Nixon's the One!
A Bonnerian Final Reckoning of the ‘Great Dollar Standard System’…
This morning, we sat down in the Paradis for a cup of coffee. We had in front of us two books and two whores.
The Paradis is a local hangout, not only for your Daily Reckoning team, but also for a team of prostitutes who work the rue des Lombards. Looking at them, and looking at us, it is hard to tell which team is more broken down. Of course, it all depends on the context. In any other line of work, the whores would be delightful and attractive. In a crowd of grandmothers, they could be as fetching as the average. They seem like cheerful women…and ready to please; what more could you want?
In the running for the governor’s office in California are two whores, too…that is, two women who perform indecent acts in front of the camera. One promised ‘a date’ to any contributor to her campaign fund who gave $5,000. Pressed for details, she maintained that the date didn’t include anything dirty – which must make her the first and maybe only candidate in American history to publicly refuse to prostitute herself for the sake of public office.
We mention this only because it opens today’s discussion; it allows readers to think we are writing about something interesting.
Richard M. Nixon: Brothers and Sisters Everywhere
We are still talking about dirty deeds and family resemblances. Resemblances between the trade deficit and the mortgage refinancing boom…betwixt worldwide deflation and the rise of gold…between…between…well, the harder we look, the more resemblances we see. In today’s world economy, we see brothers and sisters and cousins everywhere!
So far, we seem to have been the only ones to notice. But when we look at almost any chart, it is like looking at a family tree, with the same common ancestor. There he is…circa August 1971: Richard Nixon. Remember his campaign slogan: "Nixon’s the one!"
In the 1968 election campaign, Nixon’s opponents – or maybe it was Rolling Stone magazine – came out with a spoof, showing a pregnant welfare mother accusing: Nixon’s the one!
History will show that Nixon was the one who cut the dollar loose from gold. A paternity test would show that he was also the one who loosed upon the financial world almost all its current discontents. Hardly a discontent appears anywhere in the world’s financial press that can’t be traced to Nixon’s dirty deed.
But we have made this point before. We think we see Nixon’s nose on every newborn crisis. We dust every crime scene for his fingerprints. We imagine we spot his jowly face in every line-up in the financial pages.
Richard M. Nixon: Dirty Deeds
And so, we bore our friends and trouble our dear readers with ennui. "You’re repeating yourself," they say. "You’re becoming obsessed," they warn.
"So what?" they want to know.
But today, we elaborate anyway. For we think we have stumbled upon a dirty deed that explains nearly everything…and gives a hint of what comes next.
A chart of imports compared to exports, for example, shows steady progress in the ’60s…but there, in 1972, comes an inflection point. All of a sudden, world trade explodes upward…with a growing gap between what America imports and what it exports.
A chart of the world’s central bank reserves shows little growth before 1971. Then, in 1972 it lifts upward, slowly at first, but climbing steadily…and then really takes off in the mid-’90s.
Just look what happened in Japan. Gold had prevented trade balances from getting too far out of whack…because the gaps had to be filled with gold. But under Nixon’s new system, the trade chasms could widen to grotesque proportions, for the limits had been removed. Japan was the first nation to take advantage of this opportunity. Lights went on in factories all over the nation. Around the clock they worked…producing for the American market. The money flowed into Japan’s companies…and was then deposited in its central bank. And there it is on the chart…on page 123. Dollar reserves rose steadily in the ’70s…and then exploded upward in the ’80s. We know what else happened: the gush of new money sent Japanese stocks and real estate spurting to preposterous levels. Of course, then the bubble burst…and Japan has been trying to recover ever since.
Richard M. Nixon: The Infamous Twin Deficits
I refer to the charts in Richard Duncan’s book, The Dollar Crisis. There, on page 145, is his chart showing "the infamous twin deficits," the U.S. budget deficit and U.S. trade deficit. Again, both begin to lift off after Nixon unloads the gold ballast. The rise slowly at first…but then, in the early ’80s, they begin to soar. The budget deficit shifts dramatically in the mid-’90s — thanks to the tax revenue generated by the bubble economy. For a few years, the federal budget went into a surplus of sorts (ignoring the fact that federal debt actually increased in those years) and then, when the bubble burst, took flight again, reaching the highest levels in history.
And there’s the surge in U.S. stock prices. It took a while to get underway; yet the Dow went over 1,000 in 1972…dropped back…and then began its rise to glory 3 years later.
On page 101, we find out what the Dollar Standard did to total credit-market debt in the U.S.. There again, we see the same pattern: gently rising indebtedness throughout the ’70s and ’80s, on a steeper and steeper slope. From 150% of GDP in 1971, the figure is now near 300%.
Of course, for every debit there is a credit. Who owns all this debt? To whom is it owed, in other words? We find the answer on page 96. It shows that the amount of U.S. credit market assets owned outside the U.S. has risen from about $300 billion in 1980 to more than $3.5 trillion in 2002.
Believe it or not, the U.S. was a net creditor until about the time Alan Greenspan became chairman of the Fed. But in the mid-’80s, it crossed the line that separates the slave from his master…and then sank to such a level of servility that it now faces net indebtedness of more than $2.5 trillion.
While the lines were all rising, central bankers, investors and consumers felt like rats that had fallen into a dumpster in a good neighborhood. They gorged themselves on the leftovers. But now, they struggle to get out.
Richard M. Nixon: A System that No Longer Works
The whole world economy is stuck in a system that no longer works. It depends on the U.S. economy as its ‘engine of growth’…and upon the U.S. consumer to push the pedal to the metal. If Americans do not continue to buy, the whole thing comes to a halt. But something is going wrong. American consumers still buy…but they are running out of money. Americans have begun to ache and strain under the burden of the $2.5 trillion net that they owe to foreigners. And if the ‘engine of growth’ is to keep running, Americans must add another $500 billion to its borrowings each year.
At the present rate, estimates the Levy Institute, the amount owed to foreigners will rise to $8 trillion by 2008, or 60% of GDP. Which shows why Nixon’s Dollar Standard system is about to go bad. Every dollar the U.S. borrows from abroad adds to the amount it must borrow to service its borrowings. Even at 5% interest, the carrying cost of $8 trillion in debt is $400 billion per year. That is in addition to the $500 billion of trade deficit…and in addition to the anticipated federal deficit of $500 billion or so. The U.S. would soon be in the position of needing to import more capital than the entire world saves.
Something that cannot continue in the same direction must go in a different one. We’re not sure how the Dollar Standard will end…nor what direction the new world financial system will take. But we know it won’t be the same one. Exactly where we are going, we don’t know. But Richard Duncan describes what getting there is likely to be like:
"The U.S. economy has only just begun to enter the vicious downward spiral stage of this credit bubble cycle….It is only a matter of time before [consumers] are forced to rein in their consumption, pay down their debts and rebuild their savings. That…will drive the U.S. – and the world – much deeper into recession. Aggregate demand will contract, but industrial capacity will remain in place. Capacity utilization will fall further, providing a graphic illustration of the excess capacity, and corporation profitability will suffer as a result. One bad thing will lead to another in a negative mirror image of the virtuous upward spiral the economy enjoyed during the bubble years. Poor corporate profitability will result in higher unemployment, which in turn will cause a further reduction in consumption, still worse profitability, rising corporate bankruptcies, financial-sector distress, and credit contraction. Housing prices will deflate again once the aggressive credit expansion that fueled their rise is cut off."
We sign off and pledge to change the subject.
August 29, 2003
Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons) due out in September.
What is there to say today? Did anything happen yesterday? Will anything happen tomorrow? Does anything ever happen?
Yes it does, dear reader. But the events themselves mean nothing. It is the interpretation that matters; that is what gives events meaning and predictive power. A metaphor has more truth in it than a fact, says Norman Mailer.
In today’s Figaro, we learn a fact: "Growth has returned to the American economy." Number crunchers at the Department of Commerce punched up the figures for the 2nd quarter to give us a GDP increase of 3.1% annualized. Was this the beginning of a new boom…or the end of an old one? Does this mean we’re going to get richer than ever?
Alas, probably not. The GDP numbers were both defective and corrupt. Nearly half of the growth came from military spending, which has never made anyone richer, except perhaps military contractors and political insiders. And the rest is a combination of puffed-up computer numbers and a heroic effort on the part of consumers to ruin themselves. With mortgage rates at 30-year lows, homeowners squeezed out ever-bigger chunks of imaginary ‘equity’ from their homes so they could spend it on imports. Auto sales, for example, hit new records…which continue to be broken. This very month, auto sales reached another epic high. Now, there are more cars than there are licensed drivers – 1.9 million compared to 1.8 million. Mortgage debt as a percent of GDP has risen from 35% in 1980 to nearly 60% today…and consumers are going bankrupt faster than at any time in history.
The 2nd-quarter numbers look more like a ‘last gasp’ by consumers than a genuine recovery. Since June, mortgage rates have gone up, which triggered a rush to buy houses. But refinancing applications have faded as fast as the living room drapes. Last week, they fell again by 13.7%, bringing them 65% below levels at the end of the 2nd quarter…and 78% below their peak.
"Refinancing is over, basically," says the Atlanta Journal- Constitution.
Without more credit, what will happen next? "There will be no proper recovery from the recent recession," says the Levy Institute.
More on what will happen next…below…
Herewith, we bring you more news from Addison:
Addison Wiggin in Paris…
– "The Daily Reckoning is the antidote for the mass media," writes a reader on the discussion board on our website, "…don’t know how I got by without it!" Poor soul…
– If it’s true, your editors assure you, we know less about medicines (except for those of self-administered kind) than the stock market, economics or history. We are not an ‘antidote’ by design, per se. It’s just that there is so much absurdity in the news, we can’t help but open our mouths, day after day…after day…and decry it.
– Exhibit A: as we were preparing this bit of market commentary, we received an e-mail from a colleague in the London office of The Daily Reckoning. It contained a BBC article with the headline: Houses ‘Better Investment Than Gold’. The bolded subhead of the article reads: "…owning your own home has been almost twice as profitable as investing in gold over the last 3 1/2 years…"
– Loyal readers will recognize immediately where we want to go with this. Of course, houses have been a better investment than gold! London is coming out the backside of the most aggressive housing bubble the world economy has seen in the last 3 1/2 years! Gold, on the other hand, has spent the better half of the last 3 1/2 years trying to rehabilitate its reputation as the red-headed stepchild of the investment world.
– To be fair, or rather, to point out a further absurdity: the body of the article reveals that, indeed, home price rises have been slowing in England, month-over-month, for the last 5 months, bringing the total YTD gains down to 8.9%. Over the same period, gold has risen 16%. A set of numbers that might just as easily be interpreted as proving: ‘Gold "Better Investment Than Housing"’…
– Nary a mention is made of the fact that the same monetary stimulus, which goosed house prices in the first place, laid waste to the bedrock of the financial system…and is now driving people to buy gold in droves to cover their a$$ets.
– Oy…it gets worse. The credible information source cited in the article is Nationwide, a mortgage lender, among other things, with a slaked interest in keeping the lumps flippin’ houses in the London area…which has come under the most intense pricing pressure in England over the past year. One immediately assumes Nationwide spends a lot of money on advertising with BBC News. We could, of course, be jaded. Anything is possible. On the other hand, if you fall victim to this kind of ‘analysis’, we suspect you really do need an antidote…we’re just not sure The Daily Reckoning can help you.
– Meanwhile, on the other side of the Atlantic, the markets exhibited their own brand of absurdity yesterday. The Nasdaq ended up a percent…squarely on the 1,800 mark… its first time in this territory in over 16 months. The Dow added 40 points to 9,374. Even bonds got in on the action, with the 10-year US Treasury note up 28/32 to yield 4.42%. Gold retreated a bit from its late summer mini- bull…falling back $2.50 to close at $371.
– Reuters helpfully predicts that John Snow will fail in his attempt to woo Chinese bureaucrats into releasing the yuan from its dollar bondage next week.
– Busybodies at the IMF, reports the Financial Times, have suggested that the U.S. government is in danger of harming the global economy if it doesn’t admit to its spending habit and enroll in a rehab program. The U.S. economy "…is still vulnerable to a sharp correction in global current account imbalances…" the report states. Okay…so far, so good. But the IMF report also "urges central banks to keep interest rates low and cut further if necessary…" Oh man! The authors of the report must be sharing lunch counters with their friends over at 20th Street and Constitution Avenue.
– Greenspan is slated to give the opening address at the Kansas City Fed’s annual pow-wow in Jackson Hole. The Jackson Hole conference has, as future historians will discover, assumed a special place in the archives of monetary inanity. For it was here that Ben Bernanke first chided the Bank of Japan for not cutting its rates fast enough following the burst of their asset and real estate bubbles in the 90s…then proceeded to recommended a plan for how the Fed ought to deal with its own home-grown bubble. The vision landed Bernanke a front-row seat for the final dramatic act of the 3-part play, whose first scene is set 30 years prior, starring Richard Nixon (more from Bonner, below…)
– "Can Greenspan reduce confusion?" asks a headline on CBSMarketWatch.com, referring to Greenspan’ expected remarks. "The Fed – and Greenspan in particular – have a long history of using ambiguous statements to communicate with the markets," writes Rex Nutting, then goes on to speculate what the Fed chair might say. After going the distance and reading the whole article on your behalf, we’re left a little unclear about what to expect from Greenspan’s speech…but are fairly confident in suggesting to you that it won’t make a lick of sense.
– Hmmmn…let’s see…should we even get started on this headline from the AP: "U.S. Economy Shifts Into Higher Gear"? Naaah…it’s the Friday before Labor Day weekend, after all, and we’re sure you’d like to get a head start on your burgers and beer. A bientôt…
Bill Bonner, still in Paris…
*** The dollar is still at $1.08 per euro. Alas, our advice has not changed: sell the dollar, buy euros and gold.
*** Oh là là…the summer seems to be over. It is raining in Paris. Jules has already returned to school; the other children go back to classes next week.
*** Ahh…the return to school. New schools, new classes, new friends…
"How was your first day of school," Jules was asked last night.
"Did you like your classes…your teachers…?"
"They were okay…except I have one teacher who’s clearly insane."
"But that’s better than at the French school, where they were all insane."
*** "I met a nice woman when I was waiting for Jules to come out of school," your editor explained to his wife.
"Oh good, we should get to know some of the other parents."
"Well, I thought she was one of the parents. I mean, we were sitting at the café together and I naturally thought she was an American woman waiting for her children. So we struck up a conversation. But it turned out she was just having a drink…"
"You mean, you picked up a strange woman at a bar…?"
"Oh no, she is parent too…but just not of one of the students at the American School…She’s French…and she races motorcycles…"
*** Much of the discussion on the streets of Paris is still about the heat wave. Estimates put the death toll in France as high as 10,000. Even Marie Antoinette’s oak tree fell victim. Opposition politicians criticize the government for not doing enough to help old people through the hot weather. What were they supposed to do? We don’t know, but if they figure out a way to keep old people from dying, we will be the first to tell you about it, dear reader.