Sex, Lies and America's Empire of Debt
Against the backdrop of history, the ‘accomplishments’ of the 2nd Bush administration appear even more spectacular…and scandalous.
A recent NYTimes provides a comment from David M. Walker, Comptroller General of the United States. "The Federal government’s gross debt – the accumulation of its annual deficits – was about $7 trillion last September, which works out to about $24,000 for every man, woman and child in the country," he announces. "But that number excludes items like the gap between the government’s Social Security and Medicare commitments and the money put aside to pay for them. If these items are factored in, the burden for every American rises to well over $100,000."
We add to Walker’s lament:
One out of every 4 dollars spent by the federal government is borrowed. And for every dollar that comes in the door from income taxes, the feds borrow another 80 cents. Economists used to worry about government using up the nation’s savings. But now Americans have no more savings to use. And still, the nation that can’t save a dime…sets out to save the entire planet.
The cost is as monumental as the project. Taking out Social Security surpluses, federal deficits are expected to be about half a trillion dollars each year for the next ten years – or $5 trillion in total (half of GDP). We put no exclamation point following that last sentence, because the numbers seemed to shriek without one. Still, America’s economists are deaf to the problem…just as its policymakers are dumb to any solution. After all, we are reminded of the words of Dick Cheney: "Deficits don’t matter."
Myths, fraud, lies and claptrap.
Costly Illusions: Of Course It’s Phony
Here at the Daily Reckoning, we do not so much lament the humbug…we enjoy frolicking it in. But early this week, we were suddenly struck by a feeling of such abject pointlessness we had to stop and order a drink.
"Of course, it is all phony," Merryn Somerset Webb, editor of MoneyWeek magazine, had explained. "But our lives are made up with this stuff."
‘Get over it,’ she might have added.
We drank and reflected on this. We realized that we had to come to terms with it. We could not write another Daily Reckoning or mock a single economist until we had made peace with this unsettling realization. For it was true: it is all illusion. And if we were to strip away all the vain, pompous, foolish, puerile…and lovely…illusions, what would be left? We would be banishing all the sentimental and terrifying romance from life. If we never spoke again to a vain charlatan or pompous mountebank, we would spend the rest of our days in a sort of self-imposed Trappist isolation. What fun would that be?
No, dear reader, God has placed us all in His great comedy so that we may play our parts. And so we get on with it with neither a snicker of contempt nor an open-mouthed awe of the naïve believer…but with the mischievous smirk of the man who is ready to do his duty…and enjoy it.
Some are dangerous illusions; others are welcome ones, we conclude. When your wife tells you she loves you, you might as well believe it as though it were Holy Writ. What do you gain by questioning motives or deconstructing meaning?
Every illusion has its price, of course. You will as pay dearly for a chimera of love as for all others…but you will pay in kisses and caresses, a currency better spent than saved.
Costly Illusions: Fatal Illusions
But other illusions are more costly; some are fatal.
"When the government tells you do to something," said a French friend at lunch yesterday, "it is usually a good idea to do the exact opposite."
We thought about the advice recently offered by Fed officials. Spend, spend, spend…advised Robert McTeer, pointing to a shiny, new SUV. "Preferably a Navigator."
Borrow, borrow, borrow…suggested Alan Greenspan, pointing to his lower EZ credit interest rates.
Print, print, print…added Ben Bernanke, pointing in the direction of the U.S. Bureau of Printing and Engraving.
Worse advice has been urged on voters. Every election campaign brings out a plague of it, like a nasty species of 4-year locust. Our friend had in mind the period, more than 60 years ago, when the Vichy government summoned Jews to railroad stations, where they would be shipped to ‘work camps’ in the East. And of course, every war comes with its incitations to murder and mayhem.
Each branch of government has its own particular expertise. Politicians specialize in bad voting advice. The Fed gives ruinous financial advice. And the Pentagon offers young men and women often-lethal career suggestions.
But here at the Daily Reckoning, money is our beat. And so we focus on America’s leading economic illusion-du-jour: deficits don’t matter. Here, once again, we climb a pile of bones to get a clearer view. This is not the first time a nation has gone head-over-heels into debt.
"Since Prime Minister Sir Robert Walpole’s introduction of the funding system in England during the 1720s," writes H.A. Scott Trask for the Mises Institute, "the secret was out that government debt need never be repaid…Walpole’s system proved its worth in financing British overseas expansion and imperial wars in the eighteenth and nineteenth centuries. The government could now maintain a huge peacetime naval and military establishment, readily fund new wars, and need not retrench afterward. The British Empire was built on more than the blood of its soldiers and sailors; it was built on debt."
Costly Illusions: Contracting Multigenerational Debts
The new system was slow to catch on in America. Jefferson was against it. In 1789, in a letter to James Madison, he wondered whether "one generation of men has a right to bind another." His answer was ‘no.’ "The earth belongs in usufruct to the living," he concluded. "No generation can contract debts greater than may be paid during the course of its own existence."
But dead men don’t talk and the unborn don’t vote. Politicians in America – just as those in Britain, Italy and Germany – gradually came to see that they could get the benefits of spending money in the present, while passing on the debts to the next administration and the next generation. Then, as now, war provided cover for excess spending. First, there were the debts from the Revolution itself…which were paid down quickly. Then came the War of 1812, War with Mexico, and the Civil War. Each time, spending was increased, debts were taken on, and then…after the war…the debt was paid down, or paid off completely.
WWI saw federal debt explode from $3 billion to $26 billion. Presidents Harding and Hoover paid it down to $16 billion. But then came the Depression, Roosevelt, and WWII. By 1945, federal debt had reached $260 billion. But then came something new. The war did not end. It continued as "The Cold War"…which meant, rather than paying down the debt, it was increased.
Under Ronald Reagan, America’s debt seemed on course for Mars. Less than $1 trillion in 1980, it soared to $2.7 trillion before Reagan left office. One might have expected some relief after the Cold War was over. But the habit of getting something for nothing is hard to break. By the time George W. Bush took office, the debt had risen to $5.7 trillion.
Mr. Bush, a conservative, might have seized the opportunity to pay down the debt. The nation was at peace and expected huge budget surpluses. He promised as much when he stood before a joint session of Congress in 2001 and announced his budget.
"That night," Paul O’Neill tells us in his book with Ron Suskind, The Price of Loyalty, "Bush stood before the nation and said something that knowledgeable people in the U.S. government knew to be false."
But the paradox was there. Generations of Republicans had promised balanced budgets. Only war had permitted them to wriggle off the hook and continue running up debt. With no war, the Republicans just squirmed. Then came a remarkable event: 9/11. All of a sudden, another, strange war was announced…a war on an enemy no one could find on a map…a war on "Terror." Now, the war, the spending and the debts could go on forever.
In the following 24 months, the Bush Administration added more debt to the nation than had been built up in the first 200 years of its existence. Jefferson and the generations of dead men who paid their debts must weep in their coffins. The tadpoles of the unborn must shiver.
The Daily Reckoning
February 6, 2004
Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the NY Times, Wall Street Journal and international bestseller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons).
The market hesitates. It seems undecided. What to do next? Delight the lumps by shooting up to even more absurd heights? Or give the bears what they have been waiting for – the next phase of what they believe is the Great Bear Market of 2000- ???
Or do nothing at all.
What is going on, we ask? What will happen next? What is the Big Picture?
Here at the Daily Reckoning, we crawl up a pile of corpses in order to get a better view. Jesse Livermore, Freeman Tilden, Josef Schumpeter, Nikolai Kondratieff. We creep up over the bones and stretch our necks:
"He is but a mean man who takes more than a transient pleasure in successfully prophesying a catastrophe (though Lucretius intimates that no man is above a touch of vanity)," wrote Freeman Tilden from his house in Warner, New Hampshire in 1935. "So after a grim smile at the unhorsed cavalry of commerce – those mounted captains of industry and exploitation who had been accustomed to saddle and to spur just long enough to forget what one does with feet; and after a sincere ejaculation of pity for the wretched hoplites, washerwomen and sutlers who had ignorantly pawned their valuables to follow such leaders to the promised land of Something-for-Nothing – I began to speculate upon the principles that must lie behind such feats and such famine, such weal and such woe, such quondam luxury and such present misery. For there must be, I considered, if one could find them, very definite rules that produce, from the identical causes, identical results over two thousand years of written history. And this unending procession from boom to crash and from crash to boom is one of the most constant of the phenomena associated with social man…"
Tilden went on…helping us understand the world of the ’30s…and maybe our world too:
"The world has several times, and perhaps many times, squandered itself into a position where a total deflation of debt was imperative and unavoidable. We may be entering one more such receivership of civilization. It is a curious fact that in all such periods, men and governments persist in behaving, as creditors, as though the world were operating for cash; and as debtors, as though the economy of pure credit sufficed for all purposes. When one such passionate belief encounters another, the result is never very happy."
The two periods – then and now – stand out like twin peaks on a chart of debt. In the early ’30s the residual debt of the Roaring Twenties totaled more than 250% of GDP. Today, the still-growing debt of the Dollar Standard Era reaches more than 350%. At all other times – that is over the plains and valleys of the rest of the century, debt to GDP averaged only about 150%.
Still climbing up the mound of cadavers…we come upon…what’s this? One who’s not quite dead yet! Here is Sir John Templeton, over 90 years old, and still talking to the Nightly Business Report:
"Usually God favors the people who try to do good. So when you find that the crowd is desperately trying to sell, help them and buy. When you find that the crowd is over enthusiastically trying to buy, help them and sell. It usually works out…
"All currencies, not only the American dollar but all currencies, always go down, mainly because of democracy. The voters will vote for a person who is going to spend too much. And so you have to expect all currencies to go down. And just recently, America has started to spend too much and the currency has already gone down a lot. But other nations now realize that and they don’t want to lose out to America. So they make their money go down, too…."
More on debt, the dollar, love and death…below…
In between-time, here’s Addison (whose family has owned a farm in Warner, New Hampshire since 1922) reporting from London with more of the latest information:
Addison Wiggin, high above Tottenham Court Road…
– "It looks like the first thing traders will do next week is sell the dollar," Xinyi Lu, chief strategist at UFJ Bank Ltd in Tokyo told Bloomberg late last evening. Traders the world over are preparing for what could be the first phase in a very ‘disorderly decline’ in the dollar – otherwise known as a rout.
– "I’ll be in this Sunday and everyone will be in especially early on Monday," said Rick Lloyd, head of G-7 currency trading in Asia for ABN Amro Holding NV in Sydney. "We see plenty of reasons for continued dollar weakness," added Trevor Dinmore, a currency strategist at Deutsche Bank AG in London. "Because of the event risk, you don’t want to be adding dollars before the G-7 meeting," he said.
– Group of Seven finance ministers and central bankers meet on today and tomorrow in Boca Raton, Florida. Traders are speculating they won’t be able to agree whether they should – or even if they could – halt the greenback’s slide. The G-7 includes the U.S., Japan, Germany, France, Britain, Italy and Canada…countries not exactly renowned for their chumminess.
– Even in the depths of an ether-induced coma, loyal Daily Reckoning readers would be able recite the problem these finance ministers will be addressing: a cocksure, arrogant administration and a spendthrift Fed betting the rest of the world has no better place to invest its money. "Although Bush administration and Federal Reserve officials acknowledge that the rest of the world won’t lend ever-increasing amounts of money to the U.S. forever," opines the Wall Street Journal, "they insist they don’t see any imminent threat of a crisis."
– "Reliance on borrowed funds may not be sustainable," Easy Al told German bankers in a speech last month. But then, he added that "there is, for the moment, little evidence of stress [Ha!]…The dollar’s declining value is a sign of waning foreign appetite for dollar-denominated assets, yet inflation, the typical symptom of a weak currency, appears quiescent."
– What really appears to be quiescent is the president’s resolve to stop spending money. In an effort to fund the nation’s wars and drug habits, the U.S. Treasury announced it plans to sell $24 billion of three-year notes, $16 billion of five-year notes and $16 billion of 10-year notes next week. The offerings are one chunk of an expected record $177 billion in net government borrowing in the first quarter. "It’s unprecedented this much supply is coming into the market," commented Andrew Lombara, a bond trader in New York. "Obviously that’s got to get placed somewhere"…or does it, we wonder?
– These are the kinds of lingering doubts that will be prompting currency traders to head into the office on Sunday.
– Never before has the national checkbook been scribbled in at such a blistering pace. Dan Denning, pouring over the budget numbers in his Strategic Insider blog, points out that while most people harp on the president for increasing defense spending, there’s plenty of room for criticism elsewhere, too.
– Citing the work of the Tax Foundation, Denning points out that the administration has proposed $466 billion for non- defense discretionary programs…"an increase of $123 billion, or 36%, above President Clinton’s final fiscal year."
– "Despite the fact that the administration would effectively freeze discretionary spending in real terms in FY 2005," the Tax Foundation reports, "discretionary spending has grown by an average of 6.0 percent during the term. This is a faster rate of real growth in discretionary programs than at any period over the past 25 years."
– What’s more, entitlement spending is set to grow by almost 5% per year during this term – a growth rate only exceeded by George Bush, the First. The Tax Foundation: "As a share of the budget, entitlement spending will top 57% of total federal spending. This means entitlements are consuming 11 percent more of the budget than they did during President Reagan’s last fiscal year in 1989."
– Biding its time in advance of the G7 meeting, the dollar limply settled in at $1.26 against the euro in New York yesterday. What will happen come Monday? It’s anybody’s guess, but we suspect it won’t be pretty.
– And there’s a lot at stake: "The United States has been responsible for 96% of the growth in world GDP since 1996," writes our friend John Mauldin, "We are the engine that pulls the world. However, to do it we have run ever increasing trade deficits, which now run well over $500 billion. This is an unsustainable trend. As the dollar continues it slide, at some point the world will cease to finance our deficits at today’s level.
– "However, this presents the world’s central bankers with a dilemma. If they let the dollar fall too far, too fast or somehow damage the U.S. economy, the main source of their economic growth would be reduced. If the U.S. economy catches cold, many of the nations of the world might also catch our colds or develop economic pneumonia."
The Balancing Of Globalization
– The Fed’s reserve printer Ben Bernanke reportedly blabbed to a South Carolina business group yesterday that "economic headwinds had been overcome" and that he expected stronger job growth soon. Meanwhile, the BLS reported the number of initial claims for jobless benefits in the last week in January rose by 17,000 to 356,000 – the highest level in five weeks.
– The Dow managed to tack on 34 yesterday to close at 10,496. The S&P 500 added 3 points to 1,131 and the Nasdaq advanced 15 to 2,035.
Bill Bonner, back in Paris…
*** A disturbing little chart made its way onto page 8 of this week’s Barron’s. Seems the stock of un-sold single family houses is rising sharply. Not since the mid-’90s have so many digs been for sale. The number was as low as 280,000 in 1997. Now, it is at 380,000. And new homes are being built as fast as the pneumatic nail guns can put them together.
*** The Bank of England raised its prime rate a quarter of a point yesterday. Naturally, the dollar fell again. Shrewd move: borrow in dollars at low rates, deposit in pounds or euros at higher ones. You’ll earn a higher yield…and your foreign currency will, most likely, go up against the dollar.
*** Gold is still below our target price…at $398.80 per ounce. This might be the last time we will see gold below $400 in our lifetimes. Or, it could be there forever.
*** How long before the world begins laughing at the dollar?
"This story circulated in Switzerland in the 70s," writes our friend Gregor: "A person goes to buy a Monopoly set. There are two models, the salesman explained. One sells for 80 Swiss francs and one for 50 Swiss francs. "’What is the difference?’ the buyer asks. "’The cheaper model uses real U.S. dollars.’" *** Not much family news to report:
Maria is waiting to see her face all over Paris when the new Lancel handbag ad campaign appears…while trying out for the part of a high-class hooker in a new French movie.
Jules is just trying to get through the 11th grade at the American school without working too hard or taking too much time out from the serious business of playing guitar and watching movies.
Henry is looking forward to his trip to Rome, where he will do his "profession of the faith" at St. Peter’s.
Edward is looking for a new school, after the headmaster made it clear that another institution might be more suitable for him.
And the whole family is looking forward to an upcoming winter vacation – which will take us to Latin America, as usual. Students in France have a short summer vacation – they do not get out until July – but they have several weeks off during the school year.