"I regret that I am now to die in the belief that the useless sacrifices of themselves by the generation of ’76 to acquire self-government and happiness for their country, is to be thrown away by the unwise and unworthy passions of their sons, and that my only consolation is to be that I shall not live to see it."
Thomas Jefferson

"Is life so dear or peace so sweet," asked Patrick Henry, "as to be purchased at the price of chains and slavery?"

The answer is usually "yes!"

There is no such thing as a free lunch, say the libertarians. But given a choice between freedom and lunch…men will choose the meal. In exchange for a mess of potage, Americans readily gave up the liberty of the new continent.

Twenty-two years after the colonists had thrown off the shackles of Britain, they began forging new chains for themselves in 1798 – out of heavier iron.

The United States came together under the banner of "inalienable rights." But in 1798, the "Alien and Sedition Act" alienated Americans from their most basic freedoms: the right to say what they pleased and to be left alone.

"In the 1790s," explains William J. Watkins, Jr., "a number of Americans feared that the democratic excesses of the French Revolution would be exported to the U.S. They believed French agents were plotting to destroy the Constitution and overthrow the federal government. Wild rumors spread that Jefferson, Madison, and other members of their Republican Party planned to offer assistance to a French invasion force supposedly sailing across the Atlantic. To make matters worse, an undeclared naval war soon erupted between the U.S. and France."

People will believe almost anything. Revolutionary France was hardly going to send an invasion force to America – while it was surrounded by hostile monarchs on each of its borders in Europe.

But for every liberty crushed by foreign invaders there must be two or three exterminated by a bogus fear of foreigners.

"This environment of fear and distrust," says Watkins, "led to the passage of the most illiberal legislation of the early national period: The Alien and Sedition Acts. Enacted by Congress in the summer of 1798, the Acts prohibited criticism of the federal government and gave President John Adams the power to deport any alien he viewed as suspicious. This legislation made a mockery of the First Amendment and deprived aliens of basic due process of law."

"To combat the Acts, Jefferson and Madison drafted the Kentucky and Virginia Resolutions. In these Resolutions, Madison and Jefferson accused Congress of exceeding its powers and declared the Alien and Sedition Acts void. Times were so tense that Madison and Jefferson hid the fact of their authorship because they feared prosecution under the dreaded Sedition Act. Although the American people originally applauded the Acts, in the elections of 1800 they threw out of office many of the Acts’ supporters. Jefferson was also elected to the presidency and he suspended all prosecutions brought under these shameful measures. This so-called ‘Revolution of 1800’ brought the crisis of the Alien and Sedition Acts to a close."

Watkins’ might have left the appalling events of 1798 alone – except that he thinks he sees another milestone along the road to ruin.

"Today, similar to the 1790s," Watkins continues, "Americans sense a threat of danger from abroad. In the aftermath of the Sept. 11th attacks and the anthrax scare, Americans are concerned that terrorism will claim more innocent lives. Consequently, few voices of opposition were heard when Congress in late October passed the USA Patriot Act of 2001. Under this legislation, government investigators can more easily eavesdrop on Internet activity, FBI agents are charged with gathering domestic intelligence, Treasury Department officials are charged with creating a financial intelligence-gathering system for use by the CIA, and the CIA is permitted use of evidence garnered by federal grand juries and criminal wiretaps. In addition, President Bush signed an Executive Order providing for secret military tribunals to try suspected foreign terrorists. These courts will not apply the principles of law and rules of evidence that are used in the trial of criminal cases in U.S. district courts."

It took more than 300 years. But even in America, paradise yields to backhoes and politicians. The savage country has been tamed…and so have the people who tamed it. They shuffle around in as many chains as the average resident of Singapore, Hong Kong or New Zealand…none of which ever bothered to make war on their British masters.

It is an odd tyranny Americans suffer. We have no words to describe the mushy dictatorship of the majority…or the satin chains we wrap around ourselves And yet, Tocqueville saw it coming 200 years ago.

"I think," he wrote, "that the species of oppression by which democratic nations are menaced is unlike anything the world has ever seen."

In Empires and Kingdoms, Tocqueville noted, the power of the authorities is absolute, often capricious, and dangerous. But king’s armies cannot be everywhere. And his agents tend to be thin on the ground. Most people living under these forms of government had very limited contact with the authorities. Taxes were low. Regulations were few. And the regulators themselves often lived in fear of being strung up by a mob. The King’s grip was awful, but his reach was short.

Democracy is different. It invites people into the governing class…and thus turns them into unpaid agents of the government, and ultimately their own oppressors.

"After having thus successively taken each member of the community in its powerful grasp and fashioned him at will," Tocqueville predicted, "the supreme power [of democracy] then extends its arm over the whole community. It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent and guided…men are seldom forced to act, but they are constantly restrained from acting…Such a power does not destroy, but it prevents existence; it down not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people…"

"Thus their spirit is gradually broken…" he continues. "gradually losing the faculties of thinking, feeling, and acting for themselves…"

People then console themselves at the loss of their liberties, says Tocqueville, "by the reflection that they have chosen their own guardians."

Every 2 or 4 years, Americans shuffle off to the voting booth…make their selections…and feel like Jefferson or Adams. Then, they go back to doing as they are told.

Your correspondent,

Bill Bonner
February 26, 2002 — Nicaragua

"Every commentator [every analyst] had some kind of explanation for the financial disaster," says Marc Faber, reviewing the financial media’s coverage of the high-profile Enron meltdown, "but no one observed that Enron itself isn’t really the problem; rather, it is a symptom of the rot, excesses, and financial irregularities that occurred in the U.S. bubble economy of the late 1990s and which remain characteristic of the entire U.S. capital market today."

Yet, without any frightening new stories cropping up about bogus accounting or clandestine insider deals, investors "jumped back into the stock market with elan"(thanks Eric). The Dow pushed into positive territory for the year.

Trouble is, as Faber points out, "Enron is far from being a unique case of accounting irregularities, false reporting, and over-leverage; in fact, it is just one of a large number of companies who, in recent years, have artificially boosted their earnings with a view to manipulating their share prices higher.

Dr. Faber, as you may know, is a Barron’s roundtable member and a regular contributor to Strategic Investment. "The demise of Enron will have far-reaching implications," Faber continues, "not only for its dubious management, and for those companies and politicians who had a business relationship with it, but also for the entire stock and corporate bond market. The price of a stock or a market depends on fundamentals, but even more importantly, it depends on the confidence of the investing public."

But, what the heck… that’s tomorrow. La la la… live for today.

"Optimism about the present," Eric points out below, "and confidence in the future also describes the approximate attitude of the investors who are busy bidding up share prices. For the moment at least, accounting issues have receded into the background."



Eric Fry in New York…

– Now that’s more like it! Finally a good ol’ fashion rally! The Dow shot up 177 points to 10,145, while the downtrodden Nasdaq jumped nearly 3%, to 1,769. The Nasdaq and the S&P 500 still have a little more catching up to do.

– Maybe we investors had become a little too fretful about all this accounting stuff. What do reported earnings really matter anyway? It’s not like the common shareholders ever get any of it. If Cisco earns $1 billion or $1 trillion or nothing at all, what does it matter? The company pays no dividend anyway.

– A couple weeks back, Arthur Levitt, the former Chairman of the Securities and Exchange Commission, told Congress, "Financial statements, often, are not an accurate reflection of corporate performance, but rather a Potemkin village of deceit." Hey, so what, they were very lovely villages and we liked them that way. Back in the days when no one cared about accounting, stocks used to go up every day. What was so bad about that?

– In recognition of the robust stock market action, let’s take a break from our usual doom and gloom diatribe to accentuate the positive.

– Here’s an encouraging statistic: Business inventories have fallen for 11 straight months and now stand at their lowest level in two years, according to the Commerce Department. Replenishing these lean inventories may be the economy’s best near-term hope, according to ISI.

– In this Mother Hubbard economy of ours, merely restocking the cupboard could produce positive GDP growth. If consumers pick up the pace of their spending, so much the better.

– Yesterday’s headlines suggested that consumers are doing exactly that. First up, January sales of existing homes soared a stunning 16.2%…seasonally adjusted, of course. Seasonal adjustments don’t usually matter too much. But when the balmy January of 2002 follows the frosty January of 2001, seasonal adjustments might distort the true picture. In other words, the particularly warm weather this year may have encouraged an unusually large number of folks to buy houses. Nevertheless, the sales numbers were impressive across all regions of the country, with the West showing particularly spectacular sales growth of 23.3%.

– And after you buy a house, you’ll need to stock your new kitchen with an espresso machine, a bread maker and a $75 corkscrew. It should be little surprise then that Williams-Sonoma Inc., vendor of high-priced kitchen appliances, boosted its 2001 revenue and earnings estimate yesterday.

– Also testifying to the resilience of the never-say-die consumer, cell phone vendor Qualcomm, stated that business is stronger than previously forecast.

– Lastly, General Motors shares surged almost 5 percent yesterday after raising its production and earnings estimates for 2002. "Our revised expectations reflect the increased optimism we have about our near-term performance," said Chief Financial Officer John Devine during a conference call with analysts, "and the confidence we have about the future."

– Optimism about the present and confidence in the future also describes the approximate attitude of the investors who are busy bidding up share prices.

– For the moment at least, accounting issues have receded into the background. Still, it is unlikely that the final chapter has been written. Financial market trends often evolve so slowly that investors fail to recognize material changes until well after the fact. Just as the stock market boom of the 1990s did not occur in an instant, neither did the moral compromises that nurtured the boom appear all at once. Rather, barely perceptible and seemingly innocuous changes at the margin evolved into something almost diabolical.

– Investors, like plump pigeons pecking at seeds on the ground, paid absolutely no heed to the feline of aggressive accounting practices inching towards them.

– But now that a few pigeons have paid a price for their complacency, all the rest of us know to be more vigilant. But where do we turn?

– "First and foremost," professional short seller James Chanos tells the congressional Committee on Energy and Commerce, "no one should depend on Wall Street to identify and extricate investors from disastrous financial situations. There are too many conflicts of interest…I can’t think of one major financial fraud in United States in the last ten years that was uncovered by a major brokerage house analyst or an outside accounting firm. Almost every such fraud ultimately was unmasked by short sellers or financial journalists."


Back along the banks of the Seine…

*** With all the media hubbub, we here at the Daily Reckoning wondered how Enron and its inept brethren might affect the credit markets…are we going to start seeing the long-awaited squeeze? We put the question to Strategic Investment’s Dan Denning…

*** "For years," says Denning rather seriously, "the short-term commercial paper markets have been a cheap and easy way for corporations to finance stock buy backs or fund employee pension obligations. Instead of tapping into cash flow-and causing earnings to suffer- corporations borrowed freely from the abundant debt markets. Enron’s collapse has caused those markets to tighten up. Now, higher-risk companies are being forced to pay higher interest rates to borrow short term money."

*** The "commercial paper" market, explains Denning, has been fractured into three distinct categories. The first is made up of strong, credit-worthy companies. These companies can borrow at only 30 basis points over the London interbank overnight rate. Tier two is made up of companies with poorer credit ratings who have to pay 50 basis points over Libor. And in the last category you have companies who must pay up to 80 basis points over Libor because of doubts about their ability to repay.

*** In the wake of Enron, "high-risk ventures are being priced the way they should be – that is, high-risk ventures have to pay nearly twice the going rate to borrow money. Unlike Japan, where banks continue to step in and resuscitate dying companies – American credit markets are pulling the plug."

*** What will this mean for you? Denning: "You’d better make sure you don’t own stocks who depend on credit markets to meet their working capital needs. Trouble is, with murky and disingenuous financial reporting, that’s not always as easy as it seems."

Addison Wiggin