The Most Important Number in the World

The Daily Reckoning PRESENTS: Only rarely can you look into the economic future and see what’s coming…at least in time to take advantage. This is one of those times. As David Galland points out below, clarity is possible because of a combination of factors that, taken together, leave nothing but hard choices…


78 million.

That figure is the key to steering your portfolio successfully past the reefs of today’s brewing monetary crisis. And, if you play things right, it’s the key to making a lot of money for yourself over the next decade.

78 million is the number of baby boomers who are in or approaching retirement. That’s the biggest demographic bulge in U.S. history, fully 26% of the population.

And many of those 78 million are in a jam. As they approach retirement, they are still carrying historic levels of debt and, on average, have woefully inadequate net worth – and much of that based on shaky housing prices.

In fact, 25% of the retiring boomers – nearly 20,000,000 in all – are facing retirement with a net worth of less than $50,000. You don’t need to be an accountant to see that, with today’s degraded currency and longer life expectancies, they won’t get very far on so little.

This is a real tragedy in the making. After all, what could be sadder than millions of people striving for a lifetime to reach the American dream and then discovering that the “golden years” are just a fantasy, their wealth having been sucked away by decades of inflation and taxes so that politicians and bureaucrats could squander it to grease the skids for their own political success.

In 1930, the total share of the U.S. economy directly controlled by or dependent on government was about 11%, leaving the balance of 89% firmly in the hands of private enterprise.

Today, by the late Milton Friedman’s calculations, the government’s share of the U.S. economy – including the time and resources required to comply with all the regulations – has ballooned to over 50%, reducing the wealth-creating machinery of free enterprise to an auxiliary engine for government.

No wonder so many people live paycheck to paycheck.

U.S. government debt now tops $9 trillion, before taking into account its unfunded obligations for Social Security and Medicare – debts that the retiring boomers will soon have their hands out to collect.

After adding in Social Security, Medicare and all the government’s other pay-later obligations, the current debt actually comes in at over $60 trillion – an amount so large, not one person in a million has a real sense of it. So let’s try to put that number into perspective.

A trillion is 1000 X 1000 X 1000 X 1000, or a million millions. In his first address to Congress, President Reagan, himself a big spender, accurately pointed out that a stack of $1,000 bills four inches high makes you a millionaire, and that a trillion dollars would be a stack 67 miles high!

The U.S. government owes 60 of those sky-piercing stacks of $1,000 bills.

It’s a lot of money. And it’s not just any kind of money. Amazingly, this unbacked currency of a bankrupt government is still the reserve currency of virtually every nation in the world today. But not, we think, for much longer.

To service its debt and keep the game going, the U.S. government must sell on the order of $2.5 billion per day in new Treasury bills, much of it to foreigners already sitting on something like $6 trillion of U.S. paper.

Absent the foreign buyers of U.S. Treasury securities, the whole scam begins to unravel. And once it begins to unravel in earnest, with wealthy foreigners and then governments rushing to switch out of dollars, the speed and steepness of the monetary collapse will be breathtaking.

While millions of boomers will be lucky to scrape by for a year or two of hard living in a trailer park, their meager assets won’t carry them through the 20 or 30 years of retirement that medical science now promises. For that, they’ll have to rely on scraps from Washington. And if they have nothing else, every one of them has a mailbox that’s just right for receiving government checks.

In fact, according to the Fed, a majority of retired Americans already rely on Social Security for 80% or more of their income.

And that makes Social Security and Medicare politically untouchable, no matter how badly the programs trap the U.S. economy.

Recognizing that the United States has little capacity to rein in its profligate spending and has neither the intent nor the ability to actually pay off its $60 trillion debt in money worth anywhere near what it’s worth today, foreigners are increasingly leery about accumulating more greenbacks.

On November 9, for instance, Reuters reported that, “The bond and foreign-exchange markets were struggling to come to grips with comments from China’s central bank governor Zhou Xiaochuan, who said his country had a clear plan to diversify its $1 trillion in foreign-exchange reserves and is considering various options to do so.”

Normally, the more skeptical foreign investors become, the higher interest rates must go to entice them to continue raising their hands at Treasury auctions… and to keep them from dumping their existing holdings.

But even that route, at least for now, is closed. That’s due to the critical role of housing in today’s economy and in the financial statements of so many millions of American homeowners. Simply, higher interest rates would devastate the already weak housing market and bring ruin to a heavily indebted populace, especially cash-strapped boomers, and further ratchet up the cost of government borrowing. In other words, raising rates is not an option.

So what are nervous bureaucrats to do?

The answer is to depreciate the currency – and as quietly as possible. That allows the government to meet its obligations, but with ever more worthless dollars. It’s their only way to buy time.

In fact, Fed Chairman Ben Bernanke virtually gave the game book away in a speech in Frankfurt on November 10.

“It would be fair to say that monetary and credit aggregates have not played a central role in the formulation of U.S. monetary policy.”

In other words, the total amount of money in the system – what we “print” – is whatever the government finds convenient from one day to the next. That’s a politic way of admitting that the U.S. government is planning to paper over all its many obligations and accelerate a trend that has been in motion since the creation of the Federal Reserve in 1913.

Make no mistake, it’s a desperate strategy, but at this point it’s the only option for a government whose decades of reckless spending have led the economy into a box canyon, the floor of which is covered in quicksand. There is no way out. The best they can hope for is to stall the inevitable for as long as they can. “Not on my watch” is the phrase of the day.

In this age of instant communication, the government can’t hide the truth – at least not for long. So, no matter that they have stopped publishing M-3 money supply numbers, recognition that we are between a rock and a hard place is spreading.

Reckoning day is not far off. And when it comes, it will rush in faster and more brutally than almost anyone expects. The world’s financial picture will be redrawn from scratch, and a painful unwinding of the economic dislocations built up by decades of political pandering will begin.

While no one can say with certainty how the disaster will play out, there is one truth you can take to the bank. Throughout all of human history, gold has always held its value as a monetary instrument. That sort of shockproof durability cannot be claimed by any paper currency, certainly not by the dollar, which has lost 95% of its value since abandoning the gold standard in 1971. With the dollar untethered from gold, the worth of the $20 bill in your pocket is headed for its intrinsic value…as a recyclable.

In the weeks, months and years just ahead, gold, silver and other tangible assets are again going to become much more than financial obscurities tucked away on the commodities page. They’re about to become front-page news.

When that happens, the prices of the metals – and of the high-quality gold and silver shares we follow on behalf of subscribers to our International Speculator – are heading for the moon.

Hopefully, enough of the 78 million baby boomers will catch on to the underlying realities of their situation early enough to take advantage. For many, it may be their last chance at enjoying dignified golden years – instead of laboring through their eighth decade under the Golden Arches.


David Galland
for The Daily Reckoning
December 14, 2006

Editor’s Note: David Galland is Managing Director of Casey Research, LLC., publishers of Doug Casey’s International Speculator, a monthly newsletter focused on identifying high quality natural resource stocks with the potential for a double or better over the next 12 months. A 3-month risk-free trial to the letter is available for interested investors.

Where are we? What time is it?

We’re losing track. But everywhere we go…everywhere we look…we see towers of money, property, derivatives, debt and credit. Towers in the stock market. Towers in the housing market. Towers stacked upon towers.

So today, we take the unprecedented step of issuing a “Crash Alert.”

Not that we have any special information or insight on the subject. We are just looking out the window.

‘Man is a thinking, expectant being,’ says recent Nobel Laureate Edmund Phelps. The economist should have inserted an ‘or’ in the middle of the sentence. Man tends to expect…or think. Rarely does he do both at the same time.

Right now, all over the planet, men – that is men and women with money – expect the good times to continue. They’ve watched their property investments soar. They’ve watched their stock market investments reach new, record highs. And they’re sure that central banks have mastered the art of maintaining stability. ‘Things are good,’ they say to themselves, ‘and they’re going to stay that way.’

Travel is said to broaden one’s perspective. But traveling around the world today tends to focus your attention, rather than scatter it. Almost no matter where you go, people are all the same. Whether you are in New York, London, Bombay, or Sydney you will find stocks and property higher than ever…and investors hoisted up so high by their inflated assets that their feet no longer touch the ground. In that high, thin air, their brains cease to work.

There are only two ways to get rich – accumulation or speculation. Either you earn the money and save it; or you get very, very lucky. Traditionally, the vast majority of the world’s wealth – both individual and national – has been made by accumulation. Wednesday’s Australian Financial Review, for example, tells us that Chinese wages have doubled in the last five years. But while wages have gone up, the Chinese continue to be fanatical savers, with savings rates twice those of the world average.

Ben Bernanke and Hank Paulson are traveling in China now, trying to talk the Chinese into raising their own currency against the dollar. They might do better to close their mouths and open their eyes. The dollar will fall soon enough, however much they prop it up. Besides, they might learn something. While the rest of the world squanders its money on Chinese-made trifles, the Chinese themselves build wealth the old fashioned way: they spend less than they make. The difference becomes ‘retained earnings’ for a corporation or ‘savings’ for a family. The greater the savings, generally, the richer the family…the business…or the nation.

Meanwhile, in the rest of the world, it is as if a tidal wave of liquidity and New Era thinking has washed over the globe’s burgs, metropolises, and hamlets. People have gotten so lucky they think they’ll never need to save again. Even supposedly sophisticated investors have given up on the tried-and-true method of building wealth; they all must feel very lucky.

In the stock market, dividend yields are tiny…even non-existent for many stocks. Corporate profits may be at all-time highs, but an investor expecting to accumulate his way to wealth by buying stocks and collecting dividends is not thinking at all. His dividends will not even equal the rate of consumer price inflation.

Still, Barron’s group of eight market seers, sees nothing not to like. Instead, they look into the future and see the S&P going up – by an average guess of 8%.

Nor is anyone, except us, worried about a sudden downturn in stocks. The VIX, with measures stock market anxiety, is near record lows.

In the property market, too, the proud towers continue to go up. In India we learned that several cities were putting up so much new space, that at present take-up rates, there was enough new supply for 20 years. And in New York, a single apartment building just sold for the highest price ever paid – $1.8 billion. This news comes only a few months after Sam Zell sold out his New York holdings for a $3 billion profit, in the biggest, most important property transaction since the Louisiana Purchase. The buyers, a subgroup of BlackRock, Inc., led by Tishman Speyer paid $5.4 billion.

Owning property is not like owning T-bills. You have about 10% per year in taxes, maintenance and operational expenses. But the BlackRock group must not be thinking any more than the typical investor. Five percent of $5.4 billion is $270,000. And the projects’ estimated rental income is only about $170,000 per year. They’re not even covering their interest cost – to say nothing of their operating expenses.

What are they thinking? The same thing apartment buyers in Bombay are thinking. The same thing stock buyers in Sydney are thinking. The same thing ‘art’ buyers at Christies in London are thinking. They’re all thinking that asset prices go up. They’re all thinking that they can get rich by speculating on capital gains rather than accumulating earnings. They’re all thinking that prices go up all the time…or often enough so you don’t really have to worry about them going down if you take a long-term perspective.

They’re all thinking that these towers of debt, credit, and cash…can get higher and higher. And now comes a report claiming as much:

“A report issued by CB Richard Ellis’ research department shows that developing countries make up half of the 20 fastest growing markets for office space costs. The Global Markets Rents survey, issued semi-annually, surveyed 176 markets throughout the world.

“Of the markets surveyed, only 20 saw a decrease in occupancy costs, while 150 saw increases. Abu Dhabi saw the largest increase in occupancy cost jumping 92.8% to $52.82 per square foot. Ward Caswell, U.S. director of research for CBRE, says these findings are a great sign. Six months ago, ‘For the first time we were seeing all the top global markets in an upswing at the same time,’ he says. ‘We are seeing that continue and in a lot of the places accelerate.'”

And while England and Japan were the most expensive markets, with London’s West End, posting $212.03 per square foot and second ranked Tokyo costing $145.68, some markets have shot up drastically in the ranks. Mumbai, India is now ranked seventh in the most expensive markets. The city climbed from $41 to $106 average price per square foot in the last year.

Our friend Rick Rule tells this story: “A woman goes into a grocery store and finds she can get tuna fish at half the price she paid a week ago. She is happy, and decides to take advantage of it by buying twice as much. She stocks up and gets twice as much for her money. Her husband, meanwhile, goes into his stock brokerage down the street. He finds the same stocks he bought a week ago now selling for twice as much. He too gets excited. He decides to stock up too…but only gets half as much stock for his money. Which one of them is doing the right thing?” Rick asks.

Right now stocks and property are at record levels all over the world. An investor has to take stock of himself. Should he buy more…or sell? The pundits, commentators, the Cramers and Kudlows, are all positive. In the face of such jolly sentiment, it’s hard for an investor to keep his wits about him. If he can’t count on his natural gloominess to pull him through, he’ll have to think.

And of course, no investor wants to do that.

But if he were to think, he might want to think of Yogi Berra’s comment on a restaurant: “Oh, nobody goes there any more; it’s too crowded.” Right now, everyone is crowding into these towering eateries. The food and service – that is, the yield an investor might reasonably expect – have already slumped to near-record lows.

Just wait until someone yells ‘fire!’

More news:


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“So with retail sales shooting to the moon, the dollar rallied on Wednesday, but that rally was held to a mere half a cent versus the euro, as the rally died on the vine.”

For the rest of this story, see today’s issue of The Daily Pfennig


And more thoughts…

*** We don’t know which city we like better – Melbourne or Sydney. Melbourne is a little reserved; Sydney has a free spirit. Melbourne reminds us of Vancouver…without the mountains or the ocean; Sydney reminds us of San Diego.

We went over to Manley Beach yesterday. It is a marvelous old part of town, with an open beach on one side and a harbor – with remarkably clear water – on the other. For $5 (U.S.) we took the ferry from Manley Beach over to the downtown area. Around the bay…and on the oceanfront too, for that matter…we saw houses built on the hillsides. Some old. Some new. With semi-tropical vegetation around them. The views must be spectacular. There are also plenty of restaurants…with quiet, small town conveniences in the neighborhoods that surround the downtown area. It seemed like a very pleasant place to live.

*** Australians tend to be informal and polite. This morning, we got in an elevator and a man said:

“Got a big dye ahid of you, maiht?”

It took a while to realize that he was talking to us. In Paris, no one speaks, except to say ‘Bonjour Monsieur,’ without smiling. But here was a man not only speaking to us…but when we finally figured out what he was saying, we realized he was inquiring into our work schedule.

We didn’t know how to answer. “Well, at 9AM I have a meeting with…” We were just about to give him a full report when the elevator got to the ground floor.

“G’dye,” he said…and he was off.

*** Yesterday, we took time off from our work to visit with our daughter, Maria, who just happened to be in Sydney with a school friend.

“Oh daddy, it’s so much fun. Everybody is so relaxed. And this is a double holiday season here. It’s Christmas season…but it’s also their summer vacation. So there are a lot of parties and socializing. We’ve got a big weekend coming up.”

Maria went into the post office at Manley Beach to buy stamps. There was a long line. We couldn’t wait, because we were going to catch the ferry, so she entered a small, deserted nearby shop…and found an exception to the friendly Australian stereotype.

“Excuse me, but do you sell stamps,” she asked.

A disagreeable woman was sitting behind the counter eating a candy bar. She chewed for a moment, and then replied sourly:

“Do you think there would be such a long line at the Post Office if I sold stamps?”

Tired, jet-lagged…we couldn’t resist: “Well, if you’d bothered to buy some stamps this morning, maybe you’d have some customers.”

The Daily Reckoning