The Day the Earth Stood Still - Part II
Every man with a Social Security number believes he has the blood of Jefferson and Franklin somewhere in his veins. The Daily Reckoning investigates…
Who built the pyramids, dear reader?
Visitors to modern Egypt scratch their heads. All along the muddy waters of the Nile, nothing seems to work quite the way it is supposed to. Egyptians are interesting and enterprising people, say travelers, but organization is not their thing. In fact, state administrators seem bent on preventing anything from getting done. For example, if you wanted to buy a piece of desert in order to build a factory, Hernando de Soto [in his book, The Mystery of Capital] found that it took 77 administrative steps, involving 31 different government agencies – a process that would take between six and 14 years to accomplish.
How did these people ever build the pyramids, one wonders?
So, too, does a visit to Greece bring question marks. Where are the descendants of Aristotle, Aristophanes, Euripides, Plato, Phidippides, Socrates? What happened to the noble race that stood at the pass of Thermopylae and the plain of Marathon? The Greeks still participate in Olympics – and still win a medal or two – but are these the heirs of Alexander and Pericles…of Euclid and Pythagoras?
Similarly, a visitor to Rome wonders what happened to the Romans. The people one sees in modern Rome are attractive and fun loving, but they hardly seem the same sort whose legions once lorded it over almost the entire civilized world. Roman armies were practically unbeatable. Roman law and administration were ubiquitous. Rome’s manners, art, customs, and gods were all the rage.
But where is today’s Cato? Caesar? Augustus? Tiberius? Trajan? Severus? Antony? Italian politicians of the modern era fall somewhere between ineptitude and buffoonery. We cannot imagine them conquering anyone…
Pioneer Spirit: Revolutions Fail
Our recent visit to North America left us wondering, too. We are the "conquerors" now, says Michael Ledeen.
"The French Revolution produced massive bloodshed, a world war, and then failure," Ledeen opines. "The Russian Revolution produced bloodshed, then organized terror for three quarters of a century, then failure. The fascist revolutions in Italy and Germany produced a world war, the Holocaust, and then humiliating defeat. The Chinese Revolution killed more people than all the others combined, and China is still looking for a workable solution to its enormous problems. The American Revolution produced a great success, and we are still succeeding more than two centuries later."
Every era – Precambrian, Cambrian, Paleozoic, Mesozoic, Cenozoic – comes and goes. Revolutions create…and destroy. The world turns. But Americans believe their own Success Era is eternal. For us, the world stands still.
Americans believe they are pioneers forever…the same people who crossed the prairie in covered wagons, beat the British in 1814, and wrote the Declaration of Independence. Every man with a social security number believes he has the blood of Jefferson and Franklin somewhere in his veins…he sees no difference between himself and Daniel Boone, save the coonskin cap, and he imagines he is as ready as a Roosevelt to charge up San Juan Hill.
"The things that will destroy America," remarked this first Roosevelt, "are prosperity-at-any-price, peace-at-any- price, safety-first instead of duty-first, the love of soft living and get-rich-quick theory of life."
Pioneer Spirit: Flabby Pretenders
On our trip across the lower 48 we found few of the lean, hard men cast in the mold of the pioneers – at least, not in public life. America has moved beyond its founders, its visionaries and its grabby extenders. In their place is a race of flabby pretenders; as high-minded as modern Romans, energetic as modern Egyptians, and as disciplined as modern Greeks. Americans still value their independence; they are beholden to no one, unless he offers easy credit terms.
In their unbecoming desperation to preserve their own soft lives Americans go along with almost anything. They stand in line while grandmothers are patted down at airport terminals and pretend it makes them safer…meanwhile, they squander the wealth, institutions and customs that took generations to build.
In the space of a single generation the nation had been transformed from the world’s largest creditor to its greatest debtor, and Americans themselves from the world’s most productive people…to its biggest consumers. Squandered too was the high ground in international relations; the Bush administration’s talk of "pre-emptive" war brought America down to the level of every other powerful nation in history: The new doctrine might have been announced by Bonaparte or by Caesar.
Even more remarkable, in the space of barely three generations, the West had used up nearly half the world’s readily accessible petroleum deposits – which took the planet 20 billion years to create. Precambrian, Cambrian, Paleozoic, Mesozoic, Cenozoic, Triassic, Jurassic… it takes a long time to crush a barrel of oil out of the world’s bogs.
And now it is the century after the American Century. It is time for real challenges tossed by Fate in our path, like banana peels on the steps at twilight.
A recent edition of the Financial Times reported that "Confidence among business leaders is stronger than it has been for 20 years."
Pioneer Spirit: An Atypical Bear Cycle
Markets make opinions. But the bull market that so flattered Americans’ opinion of themselves and their prospects has come to an end. Typically, prices go up and down. After stock market prices have run up for a period of 15 to 25 years, they turn around and run down. Nothing goes up forever, after all. Since the U.S. stock market – aided and abetted by a long downward trend in interest rates – went mostly up from 1975 until 2000, it is a decent bet that it will go mostly down from 2000 until most of us in this room are dead.
But if that were all there were to it – that is, if we only faced a normal, regular, run-of-the-mill bear market cycle, we could sell our stocks, put our money in short-term Treasury paper, and relax. Unfortunately, this new cycle comes at a bad time…when a number of other longer-term cycles seem to have turned against us.
For the first time since the beginning of the Industrial Revolution, American workers face competition – directly or indirectly – from 3 billion people in Asia who are willing to work twice as hard for a tenth the money.
For the first time ever, the world’s supply of cheap oil is declining. There is plenty more of the stuff…and plenty of other ways to generate power – but none at the same price. As Asians earn more money, they will use more energy – and compete with the West for it. Everyone will have to pay more for energy.
For the first time since – perhaps – the decline of Rome, the dominant civilization is getting old and fat, and has become dependent on thin people in much poorer countries in order to maintain current living standards. All governments in the Western world have made promises and commitments that they can’t possibly keep and seem to be headed towards bankruptcy. For the U.S. government, those obligations presently out-run expected revenues by $44 trillion dollars, a gap that couldn’t possibly be filled, even if every centime were squeezed out of the rich and poor alike.
Pioneer Spirit: Net Debtors
For the first time ever, Americans are net debtors to the rest of the world…and are presently going deeper and deeper into the hole at a faster and faster rate. No country has ever dared – or been permitted – to run up such a tab. No similar situation has ever been set straight; we have no idea what it may mean – except the likely destruction of the dollar.
And for the first time ever, the whole world operates on a currency of no particular value – a faith-based money – whose custodian, the Federal Reserve, has proposed ways to destroy it itself, including dropping it from helicopters, if necessary.
As our friend Byron King puts it: "Debt, resource- depletion, industrial decline and adverse demographics – we are…on the cusp of a major set of changes in the world that will be as significant as the events of 1914-1918.
"What will be the trigger for things? Your guess is as good as mine. It seems that things are wound about as tight as they can be in the political-military arena. So my next question is, what event will be the ‘assassination of Archduke Ferdinand’ this time around? Will al Qaeda get lucky with a couple more airliners? Will the Iranians preemptively hit the Israelis, in order to pre-empt the anticipated Israeli pre-emption of the Iranians? Will Taiwan do something like declare independence, and incur a barrage of Chinese missiles? Somebody will do something stupid and upset the whole matter…"
Almost inevitably, living standards in America will fall – relative to those of other nations. It is one of the safest, surest predictions we could make.
But at The Daily Reckoning, as you know, we always look on the bright side. Standards of living may fall, but not necessarily quality of life. In the years ahead, Americans will be broken, buckled and bent – but into a better shape.
The Daily Reckoning
August 27, 2004
"I’ll take Manhattan…"
Nothing much happened yesterday…just as nothing much has happened all year. Stocks, bonds, the dollar…everything went pretty much nowhere.
But while nothing goes nowhere…Americans get poorer and don’t realize it, while Asians get richer…and don’t mention it.
Day after day, they accumulate more U.S. dollar paper – bonds, notes…Treasurys, corporates…you name it.
Why? Because they sell more than they buy. They end up with a surplus of money that they have to do something with. Never before in the history of the world has the imbalance between nations been so pronounced. Never before has the division of labor been greater: They make, we take. We buy gizmos and gadgets…made in China, of course…and the jobs, factories, profits, wages – all of it ends up in Asian hands.
And someday…after the U.S. economy has slumped into recession and deflation – that is, after prices have fallen to the point where U.S. assets are attractive again – the Asians are going to come in and trade their paper for real value-producing assets.
"I’ll take Manhattan," they will say.
And once again, after 350 years, the island will change hands – for trinkets.
That’s what we like so much about this tattered ball we live on, dear reader: It turns.
"And the last shall be first…"…and the first move to the end of the line.
No sooner does a group of people get to be first than they look for reasons why they will be first forever. They look for something inherent, innate…some genetic predisposition or climatic precondition. The Romans thought it was the sweet temperatures and soft air of their capital that gave them strength…the Germans came to think it was the blood of the master race. And now Americans believe that we too are blessed by God himself with some special capacity…some special genius…
"We are a revolutionary people," writes Michael Ledeen, "driving ourselves to new frontiers in every generation, constantly creating and constantly destroying…"
Ledeen’s oeuvre can be summarized in three words: "Aren’t we great!" But the poor man seems not to notice that we are no longer a revolutionary people…but a conservative one, desperately trying to keep the world from turning, so that Americans can bask in the warm light of EZ credit and the Great Dollar Standard forever…and the only place Americans drive themselves today is to Wal-Mart…
More below…after the news from Tom:
Tom Dyson, from historic Mount Vernon…
– Here’s a twisted bit of historically ironic fate on the eve of this year’s Jackson Hole Fed retreat…
– Two years ago, at the same meeting, Greenspan sought to justify his actions – or inactions – in dealing with the tech bubble.
– At the time, he was being bombarded with criticism…he should have been aware there was a financial bubble-in- progress, said the hounds, and he should have done something about it. After all, he made his famous "irrational exuberance" speech in 1996.
– "The struggle to understand developments in the economy and financial markets since the mid-1990s," said Sir Alan of Greenspan, "has been particularly challenging for monetary policymakers."
– Greenspan was pleading ignorance…or stupidity. He told the world it was impossible to spot a bubble in formation and even if they could have seen it, there was nothing they could have done to slow it. "As events evolved," he continued, "we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact – that is, when its bursting confirmed its existence."
– Now he’s pleading stupidity again! Only this time he’s referring to the housing bubble. Regular readers will already know that here at The Daily Reckoning, it is our assertion that – like the tech frenzy – Greenspan created this bubble with his regime of EZ credit and loose money, and now depends on the paper wealth he created to prop the economy.
– "House price increases have outstripped gains in income and rents in recent years," he pointed out. "While that raises the possibility that real estate prices, at least in some markets, could be out of alignment with the fundamentals, that conclusion cannot be reached with any confidence."
– "House prices are difficult to measure," Greenspan concluded. Sound familiar? As familiar as the sound of escaping air, we answer…[Ed. Note: We are in the midst of the greatest mortgage debt bubble the world has ever seen. We must protect ourselves from Greenspan’s most heinous experiment with your wealth.
– If this is a housing bubble, as Greenspan thinks it might be, then the global economy is a busted flush, says the FT. Bubbles, by definition, pop. And when this one goes, it’ll bring the house down with it. "It’s a global cycle that has never really got to self-sustaining, cumulative-recovery mode and that has relied on monetary and fiscal stimulus in the United States and on external demand in the rest of the world," says uber-bear Stephen Roach, speaking in the FT. "There is nothing mature about it but the imbalances. How strong will the recovery be when the stimulus steroids wear off?"
– The real estate market is supporting the U.S. consumer, who, otherwise, would have been tapped out long ago. In turn, the U.S. consumer supports China, who supports Japan. "A slowdown in the United States and China and questions over the strength of the Japanese expansion," says Roach, "have raised the risks of a global recession in 2005."
– For now the markets hold up, oblivious to the danger. Yesterday, stocks went down…slightly. The Dow declined 9 points, to 10,173, the Nasdaq lost 8 and the S&P failed to move. It stayed at 1,105.
– "The correction will come…eventually," said Addison, yesterday afternoon. "Not only is it healthy, it is essential. This is the way of nature. The Fed should just let the correction happen."
– "But they won’t…" countered your misplaced British editor, "they’ll keep throwing money at it. They’ll do everything they can to induce ‘recovery…’"
– "…And ensure we get the worst of both worlds," interrupted Addison, "…a prolonged global slump and inflation. The government and the consumer will be dragged down kicking and scratching and screaming for years. That’s why we called our book ‘The Soft Depression’…"
Meanwhile, back in Ouzilly…
*** As the 21st century takes its first baby steps, it risks wobbling into a number of sharp and explosive objects.
"Terrorist attack!" the sons of the pioneers will volunteer. But the threat of terrorism barely makes the list. Terrorism is a distraction, rather than a serious threat. Not that terrorists can’t kill people and can’t make headlines. But the handful of fanatics – supported by no state – pose no serious threat to the republic, its armies or its institutions. Terrorism threatens Americans – along with muggers, serial killers and overeating – but not America.
Terrorism is a method, not an enemy. It was as if, following the Luftwaffe’s bombing of London, the English had declared war on airplanes! After the fall of the Soviet Union, no other country had the power to challenge America militarily. And its few enemies – of whom there were fewer than in an average small-town police department – were forced to resort to terrorist attack to express themselves. Like the anarchists a century earlier, who blew up a public building occasionally – they launch terror attacks because they have no means of launching more serious ones. If terrorists were capable of posing a genuine threat to the nation, in other words, they wouldn’t be terrorists.
Maybe invading Iraq and Afghanistan are effective ways to prevent terrorist attacks; maybe they are not. But as our reader wrote yesterday, too bad they will bankrupt us.
*** Things go wrong. A Daily Reckoning reader:
"Here am I at 44, a female veteran of the United States Navy who, following 14 years of service as a boiler technician, found myself out of a profession (thanks to that nasty NAFTA trade agreement) and at that same time lumped with a mortgage, two small children, and a diagnosed manic-bipolar husband. Needless to say, the husband, once a smart hardworking partner, was reduced to a Prozac-ed, lithium-filled addition to the pillows on the couch of the home I alone could not save. Social service systems, contact with congressmen and senators have all proved useless."
"The word ‘struggle’ does no justice to what I went through. The household also included my mother who suffered with a Lou Gehrig’s-type disease along with dementia. In 1998, one of the three jobs I was holding ended. With NO way to make the mortgage payments any longer, my children and I moved in with a friend. Mother went into a Masonic nursing home and the ex went his way. A nurse 90 miles north of here took him in, got him to straighten out his meds and – surprise of surprises – he has continued to work a JOB for the past five years! Sadly, no support came my way for the children.
"Sadder still, my own employment consisted of stealing high school-kid jobs…pizza delivery, dog grooming, lifeguarding, chimney sweeping…anything to keep my half of this makeshift household going.
"This friend, ‘Charles,’ came with two children of his own (Charles, is yet another who’d been snookered into marriage by a manic-depressive. I swear they should come with warning labels.) Charles’ two children consist of a most wonderful now teen girl and a not-so-wonderful now teen boy. This boy, following delinquent behavior since we all moved in together, began to spiral out of control.
"Nothing I tried in the way of correction or discipline was encouraged by the father…
"Rather he cared to view it as if I was picking on his ‘Nick.’ His ‘Nick’ continues to be a threat to society. My children had to go to live with their father for safety’s sake as drawing guns/knives became part of Nick’s behavior pattern, while his father and I both worked…(albeit the father is still able to earn the $22 hourly rate I should be earning…as we both had the same training in plumbing and boilers). "I tried retraining in computers, a field I was guaranteed would spring me back to the income range I needed to sustain the meager blue-collar life I sought.
"To no avail…more lies. Ten grand to a computer school so I can e-mail my sister? Last year, I obtained an all- endorsement CDL…America needs drivers, I was told, via my veterans’ job placement counselor. What they did not say is that America will only hire drivers who have two years over the road, importing drivers from Russia or Australia if need be, as the insurance companies will not hear of school-trained beginners. I continue to collect unemployment at the moment, lifeguarding on weekends, and find myself $2,000 in the hole with Citibank from making visits to my estranged children each month as I am able, or not. I simply will not NOT visit them.
"I see commercials touting the importance of spending time with family, and I cry. Who are they meant for? No one I know is doing any kind of good. So my question is this: Do you have a position on board for a disgruntled, misled veteran?
"My Children are 12 and 13 years old, estranged one year from me come September. How has it happened that, in five years time, two attempts and $2,000 invested in a failed effort to divorce Mr. Prozac and that he, in four months of requesting – while safekeeping the children until HOPEFULLY something happened to enable me to afford my OWN place – was able to file and gain full custody of both MY babies? It is worse than criminal. (The divorce was finalized September 12, 2003, the same day my mother died…I was unable to make it to Jersey City to protest, and no reschedule date was offered.) I am now the third woman I know to have suffered the same. It is unconscionable…knock us up, walk away, starve us out, take the kids, and charge us support! Wanna see females in mass suicide mode? Let this abhorrent behavior continue.
"There is no bond closer than that of a mother and her babies.
"I can share with you the fact that functionality is beyond difficult when every day you wake and your first thought is…’Another day without my children.’ Why go on? What for? To work? Did I miss something somewhere? Does Wal-Mart need another cashier? ‘F*** it,’ comes to mind. ‘F*** it all.’ "Work hard, go to school, get good grades, keep your nose clean. These were the dubious teachings said to enable one to ‘make it.’ Heidi Fleiss worked hard…is that what the teachers meant, do you suppose? Any help, any ideas? "Thanks for your time and allowing me to vent at least a small portion of this morning’s thoughts. Same thoughts I been having daily. I keep hoping maybe this will all land somewhere useful and enable me to one day help others in similar distress be spared the grievous agony of missing their children. Insult to injury? Like struggle and poverty weren’t enough."