happening. Paraphrasing Warren Buffet, "If we spent a trillion dollars, we could make things happen, too."

– The strategy seems fairly simple: keep rates low, cut taxes (heaven forbid, not spending), and when the economy heats up and begins to produce jobs…tax the new incomes. Et voilà, we’re in the clear. Of course, as we’ve been reporting, there’s no clear trend indicating that jobs are being created. In the meantime, the lumps have to hope and pray that housing continues to stay strong. "What they’re really hoping," Prudential Securities’ Chuck Gabriel told MSNBC, "is that if you ignore the future costs in the war on terrorism and you ignore the costs of extending these expiring tax provisions…yeah, in fact, the $480 billion deficit will trend down." What about spending? Why not cut spending? (More on this exigent theme from Bill Bonner, below…)

– In the meantime, the financial media is all agog over the housing start numbers for ’03. "Housing Keeps Driving the Economy," says a headline in the NYTimes. Reports this week from the Census Bureau put housing starts at their most robust in a quarter century. The news drove homebuilding stocks wild. "We have three homebuilders on our recommend list," writes True Wealth editor Steve Sjuggerud. "The gains so far are downright silly." Steve’s recommendation: "keep buying."

– On the other hand, our macro-man Dan Denning doesn’t like what he’s seeing. "On the face of it," says Denning, "the census bureau numbers confirm that the housing boom is alive and well, right?" After all, according to the Mortgage Bankers Association of America, the 30-year fixed mortgage rate is 5.56%, still historically low. – "The question I have to ask is," continues Dan, "’How long can something stay historically high or low before it goes back to historically average?’ Before you answer ‘apparently much longer than you think,’ consider this: housing activity is a function of affordability. As home prices rise, homes become less affordable to marginally qualified buyers entering into the market for the first time with generous borrowing terms. The other pressure on affordability is stagnant or declining consumer incomes…and higher unemployment. – "The housing market today reminds me of the tech market in ’99," writes Denning. "If you raised even a hint of a doubt, you were laughed out of the room, humored, or patted on the head sympathetically, like a wayward child. No one can imagine that what we’re really seeing is the hyperbolic phase of a credit-induced bubble in the American housing market, and that it’s going to have disastrous consequences for nearly everyone involved."


Bill Bonner, back in Paris…

*** Oh là là…the dollar has resumed its decline…falling for the 3rd day in a row yesterday. So far, it is remarkable how calm and orderly this bear market has been. The dollar has fallen some 40% against the euro…but with no great panic…and no great correction. Typically, Mr. Market tries to shake people out of their positions…in both directions. As people get onto the rising euro, for example, you’d expect a violent correction to discourage them. Likewise, you should be prepared for a panic selling of the dollar…to put the dollar bulls to flight. None of this has happened yet. Well, another thing to look forward to…

**** Nor has there been panic or violent correction in the gold market. Again, something to look forward to…

*** The sticker price of the average car has gone over $30,000 for the first time ever. But don’t pay any attention to that – what’s the monthly?

*** Jay Leno [with thanks to Bill King]: "I tell you something fascinating – John Kerry’s victory over Howard Dean has completely changed the presidential race around. Now instead of the rich white guy from Yale who lives in the White House facing off against the rich white guy from Yale who lives in Vermont, he may have to face the rich white guy from Yale who lives in Massachusetts. It’s a whole different game."

*** President Bush was "like a blind man in a room full of deaf people," former Treasury secretary Paul O’Neill recently remarked.

Blind people should demand an apology, we replied; their only problem is that they cannot see. The real disasters are caused by people with perfectly good eyesight, we continued.

Here, a blind reader reminds us that even people who cannot see can be dangerous:

"Dear Mr. Bonner, you do us (I speak as a totally blind subscriber) an ‘injustice.’ Unless my memory is playing tricks on me, the Holy Imam who was arrested in connection with the unsuccessful bombing preceding 9/11 was blind. Many a time and oft have I jokingly told my family that with my meltingly charming innocence it would have been possible for me to courier any amount of contraband and worse across borders. But the point is that ‘the poor blind’ gentleman referred to above should be a warning against the sentimental slush and the sheer stupidity of those who treat us as from another world. We deserve no more and no less than the rest of mankind."

The Daily Reckoning