The American Syndrome

Economist Anthony Chan met privately with Alan Greenspan and the Federal Reserve Board. After the meeting he was asked by a journalist: “Tell me a little about what that was like…and what you were able to learn that you didn’t know before.”

“Well,” said Chan, “If I told you, or answered that question, I would have to kill you.”

The Washington Post

TIME advises its readers how to get through the “slump” while waiting for the stock market to make them rich:

“Put off purchases of things like cars and appliances… try to build a cash cushion equal to 3 month’s of living expenses…”

TIME’s good counsel has a small potential flaw: if TIME readers were to take the advice seriously, it would almost certainly trigger a recession far worse than any expect. That is why Fed governor Robert McTeer gave his audience the opposite advice: buy an SUV.

Retail consumption represents 2/3rd of the U.S. economy. Consumption depends on spending. And, in America, spending depends upon borrowing. Americans already spend all they earn, and then some.

“It was in 1998,” writes Kurt Richebacher, “that everything, both the U.S. economy and its financial system, went completely out of control. Since that year’s fourth quarter, personal saving has plunged from $244 billion to recently [negative] $56 billion. As to the U.S. current account deficit, it increased from $77 billion to $140.5 billion between 1990 and 1997. By the 3rd quarter of 2000, it was running at an annual rate of $450 billion.”

If American consumers suddenly begin to act like their Japanese counterparts – it will set in motion what is commonly known as a “vicious circle” of unpleasant effects. A cut-back in spending would produce a cutback in sales, which would mean lower profits. Lower profits would cause businesses to reduce their payrolls, trim inventories, and curb expansion. This would mean even less money in consumers’ hands. It would also encourage foreign and domestic investors to dump U.S. stocks…which would send the ‘wealth effect’ into its own little vicious circle…and cause collateral damage to consumer spending as well as investment spending.

The overall effect is recorded in the literature of the economics trade under the oxymoronic heading: The Great Depression.

What was so great about it? Well, you could walk into almost any restaurant in Manhattan without a reservation and still get served. You could buy a new car without have to spend time on a waiting list while it was assembled from component parts made on another continent. And vanity was cheaper. It didn’t take a lot of money in order to feel superior. A man with even as little as $1 million in savings in a solvent bank could still feel like a big shot.

“People worry too much about money,” said my friend Francois yesterday. “It’s madness.” Perhaps one of the things that made the Depression great was that people had less money to worry about.

But there’s good and bad to everything. Even the Great Depression was marred by widespread poverty and the Roosevelt administration.

Could we have another Depression, great or even not-so- great? It is almost unimaginable.

Why not? “Because the character of our economy has changed,” economists will answer. “During the ’30s, we put into place institutions that act as safety nets to protect people from catastrophic losses – such as Social Security and FDIC insurance. And the Fed now understands how to manage the credit cycle.”

What Roosevelt & Co. did was to implement the reigning illusion of the time: that technology and rational central planning could eliminate uncertainty. Government social programs would replace the chaos of tradition and culture. Keynesian fine-tuning would bring economic cycles under control. And the Federal reserve would manage the currency and prevailing interest rates to ensure stability in the markets.

The result – much disputed by economists – was probably to turn a short, swift market break into the biggest economic disaster of the industrial age…and to burden American society with expensive programs from which we have yet to escape.

But here we are, in a new millennium, still counting on a pre-WWI idea — whose central, hidden tenet is that a man’s pockets should be picked by the government in exchange for protecting him from his own imprudence and misfortune.

Rather than let Mr. Market decide what interest rates should be, for example, Mr. Greenspan is forcing the issue: setting, by declaration, the rate at which banks can borrow.

Rather than allow people to finance their homes at the market rates, Congress – in its wisdom – has reduced mortgage rates for millions of Americans, by backing the most reckless lenders in the world – Fannie Mae and Freddie Mac.

Rather than let people take care of themselves when times are tough – thus requiring them to save money for a rainy day – the government, and Federal reserve, have encouraged the illusion of a vast umbrella, shielding the public from any major downpour. Since the Roosevelt era, it is believed, there will always be plenty of jobs…plenty of money…plenty of credit…plenty of food and fuel…plenty of everything – as long as you go along with program.

“We have noted before,” writes Sean Corrigan, of the Capital Letter, “the spread of the American Syndrome around the Anglo-Saxon world. Briefly, the characteristics are that household savings ratios have become depleted while personal borrowing has shot up. Exposure to the stock market has increased as market-valued net worth has risen, giving rise to an illusory perception of increased wealth.

“In essence, the Atlantic and Australasian Middle Classes have almost unknowingly been turned from creditors to debtors and have come to rely on – indeed to cheerlead – the process of monetary inflation to bail them out, as debtors have from time immemorial.”

Americans will not be disappointed by the Fed’s actions. They will not be crucified on a cross of gold…nor have a crown of hard dollars pressed down upon their brows. The Fed will make good on its promises. It will cut rates. It will increase the money supply. Fannie and Freddie are ready too. As reported by Kurt Richebacher, “they have converted private mortgage debt into government debt at massive scale….When the credit market tightens, they step in and create liquidity. Just recently, Freddie Mac announced, ‘it expects to issue $90 billion of US dollar- denominated Reference Note and Bond debt in 2001, implying a 25% annual rate of growth.'”!

All the expensive, lumbering gear of the Rooseveltian machine now stands at the ready…prepared to do its part – to protect and defend the world’s most profligate debtors from the fate they most assuredly deserve.

But will it work? Can you build an economy by destroying your own currency? Can you get rich by living beyond your means? Can the Federal Reserve really encourage the production of new wealth…by offering the public phony apples?

Stay tuned, as your correspondent returns, as usual, on Monday…

Bill Bonner Paris, France February 9, 2001

*** “The Party’s Over” says the Economist. So creative are the writers at Advertising Age that they came up with the exactly the same headline: “The Party’s Over.”

*** “Goodbye New Economy” says the Washington Post. “How to Survive the Slump” TIME tells us.

*** In Japan, businessmen and investors practice the “convoy system.” They stick together…all crossing against the red light together. Even the Japanese cartoon Pokemon, a DR reader informs me, celebrates the virtues of group action…or, as the French say, “solidarity.”

*** But in the Anglo Saxon world we value independent thinking – which means we all think we come to the same conclusion on our own.

*** And so, still in the lobby of the 3rd millennium, and even before we’ve taken off the coats and mittens from the Winter of Woe, we have already formed a collective idea about the show that awaits us inside. And we think it will be a crowd-pleaser.

*** After a brief lull in the program…so gently orchestrated by the Maestro himself, Alan Greenspan, that we scarcely notice it…the good times will come again in the 2nd half of this year.

*** So an investor doesn’t even have to trouble himself with the next few months. Investors’ Intelligence reports that bullishness has never been higher in the last 14 years. 61.8% of newsletter advisors are bullish. Only 30.4% are bearish.

*** The Dow fell 71 points yesterday, but is still not far from the 11,000 barrier, and only a couple of percent below its all-time high.

*** And while the Nasdaq crashed…this was a good thing, the bulls believe, because it brought stocks down to a realistic level. “I’ve been trying to tell Bill,” says a Daily Reckoning reader in the discussion board in our website, “that the Nasdaq has bottomed. He can cut all this bearish talk.”

*** The Nasdaq may or may not have bottomed. It fell 43 points yesterday. But it’s far from cheap. “On March 10,” writes my favorite gloom and doom economist, Dr. Kurt Richebacher, “at the peak of the market, the Nasdaq index had an average P/E ratio of 240 times annual earnings. Even after their steep fall, the average P/E ratio of Nasdaq stocks is still well above 100.”

*** And with profits falling, unless stock prices fall too, P/Es will rise.

*** But who cares about P/Es? Stocks always go up in the long-run, don’t they?

*** Microsoft went down $2. Amazon dropped below $15 and Cisco fell another 3% yesterday…to close right at $30.

*** “Cisco may have some of the best and brightest workers in America,” wrote Rick Ackerman nearly a year ago, “But at what cost? The answer: (when you include the company’s extravagant stock option giveaways) is an astounding $750,000 per employee. That would be a bargain if each of the company’s employees were responsible for, say, $1.5 million of revenues. They aren’t. Cisco’s workers generate less than $600,000 of revenue apiece. Considering the operating expenses, that amounts to a loss of $150,000 per employee.”

*** Meanwhile, back on Main Street, TIME tells its readers what to do in this temporary economic slowdown while they’re waiting for the stock market to make them rich…below…

*** “Layoffs yes,” says the San Diego Union Tribune to further confuse the labor picture, “but job market is still strong.” The cost of labor rose 4.1% in the last quarter. “There’s a lot of noise in the quarterly numbers,” said one sage economist.

*** Productivity rose at a 2.4% annual rate in the 4th quarter. “Truly extraordinary…” said another economist. The big promise of the New Economy was that it would produce higher levels of productivity, more or less forever. “A new economy driven by a productivity miracle now seems even more far-fetched,” opines the Financial Times.

*** What’s more, future productivity gains depend on capital spending – which fell at a 2.6% annual rate in the same quarter.

*** Advancing stocks fell behind declining ones on the NYSE yesterday. But new highs beat new lows by a 10 to 1 margin.

*** The Japanese stock market dipped 2% yesterday – to a 2- year low. The Japanese are, as everyone knows, hopeless. Despite the advice of our Treasury secretaries, economists and pundits, they stubbornly refuse to destroy their currency. God help them.

*** Gold fell $2.70. Gold bugs could use some divine help too.

*** When gold goes down, the dollar goes up. It knocked the euro down to 91.85 cents yesterday; the dollar index rose to 112.05.

*** But, “the euro seems to have turned a corner,” writes Andrew Krieger in Forbes, “…the time is ripe for speculators and businesspeople – or simply consumers who want to lock in attractive euro prices on country houses in Tuscany or next year’s European ski holiday – to sell dollars and buy euros.”

*** My old friend, Francois, joined me for a drink at the Paradis Caf? yesterday. Frank is single-handedly transforming the political landscape in France by erecting American-style free-market-oriented pressure groups. He started a taxpayers group…then a union of retirees…and now a small business alliance.

*** I don’t know if Frank’s efforts are the cause, but France and other European governments are cutting taxes. Forbes reports that France’s “misery index” – a comparison of the tax burden country by country – fell from 193 last year to 181 now. By contrast, a New Yorker suffers a rating of 118, about the same as resident of Berlin.

*** “LIES, LIES, AND MORE LIES!” says today’s issue of Early To Rise: “One of the biggest lies we’ve been told by government lately – and this comes from both Democrats and Republicans alike – is that the federal budget is in surplus. The truth is that the government is running deficits higher than at any time in history.”

*** “Until the late 1990s,” reports a website called Downside.com, “the Securities and Exchange Commission’s Rule 144 generally required that insiders hold their stock for two years after an IPO. That rule was changed on February 20, 1997… allowing management and the VCs to cash out and watch from safety while the ship goes down without them.”