The Vultures Are Circling

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rotting corpses of several large corporations are attracting the
vultures. The vultures are circling. From time to time, one of them
flies down, lands next to a body, and begins picking away at its

Vultures need a steady supply of corpses. That old poster is accurate:
one vulture saying to another, “If things don’t change, we may have
to kill something.”

The crucial investment question today is this: “What caused these
companies to die?” The answer is not greed. Greed is present in
all societies at all times. These companies died in 2002. Why? K-Mart
went bankrupt because it offered lousy service, a poor selection
of products, run-down stores, and was aimed at people without much
money. It died because Wal-Mart is a better company. Its only big-name
hope was Martha Stewart. It was an enterprise aimed at just barely
middle-class women. I dreamed for years of hearing this: “Attention
K-Mart shoppers: Wal-Mart has a better selection.” Global Crossing
and Enron and WorldCom died for very different reasons.

What, specifically, has created demand by naive stock market investors
and fund managers to buy overinflated, stocks for 40 times reported
earnings — almost three times the historic average Warning:
I keep seeing reported P/E ratios for the S&P 500 ranging anywhere
from 23 to 40. I use the S&P 500’s own statistic:

The public’s willingness to buy stocks at inflated prices has in
turn made possible the ability of America’s corporate CEO’s to gain
incomes that were on average 531 times more than the average worker’s
income in 2000, up from 85 in 1990 and 42 in 1980.

CEO’s pull this off mainly with stock options, which are taxed favorably
for the companies that issue them. Stock options create potential
future corporate liabilities that are not treated as present liabilities
by accounting laws. The liabilities hit after common investors have
bid up the price of the shares. Congress has created this monster
by structuring corporate tax laws to favor senior executives rather
than common investors. It is just one more example of government
promising to “help the little guy,” and then creating arcane tax
laws that help the big boys, who donate big bucks to incumbent politicians.
It is the same old deception.

If there were a flat sales tax instead of an envy-driven graduated
income tax, there would be less of this cream-skimming by the rich.
If capital gains were not taxed at all until investors sold their
investments and took the money as income, there would be more economic
growth and fewer scams. If corporate tax law allowed corporations
to deduct dividends as expenses — single taxation of dividends
— and if recipients could legally reinvest dividends on an
income-tax-deferred basis, there would be more interest in income
than creative accounting. But this would mean that the politics
of envy no longer gets people elected. That’s not our world.


On Sunday evening, July 28, NBC television broadcast a memorable
piece of hatchet journalism, “Take the Money and Run.” It was hosted
by Tom Brokaw, the NBC anchorman.

The show dealt with the evils of the Chief Executive Officers of
now failed corporations, though its main poster child was Global
Crossing. The show reported on things that are bad about American
corporate capitalism, with these notable exceptions:

  1. The envy-driven
    tax structure that promises to “soak the rich”

  2. Federal
    regulatory agencies, especially the Securities & Exchange Commission,
    that create barriers to entry against new, innovative firms
    — barriers based mainly on hiring lawyers and filling out

  3. The politically
    untouchable government-created monopoly, the Federal Reserve
    System, which initially provides the fiat money that fuels every
    market mania

  4. The major
    media, such as CNBC, that make their money by attracting audiences
    with lots of money for advertisers to skim off, audiences that
    can only be attracted by selling greed

In other words, NBC was attacking the results of anti-capitalist
interference into the free market. The media today are attacking
the results of the media’s own marketing strategy to bring in suckers
by the millions and deliver them to advertisers. The networks and
newsstand money magazines lure in the masses with stories of dreams
of wealth — stories that statistically cannot come true for
more than a tiny handful of investors. The winners are those investors
who, unlike the media’s dupes, see a bear market coming and sell
out at the top to the naive victims of the media’s own hype. The
media create insatiable demand for get-rich-easily stocks, and the
viewers respond by buying stocks from wiser souls, who see a stock
market bubble for what it is and unload their shares on the rubes.
Nobody on Tout TV told the rubes to sell Global Crossing or Enron.
As Brokaw’s report said, less than 1% of all stocks mentioned by
brokerage firms are ever in the “sell” category. Tout TV followed
the lead of the brokerage firms.

The script writers of the prime-time specials, hostile to the free
market, now blame the free market for the failures of what is best
described as monopoly capitalism. Then they call for more of the


The NBC show told a human interest story — a real-life soap
opera with an unhappy ending. It focused on some naive schnook who
believed all the nonsense about the technology sector. He read and
believed George Gilder’s technobabble. He went to Websites and watched
the hypesters on Tout TV. Then he bought Global Crossing at $60
a share, from which it steadily dropped. He used his retirement
money. He kept buying more Global Crossing shares as the price fell.
He had heard and absorbed all the brokerage house nonsense about
“averaging down,” i.e., buying more shares in a falling market.
He applied this eminently false and potentially suicidal investment
strategy in a way that even the experts (so-called) say is wrong:
by buying more of a losing proposition, rather than diversifying
his portfolio.

Now he goes on national TV and says that he feels betrayed. It was
his own bad judgment that did him in. It was his desire to “get
even with the market,” to prove to himself that his bad judgment
had in fact been good judgment, by buying more and more of a losing
company. He thought that investment experts knew what was happening,
which prime-time experts rarely do in mania markets. He violated
the rules of sound investing all the way down, and then he consented
to become a guest star on Tom Brokaw’s prime-time soap opera. He
consented to become the seasoning for Brokaw’s feast on the rotting
corpse. The show was a feast of fools.

interviewed other victims. I have never seen such blatantly leading
questions. He asked one group that had lost their retirement funds:
“How do you feel about all this?” Would this man ask a victim of
the 9-11 disaster, “How do you feel about losing your husband?”
Everyone knows how she would feel. Why ask? What’s the hidden agenda
here? Then he asked: “Do you think these executives should go to
jail?” One respondent was wiser than the questioner. The woman did
not go that far. But other participants did.

Would he have asked the 9-11 victim, “What do you think about Al
Qaeda?” Why would anyone ask such questions? In the case of 9-11,
for this reason: to create broad public support for the creation
of a Department of Homeland Security. But even the newscasters did
not go that far. Such questions would have been seen as exploitative
and cruel last September. But when capitalism is in a network’s
prime-time dock, no question is too blatantly leading for a network’s
multimillionaire anchorman.

These TV news anchors have been carefully screened and promoted
by the networks’ hired public opinion experts to play their roles
as neutral reporters of the news, who narrate what viewers are supposed
to believe is the unvarnished truth, interspersed with 12 minutes
of ads, five nights a week. Or, in this case, a one-hour special
on Sunday evening.

Interview by interview, Brokaw was playing the prosecuting attorney,
establishing a case against senior executives who in fact seem to
have broken no laws. When we see something like this, we should
recognize the presence of a hidden agenda: laying the ground work
for another round of statist intervention into the capital markets.

Global Crossing was a classic example of an empty shell, a multi-billion
dollar product of media hype and central bank monetary inflation.
George Gilder was the main hypester here. This poor soul actually
believes his own technobabble. He invested most of his own money
in this turkey. It was madness to the nth degree. Gilder kept writing
in the 1990’s about the falling price of bandwidth, i.e., the wonders
of what he called the telecosm. (I saw his book, Telecosm,
in the $3.98 remaindered books bin at Hastings recently.) I accepted
his theory about the falling price of bandwidth. I was not equally
impressed by his claim that this would in some way revolutionize
the lives of Americans. One of my doubts about the incomparable
benefits of cheap bandwidth is the speed of modems, which has peaked
for years at 56k. The vast majority of Internet users still use
56k modems, and seem vaguely contented, including me.

Gilder then drew an economically insane conclusion from his theory
of ever-cheaper bandwidth: the greatest company in the world was
a company that spent billions of dollars on buying or laying fiber
cable to supply bandwidth. I read his reports on Global Crossing
at the time and thought, “This man has lost his ability to think
economically. If the price of something is heading relentlessly
toward zero, then the last thing you want to invest in is a company
that sells this product. You may want to invest in companies that
add value for consumers by converting this depreciating asset into
usable services or goods, but not the seller of the asset.” My suspicion
was correct. Global Crossing went bust.

The man who ran it, Gary Winnick, sold 30% of his shares in three
separate unloadings, took in $735 million, and bought a $90 million
estate in Bel Air, California. (Why any home is worth $90 million
in the smog-filled Los Angeles basin, I cannot imagine.) This, of
course, is supermoney
in action, as described a generation ago by “Adam Smith,” and praised
ever since as capitalism’s ninth wonder of the world. (The eighth
wonder is compound interest.) NBC got finally it right. Supermoney
is indeed a system based on the principle of “take the money and
run.” Supermoney is based on a premise: “A fool and his money are
soon parted.” CNBC and other Tout TV channels created a huge market
of these fools, and, sure enough, they and their money were soon

Of course, all of this is peanuts compared to the level of the deliberate
deception by the West’s welfare states with respect to their pay-as-you-go
compulsory retirement programs and compulsory health insurance programs.
Nothing that Global Crossing or Enron did can compare with what
Social Security/Medicare has done to, and will continue to do to
the masses who got in on this compulsory Ponzi scheme late (after
1955). Nothing that Arthur Andersen did can compare to what Congress
has done, namely, to count $25 trillion of unfunded liabilities
as off-budget liabilities, and therefore not reported in the budget
statistics, and not limited by the automatic annual increase in
the Federal budget ceiling. If you doubt me, order my report on
the bankruptcy of these systems. Click here,
and then click “SEND.”

But NBC, CBS, and ABC never air a program called “Account Overdrawn:
The Social Security Trust Fund.” That would undermine trust in the
government. Their shows are designed to undermine trust in the free
market, not trust in the welfare state.

It amuses me to see the prime time big brother of CNBC wring its
hands in horror. “Blame the CEO’s!” No, blame the politics of envy.
Once again, those fools who believed the pied piper’s story of wealth
for all through government-regulated, central bank-funded intervention
into the free market have had their money removed from them by sharpies.

The NBC show was about poorly invested pension fund money. Well,
this disaster has only just begun. It will play out for the next
forty years, getting ever worse. The model of self-conscious deception
of the public is the Social Security system, the most untouchable
of all government programs of compulsory wealth extraction. Those
who still vote for politicians who promise to continue this theft
will find themselves ruined. I cannot resist citing Karl Marx: “The
expropriators are expropriated.” He was speaking of capitalists.
I am speaking of voters who vote to provide old age security for
themselves at the expense of workers still in the labor force, and
who will find, as Pogo Possum found, that “We have met the victims,
and they are us.”


Economist Thomas Sowell recently hit the nail on the head. The great
threat to our prosperity is not the popping of Greenspan’s stock
market bubble. The threat is what the government is likely to do
to fix things. He wrote:

can be even worse than a stock market crash — including the great
crash of 1929 — are politicians rushing in to fix things. At one
time, it was widely assumed that the 1929 crash led directly to
the Great Depression that lasted throughout the decade of the
1930s. Now, more and more people who have studied that era have
come to see what the government itself did to help as being the
biggest reason why the depression went so deep and lasted so long.

economist who first proved this was Murray Rothbard, in his book,
Great Depression
(1963). I read it the year it was published.
It convinced me. It is the best book ever written on the topic.
It was savagely attacked in academic journals at the time and then
ignored by the academic community. Rothbard blamed Hoover’s interventionist
policies, thereby alienating Republican apologists, and he blamed
the Federal Reserve System’s monetary policies in the 1920’s, thereby
alienating the bankers, the FED, and conventional free market economists.
Not until the master historian, Paul Johnson, wrote Modern
(1983), and made Rothbard’s book the basis of his
analysis of the Great Depression, did Rothbard receive even grudging
credit. Sowell quotes Rothbard’s conclusion, but not the source:

Republican President Herbert Hoover or his Democratic successor
Franklin D. Roosevelt had a clue about economics or a policy that
made any sense.

Both sought
to keep prices — including wages — up, despite the fact
that the money supply had declined by one third. How was the country
supposed to buy all the output at existing prices, and employ
all the workers at existing wages, when there was so much less
money? . . .

In reality,
it was Hoover — not FDR — who became the first president
to throw the power of the federal government into the effort to
get the country out of a depression. In recent years, it has become
more widely acknowledged that Roosevelt’s New Deal was essentially
Hoover’s policies raised to the next exponent, spending on a more
lavish scale and saddling the country with counterproductive programs
that have lasted into the next century.

This was Rothbard’s thesis in 1963, and it was ridiculed. His thesis
has yet to work its way into the history textbooks. The textbooks,
bought by government-funded schools to promote faith in the government’s
funding of everything, do not deviate from the original propaganda
campaign of the New Deal: “Roosevelt saved capitalism from itself.”

We are now seeing the latest application of this false claim. The
Democrats are going to ride into control of Congress this fall with
a campaign based on this claim: “We need to save capitalism from
itself.” They will not show the film clips of Global Crossing’s
Gary Winnick playing golf with Bill Clinton. They will tar and feather
the Republicans, as if this corrupt stock market were not a bipartisan
disaster that has been funded by the supposedly independent, supposedly
non-political Federal Reserve System.

You may not believe me. OK, test me. Click through on this link.
It will take you to a graph. The graph reveals the expansion of
MZM (money of zero maturity). With this graph, things will become
clearer as to why the mania of 1995 to March of 2000 took place.

This chart is from,
a marvelous statistical site. You can play around with the chart.
Use the options box. It starts in 1990. Insert 1975. You can see
why the dollar has fallen in value. You should set the chart to
show recessions. But before you have fun with this chart, look at
what happened in 1993—94. There was a slight decline in MZM.
But, beginning in 1995, the graph shoots up rapidly. This is when
the stock market boom turned into a stock market mania. This is
what turned the NASDAQ into a bubble. Look at what happened to the
NASDAQ, beginning in 1995..

relationship is even closer for the New York Stock Exchange Composite

What is ahead for us? Maybe a replay of the 1929 stock market. Again,
quoting Dr. Sowell:

Not only
the Federal Reserve and two presidents managed to make the Great
Depression worse, so did Congress. When it passed the Hawley-Smoot
tariff of 1930, it contributed to a worldwide contraction in international
trade, as country after country tried to “save jobs” by protectionism.

Bush has already raised tariffs on imported steel. He has shown,
once again, that the Republicans have learned nothing since Hoover.
Bush has yet to veto any bill. He signed the agriculture subsidy,
a gigantic subsidy to large-scale corporate farming, which of course
was passed in the name of helping the family farm.

Sowell continued:

This year’s
scandals and stock market collapse could not have come at a worse
time, with an election coming up and no other big issues around
for politicians to use. It is also worth noting that there are
only two economists in Congress and hundreds of lawyers, ready
to say and do whatever will look good and feel good at the moment.

One of these two economists, House Majority leader Dick Armey, has
announced that he will not run again. It is clear what is coming:
a bipartisan extension of government control over the capital markets,
which will match the extension of government control over the communications
system through the Homeland Security system. NBC needs to do a one-hour
special, “Take the Constitution and Run.” Somehow, I don’t expect
to see this.


The vultures are circling. They appear to be feasting on corpses,
but they will soon produce an assembly line of corpses: the picking
away of our liberties. The voters will go along with this.

This is not the pathway to Dow 36000.

31, 2002

North is the author of Mises
on Money
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