Rigor Mortis

More musings on the dead…and who, at last, will foot their bills.

"Oh death, we thank you for the light you spread across our ignorance."

– Bossuet

Tante Janine lost her right to vote. But that was the least of it; the old woman was dead.

"We all remember her as ‘Tante Janine,’" said the eulogist, "because she was like a family member to us all. Always ready to lend a hand…always ready to comfort the sick…and help with community projects…Tante Janine was there for us all."

"She will be remembered by us too, as a woman who was always full of life…even though in her own life she had to overcome many obstacles and hardships."

Poor Tante Janine had her share of life’s miseries. Her husband died young. And then, her only child was killed in a motorcycle crash a few years ago, leaving her alone in the world. And then, she was crippled by severe arthritis and finally done in by something else.

"We will all remember her fondly," continued the farewell address, "but she would not want us to do so with tears…"

America’s Debts: Rest in Peace

Yet, there in the front row, in a church full of gray heads, were two very pretty young women whose eyes ran like leaky faucets. Janine Armande had taken to them both – Maria, your editor’s daughter…and Elisabeth – as if they were her own kin.

Tante Janine had taught the girls to knit. Maria, waiting for a photo-shoot, would pull out her knitting to pass the time. Then, she would send Janine a copy of the magazine – usually a fashion spread – which the old lady would show off as if they were photos of her granddaughter. May she rest in peace.

"We saw her in the morgue," Maria reported earlier. "Elisabeth cried, but I didn’t really know her as well; I wasn’t as close to her…She looked pretty good."

Veni et vidi. Gaze on the dead, and learn their secrets.

No one seems to care about dead people. No stockbrokers ask for their business. No politicians pander for their votes. No one cares what they think or what they may have learned before they shucked their mortal shell. They get no respect, just a quick sendoff…and then they are on their own.

America’s Debts: The Dead Whisper

But come with us, dear reader. And let us look into the open carton and see ourselves, we Americans…the world’s mouth. But not ourselves as we pretend to be – full of pretense and chutzpah – but as we really are, with our mouths shut.

Lately, we have taken up a morbid fancy. We think we hear the dead whispering to us: ‘come over…peer into this carton…and take a good look!’ We read the obituaries first. And show up for funerals a half an hour early so we will get a good seat. It is as if each corpse had something to tell us; but the poor stiff cannot speak. So, we have to stare and wonder.

"In death, all debts are paid," said Shakespeare. The dead get no breaks; they are held to strict standards. Rigor mortis – that is what draws our thoughts toward the defunct. The dead are paid up. Settled. They make no mortgage payments and take no calls from creditors. Their Final Reckoning is over and done.

A body decomposes into its constituent elements. If we watch carefully, maybe we will find out how it works. The soul goes Heaven-knows-where…while the rest returns to the dust from whence it came.

And the debts? Where do they go?

We lean over the box. We want to know. Who gets paid…and who gets stiffed?

Every debt is eventually settled, one way or the other. It is paid by the borrower. Or – if his luck runs out – the lender must make up the difference. Either way, like a night janitor in an empty schoolroom, death cleans the slate.

America’s Debts: China as the Company Store

How is it then that Americans think they can slide into paradise…owing the rest of the world $2.5 trillion, net? Do they think their heirs can add to their borrowings at the rate of another $2 or $3 billion every day, forever?

Such is the remarkable state of the world that China – a 3rd World Nation – lends the U.S. $300 billion per year…buying that much, according to the latest estimates, in U.S. Treasury bonds. Without Chinese support, the dollar would have already collapsed…bond yields would have soared…and the U.S. economy would be in a recession, if not a depression.

Where does the money come from? The Chinese get the dead presidents from selling products to live Americans – who seem ready to consume anything that comes their way. First, the dollars come rolling off America’s printing presses…then they make their way into the hands of Chinese and other manufacturers…(in the first quarter of 2003 alone, China’s exports to America rose 35%)…and finally, are returned to their birthplace as loans.

China is fast becoming America’s ‘company store,’ to whom we owe our standard of living…and maybe even our soul.

And thus comes an even more remarkable curiosity:

"In an era of free trade," begins a complaint from Treasury Secretary John Snow, "we should not have to confront the issue of countries distorting their currencies to gain unfair trade advantages."

The specific country to which Snow refers is China. The trade advantage the latter enjoys is that it sells much more to America than America sells to it, by a ratio of 5 to 1. And the unfair distortion is that China pegs its own currency to the dollar.

Daily Reckoning readers will have to rub their eyes. They will have a hard time seeing what is unfair or distorted about fixing your currency to the world’s reserve money; that is the whole idea of the Dollar Standard system. It seems admirable on the part of the Chinese, rather than conniving. But the Treasury Secretary is a desperate man. Thirteen rate cuts have failed. Perhaps a dollar devaluation would help. What stands in the way is China’s resolve to hold its currency steady against that of its major trading partner.

America’s Debts: Spend Your Way to Prosperity

An entire American generation has grown up being told that it could spend its way to prosperity. Snow, McTeer, Greenspan, Bernanke – they all still believe it. Debt is no problem, they say. Spend, spend, spend.

American spending has created a boom in China, where the average person works in a sweatshop, lives in a hovel, and saves 25% of his earnings.

And yet, Americans have come to believe there is something unfair about China’s trade practices…that they must be ‘stealing’ jobs with a distorted currency, rather than competing for them fair and square.

Meanwhile, in America, the average man lives in a house he can’t pay for, drives a car he can’t afford and waits for the next container from Hong Kong for distractions he can’t seem to resist. He saves nothing and believes the Chinese will lend him money…forever, on the same terms!

That this cannot go on forever seems hardly worth pointing out. Whether it will go on much longer or not, we cannot say. But that it will all end badly seems a lead pipe cinch.

If the Treasury Secretary can pull off a devaluation against the Chinese currency, he will effectively stick Chinese investors with the bill for America’s debts. Compared to their own currency, they will be holding assets in a declining one. He will, no doubt, succeed eventually. Because it seems sure that the dollar will go down. But at what cost? If the Chinese are too badly stiffed, why would they continue to lend? And what will become of us when foreign lenders are no longer willing to pony up?

Which way to Buenos Aires?

Oh, you worthless dead people! If only you could move your lips and tell us something useful! All of these debts, conceits and tomfooleries must be settled somehow…if only you could tell us how!

Instead, you deconstruct in front of our eyes…and take your secrets to the grave.

Your editor,

Bill Bonner

August 01, 2003 — Ouzilly, France

Editor’s Note: 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.

It is hard to believe, but it is already the end of the week…and the end of August. We are gulping down the calendar as if it were $2 wine.

But though the U.S. has become "the world’s mouth," we have been on short rations here at the Daily Reckoning. People from Romania, Poland, Germany, South Africa, Britain, France, Spain, and of course, America have come to hear your editors talk about writing. We have to put on a good show. We are left with time to write, but none to think.

The bond market fell again yesterday. In a just a few weeks, falling bond prices have wiped out 4 years of earnings. Imagine the poor people who bought in June – desperate for a measly 2.5% yield, but sure that U.S. Treasury bonds were the safest financial credits on the planet. Instead, they have lost 10%.

We are not convinced this means the end of America’s progress towards Tokyo, but we are sure it is the end of something.

No, dear reader, we have not become obsessed by the Dollar Standard; we’re just trying to understand what happens next. (More on this below…)

We know how it got started: under pressure, President Nixon defaulted on America’s pledge to redeem its paper money with gold. Thirty-two years later, there is $9 trillion in foreign hands…the current account deficit has reached more than $500 billion per year…and the U.S. federal deficit has grown to about $400 billion. The temptation to make the next dollar a little less valuable than the last is irresistible. Bernanke has not only admitted as much; he has promised it. If foreign lenders get their money back at par, it won’t be his fault!

We think we know how it ends: on the pampas…that is, in bankruptcy, recrimination, and desperation. But we are still not sure it doesn’t make a little stop in Japan on the way.

A friend is down in Buenos Aires. It is a beautiful city, he reports, which looks like it was once a rich one. It is like Paris, but Paris down-at-the-heels…and now overrun by beggars. People pick through trash bins looking for things they can eat, wear or sell.

Why doesn’t the Argentine central bank just lower interest rates? Maybe they never thought of it….

Here’s Eric Fry, on the very lips of the great American digestive system:


Eric Fry, our usual suspect in New York…

– The final day of July 2003 was a glorious one for the bulls…for a while. As the new trading day dawned, stocks soared majestically toward the heavens. The Dow glided more than 160 points higher, before suddenly losing altitude. Although the Dow’s nosedive stopped short of crashing into negative territory, the blue-chip index tumbled to a mere gain of 34 points to 9,234. The Nasdaq Composite also relinquished more than half of its earlier gains to advance only 14 points to 1,735.

– Meanwhile, the bond market resumed its inelegant collapse, as the 10-year Treasury note tumbled 1 6/32, causing its yield to spike to 4.47%. The 10-year yield has jumped a stunning 1.38 percentage points in just six weeks since hitting a 1958 low of 3.07%. The 30-year government bond plummeted 2 11/32 points yesterday, driving its yield from 5.21% to 5.41%.

– The "news du jour" which cheered the stock market undefined initially undefined and spooked the bond market was the Commerce Department’s report that GDP rose at a 2.4% annual rate in the second quarter, after growing at 1.4% rate in the first quarter. Highlights of the report included the fact that consumer spending rose 3.3%, and business spending rose 6.9% in the second quarter – the largest increase in business investment in three years. Spending on equipment and software rose 7.5%, also the largest increase in three years.

– Lowlights included the fact that, excluding the defense buildup, the U.S. economy grew only 0.7%. Defense spending rose 44.1%, the highest rate since the third quarter of 1951. Net-net, it looks like America is making a lot of guns, but not much butter.

– So the stock market bulls are finally getting what they want…or are they? Maybe they are merely on the road to getting what they deserve. For months, the stock market’s optimistic contingent has been longing for an economic recovery undefined one that is sufficiently robust to help them justify paying nosebleed prices for stocks.

– Yesterday, the bulls believed they received evidence of said hoped-for recovery in the form of 2.4% GDP growth. Unfortunately, the recovery undefined so far undefined is strong enough to boost GDP a little, while boosting interest rates a lot. A 10-year yield of 4.50% will be no help whatsoever to GDP trends in the third and fourth quarters of this year.

– But the stock market bulls aren’t worrying about rising rates. They can’t be bothered with concerns about soaring long-term interest rates, even though they are clamoring to pay 40 times earnings for stocks that rely greatly upon a low interest-rate environment. Heck, maybe this time IS different. Maybe times have changed. If pornography can play on TV during prime time, can’t stocks selling for 40 times earnings continue rallying?

– A new TV series called "Skin" will debut on the Fox Network this fall. As the International Herald Tribune reports: "’Skin’ tells the tale of the forbidden romance between a 17-year-old Mexican-Irish Romeo, whose father is the Los Angeles district attorney, and a 16-year-old Jewish Juliet, whose father is a porn king."…Think of it as a modern-day "Father Knows Best."

– "How much redeeming social value can be shoveled onto two hot bodies in a single Fox TV series?" quips the International Herald Tribune. Helpfully, the show’s Web site provides a suitably provocative answer: "’Skin’ is about sex and race. ‘Skin’ is about politics. And most of all, ‘Skin’ is about skin: complexion, beauty, desire, attraction, obsession and prejudice in contemporary Los Angeles."

– On Wall Street, "Skin" is about the depth of sell-side research. Wall Street’s skin-deep analysis and automatic "buy" recommendations may continue to succeed for a while longer, but we suspect that the market’s "ugly internals" will halt this rally before too much longer.

– Eventually, investors will discover that this market’s inner beauty is sorely lacking. One facet of the market’s "ugly internals" is the fact that financial stocks have been leading the market’s advance. These same financials are, of course, acutely sensitive to interest rates. When rates are falling, life is good. But when rates are rising undefined Yikes! undefined watch out!

– "The weight of interest-rate-sensitive stocks in the S&P 500 is at a 25-year high, suggesting that the market is more sensitive to the bond outlook than ever before," one analyst observes…Maybe it’s a good idea to steer clear of the financials for a while.


Back in Ouzilly…

*** The dollar rose yesterday, to 1.12 to the euro. We also note that you can buy an ounce of gold for only 354 dollars. Eventually, we suspect that the euro will rise to at least 1.5 to the euro…and that it will take more than 1,000 dollars to buy an ounce of gold. When? We cannot say, but readers are urged not to linger over this opportunity for too long.

*** Another reader comment:

"What is the future of a failed governor of America’s largest state? Looking at this remarkably informative and encompassing photo of California Governor Gray Davis, I am reminded of historian John T. Flynn’s contention (in "The Roosevelt Myth," 1948/1956) that the Great Depression commenced in New York state under the governorship of one Franklin Delano Roosevelt.

"In 1929, as we all know, there was a classic Wall Street Panic on FDR’s gubernatorial watch, which FDR did nothing to alleviate. Recall that in those halcyon days it was the state, and not the federals, who regulated banks and brokerages. FDR’s New York regulators did nothing to correct the excesses that led to the Panic. Subsequently, FDR’s Wall Street Panic spread across America like a financial plague, aided and abetted by an incompetent Federal Reserve (is it redundant to say that?). The FED kept money tight (it was Gold-standard money, in those days), and compounded the problem by permitting the U.S. Dollar to be used as a world "reserve currency" for third-party nation transactions. That is, for example, Brazil settled accounts with Germany in U.S. Dollars, and in the end U.S. Gold currency physically left the country to one or both nations.

"In 1933, FDR took the helm from the by-then disgraced Hoover, on a political platform of balanced budgets and investment-led growth. FDR’s first act? Confiscate the nation’s Gold. Then devalue the U.S. Dollar from $20 per ounce of Gold to $35 per ounce of Gold, a 43% loss of value to the national currency in a matter of two months. Now there was even less money in a broke nation.

"After several iterations of FDR’s so-called ‘New Deal,’ by 1939 the U.S. had more unemployed workers and people on relief than in 1933. Factories were still idle, furnaces were still cold, fields were fallow and mine pits were flooding. But quite a few leaves were raked, I hear.

"At root, it seems that the nation’s and world’s capitalists heard the socialist-nationalist musings of FDR et al., and did not invest in the USA. How to solve the problem? In the words of that self-same FDR, ‘Battleships’ and other military preparedness. And that is another story entirely.

"But I do wonder what the future holds for California and its poster-boy for tax-and-spend governance. Keep your powder dry, Gray."

The Daily Reckoning