Serial Dishonesties

A DR reader tells me the Fed has opened a museum in Chicago:

“There’s supposed to be an exhibit in which you are presented an economic problem, and are supposed to figure out what the Fed should do…raise interest rates, lower them, do nothing, etc. After you make a guess, you get to hear the “right” answer…what Alan did in the same real-world situation.”

President Lincoln’s innovations were many and long- lasting. In the South, he introduced the use of monumental force against Americans. In the North, he preferred fraud.

The greenback – an IOU with no intention to ever pay up – is still with us. Both the currency and its managers are regarded with suspicion by only a few economists, conspiracy buffs and crank commentators. Otherwise, they enjoy the kind of reputation that is usually reserved for live war heroes and dead bank robbers.

But things that need to be managed will soon be mismanaged, at least that is today’s cheerful hypothesis. And even Alan Greenspan will someday come up with the wrong answer. This is not merely a matter of chance….but one of destiny. The use of force and fraud – whether by dead presidents or with dead presidents – carries with it a deadweight loss. Sooner or later…somewhere and somehow…the dead weight has to fall on someone.

It is hard for us to imagine, but there was once a time when the nation’s money had no central managers. Economic historians – believers in the unrelenting forward march of progress – describe the antebellum banking period as one marked by frequent crisis, instability and bank failure. Thus, Lincoln’s new centralized monetary authority – and even his unbacked paper money – looked to many like an improvement.

But the Jacksonian era, says Jeffrey Rogers Hummel, “was probably the best monetary system the United States has ever had. The alleged excesses of the fraudulent, insolvent or highly speculative “wildcat” banks were highly exaggerated. Total losses that bank note holders suffered throughout the entire antebellum period in all states that enacted free-banking laws would not equal the losses for one year from today’s rate of inflation (2%) if superimposed onto the economy of 1860.”

It did not take the currency managers of 1863 long to get into bad habits. They had printing presses back then, too. And by the next year, the greenback had already fallen to 35 cents worth of gold.

Much of Lincoln’s central banking apparatus was dismantled in the late 19th century. But you can’t keep a bad idea down for long. The Federal Reserve system was put in place in 1914, after the Panic of 1907 convinced bankers that they could dress up their cartel in the ‘cloak of philanthropy’ and sneak through Congress.

“From its humble beginnings as primarily a decentralized backup system encompassing twelve districts across the U.S…..” writes William Anderson, “the Fed quickly gained importance during World War I as a huge holder of short-term government debt. Its place secured by its WWI performance, the Fed went on quickly to inflate the currency, leading to the short but drastic recession of 1920 and 1921. Led by Benjamin Strong, the head of the NY Federal Reserve Bank, the Fed really turned on the crank during the 1920s in order to prop up the British pound…”

“Turning on the crank” is what the Fed tends to do. In fact, it is just about the only thing the Fed does.

“The Fed continues grasping at the only straw within its grasp,” writes the Mogambo Guru, “flooding the world with funny money and appropriating the meager savings income of the little people so as to drive interest rates artificially down… The Fed drives the markets by committing serial “we’re-so-clever” dishonesties, one after another, in desperate response to the disasters consequent to the entire previous series of lies, frauds and intellectual corruptions that they, and associated others, perpetrated.”

Greenspan has been confronted with several crises, imagined and real, during his spell at the Fed – the recession of ’90-’91, LongTerm Capital Management, Asian Currencies, Russian default, Y2k… Each time, he has turned the crank a little faster. Now, he faces his biggest challenge. Industrial production has fallen for 9 months in a row. A chart in Grants Interest Rate Observer records 10 recessions since WWII. The longest period during which industrial production fell was between ’60 and ’61, a period of 11 mos. The only other period of longer decline was in the early ’80s. And never, in any previous decline, has the consumer been so light on savings and so laden down with debt. He has no margin of error. A month or two of unemployment – and he’s insolvent

“The signs of an investment collapse are everywhere,” writes Dr. Kurt Richebacher, “particularly in the steepest and most rapid slump of profits in the whole postwar period.” American businesses – seeking to maximize shareholder value by cutting costs – will put more people out of work in the months ahead. Even with lower-interest short-term rates, those people will not be avid shoppers.

Still, today’s managers are thought to be smarter than Salmon P. Chase in the 1860s or Benjamin Strong in the 1920s. Alan Greenspan will always come up with the ‘right’ answer, it is widely believed…

But Greenspan’s dollars are no less fraudulent than those of Chase. Spreading them around does not make people richer. It only makes them feel richer…and leads them to miscalculate. The consumer, feeling flush, tosses around $20 bills with greater ease and abandon… The businessman, feeling the fresh flood of bills headed his way, misinterprets it as a sign of real, durable demand; he hires more workers and builds a new factory. The investor, seeing the new capital spending, mistakes it for a New Era of higher earnings and permanently higher stock prices.

Even a Fed chairman, watching the flow of new investment and higher profits, like the warm water filling his bath, mistakes the ersatz boom for the real thing and imagines, as Mr. Greenspan did recently, that “there is still, in my judgment, ample evidence that we are experiencing only a pause in the investment in a broad set of innovations that has elevated the underlying growth rate in productivity.”

And yet, it is all a mass delusion built on a fraud…a riot of cash and credit incited by the central bank and whipped up by Wall Street and the financial press, while the financial gendarmes, like the Irish cops in the NYC draft riots of 1863, conveniently disappear.

The deadweight loss of a riot is unmistakable – broken windows, burned out cars, looted shops – and often, dead bodies. The deadweight loss of a central banker’s fraud falls heavily too…but on whom? When?

We will see.

Bill Bonner
July 20, 2001

For a moment, early yesterday, it looked as though the 2nd half recovery had arrived – right on schedule. There were the Finns, telling Wall Street that Nokia’s earnings fell only 16% in the latest quarter…and that things would get better.

But then, other companies reported in – bad earnings, layoffs, no recovery in sight.

And the international news was no better. Japan’s banks say bad loans are worse than expected. Argentina’s unemployment rose to over 16%. Brazil warned of recession. And stocks in London fell to a 3-year low.

And those poor consumers! Household wealth fell for the 2nd quarter in a row – the first time this has happened in a quarter century.

But in 1974 at least, common householders were not carrying such a huge debt burden. They skipped along with total debt of less than 150% of GDP. But since 1982, Americans have borrowed so much money you’d think they were planning to skip town. Debt has risen to 272% of GDP.

Consumers are beginning to sag under the weight. The only thing that keeps them going is the rise in real estate values – up 11% in the last 12-mo. reporting period – which gives them something else to borrow against.

Of all the things that might happen in the next few years, this seems most likely: these consumer atlases…schlepping the entire world economy on their backs…will shrug.

Yo, Eric!


– Nokia, the Finish cell phone giant, wowed Wall Street yesterday by prophesying that its sales and profits will rebound later this year. The stock jumped more than 14%. This implicit all-clear for tech stocks emboldened investors to buy their favorite NASDAQ issues – driving the tech-leavened index up 1.5%. The Dow rallied 40 points.

– But after the close of trading, Microsoft wowed Wall Street with a prophecy of a different sort. The company said its sales and profits would fall short of forecasts for the current quarter because fewer customers are buying PCs loaded with Microsoft software. Say it ain’t so, Bill.

[Actually, Eric, it’s worse. I read a news item this morning – PC sales worldwide have fallen, for the first time since 1986! -Bill]

– Is the dollar beginning a stealth bear market? Or just taking a breather? Whenever the case, the greenback seems to find it easier to fall these days that to rise.

– Maybe America’s yawning current account deficit is starting to make its presence felt. Like the world’s neediest teenager, we seem to need a few extra dollars every day in order to maintain our carefree lifestyle. Just maybe, “Dad” is growing a little tired of coughing up pocket change for Junior.

– All else being equal, if foreigners don’t plug the gap between what we earn and what we spend, the exchange rate falls, just like it’s doing at this very moment.

– In only two weeks, the dollar has dropped more than 4% against a newly revitalized euro.

– If the dollar continues weakening, it might just pay to keep a wary eye on the gold market (as boring as that can be). There’s wisdom in the old Wall Street adage, “Never sell a dull market short.” One of these days the yellow dog will stir. Just maybe, the time is drawing nigh.

– Most of the tortured souls on Wall Street these days lack a similar faith, although they may be starting to get religion. Kenneth Scheinberg, head of listed trading at S. G. Cowan, tells Bloomberg News, “People are starting to write off the third quarter and to pray for the fourth quarter, and if praying doesn’t come through, we are in some serious trouble.”

– What time do we get in to Penn Station?” I asked the Amtrak conductor. “6:22,” he says. “But that depends on God’s will and that the creek don’t rise.” I couldn’t resist asking which of these two factors he considered more important. He answered with a smile, “Well, God’s already on Amtrak’s side, so I think more about the creek.”


Bill writes:

*** One thing I was not looking forward to, returning to Baltimore for the summer, was the hazy, hot and humid weather. But, this summer, it’s been surprisingly cool and dry. If this is global warming…what’s not to like?

*** wrote to offer me investment advice.

“For years,” says the letter, “the market’s top journalists, money managers and investors have looked to Jim Cramer for insightful market commentary and analysis.”

Are any of them still solvent? If so, Cramer now offers “to share his stockpicking secrets with the world, and make trades for his own personal account. And you can get these Premium Stock Picks delivered to your email inbox absolutely FREE.”

This proposal sounds almost diabolical. Cramer, you may recall, has a remarkable track record – remarkable for the fact that he is reliably wrong about almost everything. But is still in business, and so is Cramer….