THE GHOST OF CHRISTMAS PAST -- Economic Commentary

There seems to be some natural cycle to the way societies, and even families, think about money - not seasonal, as Eric explains below, but epochal. It is not so much an economic cycle...as a moral one.

At first, early in the cycle of wealth building, people are careful. They work hard and save as much as possible. Americans once saved 20% of their incomes. Even after WWII, they saved more than 10%. Now, in the degenerate phase of American capitalism, the figure for net national saving is less than 1%. The Chinese, apparently just setting out on the road to wealth, are said to save as much as 30%.

As time goes by, people tend to forget that hard work and self-sacrifice is the way to build wealth. They confuse wealth with what money will buy...and begin to think they are wealthy when they are not building wealth, but consuming it. A man drives a big car, lives in a big house, eats at fancy restaurants, and enjoys frequent vacations and big screen TVs - he is said to be a wealthy man. In fact, he may not have a spare dime. Instead of conserving and accumulating riches...he may be using every penny that comes his way - and more!

We mentioned yesterday that the 'recovery' was a double- fraud. Now, we add another fraud. People have come to believe that if they are able to shop, they must be rich. They think that THINGS mean prosperity.. As long as they can bring THINGS home, they must be rich.

But a man's possessions - and all his expensive habits - are not wealth at all; they are anti-wealth...obstacles to wealth...handicaps that prevent him from actually getting anywhere. Each one takes money away from his savings, and out of his wealth-building capital. And each one takes time and maintenance...distracting him from his goals and burdening him with on-going costs. Late in the cycle, however, no one seems to notice. They no longer know what wealth is; all they see is THINGS.

Typically, following a wintry recession, there is 'pent-up' demand for things that fuel a recovery. Consumers have put off spending, preferring to pay off debts and build savings. So, when the first crocuses of a spring recovery appear, the consumer is ready, willing and able to buy.

But rather than give the consumer economy a breather during the recession of 2001...Alan Greenspan and George Bush turned every knob and pulled every lever they could get their hands on to keep the big spending machine running at peak power.

With interest rates at Eisenhower levels...and government spending increasing at levels reminiscent of the New Deal or Great Society (despite tax cuts)...the machine whirred and belched. Millions of jobs were lost. Investment spending by businesses collapsed. But the consumers didn't care. They kept on spending, buying THINGS and believing themselves wealthy. The consumer had long since forgotten how to save; he had forgotten what real wealth is. As long as he could make the monthly payment, he asked no questions.

Now, economists wonder what's wrong with the 'recovery,' as if you could have a proper recovery without ever having something to recover from. There is no real pent-up demand; consumers have saved no money. So, they can only continue to spend by borrowing...that is, by making a bad situation worse, buying more THINGS on credit, bringing more impedimentia...more anti-wealth...into their lives.

The day will come when the dollar standard will have collapsed...when Americans will find no more money and no more credit to buy the things they want. Then, at last, the recession will become real...and they will rediscover the virtues of savings...and real wealth. We cross our fingers...and wait.

- Sellers swarmed around the dollar yesterday like tourists around the Christmas tree at Rockefeller Center. Rarely has the world observed a sight as dazzling and awe- inspiring...as the dollar's collapse. For seven straight weeks the dollar has tumbled against the euro. Yesterday, the dollar slumped another 0.3% to $1.241 per euro, which boosted the gold price a bit. The yellow metal gained $1.10 to $410.45. Despite the dollar's woes, the Dow jumped 60 points to 10,338 - a new 19-month high. The Nasdaq added 5 points to 1,956.

- Like the majestic, 79-foot tall Norway spruce towering above Rockefeller Plaza, the dollar's slide is awe- inspiring. But unlike the famous Christmas tree, the dollar's collapse is not a seasonal phenomenon; it's epochal. The greenback's century of monetary hegemony may be drawing to a close...

- But perhaps we are being overly melodramatic. Perhaps foreign investors and central banks will continue shipping cratefuls of euros, yuan and yen to our shores in exchange for ever-larger cratefuls of dollars. And maybe they will also continue buying billions of dollars worth of Treasury bonds every month, even though they receive less than 5% interest per year in a currency that is falling about 15% per year...Or maybe foreign investors will tire of their financial masochism.

- "There are rumors on the market," the Japan Times reports, "that China...is turning to the euro for part of its foreign currency reserves...The markets are worried...because of the worst-case scenario - that funds could start flowing out of the U.S."

- Americans have become so accustomed to the daily miracle of receiving $2 billion dollars in fresh financing from foreigners every day that the miraculous seems utterly ordinary. Unfortunately, a merely ordinary supply of foreign capital would not be sufficient to support the prevailing dollar exchange rates. In other words, the dollar's value would continue to fall.

- "Few are expecting such a doomsday scenario," Reuters chimes in, "but with the dollar at a seven-year low against the Swiss Franc, an 11-year low against the British Pound and the euro enjoying an 18 percent gain this year, investors are hoping that the dollar is closer to the bottom than not." - The dollar has been sliding - and gold has been rallying - for so many months now that buying gold is no longer a contrarian investment idea; it's almost mainstream...Behold the arrival of the contra-contrarians: A category of investors who love gold for the long run, but expect it to fall over the short run.

- "The same factors that lead us to believe a correction is overdue in the euro, have us worried about a similar move in gold," says one anonymous commodity analyst. "Overwhelming bullish sentiment and positive press have us worried about the short term. Does that mean we are no longer bullish? No. We remain as long-term bullish as we ever were and consequently, would not recommend completely abandoning long-term positions.

- "Thin holiday markets have the potential to exacerbate any corrective down moves," says the analyst. "Like the euro, gold can correct a long way without fundamentally damaging its long-term uptrend. $370 per ounce is not out of the realm of possibility. Recent rumors that one or another central bank may begin selling the Midas metal again probably won't help matters either."

- It's true, rumors of renewed central bank gold sales next year are starting to surface. But at this point, they are merely rumors. As for the euro, investor sentiment is beginning to shift in favor of the dollar. Some of the short-term - repeat, SHORT-term - sentiment indicators are showing that the dollar is overdue for a rally.

- Figures from the Commodity Futures Trading Commission show that the large speculators, also known as the "dumb money" have amassed some very large bullish bets on the dollar. The difference in the number of wagers by large speculators that the euro would rise minus bets that it would fall - so-called net longs - was about 34,800 in the week ended Tuesday, the highest since May 2002.

- Net-net, if we were to follow the contra-contrarians, we'd sell euros and gold for a short-term trade, and try to buy them back in a few weeks for a long-term investment. On the other hand, if we were to trust in the long-term dollar trend - down - and in the long-term gold trend - up - we'd forget trying to trade "tick-for-tick" and buy gold on weakness. Lastly, if we were to follow the common wisdom on Wall Street, we'd sell gold now, buy Intel and hold on until we reach Dow 36,000...You decide.

*** Our friend Scott Burns writes that the average precious metal fund rose 64% over the past 12 months. Over the last 3 years, precious metal funds have gone up 44% each year - by far the most profitable sector.

Scott points out that a simple 10% position in a precious metals fund - an insurance position - would have protected the holder from losses in stocks and bonds over the last 3 years. Instead of suffering a 6% loss from pure stocks and bonds over the 3 year period, an investor would have gained 4%.

*** Our little choir has only 7 members, of whom almost half cannot sing at all. It lost another member the other day, when Jacques walked out.

French catholics are on 'high alert' against creeping latinism. They regard it as retrograde, elitist, bourgeois and 'exclusionary.' Of course, that's just what we like about it. We only wish the priests would give their sermons in Latin. We wouldn't understand a word, which would usually be a big improvement.

*** Everybody knows it is a safer world - now that Saddam is out of his rat hole and behind bars. And now at least two spokes on the Axel of Evil - Afghanistan and Iraq - have been shaved and rehabilitated. But back in the homeland, people seem to have the jitters. In a real war, the authorities try to calm the population, assuring people that there is nothing to worry about. The last thing they want are panicky crowds getting in the way. In Germany, at the end of WWII, for example, the authorities insisted that there was nothing to fear; even as the Russian army swarmed across the Oder on the Eastern frontier, raping and murdering thousands along the way.

But this 'war on terror' is different. The risk to the average American of getting killed in a terror attack seems vanishingly small. Still, Americans are supposed to be on 'high alert' against the threat.

*** The following appeared on a French website under the heading 'Land of the Free.'

An Australian journalist gets a taste of Department of Homeland Security hospitality

Sue Smethurst enjoys traveling. It's one of the things about my job that I absolutely love," says the 30-year-old Australian, who works as an associate editor for the women's magazine New Idea. She doesn't even mind flying. "It's one of the great pleasures of the world to be able to turn off your cell phone and be where no one can annoy you."

But when her Qantas flight from Melbourne, Australia, touched down at LAX around 8 a.m. on Friday, November 14, Smethurst found herself nightmarishly annoyed - by the Department of Homeland Security (DHS). Smethurst was supposed to continue to New York and on Monday interview singer Olivia Newton-John. Smethurst had honeymooned in Manhattan last year and was looking forward to a long, free weekend having a good walk through Central Park, getting a decent bowl of chicken soup and going Christmas shopping - all those gorgeous New York things."

Better still, her six-hour layover in L.A. would allow her to have lunch with her American literary agent. "I had a room booked at the Airport Hilton, where I was going to my leave bags, shower and get a cup of coffee."

But first she had to clear LAX's immigration check-in, which she reached after 20 minutes in line. An officer from the DHS's newly minted Customs and Border Protection (CBP) bureau studied the traveler's declaration form Smethurst had filled out on the plane.

When Smethurst tells me this, she pauses and adds, "I thought that last question was a little odd, but figured everything's different now in America and it was fine." What she didn't know was that her assignment and travel plans, along with the chicken soup and stroll through Central Park, had been terminated the moment she confirmed she was a journalist.

Fourteen hours later, she was escorted by three armed guards onto the 11 p.m. Qantas flight home.

"I want to say right off that I adore America and love Americans," Smethurst says. Still, she remains perplexed and emotionally bruised by what followed in Terminal Four. The CBP agent who read Smethurst's traveler's questionnaire took her to a secondary inspection area 30 feet away and told her to wait, then left for half an hour. He returned with additional uniformed staff who, professionally and pleasantly enough, asked more questions.

Where was it published? What was its circulation? Does it print politically sensitive articles? When would her interview appear? Who would be reading it?

"I laughed," Smethurst recalls, because we're a cross between Good Housekeeping and People magazine. "The most political thing we'd likely print was Laura Bush's horoscope."

The polite interrogation continued. Who was her father? His occupation? Her mother's maiden name and occupation? What were their dates of birth, where did they live?

The agents gravely nodded at Smethurst's replies and left once more, promising to return. When they came back half an hour later, one of the officers offered Smethurst a cup of airport coffee.

"I thought at that stage something was quite wrong," Smethurst says, "so I asked the man with the coffee if there was some problem."

"I will tell you when there's a problem," he abruptly snapped, according to Smethurst. Then he pointed to a nearby sign:

At about noon, CBP informed Smethurst she would be denied entrée into the United States: While Australian tourists visiting the United States are visa-waived for 90 days, working journalists need a special I-Visa, which Smethurst had not been aware of and did not possess. She had, after all, flown into LAX on the same passport eight times previously without incident. Now she was being asked to raise her right hand and swear that her answers had been truthful, then was fingerprinted and photographed - every time she comes to America, her swiped passport will bring up this documentation of her rejection. As Smethurst's inked fingers were rolled onto the government form, she noticed its heading:

Eventually she was escorted under armed guard to a pay phone to make the call she vainly believed would clear everything up and allow her to stay in the country. Then, while conversations were occurring among her husband, editor and consul officers in L.A., Smethurst's baggage was thoroughly searched and a makeup bag temporarily confiscated. She was then handcuffed and marched through the airport to another terminal, where LAX's main detention center is located.

After the phone call she pleaded for food, having now been away from home nearly 24 hours. Smethurst offered money for a snack to be brought to her - French fries, potato chips, anything - but was refused.

"Would it be possible to get a cup of tea?" she asked. This too was denied, because it could be used as a weapon - someone, it was explained, had recently thrown hot coffee into an agent's face. When she requested a cup of cold tea, she was similarly refused, although no one could explain to her how a cup of cold water could become weaponized.

Finally, around 6 p.m., a "detention meal" was pulled from a fridge, consisting of an orange, fruit-box drink and a roll that, Smethurst says, "I could play golf with."

For a while she sat in the main detention center, unable to eat the food, as eight armed guards watched TV. Then one of the staff returned with a bag of takeout and began eating a hamburger and fries in front of her.

"At that stage," she says, "I just lost the plot completely and threw the roll into the bin in front of me with sheer, utter frustration."

The CBP would later call this gesture a "tantrum"; Smethurst, in turn, claims that she was thoroughly body searched by female staff each time she was moved from one part of LAX to another, and that she broke down in tears several times, swearing to her captors that she was not a criminal, had done nothing wrong and should be allowed in the country. She also says one sympathetic staff member told her she'd simply had bad luck in getting the agent she did at the first customs station, since the I-Visa rule was enforced at the discretion of agents. Smethurst could have entered the country by simply declaring herself a tourist on her traveler's form - a routine practice among reporters entering the U.S.

Eventually, Smethurst's release was won by the Consul General's Office. The consulate also gained one other concession - the cup of tea she'd begged for. It was prepared by a senior CBP official whom Smethurst thought was the kindest American she'd met that day.

If we think that we need more stuff, then we have demand. It is called marketing.

Richard W.

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[Rand, for her part, expressed skepticism that her chief acolyte and lover, Nathaniel Branden, would ever be able to convert the Chairman to the true way ( id., p. 58): "How you can stand talking to him?" she asked Branden in her thick Russian accent. "I’m going to bring him around intellectually," Branden replied confidently. "Never! A logical positivist and a Keynesian?" said Rand. She would clearly have had higher hopes if Alan were a leper. "I’m not even certain it’s moral to deal with him at all."]

Alan Greenspan Is No John Law by Bob Landis

Merry Christmas Everyone and have a Happy Holiday Season!

Richard W.

"Despite the dollar's woes, the Dow jumped 60 points to 10,338 - a new 19-month high. The Nasdaq added 5 points to 1,956."

Interesting statement. Could it be that since the dollar has lost so much of its value over the last year, that the market has gone up to reflect the actual perceived value of these stocks? Let's see, the dollar is down about 20%-30%, depending on what you measure it against, and the stock market is up about 20%-30% in the last year, depending on which index you are looking at.

Hmmmm, boy, this is sure tough to figure out, isn't it? Yep, gonna have to think on this one for a while. Yesireee Bob, gonna have to do some deep pondering on this question.

In this new reality, the only ones who are getting shafted are those sitting on dollars. Everyone else is making out like a bandit, at least right up to the moment when the music stops and everyone is diving for a chair...

If marketing worked on me hell would be frozen yewars ago!

Me too . . .but for many Americans, too much is never enough. Running faster and faster trying to catch whatever it is that they believe will make them happy and satisfied for the moment. Materialism gone wild.

Richard W.

Yesireee Bob, gonna have to do some deep pondering on this question.

You are just going to give yourself a headache. The government is going to spend us into good times whether we like it or not.

Richard W.

If the american economy is strong, then americans will have lots of money, more than they will/can spend, and savings and investment will be at higher and higher levels, we will have a postive balance of trade, a federal budget surplus, and we will be lowering our national debt.

How much you are saving and investing today, it not only tells how well the economy is now, but it also predicts how well we will do in the future.

The best indicator of our economy, is how much money everyone(individuals and our government) is saving and investing.

How much you are saving and investing today, it not only tells how well the economy is now, but it also predicts how well we will do in the future.

Unfortunately, real wealth is being destoryed and saving are being cannibalized to support spend at any cost consumerism. Capital 'spending' is going to making companies more efficient (fewer jobs) rather than capital 'investment' in expansion. That is a problem.

Richard W.

Capital 'spending' is going to making companies more efficient (fewer jobs) rather than capital 'investment' in expansion. That is a problem.

It is also a problem if all or most of our capital investment, if all of the new and most modern state of the art factories, are in asia, and not in our homeland. The modern factories that we are building are going to be factories that compete against the aging out of date obsolete factories still operating in the United States.

This is a national security issue, if we ever have to fight a long drawn out war against the chinese, or who ever, like ww2, e.g. where the country that won ww2 was the country that could out produce Germany and Japan.

Roger Arnold explains deflation in painful detail today. Good listen.

Yes, it is a good listen. He seems to have considerably scaled back the commercial breaks. 2 or maybe 3 3-minute breaks over about a 55 minute program it seemed - very listenable.

It is also a problem if all or most of our capital investment, if all of the new and most modern state of the art factories, are in asia, and not in our homeland

I'm obviously one of those really dense guys that just doesn't get the big booming economy contrary to the facts that I'm looking at. We're on a borrow and spend binge and I think that people are confusing that with real economic growth. Capital investment is going to Asia and jobs are going to Asia and India. When thousand of people lose their higher paying manufacturing or high tech jobs and become retail clerks, that isn't a healthy sign.

U.S. Companies Moving More Jobs Overseas

Richard W.

Yes, it is a good listen

Any comments on the substance of what Arnold had to say? I'm going to be looking to see what the FED does with the long bond. If they start making noises again about buying the bonds, then I'd say Arnold is on to something.

Richard W.

Any comments on the substance of what Arnold had to say?

Don't recollect a lot of the details - I read better than I listen.

But I did think he had miscontrued the recent CPI decrease - seemingly not being aware how much CPI is influenced by falling rents as opposed to rising home prices.

But he was right on over-capacity holding finished prices down, but producers being squeezed by rising input commodity prices - so more cost cutting and management of the bottom line rather than growth of the top line. No pricing power.

He also mentioned Shostak's complaint about Austrian Money Stock measurment vs The Fed's.

Note: I read Shostak's AMS argument somewhere and wasn't impressed by his understanding - I could be wrong and Shostak right - but I haven't seen a good explanation from him. I had a similar issue with him about "Real Funding" and "Real Savings" back in May - even exchanged half a dozen emails, but he kept dancing around my questions. Disconcerting. OTOH, the BLS has been dancing around my questions about "Productivity".

He quoted Roach, whom I generally agree with, but forget the point...

I read Shostak's AMS argument somewhere and wasn't impressed by his understanding - I could be wrong and Shostak right - but I haven't seen a good explanation from him. I had a similar issue with him about "Real Funding" and "Real Savings" back in May - even exchanged half a dozen emails, but he kept dancing around my questions.

I would assume that you have probably already read the following regarding AMS, but just in case you haven't, here are the links.

Making Sense of Money Supply Data

The Mystery of the Money Supply Definition

Austrian Definitions of the Money Supply

The True Money Supply: A Measure of the Supply of the Medium of Exchange in the US Economy

Richard W.

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