When Bush Comes to Shove

And freedom? Ahh, freedom… that’s just some people talkin’

– the Eagles

The world’s chattering classes pose themselves a two-part question: Why Iraq? Why now?

The Bush administration has given its answers. Saddam is a monster…he may have weapons of mass destruction…he has links to the Al Qaeda network…America’s security is at stake…it is our duty to bring freedom to the Iraqi people…and so on.

These explanations were good enough for reporters, members of Congress, and village idiots…but the skeptics, cynics and kibitzers needed something more. All that Bush had said about Saddam might be true, but the same could have been said of him when America was supplying him with weapons of mass destruction a few years ago…and now could be said of many other regimes in the area. Cynics scratched their heads…and even laughed out loud at the “Liberty for Iraq” campaign theme. What’s the ‘real reason’ for the war, the intellectuals continued to wonder? A French journalist, Francois de Bernard, wrote recently that he was so perplexed, he decided to study the transcripts of White House discussions for signs of mental illness!

Economics and Morality: Looking for Absurd Reasons

Here at the Daily Reckoning, the question came up from time to time. We do not especially like intellectuals…and we have no faith in thinking, especially our own. But we stoop to it occasionally, after we’ve been drinking. We drink so much, however, that it is hard to find a single idea in our whole Daily Reckoning oeuvre that doesn’t bear the stains of cheap Bordeaux.

We take it for granted that politicians usually lie and are often insane. Still, when they do extraordinary things – such as making war for no apparent reason – we look for reasons at least as absurd as the events they are meant to explain.

“It is plain bizarre,” wrote Geoffrey Heard, from Australia, preparing to offer one. “Where does this desperation for war come from?”

“It’s oil,” is the reason most commonly given.

The insight quickly spread among the Greens and peaceniks, who didn’t care much for oil in the first place. They were perfectly content to drive an SUV to an anti-war demonstration, but they never liked the people who produced oil, and didn’t like the idea of other people using so much of it. “No blood for oil,” became their slogan.

Blood for oil probably seemed like a fair bargain to many Americans, so long as it was someone else’s blood. But the ‘blood for oil’ theme was too obvious to elicit much shock and awe at cocktail parties. And few intellectuals could imagine that the Bush administration would go to war in order to give their buddies in the oil industry a few slimy dollars of profit. ‘Even Republicans could not be that craven,’ they said to one another, probably underestimating them. But the theme had an even graver defect: it sounded too moralistic, as if someone were wagging a finger and threatening damnation.

Economics and Morality: Push Lever A, Get Result B

Intellectuals had long since come to see the world in a different way: it is a mechanistic world, not a moralistic one, they say. Push lever A and you get result B. Morality has nothing to do with it; people get the results they chose, not the results they deserve. All they have to do is to push the right buttons and pull the right levers.

James Davidson, writing in this space a few weeks ago, accused us of being “Old School” here at the Daily Reckoning and derided the whole idea of morality in the marketplace. Why should investors ever be ‘punished’ for excessive gains, he wondered? Why couldn’t they just earn more and more money, forever and ever, amen?

Paul Krugman, too, dismissed the notion that economics has a moral character. “Hangover theory,” he called it…referring to the way a man who enjoys an excess of alcohol in the evening suffers an excess of regret the following morning. All that is needed is for government to make the right ‘policy choices’, he said, and the hangover would disappear.

The right policy choices had been described by Lord Keynes many years before. Analyzing the Great Depression, he came to the conclusion that it didn’t really matter how much you drank the night before…you just had to find the right lever in the morning. When an economy fell into a slump, said he, the lever to pull on was the one marked “Government Spending”. If the private sector was unwilling to spend, the public sector should pick up the slack; it was a simple as that. No moral lessons needed.

After mocking morality for the last 100 years, the intelligentsia could not look at the war from a moral perspective; instead, intellectuals had to pry open the hood and see how the machine worked.

Economics and Morality: Tracing the Wires

Why was Bush pushing so hard on the “I” button? For the last 6 months, critics have been tracing the wires to try to figure out where they lead. Only recently, they have come upon the dollar. “There are many things driving President Bush and his administration to invade Iraq, unseat Saddam Hussein and take over the country,” explains Heard. “But the biggest one is hidden and very, very simple. It is about the currency used to trade oil and consequently, who will dominate the world economically, in the foreseeable future – the USA or the European Union. “Iraq is a European Union beachhead in that confrontation. America had a monopoly on the oil trade, with the U.S. dollar being the fiat currency, but Iraq broke ranks in 1999, started to trade oil in the EU’s euros, and profited. If America invades Iraq and takes over, it will hurl the EU and its euro back into the sea and make America’s position as the dominant economic power in the world all but impregnable.”

“In 1999, Iraq, with the world’s second-largest oil reserves, switched to trading its oil in euros. American analysts fell about laughing; Iraq had just made a mistake that was going to beggar the nation. But two years on, alarm bells were sounding; the euro was rising against the dollar, and Iraq had given itself a huge economic free kick by switching. “Iran started thinking about switching too; Venezuela, the 4th largest oil producer, began looking at it and has been cutting out the dollar by bartering oil with several nations including America’s bête noir, Cuba. Russia is seeking to ramp up oil production with Europe (trading in euros), an obvious market. “The greenback’s grip on oil trading, and consequently on world trade in general, was under serious threat. If America did not stamp on this immediately, this economic brushfire could rapidly be fanned into a wildfire capable of consuming the U.S.’s economy and its dominance of world trade.”

Mr. Heard has a point. The U.S., its dollar, its consumers, its government and its central bank have an enormous advantage. But it is an advantage like an unlimited bar tab; it can get a man into trouble.

The U.S. issues dollars to pay for the things it wants. Many of the dollars are then used to buy oil. As long as oil accounts are settled in dollars, there will be a demand for them. But the demand is not infinite. More dollars are needed only insofar as the world’s use of oil increases…not necessarily as America’s need for foreign credit increases.

The wiring of the world financial system is more complicated than Mr. Heard thinks. The U.S. may seize the oil fields. It may reinstall the dollar as the designated currency. But it cannot make its financial situation “impregnable”. It can control the value of its currency, or its quantity, but not both. If it increases the supply of dollars, it risks setting off a panic out of dollars – whether oil is priced in dollars or not.

The U.S. may control Iraq’s oil fields, but it cannot control oil’s price…nor its reciprocal, the price of the dollar. In the end, these will be determined not just by how the oil market is wired, but also by how human beings are wired. When they grow fearful of the dollar…not even the 3rd Infantry will be able to stop them from dumping it.

Then, there will be hell to pay…no matter what lever authorities choose to yank.

Bill Bonner,
writing from a little outpost of the Old School, in a small, old corner of an old city in old Europe…
March 28, 2003


The U.S. is a “housing economy”, we are told. What kind of economy is that, we wonder?

Last year, homeowners took out $130 billion in home equity loans, up nearly 100% from 2001. What a surprise, now we find that home equity loan delinquencies are rising…along with foreclosures!

“We are just buried in foreclosures,” said a bankruptcy lawyer in St. Paul. So many people are losing their equity lines that they are filling lawyers’ waiting rooms.

This is no problem, says the credit industry, because householders have a lot more equity in their homes that they haven’t spent yet – $6.6 trillion.

But the problem for American consumers is not a lack of ‘equity’; it’s a lack of cash flow. The more a person mortgages his house…the more money he has to pay to the mortgage-lender in order to continue living there.

The Mogambo Guru offers an economist’s assessment of the typical householder’s dilemma: “My 401(k) is down over half, they are re-possessing my car, I’m late with my mortgage payment again this month, the company is slashing the payroll, my benefits package has been pared back, my son thinks he’s gay, may daughter is in love with a biker who is wanted for questioning by the FBI, for crying out loud…Get away from me!”

Offering the poor man access to more credit is not necessarily doing him a great favor. You might just as well offer to introduce a rich, lonely woman to an Argentine gigolo…or a weightwatcher to a French pastry shop. But the banks, the Fed, Fannie Mae, Freddie Mac and the sub- prime lenders are still handing out business cards all over town.

To their credit, consumers seem to be taking up these offers a little less eagerly. New home sales, for example, just saw their biggest drop in 20 years. Savings rates are creeping up. And sales figures are easing off.

Maybe this is the beginning of a long-term trend. Or maybe consumers are just experiencing a temporary attack of prudence.

“They’ll get over it soon,” say the bulls…just as soon as this war is over. (More on that below…including the ‘real reason’ for the war…)

Eric, your thoughts…please…


Eric Fry (who, by the way, is also hosting CNNfn’s “Market Call” this morning from 9:00am to 11:00am)…

– Investors ducked for cover again yesterday, as the Dow dropped 28 points to 8,201 and the Nasdaq slipped 3 to 1,384. Gold investors also kept their heads down as the yellow metal dipped $1.70 to $328.40 an ounce. Meanwhile, the energy markets charged ahead. Crude oil for May delivery busted through the $30 level by gaining $1.74 to $30.37 a barrel. Unleaded gasoline kept pace by advancing more than a nickel to 97.5 cents a gallon.

– To judge from today’s stock market action, the rising price of gasoline is taking a big bite out of the household wine budget. The shares of Robert Mondavi spilled 6% after the wine maker warned it would post a loss for the quarter. Mondavi blamed weaker demand for its wines and an oversupply of grapes, which has led to intense price competition and a proliferation of new brands. In the post- bubble economy, it seems, beer and potato chips have replaced chardonnay and foie gras.

– In response to the falloff in business, Mondavi plans to follow the well-worn path of firing workers. The company will slash its payroll by about 10%. And just like that, one more company contributes to the ranks of the unemployed. Despite our economy’s positive GDP numbers, unemployment remains stubbornly high. The four-week moving average of initial unemployment claims still stands at a hefty 422,500 job claims per week. A recovering economy should not produce numbers like that.

– But let’s not focus entirely on doom and gloom. Let’s look on the bright side. The difficult job market means that your co-workers may not slough off as much as they used to. Read on…”The latest casualty of the worst employment market in a decade is the sick day,” the Wall Street Journal reports. “Given the grim job market right now, looking lazy is a bad idea.

– “The sluggish economy has done wonders for the nation’s attendance record. This year, about 200,000 fewer employees per week are taking a day off for health, personal or medical reasons than did in 2000, according to the Bureau of Labor Statistics…Even managerial-level workers, who might arguably feel they have more job security than their minions, aren’t playing hooky as often these days…One telling indicator: It’s getting easier to line up tee times. At the Inverness Golf Club in Denver, rounds played by guests of members fell 20 percent last year.”

– When, if ever, will the gold shares mount another major rally? Gold stock investors are anxious to know. Despite massive geopolitical upheaval and a steadily sliding dollar, most gold shares have LOST ground over the last few months.

– Maybe gold is a barbarous relic after all. Or maybe the mega-rally that gold bugs dream about is just a bit slow to get under way. We have no idea, of course, but the McClellan Market Report declares, “We expect a major (we mean major) bottom in gold prices next week.” McClellan bases its observations on a proprietary technical analysis with a pretty good track record. Past performance does not guarantee future results, of course. But we thought we’d pass along the information just the same. Besides, we’re inclined to believe that gold is better bought than sold at current prices.

– “One way to look at the recent pullbacks is that it is merely a ‘refueling’ phase before the next Gold price push,” says Victor Hugo of Hugo Capital. “The rocket beneath the Gold price will be lit when the realization spreads that the U.S. is in a debt hole and won’t grow out of it quickly…The U.S. Federal Reserve cannot continue to print trustworthy money whenever it needs to, whether in the form of uncontrolled government spending and trade deficits or otherwise.”

– While on the air Wednesday at CNNfn, your co-editor engaged in a panel discussion with Roger Ibbotson, the well-known and oft-published Finance Professor at Yale University. Ibbotson arrived on the set armed with the fruits of his elaborate mathematical equations and his high-tech data-snooping capabilities. He displayed a chart showing how stocks “always rally” one year after a war. It’s true; one year after World War II, the stock market rallied more than 20% and it advanced a similar amount 12 months after the Korean Conflict. Stocks produced somewhat less spectacular gains one year after Vietnam, but gains nonetheless.

– You see, war is bullish, Ibbotson proudly demonstrated. Your co-editor noted one important caveat: a post-war rally may not commence until we are post-war. During-the-war markets are not nearly so friendly to investors.

– Off the air, your co-editor questioned the professor: “Mr. Ibbotson, you realize, of course, that these various post-war rallies all commenced from very dissimilar valuation levels, none of which bear any resemblance to today’s valuation levels.” He shrugged. Your co-editor continued, “Stocks were selling for about 14 times earnings in 1945 and yielded about 4%. So we may not get quite the same post-war pop this time around, right?” He shrugged again.

– In fact, dear reader, stocks that are twice as expensive as they were in 1945 needn’t rally at all, no matter what Professor Ibbotson’s charts show.


Back in Paris…

*** If the war is over in a week or two, it could produce a major ‘relief rally’ on Wall Street. We don’t know; Mr. Market can do what he wants without asking our ‘by your leave’. But will the war help the economy? Some people think so. But here, dear reader, we take a categorical position: no. There is no way under heaven that destroying property and killing people can be good for an economy. And even if a boom results, we will still deny it.

*** We are not saying that war is always a bad thing, at least for the spectators. For example, it is a marvelous distraction from life’s real pains and sorrows! How much easier it is, for example, to explain to your wife the latest strategy for taking Baghdad…than it is to explain why you spent the night in a hotel room with your secretary, albeit as a war-time, cost-saving gesture…

…and frankly, the war incites our interest in history. We read history the way we read the newspaper…not to be informed…but only for prurient interest. The whole hullabaloo of it is as titillating as a strip show, and just as rewarding:

Hitler was sure he could conquer the Soviet Union quickly. He knew the Russians hated Stalin…and thought they would lay down their arms. “The whole structure is rotten,” he remarked, “we have only to kick in the door and it will fall down.”

The campaign went fairly well…until the Wehrmacht reached Stalingrad. (We bring this up only because Saddam has threatened to turn Baghdad into a Stalingrad on the Tigris.)

In 1941, the old Bolshevik brought in Marshal Zhukov to defend the city that bore his name. Taking charge, Zhukov immediately lined up the city’s defending troops. But instead of giving them an inspiring speech, he decimated them. That is, he accused them of cowardice and shot every 10th man – just like the Romans used to do. This brutality seemed to have the desired effect; the Russians fought for every inch of ground in Stalingrad as if it were sacred…and gradually broke the Nazi’s war machine.

Now, reports from Baasra tell of Iraqi soldiers shot by their officers – just like the Russians once were. They also tell us that the Iraqis are not yet throwing rose petals in the coalition forces’ path; instead, they may put up the same stubborn resistance to the invader that the Russians did. And the campaign of Blitzkrieg – oops, we mean “shock and awe” – seems on the verge of losing its awe factor altogether.

*** Of course, we have no doubt about whether George Bush is a geopolitical genius. But we’re still not sure how the war makes the world a safer place. Both friends and enemies alike are watching the war in Iraq with alarm and great interest. They’re all looking for weaknesses in the U.S. military machine…calling their arms suppliers…and laying up provisions.

*** “A world order in which the superpower decides on military strikes based only on its own national interest simply cannot work,” said German foreign minister Joschka Fischer. News reports tell us that German restaurants are boycotting certain U.S. products. What’s more, the Germans have declared that they will not contribute to rebuilding Iraq. The U.S. is destroying the country, they seem to say; let them pay to rebuild it.

*** Which raises an interesting issue…how will the world’s largest debtor pay up?

The Daily Reckoning