Species by Decree
I hear the distant thunder hum,
The Old Line’s bugle, fife and drum,
She is not dead, nor deaf, nor dumb –
Huzza! She spurns the Northern scum!
She breathes! She burns! She’ll come, she’ll come!
Maryland, My Maryland!"
Friday’s letter ended with a implied promise.
Today’s letter begins an attempt to make good on that promise.
Our beat, here at the Daily Reckoning, is money – how it is earned, and how it is preserved. How can we fail to notice that our biggest single expense – taxes – is something for which we get no obvious return? How did this come about?
You will recall that a certain pettifogging busybody – writing a column in the national press – wants to regulate financial newsletter writers, such as this correspondent. Why is it that some people always want to boss others around? Why would citizens of a free country submit to regulation of almost every aspect of their lives and to a tax burden higher than that paid by serfs in the Dark Ages?
Even our money itself is no longer a matter of free choice – but of government decree. Until the War Between the States, people could decide for themselves whose bank notes they would accept. The coins of Britain and other sovereign nations circulated freely in the Americas and could be used by anyone who chose to do so.
"There was no nationally chartered central bank," explains Jeffrey Rogers Hummel in his history of the period, "Emancipating Slaves, Enslaving Free Men." The only legally recognized money was specie, that is, gold or silver coins. The economy’s currency consisted solely of bank notes redeemable in specie on demand. Private competition thus regulated the circulation of paper money."
But by 1862, Lincoln’s government was toting up the cost of killing Southerners – and it was more than the Northern bankers were willing to lend.
The constitution limited the federal government’s ability to raise money and spend it. But Lincoln was not a man to let the constitution stand in his way.
He had already suspended the ancient protection of habeas corpus and had sent troops to occupy Maryland. Marylanders favoring secession were thrown into jail, without trial. Chief Justice Roger B. Taney, sitting as a circuit judge, ruled the practice unconstitutional. "If Lincoln’s act is allowed to stand," he wrote, "the people of the United States are no longer living under a government of laws, but every citizen holds life, liberty and property at the will and pleasure of the army officer in whose military district he may happen to be found."
Lincoln’s order stood. In fact, Lincoln ordered the chief justice arrested, too – a violation of separation of powers doctrine so shocking that federal marshals would never carry it out.
And then, in an act worthy of a Latin American dictator, Lincoln moved on the rest of the Marylanders – arresting 31 legislators, Baltimore’s mayor, one of the state’s congressmen, as well as any newspaper editors unsympathetic to Lincoln.
At the beginning of Lincoln’s term in office, the states of the Deep South had declared their independence. Many in the North would have been happy to let them go. "No Union with Slaveholders," was a popular abolitionist slogan.
But the urge to boss people around was too great. Lincoln called up the militia. It was the first of these troops, from Massachusetts – marching between train stations as they made their way through Baltimore – that stirred up a mob and brought Lincoln’s retaliation. Baltimore wanted no armed soldiers from the north – and burnt its railway bridge to prevent future arrivals. Lincoln turned the whole state into an occupied zone, denounced by the Maryland legislature, accurately, as "a flagrant violation of the consitution."
It was Lincoln’s bellicose reaction to secession – calling up 75,000 militia – that pushed the wavering slave states of the upper south into the secessionist camp. Virginia, North Carolina, Tennessee, and Arkansas joined the confederacy… along with several Indian tribes, including the Cherokees, Choctaws, Chickasaws, Creeks and Seminoles.
"At a single stroke of the pen, Lincoln had more than doubled the Confederacy’s white population and material resource," writes Hummel. And made a long, very expensive war almost inevitable.
Hardly a year later, the federal government was already straining under the financial burden. Lincoln sought relief in the familiar way. A Legal Tender Act was passed in early 1862, permitting the federal government to issue paper money. "The Greenbacks," writes Hummel, "were unbacked, directly issued by the government, and made legal tender through fiat for all payments, public and private, except tariff duties and interest on the Treasury’s debt."
Is it really necessary, asked Senator Charles Sumner, "to suffer the stain upon our national faith [of inconvertible paper money] – to bear the stigma of a seeming repudiation…? It is hard – very hard – to think that such a country, so powerful, so rich, and so beloved, should be compelled to adopt a policy of even questionable propriety."
The results were predictable. By 1863, the Union’s money supply doubled. Greenbacks soon began to fall in value – against gold, losing 65% of their value by 1864.
People tried to protect themselves – by dumping Greenbacks and hoarding gold and silver coins. Soon private minting of coins was made illegal. And Congress tried to "shut down trading in contracts promising future delivery of gold."
In those days, however, the greenback did not enjoy the universal confidence that it does today, so Lincoln’s government was forced to backtrack. Foreign governments still required gold-backing.
More tomorrow, on the War Between the States, bossing people around…and, of course, money…
July 16, 2001
"The bear is dead," said Alfred Goldman, chief market strategist at A.G. Edwards. "The fuel for bearish sentiment has been lousy corporate earnings, but that’s antique news now. And anyone that hasn’t discounted the likelihood of poor earnings has been in a coma for the last three months."
This week, a barrage of earnings announcements will entertain investors coast to coast. Those not in a coma will have already discounted the bad news. They will be cheered by whatever good news they can come by – even announcements that earnings ‘are not as bad as they might have been.’
But the real news lies elsewhere. First, the consumer may be nearing the end of his spending spree. His wealth fell for the first time in 57 years last year… and another 4% in the first quarter of this year. Unemployment is still rising – as businesses scramble to cut costs to preserve margins. And incomes are barely keeping up with inflation.
The New York Times: "We haven’t made changes yet, but we will," said Mr. Saint-George, a 35-year-old who recently lost his $75,000-a-year job. "The idea is to spend a little more wisely, to be a little more frugal." Just a little frugality is all that it would take – and the US would be in recession, possibly for a long time.
Meanwhile, the international picture is darkening, too. "UK industry is on the brink of recession," reports the Financial Times. "Argentina’s financial crisis deepening," says the BBC. Japan is already in recession…so is Singapore…Europe’s economic situation is clouding over too, with slowing growth in all major countries.
If the U.S. consumer eases off just a bit, these foreign economies – many of which rely heavily on a lack of frugality on the part of U.S. shoppers – are in even bigger trouble. But so are we. Because the money now being sent abroad to buy foreign goods will no longer come back to U.S. capital markets.
Eric, what’s up on Wall Street?
– Mr. market had a very nice time last week. By the close of trading Friday, the Dow had tacked on 286 points for the week, while the NASDAQ had gained nearly 4%.
– "Foreigners own one hell of a lot of US securities," says Richard Russell, "[A]ll that has to happen is for foreigners to dump a small portion of their holdings of US securities and it’s ‘Katie, bar the door.’"
– "The US current account deficit has been running at historic levels," the DR Blue Team reports, "and while the US has been slashing rates the ECB has been holding steady – afraid of inflation in Ireland, Italy and Portugal – Europe’s three hottest economies. Both of these facts should be leading to a weakening dollar."
– In the 12 months ending April 2001, foreigners bought a net $158 billion worth of U.S. equities. Europeans accounted for $131.4 billion of the total. To state the obvious, foreigners can sell just as easily as they can buy.
– The price of oil dropped last week to just over $25 per barrel of Brent crude after the International Energy Agency (IEA) predicted slowing demand for oil and a rise in non-OPEC oil production. The organization reduced its projected demand growth by 510,000 barrels of oil a day – the seventh downward revision in its forecast since last summer.
– Is the energy rally over? Were last year’s rising prices for oil, gasoline and coal merely inconsequential blips in the long course of financial history? Or might the energy sector be coming back for one more walk around the block?
– Certainly, the global economic slowdown is no friend to the oil price. Nevertheless, the long-term story for oil is bullish indeed, says Henry Groppe, partner of the energy consulting firm, Groppe, Long and Littell.
– When addressing the BCA Investment Conference in London recently, Mr. Groppe boldly proclaimed, "My key message is that the supply and demand profiles for world oil and North American natural gas point to a long period of high prices. In both cases, it has required increasingly aggressive exploitation of already known reserves in order to maintain production levels. However, we have now done all of the easy things."
– "The world consumes about one billion barrels of non-OPEC oil every 23 days. Just to replace production, we would have to add one billion barrels of recoverable new reserves
every 23 days. That cannot be done."
– "Deprived of half its daily oil supply, the United States would be economically and militarily impotent in 90 days," writes our oil and gas man John Myers. "Taiwan – possibly ground zero in the next war – would be choked off in 60 days, and there wouldn’t be a damn thing the United States could do about it. Europe would lose three-fourths of its potency in two or three months."
– Turning to natural gas, Groppe states, "To maintain total North American gas production, we’d have to bring on-stream every year, total production roughly equivalent to the [total] production that has been developed on the Gulf of Mexico shelf in the last 45 years. This can’t be done!"
– Not surprisingly, Groppe expects oil and gas prices to climb higher as the decade progresses. He’s looking for oil prices to move above $40 per barrel, and gas to climb above $6 per thousand cubic feet.
– In the near term, the commercial oil traders are becoming increasingly bullish on the oil price and these guys (and gals) tend to be correct at important turning points.
– Jim Bianco, who closely tracks the behavior of professional futures traders by monitoring the CFTC’s Commitment of Traders report, notes, "The entire energy complex is showing bullish readings." Translation: the commercial traders have been increasing their positions in everything from crude oil to natural gas to gasoline.
– The Manhattan office market is drowning under a flood of sublet space, according to Crain’s. "Today, sublets have catapulted to 35% of the total office space available in Manhattan, more than double the 14% share of a year ago… The explosion in the volume of sublets is bringing profound change to the city’s commercial real estate market. After half a decade of uninterrupted rent rises, even double-digit rent cuts and other sweeteners are failing to draw subtenants."
– "Deflation in real estate asset values is on the horizon," predicts Charles Peabody, banking analyst for Mitchell Securities. "The real estate bubble has been prolonged much beyond its natural course, largely because of the liquidity that Fed Chairman Greenspan injected into the system through the six panic easings over the past six months… Without ever-increasing amounts of liquidity/credit, the sector [will begin] to fall under its own weight."
– Peabody notes that in the recent "Survey of Credit Underwriting Practices" for 2001, the OCC stated, "For the first time since the OCC began conducting the survey, examiners reported tightening standards for commercial real estate loans."
Back to Bill in Baltimore…
*** Finally, the family re-assembled, briefly, on the weekend. Even my oldest daughter, Sophia, returned from a week-long vacation at Myrtle Beach. We live in Southern Maryland, not far from the Chesapeake. I had to drive from there to Washington to pick Sophia up at the Greyhound bus station.
*** There’s no Business Class on Greyhound. And the bus station is in a part of town where you can’t even leave a gold coin on the car seat without getting your windows smashed. There, in the heart of the nation’s capital, are several blocks of urban barrens – as if bombed out in a war… and never rebuilt.
*** But Sophia arrived on time, and we headed home. Back in Maryland, in the middle of the countryside, we found a helicopter hovering over the road and dozens of police cars parked on the shoulder. What in the world…?
*** "Didn’t you hear," explained a friend later, "they found a body. They thought it was the missing intern… but it turned to be a man." Since the corpse was no one special, I guess they just left it where it was…