Reagan's Real Revolution, Part One
On the outside, the U.S economy looks just fine and dandy, thanks to the "world improvers"…but if you dig a little deeper and open your eyes a little wider, you’ll see something quite different.
(Much of the following is adapted from our largely unwritten, and completely unpublished new book…watch for it.)
A long line of long time Daily Reckoning sufferers is forming. All seem to want to say, "I told you so." Many are hoping for an apology. Some expect a confession. A few would prefer a hanging.
They will say we’ve been wrong about a great many things. Five years after the initial shock, the U.S. economy is still intact. Indeed, it seems to be doing just fine. During those five years, more than once we thought we saw it falling apart. Every day, we thought it should. Many readers must think we were wrong and should say so. "There is nothing wrong with the U.S. economy," they say now. Alan Greenspan pledged to "mitigate the fallout when it occurs and hopefully ease the transition to the next expansion," even before anything fell out. His mitigation was so catastrophically swift, hardly anything had time to fall before he had picked it up and boosted it higher than ever before. And if anything ever does fall out, he or his successors will mitigate even more.
What’s to worry?
They will say we were wrong about foreign policy, too. The papers are full of backslapping today. Earlier in the week, President Bush spoke to the National Defense University. He told the audience that the constitution in Iraq, "must take place without external influence." Sounds strange, coming from a man with 100,000 troops in the country. Then, in a line that sounded like it was taken from a popular world improver of the previous generation, he added: "No matter how long it takes, no matter how difficult the take, we will fight the enemy and lift the shadow of fear and lead free nations to victory." All over the world, people are wondering if George W. Bush was right, after all. Are not "reform" and democracy on the verge of breaking out – all over the Middle East? Wasn’t it worth killing people, after all, for the benefits these "reforms" promise? Is not George W. Bush the heir of Ronald W. Reagan, after all?
The world can be improved; we don’t deny it. But the only improvements that really make the place better are those that remove the eyesores and prevarications of previous improvers.
Ronald Reagan’s Foreign Policy: Reagan’s Instincts
Ronald Reagan’s genius was that he was able to see that high taxes and regulation did not make the world a better place, but a worse one. Milton Friedman’s three-part formula for better government – cut taxes. Cut taxes. Cut taxes – seemed like a decent solution.
Reagan had the right instinct. "Get big guv’mint off our backs," was almost his campaign theme song. And when he had the chance, he often did the right thing. Faced with a strike by air-traffic controllers – the only union to back his campaign – he fired 10,000 of them. That is, when he saw some improvement created by his predecessors, his instinct was to generally to get rid of it.
The trouble was that once in Washington, the actor still remembered his lines, but he lost the plot. Almost before he could get his cowboy boots off, he was making improvements of his own.
This was especially notable in what is known as "foreign policy." As mentioned earlier, Republicans had learned their lesson from the Vietnam War. They were generally content to mind their own business overseas, seeking only to "contain" communism – which they saw as a menace. But Reagan fell under the spell of the proto-neoconservatives in Washington. Not content to leave things alone, he decided he could improve the world by actively trying to defeat communism.
Of course, this is celebrated as a great and good victory. In her comments on Reagan’s death, Britain’s Maggie Thatcher said he would be mourned by "millions of men and women who live in freedom today because of the policies he pursued."
Maybe this is true. Maybe it is not. It is impossible to know what might have happened had Reagan left things alone. Most likely, communism would have fallen apart anyway, perhaps sooner.
Ronald Reagan’s Foreign Policy: The Activists Get the Monuments
When a man’s investments go up, he is a genius. Those who failed to invest are fools. And when they go down it is because of events he could not possibly have foreseen. Likewise, in public spectacles, the link between action and consequence is forged in a way that always flatters the activists. If something turns out reasonably well, it is because some world-improver took action and made it that way. If something turns out badly, it is become someone failed to act when he should have. It is always the activists that get the monuments. Abraham Lincoln is credited with having abolished slavery – at a cost of 618,000 American lives, 2% of the entire population. (An equivalent death toll would wipe out 5 million Americans). Everywhere else in the world, slavery was abolished – at about the same time – with hardly a single corpse. The Great Emancipator might better be cursed than praised.
Likewise, Woodrow Wilson is given credit for all manner of extravagant improvements. That he almost single-handedly brought about WWII, with his appalling meddling in WWI, is never mentioned. Instead, when the subject of WWII comes up, Neville Chamberlain’s name arises almost immediately. The poor man gets the blame for trying to avoid war – that is, for not taking action when he should have.
We don’t know whether people are freer because of Mr. Reagan or not. We don’t know whether Mr. Bush’s meddling will pay off or not, either. What bothers us is the immodesty of it all.
Reagan "also helped engineer a huge surge in American patriotism," writes Ross MacKenzie. "The Carter years were a period of American self-doubt: about the economy and about American power (with the memory of Vietnam still tormenting most policymakers). Mr. Reagan set about wiping this away. He increased military spending by a quarter between 1981 and 1985. He talked to the American people not about ‘malaise,’ (as Mr. Carter had done) but about ‘morning in America.’ By the end of his second presidency, much of the talk about American decline had gone out of fashion: the country regarded itself once again not only as the world’s greatest superpower, but also as the world’s most dynamic economy."
Now, we look around and we see no trace of self-doubt. Instead, we have become the most confident bunch of blockheads on the globe. That alone would be no disgrace, but it comes with the most immodest plans for world improvement …and the biggest rush of liquidity the water planet has ever seen.
The Daily Reckoning
March 11, 2005 — London, England
Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).
The papers are full of recollections. Yesterday marked the 5th anniversary of the "peak of the great millennial stock market," says James Grant in The New York Times. Thursday, five years ago, you could have still bought Cisco Systems at about four times today’s price. Tech stocks were selling for record prices. The previous October, for example, just six of the leading tech stocks – Microsoft, Intel, IBM, Cisco, Lucent and Dell – were thought to be worth $1.65 trillion, or 20% of the U.S. GDP.
Such was the level of madness, that VA Linus Systems when public in December of 1999, and set a one-day record for initial public offerings. The company had lost $14.5 million on sales of $18 million the year before. Still, in its first day of trading, the stock rose 698% to give the company a value of $9 billion. This was not as extraordinary as it sounds today. Investors’ Business Daily reports that of 240 companies that went public in the second half of 1999, barely 1 out of 10 was profitable and nearly half had no revenue whatever.
Alan Greenspan saw no danger. Instead, he announced just four days before the crash began that "the capital spending boom is still going strong." Over the next two and a half years the U.S. stock market lost half its value – a loss to investors of more than $9 trillion.
Well, easy come, easy go.
And we do not fault the Fed chairman for failing to warn investors. How was he to know?
Besides, what business was it of his? The Fed’s role was supposed to be to maintain the stability of the currency and the banking system. That investors were prone to losing their heads from time to time has always been taken for granted. No one could expect a central banker to change human nature.
And what is the proper role of a stock market? To separate fools from their money, of course. In running up prices…and then collapsing…the NASDAQ was merely doing what Nature intended.
Not that the Fed was innocent. For a very long time, Fed policy had favored credit expansion. Easy credit was meat to the Reagan-era boom…and mead at its exaggerated end. By 1999, investors had drunk too deeply from the cup; their knees were beginning to wobble.
But then, only after they hit the floor, did Alan Greenspan begin his real mischief. He went around offering pick-me-ups – more credit, 100% proof. The Fed’s key lending rate had been over 6% when the NASDAQ hit the fan. By June 2003, it had been knocked down to 1%. Previously, investors who wanted to borrow had to jump the 6% hurdle – the target of their intentions had to be able to provide more than a 6% return. Now, the hurdle was taken down and throw away. One percent was barely half the rate of consumer price inflation. All they had to do was buy long-dated bonds.
That is the story of the last five years. After an initial shock, investors got up off the floor…and the party was on! Now, an investor in residential real estate (at typical 5-to-1 leverage) is getting the same returns as NASDAQ investors in the late ’90s – about 40% per year. And now, Americans are trillions of dollars deeper in debt.
And Alan Greenspan? Is he five years’ wiser?
Are any of us?
More news, from our team at The Rude Awakening…
Eric Fry, reporting from Manhattan:
"Agricultural commodities have been soaring for the last five weeks, despite horrible fundamentals. The Rude Awakening wanted to know why…so I sought out an expert…"
Bill Bonner, with more views:
*** "What are investors thinking?" we asked one of them, last night. In particular, we wanted to why anyone would buy a French 50-year OAT (government bond). The bond is denominated in euros – a currency that has only been around for six years. It pays less than 4.5%. What are the odds that sometime between now and 2055 interest rates will rise…or the currency will fall? What are the odds that sometime between now and 2055 investors take a less optimistic view about the world and its economic future? What are the odds that sometime in the next half a century…investors feel like they’ve been had?
The person to whom we posed the question was a French woman.
"It is all remarkable. Apparently, there is a strong demand for the bonds, coming from pension funds and insurance companies. The insurance companies own a lot of real estate in Paris. They think real estate has reached a cyclical high, so they’re unloading it. But they have very long- term obligations that they have to cover. These long-dated bonds allow them to cover those obligations – legally as well as responsibly. But, of course, it is insane. If you went back 50 years and bought such a bond you would have been wiped out several times. During that time, there have been several financial crises…interest rates have gone up and down. Inflation rates have been much higher. And we’ve changed our money twice. We had francs in the ’50s…and then changed them for New Francs in the ’60s…that were replaced by euros in the ’90s. What are the odds that the euro will still be around in 2055? I don’t know, but they can’t be very high."
*** A note from Chris Mayer…
"Investments are made with an eye for finding value, and holding on. As Seth Klarman, a great value investor and the top dog at Baupost Group, notes, ‘Investors in stocks expect to profit in at least one of three possible ways: from free cash flow generated by the underlying business, which eventually will be reflected in a higher share price or distributed as dividends; from an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price; or by a narrowing of the gap between share price and underlying business value.’
"CrisisPoint Trader deals in the guilty pleasures of speculation – the fatty foods and sweets of the financial world. I wouldn’t recommend you go out and put your whole net worth to work in CrisisPoint’s speculations, just as I wouldn’t recommend a diet consisting solely of doughnuts and chocolate, but in moderation, speculating can be very profitable and a lot fun."
*** Middle age is such a difficult time for men. They must feel some biological urge to procreate…to leave some genetic trace…before it is too late.
"The lover who sent Boeing boss’s career nose-diving," is the headline yesterday’s daily mail.
You already know the story, dear reader. Harry Stonecipher was told to back up after he dallied with a Miss Debra Peabody, a woman on the Boeing payroll, formerly resident in London. The two met at a "bonding retreat" for corporate executives in Palm Desert, California. There on the page is a photo of Miss Peabody. She looks like the sort of woman a man might want to dally with. But also on the page is a photo of Mr. Harry Stonecipher. The poor man looks not merely over the hill, but as if he had just be dug out of it.
Puzzled, we turned to a friend for feminine guidance:
"We can see why he would want to fool around with her," we began, "but why would she want to fool around with him?"
"She wanted a promotion…"
"A very unromantic way to look at it…"