The Lint Age

London, England- When Ben Bernanke gave his speech to the London School of Economics on Tuesday, our reporter was on the scene. Terry Easton put a tough question to America’s central banker: aren’t your interventions just making the situation worse, he wanted to know.

Amid the blah…blah…blah…of Bernanke’s response was this:

“The tendency of financial systems to boom and bust …is a very long-standing problem… but I think it’s very important for us to try to put out the fire…then you think about the fire code.”

In his 1988 book, The Collapse of Complex Societies, Joseph Tainter argued that all societies – like all organisms – are doomed. Tainter studied ancient Rome as well as the Mayan civilization. He noticed that problems always blaze up. Each one – whether climatic, political or economic – rings the firehall bell. And each solution – and readers may substitute the word “bailout” for solution – brings more challenges and takes more resources. Finally, the available resources are worn out.

Tainter observes that when the costs become high enough, people seem to give up. By the end of Roman era, for example, the burdens of empire were so heavy that people sold themselves into slavery to get free of them. So many people did so at one point that the authorities had to come up with another solution; they outlawed the practice. Henceforth, Roman citizens were required by law to remain free!

Another philosopher, Giambattista Vico, writing in the 18th century, put the beginning of the decline of Rome roughly at the time of the Great Fire during Nero’s reign. Nero, partly to pay for his post-fire reforms and reconstruction, began taking the gold and silver out of the coins. All civilizations go through three stages, Vico said – divine, heroic, and human. The divine period is ruled by the gods. The heroic period is adorned with victories and statues. Then, comes the human era. (Here, we permit ourselves to add a footnote to Vico’s oeuvre: the coin of the realm in early periods is the gods’ money – gold. Later, people switch to money of their own invention – the kind of money you make from trees.) This last stage, says Vico, is when popular democracy arises, along with rational thinking and what Vico delightfully calls the “barbarie della reflessione” [the barbarism of reflection]. In earlier eras, people do what their gods and leaders ask of them. In the final era, they ask, “what’s in it for me?”

Even as late as the early ’60s, John F. Kennedy could still appeal to heroic urge without drawing a laugh. “Ask not what your country can do for you,” he said in his inaugural address, “ask what you can do for your country.”

But 11 years later, Richard Nixon, like Nero before him, began the process of debasing the country’s money. That was a solution too; the United States had spent too much. Nixon could worry about the fire code later. First he opened up with the fire hose; he defaulted on America’s promise to exchange dollars for gold at the statutory rate.

Barack Obama tried a Kennedyesque appeal to civic high-mindedness last week. We need to “insist that the first question each of us asks isn’t ‘what’s good for me’ but ‘what’s good for the country my children will inherit,'” said the president-elect. But now, like Doric columns in a trailer park, the words are ornamental, not structural. They are the homage that one age pays to a better one.

We are in the 21st century now. Barbarous reflections rise up like swamp gas. The whole place stinks of them. Bernanke and Obama offer solutions. But their plans to save the world from a correction are little more than a swindle. They offer to bail out the mistakes of one generation with trillions of dollars’ worth of debt laid onto the next.

“Regarding the current financial meltdown,” writes Rony Teitelbaum, “it is very clear that two main factors underlie the political reactions to the crisis, the first being pressure originating from ties between the financial and the political elect, manifested by taxpayer bailouts of large institutions that continue to deliver bonuses to the executives and donate to political campaigns. For those of us who are not blind, these are clear signs of political corruption which would have made the worst Roman emperor blush. The second factor is political pressure originating from the mass public. The kind of solutions offered so far, and I may add which were received with very warm enthusiasm, were tax rebates and gasoline tax holidays. These are actions aimed at a public who “impatiently expected quick and obvious results,” to quote Cary’s description of Roman society in AD300. (A History of Rome).”

Circa 2009, there is hardly a soul in the entire world who has not been corrupted by the barbarie della reflessione of the late imperial period. Both patricians and plebes are for bailouts. Both business and labor back stimulus programs. The taxpayers and the politicians who rule them are of one mind. Liberal, conservative, rich, poor, Republican, Democrat all speak with a single voice: ‘Screw the next generation!”

The golden age is over, in other words. In the space of 40 years it passed from gold, to silver, to paper…and is now somewhere between plastic and navel lint.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

January 16, 2009

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

After five straight days of losses, Wall Street managed to steady itself yesterday. The Dow rose only 12 measly points; but that was a relief for most investors.

Oil held steady too – at $35. And gold lost a dollar, to drop to $807.

The big question is a question of faith. How much faith do you have in the feds? They aim to get inflation fired up. They’ve got the fire-starters. They’ve got the matches. They’ve doused on the gasoline. But so far, the whole world economy is still waiting…shivering…hoping for a spark.

Yesterday, Congress released another $350 billion in bailout funds. And Barack Obama and the democrats announced their own bailout/stimulus program – with an $825 billion price tag.

Christmas is over…but the Obama plan is keeping spirits bright around the capitol. Never in history have the feds had so much in money to share out…money they haven’t even stolen yet.

The program includes “huge increases in federal spending on education, aid to states for Medicaid costs, temporary increases in unemployment benefits and a vast array of public works project to create jobs,” reports the International Herald Tribune.

In Europe, the ECB cut rates. The IHT reports on that to

“Alarmed by the rapid economic downturn, the European Central Bank on Thursday lowered its benchmark interest rate by half a point to 2%, and hinted that the rate would fall further from what is already the lowest level ever.”

“The data surprised everybody about how negative it turned out…” said an economist watching the ECB.

But will all this extra kindling be enough to get a blaze going? How much faith do you have, dear reader?

“Economic conditions around the world are horrible and will get far worse in 2009 despite all the fiscal and monetary measures that are now being implemented in order to ‘save’ the system,” writes old friend Marc Faber. “In fact, I believe that in the US and stimulus package and the various bailouts engineered by the Fed and the Treasury will make matters far worse than if the free markets had been left alone to make the necessary adjustments.”

The feds might manage to get a blaze going, but it won’t necessarily be the nice little, crackling fireplace treasure they’re hoping for. The system of debt-addled investors and homeowners is over. All the feds can do is to blow up a new bubble – in public debt.

What effect that will have on the economy…or on investment markets…no one knows. Never before has the world’s reserve currency been purely paper. And never before have its custodians been so eager to set it alight.

*** What’s normal?

Looking at the long sweep of the stock market, we notice that there’s nothing unusual about today’s prices. Au contraire, they are more ‘normal’ than prices were a year ago.

Colleague Simone Wapler handed us a chart of the French stock market going back to 1900. With prices adjusted for inflation, what we see looks like the Alps. There are peaks and valleys. The pattern is irregular…apparently unpredictable. But there’s no mountain with only one side. Every time prices went up…they went back down.

The CAC 40 rose during the boom years of the ’20s…and crashing during the ’30s. Curiously, it rose to a new peak during the German Occupation in the ’40s and fell in the ’50s. The next peak came in the de Gaulle years, in the early ’60s. Then, price fell for the next 20 years. As in the United States, the most recent bull market began in ’82 and collapsed last year. But even after the recent rout in share prices, stocks in France are only back to their average levels. The numbers show that an investor who bought shares in 1900 could have held them for the next 108 years and still not have made a penny in capital gains.

Normally, you do not make money from rising share prices. You make money from dividends.

*** Simone used to be an aeronautical engineer; she worked on the development of the Airbus – the plane that just went down in the Hudson River.

“It’s safer for them to do a crash landing on water,” she explained. “Less of a risk of fire. And it takes a while for them to sink…so you have time to get out.

“When you land or take off, there is always the risk of birds getting in your engines. When I was at Airbus, we conducted extensive tests…in which we threw chickens into the turbine engines to see how many they could take. They had to be free-range chickens…the others are too soft. Trouble with birds is that they tend to flock together… but I don’t remember how many chickens an Airbus turbine can handle before it stalls.”

*** “Ford chief doubts a return to old times,” says the Financial Times.

This week, the annual Detroit Auto show is underway. America’s automakers are sitting at the wheels of their new electric/hybrid cars…and driving into the future.

It used to be said, “What was good for GM was good for America.” Now, what is bad for GM is also bad for America.

We have vowed to focus on the bright side this year, so we will look at the half of this glass that has the water in it. There, we find an explosion of invention and innovation in the auto business.

Detroit dominated the auto world after WWII with a simple idea about what a car should be – a piston engine attached to a standard drive train. For the next 50 years, the basic plan didn’t change very much. Detroit designers added tail fins…and then withdrew them. Engineers figured out automatic transmissions, power steering and air-conditioning. The French added radial tires and front wheel drive. But neither the car not the business model was substantially altered.

But all of a sudden, America’s big automakers are going broke – and neither the auto business nor the auto is the same. Now, autos are being made with new materials…new engineering and a new power plant. Now, the key to the auto of the future is no longer the internal combustion engine; according to the press, it’s the battery.

This is what happens to any business…or any society. Detroit can make big SUVS, trucks and cars – all based on the post-war model. But what does it know about composite materials and batteries? Not that it is impossible for it to compete. But it has a huge disadvantage – while newer, lower-cost competitors start fresh and fit…Detroit enters the race with a 2-ton piece of junk on its back. It has generations of mechanical engineers for whom it must provide pensions…an army of bolt tighteners and metalworkers it must rehabilitate…acres full of manufacturing equipment suitable for making 20th century cars and trucks.

Meanwhile, a company in China is producing an electric car that it says will go 250 miles without a recharge. The company is not an automaker at all – it’s a company that makes batteries for cell phones.

Yes, dear reader, that’s the way the world works. Just when you get something figured out, the facts change. Then, you find yourself no longer at the front of the race…but dragging along at the end. All that you learned and put in place is no longer an advantage, it’s a liability.

And yes, as Detroit goes…so goes the United States of America. Cock of the walk in the 20th century, it now finds its infrastructure…its financing…and its training all inadequate or inappropriate for the challenges of the 21st century.

The Daily Reckoning