The Enron Guide to Economic Management

The Daily Reckoning – Weekend Edition
March 18-19, 2006
Baltimore, Maryland
By Kate Incontrera


Here we go again…after a nice stretch of relative dollar strength, this past week saw the greenback’s biggest weekly loss in six weeks.

"This is the most serious assault on the dollar since January," said Steven Englander, chief currency strategist for the Americas at Barclays Capital in New York. "This feels different."

Why the decline? First, there was a dramatic downshift in the market expectations of how high interest rates will go. Most in the interest rate futures market believed that the Fed would raise rates to 4.75 percent by the end of the month, with a chance that they would raise to 5.25 percent by the middle of the year.

"Now, however, markets have taken all bets of a hike beyond five percent off the table, and are pricing in only three in four chance the Fed will even reach five percent," reports Reuters.

"This helped compress the spread between two-year U.S. and euro zone government debt to its narrowest level in favor of the dollar in 10 months."

Another factor conspiring against the dollar is the U.S. trade deficit. A U.S. Treasury Department reports shows that foreign purchases of U.S. securities were less than the amount needed to finance the trade deficit for the second month in a row.

"If international investors are no longer investing enough to finance the trade deficit, just how is the dollar keeping as strong as it is?" wonders EverBank’s Chris Gaffney. "Smoke and mirrors. It sounds like the U.S. government is taking a page out of the Enron guide to economic management."

Just a thought: If we have to compensate for the gap in the current account deficit and maintain the value of the dollar by attracting overseas investment to the tune of 3 billion dollars a day – shouldn’t we be making ourselves attractive to these investors? Say, by not turning big money deals, like the one with Dubai?

EverBank’s Chuck Butler echoes this thought: "How many times do these foreign investors have to get burned by this scandal or next scandal before they can say, ‘never again’?"

‘We have to keep American companies in American hands’ was the cry heard far and wide over the last few weeks. You can bet that foreign investors got that message, loud and clear. Sooner or later, they will stop fighting to prop up our economy and look somewhere more welcoming – like China or India – to make their investments.

Kate Incontrera
The Daily Reckoning

P.S. Since the dollar seems doomed to die a slow and painful death, savvy investors are diversifying their portfolio with gold. Right now, until Tuesday, March 21, our friends at EverBank are offering quite the deal on their 5-Year MarketSafe Gold Bullion CD. With guaranteed principal protection and FDIC insurance, you’ll enjoy the same secure features that make the traditional CD an attractive choice for conservative investing.

— Daily Reckoning Book Of The Week —

Demise of the Dollar…and why it’s great for your investments
by Addison Wiggin

This acclaimed book spent over a week in the #1 slot on Amazon’s bestseller list – knocking Harry Potter to number two. It then showed up on Barnes and Noble’s bestseller list and debuted on The Wall Street Journal’s Business bestseller list last week at #8!

The only logical next step was for the book to get on the New York Times bestseller list…which it and sat strongly at #5!

The Demise of the Dollar examines the reasons for the dollar’s slide – including the nation’s historic trade deficit, the euro, government spending habits, globalization, and other international factors – and offers an up-close look at the Federal Reserve’s attempts to "manage" the dollar’s value.

To purchase your copy, see:

The Demise of the Dollar

THIS WEEK in THE DAILY RECKONING: Put down that Guinness…St. Patrick’s Day is over. Check out what you missed while you were wiling the hours away at the pub this week…

All About Evo 03/17/06
by Bill Bonner

"Evo Morales was elected president of Bolivia in December 2005. He won a landslide victory at the polls, proving once again that voters too get what they deserve, not what they expect."

Going Off-Grid 03/16/06
by S.R. Nunnally

"In 1997, Denmark held a national competition. The selected winner would be home to a one-of-a-kind experiment: The winner would be expected to convert all its energy supply to 100% renewable energy within 10 years."

A Congressional Tantrum 03/15/06
by John Mauldin

"Last week, an updated version of Smoot and Hawley’s Congress put together a veto-proof gaggle to stop the United Arab Emirates from buying a British port management company that ran six of our nation’s ports."

Got Demographics? 03/14/06
by Harry S. Dent

"As we get closer to the demographic turning point, you need to get conservative. You’ll need to start ‘acting Japanese.’"

The Federal Reserve and the Nebulon Five Galaxy 03/13/06
by The Mogambo Guru

"The vulgar phrase ‘act Fed’ has replaced the long-time favorite expression, ‘He’s got his grumkin up his gorfhole."

FLOTSAM AND JETSAM: In honor of St. Patrick’s Day and the great Irishman, Jonathan Swift, who wrote A Modest Proposal in 1729, in which he suggested that the surest way to solve the problems of over-population and hunger in Ireland was to let parents sell their babies to be eaten for dinner.

A Modest Economic Proposal: Sell Your Parents
by Susan Walker

It is a melancholy state of affairs to behold parents in our nation so plagued by debt and worries as they walk the streets and byways. Their bowed heads and tortured expressions betray the burdens they carry. They constantly remind their children of their worries about money. They have forgotten the joys of their youth, when they knew what true happiness and true wealth were.

Statistics from the Federal Reserve’s 2001 and 2004 Surveys of Consumer Finances explain how recent changes in family income and net worth affect parents today. In the most recently measured three-year period, average family income fell 2.3%. This compares with the previous period (1998-2001) when average family income rose 17.3%. The report’s authors say that during 2001-04, families shifted out of equities into home ownership, and the amount of debt relative to their total assets increased markedly. "As debt rose over the period, families devoted more of their incomes to servicing their debts, despite a general decline in interest rates."

Such evidence supports my argument that parents cannot stumble along on the self-same path to wrack and ruin. Hence it seems that there is but one way to stop the burden of debt from increasing, to wit: adult children should sell their baby-boomer parents to the meat market. Once their parents are gone, the credit-card purchases will cease, the unremitting refinancing of homes will end, the constant spending will stop, the fretting about no retirement to live on and no savings to fall back on will be finished.

This modest proposal could profit the remaining generations who will receive a fair price for their parents while inheriting what is left of their parents’ property and assets. My hope is that they will have learned not to encumber themselves with more debt, because they shall have seen that too much consumption with too little cash can cause terrible worries that devour a person’s later years.

One of my acquaintances, Bob Prechter, a delineator of modern affairs, discusses the painful result of too much debt in his business bestseller, Conquer the Crash:

When the burden becomes too great for the economy to support, reductions in lending, spending and production cause debtors to earn less money with which to pay off their debts, so defaults rise. Default and fear of default exacerbate the new trend in psychology, which in turn causes creditors to reduce lending further. A downward "spiral" begins, feeding on pessimism just as the previous boom fed on optimism. The resulting cascade of debt liquidations is a deflationary crash. In desperately trying to raise cash to pay off loans, borrowers bring all kinds of assets to market, including stocks, bonds, commodities and real estate, causing their prices to plummet.

Why let your parents be consumed by these worries? Let some other wealthy personage roast them or grill them or sauté or fricassee them. Just be sure to make their end swift and painless – either find a skillful butcher or deliver them to the tonsorial parlour of Sweeney Todd, the demon barber of Fleet Street.

Then rejoice that you have found a way to relieve them of their debt and to preserve what wealth they amassed to pass onto your own children to enjoy. The world will likewise be a healthier place, because purchasers will have a ready supply of victuals that has not been touched by mad-cow disease or avian flu.

Besides this health benefit, other benefits would ensue: no more having to listen to baby boomers go on and on about lessons of the Vietnam War; no more having to listen to oldies-but-goldies radio stations constantly playing Crosby, Stills, Nash and Young and Led Zeppelin; no more having to listen to their free love, sex, drugs and rock ‘n roll mantras.

I beg you not to let your finer sensibility dismiss my proposal out of hand. It will work if we let it.

Nor do I want to hear of other expedients, such as (1) living within one’s means, (2) paying down credit card debt (3) saving and investing for retirement rather than spending now and planning to work until age 75, (4) increasing taxes and decreasing government spending so that deficits can be turned back into surpluses, (5) sacrificing now by delaying Social Security payments until age 75 and indexing Medicare benefits according to income.

These are all too difficult for living generations either to contemplate or to carry out. The simplest plan is to diminish the magnitude of elderly souls who need to be cared for and who shall inevitably be a drag on the U.S. economy.

Also, do not argue that, for many decades, people like me have warned that the burden of debt must bring down our economy and yet it has never happened. Neither speak to me of those who have lived beyond their means from the moment they could get credit to the day they died. Did they suffer? No. Did they have more toys, bigger houses, fancier cars? Yes, nor did they ever pay them off. They may have learned how to play the game better than the rest of us, but I cannot accept that their motto of "Live long and frolic" made this world a better place.

I am certain that all you of like minds will see the efficacy of my proposal, and I profess sincerely that I have no personal financial interest in this plan, since my parents and in-laws are either long gone or have provided well for their later years. Nor do I plan to live beyond my own means any longer. I seek only to provide for the younger generations of this great nation at little or no risk to their own comfort.

Editor’s Note: Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta’s president. She is a graduate of Stanford University.

The Daily Reckoning