The Most Flattering Fraud of All

Everything in this world is connected – manias and bubbles, liberty and happiness – and even affairs of the heart and economics. Bill Bonner explains…

We have been urged to give up on this series of love letters. It has no place in a financial rag, we are told. But we continue to wander anyway, a bit aimlessly, in the hope that we might stumble on something worthwhile.

The old arranged marriages have given way to spontaneous ones; now, people fall in love, and while in that addled condition they make the most important decision in their lives. How different is that from financial manias…or mass political upheavals, we wonder? There too, in the pursuit of happiness, people take leave of their senses…and usually regret it.

Last week, John Locke reminded us why we choose our own mates. We need liberty to pursue our own happiness, he explained. The more choices we have, the freer we are…said the great philosopher…and therefore, the more able we are to choose those that will bring us the greatest happiness. We repeat his quotation not in admiration, but in wonder….

“As therefore the highest perfection of intellectual nature lies in a careful and constant pursuit of true and solid happiness; so the care of ourselves, that we mistake not imaginary for real happiness, is the necessary foundation of our liberty. The stronger ties we have to an unalterable pursuit of happiness in general, which is our greatest good, and which as such, our desires always follow, the more are we free from any necessary determination of our will to any particular action, and from a necessary compliance with our desire, so upon any particular, and then appearing preferable good, till we have duly examined whether it has a tendency to, or be inconsistent with, our real happiness: and therefore, till we are as much informed upon this inquiry as the weight of the matter, and the nature of the case demands, we are, by the necessity of preferring and pursuing true happiness as our greatest good, obliged to suspend the satisfaction of our desires in particular cases.”

Flattering Frauds: Risk Avoidance

Poor Locke. We see the problem in the first sentence. He flattered himself and his species. Man may build bridges with a “careful and constant pursuit” of the best choices. But in his pursuit of happiness, he is rarely either careful or constant.

“A great fallacy,” explained our friend Nassim Nicholas Taleb in the International Herald Tribune, “…has marred Western thinking since Aristotle and most acutely since the Enlightenment. That is to say that as much as thinking of ourselves as rational animals, risk avoidance is not government by reason, cognition of intellect. Rather it comes from our emotional system.”

Taleb was referring to the reactions to terrorist bombings. Agitated by media or hormones, a man might come to believe anything. Reading the newspaper headlines he might believe that terrorism was a big risk. Statistically, it is insignificant. Following September 11, for example, many people decided to drive rather than to fly. As a result, more died in traffic accidents than would have died in airplanes.

Even a careful reading of the press reports reveals that terrorism is hardly the sophisticated international conspiracy threat it is made out to be. The bombers in London were the rankest amateurs. Some didn’t know how to detonate their bombs. And when they contacted their “mastermind,” they did so on cell phones – which they then took with them on their bombing missions. All you have to do is watch a few spy movies and you know better than that – call from a payphone; at least it’s not registered in your name…and there’s no record of the call!

In America, meanwhile, you’d think terrorists who had their wits about them would strike at the electricity grid during a heat wave. Without air-conditioning, Americans would surely get hot and do something foolish.

Flattering Frauds: Politics and Bubbles

Popular politics and bubbles are almost always flattering frauds. Terrorists, for example, believe they are fighting in some great, heroic struggle – rather than merely blowing themselves up on a fool’s errand. Westerners believe Muslim billionaires are plotting against them because they are “jealous.” And the hundreds of thousands of security personnel would much rather think of themselves as guardians of the public safety rather than the shiftless time-servers they usually are. And when they miss an opportunity to arrest Osama bin Laden or thwart a teenager with a death wish…well, doesn’t that show how clever those terrorists really are!

Of course, some things are too important to leave to the rational part of the brain. Faced with a postal worker in full battle armor or a fashion model stark naked, a smart man doesn’t think at all. Nor does a man typically stop to think when he’s in a bar fight, a market bubble… or in love. Not that he wouldn’t like to; it’s just that he hasn’t the time for it. The thinking can come later.

Romantic love may be a flattering fraud, too. A man never feels more noble, handsome or worthy as when he sees himself reflected in the eyes of his admiring lover. All rational thought ceases immediately. Unless he is a seasoned cynic with a pre-nup in his hand, he believes it will last forever, or at least as long as a bubble in the housing market. He looks at his lover and sees no faults or flaws. If she is fat, he finds her pleasingly plump. If she is stupid, she finds her admirably unpretentious. And she returns the favor, looking upon him as uncritically as a Wall Street analyst on a balance sheet. To the rest of the world, he may be an oaf and a dimwit; to her he is an oaf and dimwit, too, but an adorable one. She can’t imagine anyone better suited to her…until he comes along next month.

All frauds have their price. A man who invests his dollars in a bubble…or gives his life to a high-minded swindle…pays dearly. There is a price to pay for l’amour, too. If he were a Lockean man, he might avoid it altogether, just as he would stay away from over-priced stocks. Why waste caresses; why wear out the heart? But nobody ever got rich or happy by storing up kisses. And even ironicists look upon a couple in love with a little envy; they are fools, he says to himself…and wishes he could be one, too.

Bill Bonner
The Daily Reckoning

July 29, 2005 — Ouzilly, France

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

“Who knows?” sighed our old friend John Mauldin last night.

John has come for a visit with his entire family – all nine of them. The local French people must feel as though Texans have invaded. They don’t know whether to smile politely, or call the gendarmes.

We had been talking about interest rates, China, and Greenspan’s policies…along with stocks, bonds, technology, children, God, and how we might earn a living 10 years from now.

The difference between young investors and older ones is that the youngsters are a lot smarter. They know the answers to many of these questions. After the age of 50, though, a smart man goes dumb. What he knows, most certainly, is that he doesn’t know much.

“Unless something big happens, China will become the world’s largest economy,” John explained. “That doesn’t particularly matter. It hasn’t hurt the Danes not having the world’s largest economy. It won’t hurt us, either. But the price of labor is going to be held down for a very long time.”

There’s the rub. The big-picture rub. Most Americans do what they are told. They hump, schlep and bus without giving much thought to what they are doing. Trouble is, there are about 300 million Chinese and another 600 million Asians who are ready, willing and able to do the work for a tenth of the price. As long as the process of globalization continues without interruption, these Americans cannot expect much in the way of wage increases. And since they are so deep in debt, they have to expect lower standards of living – at least until they have straightened out their balance sheets.

Ah, you may say…their balance sheets are not so bad. Their debts are high – but not especially high when compared to the “value” of their houses.

But if you would say such a thing you are a fool. Debt must be carried with income – not house price inflation. You can’t sell your house to make your mortgage payment. And when you do sell your house, where do you live?

The world benefits from globalization. Americans benefit too, but it won’t look that way when the housing bubble ends. Then, they will lose their jobs…and they will no longer have “equity” to take out. Living standards will fall. The slump we have been waiting for will finally come. And that is when Americans will wonder why they bear the imperial burden – guaranteeing the peace and safety of the world at their own expense.

How will it all end up? When will stocks collapse? When will the housing bubble blow up? Will bonds rise or fall? Will China blow up before it grows up?

“Who knows?” says John.

More news, from our team at The Rude Awakening:


Justice Litle, reporting from Nevada…

“If other trusts with unsustainably high payout ratios are a ‘yield grab’ in the short term, then this one is a solid value play on energy for the long term.”


Bill Bonner, with more views:

*** Second quarter GDP numbers came out yesterday. Surprise! The U.S. economy has been weaker since 2002 than economists had originally expected…and inflation was higher. Heh…who could have predicted that?

The economy grew 3.4% say the quants. “Treasury’s sold off immediately,” says the Bull Hunter himself, Dan Denning, “the market sees this kind of growth as a green light for the Fed to keep hiking overnight rates.”

But as the economist Frederick Bastiat was wont to say, “there are those things that are seen, and those that are not seen.” The study of economics is largely about those things that are not seen.

What wasn’t seen by the mainstream press in yesterdays GDP report? 67% of second quarter growth came from consumer spending… personal consumption…the great American economic ideal of “spend and grow rich” continues unabated.

What else was not seen? The biggest driver of business investment was spending on software. As Dr. Richebächer has repeatedly demonstrated over the past few years: this isn’t so good for the economy either. Replacing people with software forces wages down…at a time when consumer spending plays such a big role in economic “growth.”

What impact, we also wonder, is the U.S. auto industry’s penchant for selling cars at “employee pricing”? These are all deflationary trends that aren’t being picked up by the mainstream media radar.

*** Dan Denning and Addison Wiggin apparently did their share to prop up the U.S. economy yesterday in New York City.

Mr. Wiggin reports: “We spent the better part of the day yesterday consuming our way through the city. Dan was scheduled to tape an interview in the morning with Bloomberg TV, and then appear on Neil Cavuto’s show in the afternoon. We kicked off the day with a huge buffet breakfast provided free at the hotel…worked our way through a couple of haircuts, a few new shirts and ties…coffee…lunch at a New York deli that served pastrami sandwiches with a full pound of meat on them (huge, gluttonous portions)…a few hours at a bar while we ‘strategized’…then Cavuto bumped him in favor of NASA coverage. Discouraged, we went out to dinner in Little Italy and ate way too much pasta and drank too much wine.

“The sum total of the day’s productivity was a 7 minute segment that will air this weekend on Bloomberg TV. But here’s the best part: The subject of Dan’s Bloomberg interview? Among other things, overconsumption and the American belief we can spend our way to wealth!!!”

[Ed note. You can watch Dan’s interview on Bloomberg’s Personal Finance this weekend. It will air every hour and a half from 6am to 1pm both Saturday and Sunday. Dan’s appearance on Cavuto was postponed to Tuesday at 4:20pm. You can also catch him on the MarketWatch website TV this weekend and on CNBC’s Wake Up Call at 6:15 on Tuesday. Hope you enjoy…]

*** Air-conditioning and deodorants are among the greatest achievements of the 20th century. The modern-day humbug can steam up a crowd without breaking a sweat, even in July. In summers past, you could spot the world improvers by the beads of perspiration on their brows, the stained collars, and the damp, clinging shirts. Inciting violence or larceny, they gave off an odor too – like the smell of week-old road kill – which warned away those with delicate noses or sturdy brains. But now, our public buildings are cool; our scoundrels no longer drip. In the summer of 1917, the crowd pleasers stirred up mobs against everything German – even poor little dachshunds were not spared. In the summer of the late 1850s, they roused the populace on both sides of the Mason Dixon line to acts of fratricide. It was the summer of 1776 that brought out the perspiring idealists and swindlers in Boston and Baltimore. And in the heat of July of 1755, 250 years ago, the pulpits and public places of Massachusetts stank with sanctimonious frauds urging mayhem.

North America was largely empty of human life at the time and mostly peaceful. But that didn’t stop many of the leading citizens of the colony. Their lives and fortunes would never be secure unless they uprooted their neighbors to the north – the Acadians, French settlers in New Brunswick and Nova Scotia. The French were papists, said the fathers of liberty; they must be destroyed.

There was an even more sordid reason motivating many of the clammy blusterers. William Shirley, royal governor of Massachusetts, led a group of speculators who hoped to put their hands on the Acadians’ land, says William Fowler in the International Herald Tribune. (Having spent several summers in Nova Scotia, we can only guess that he had never seen it.) Shirley allied himself with the English in Nova Scotia, including lieutenant governor Charles Lawrence, Jonathan Belcher, chief justice of the colony, as well as army officer Robert Monckton, and John Winslow of the Massachusetts militia.

“On the morning of August 6, 1755,” writes Fowler, Monckton summoned Winslow to his headquarters at Fort Cumberland near the northern end of the Bay of Fundy. He told Winslow that he planned to order all the male Acadians to the fort. Once they were inside, Winslow’s men would surround and confine them. Unaware of their peril on Sunday, August 10th, more than 400 Acadian men entered the fort. As soon as the men were locked up, messengers were sent to their families telling them to report to the fort lest the men suffer. Those who fled would be hunted down and killed.”

“When the government tells you to do something,” says a French neighbor of ours — perhaps tipped off by a escaped Acadian ancestor, “its generally a good idea to do the exact opposite.” In the event, thousands of Acadians were rounded up and shipped off . Many ended up in Louisiana. As many as 10,000 were killed.

With the French out of the way, the world improvers and property speculators were ready to make their move. In Boston, New York and Philadelphia citizens were told of a “favorable opportunity for peopling and cultivating of the Lands vacated by the French.” More than 10,000 American colonists moved north to claim the stolen goods.

*** This morning, it is cool and raining in France. We apologized to our guests.

“Are you kidding?” came the reply. “It was 91 degrees when we left New York. This is great.”

“Searing heat strains U.S. power grid,” is a headline in today’s paper.

[Ed. Note: The U.S. isn’t the only country feeling the heat…as the temperature continues to rise in China, so does the number of forced blackouts. These energy shortages are certainly having their effect on China’s economy, which only spurs on our friends in the Far East to work even harder at making advances in the alternative energy sources. Savvy investors are getting in on these energy-related investments now – and you can, too. Just click on the link below for all the details…

The Daily Reckoning