Duck-and-Cover Revisited

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But be ye
doers of the word, and not hearers only, deceiving your own selves.
For if any be a hearer of the word, and not a doer, he is like
unto a man beholding his natural face in a glass: For he beholdeth
himself, and goeth his way, and straightway forgetteth what manner
of man he was (James 1:22-24).

Earlier
this month, I attended Burt Blumert’s gold conference. Burt runs
the Camino Coin Company
in Burlingame, California. He is one of the last sellers of bullion
gold and silver coins, having operated for over four decades. It’s
a small shop, but it does a lot of business.

At
that conference, several people asked me what I thought would happen
in Iraq. I said that Saddam Hussein would be wise to let the UN
weapons inspectors back in. That would call Bush’s bluff. He would
save tens of thousands of lives by doing this. It would also keep
him in power. Now he has done it.

This
has undermined Bush’s stated goals of changing the regime in Iraq
by unilateral aggression. It means that he will not do to Hussein
what his father did to Manual Noriega, another in-house dictator
for the United States, just as Saddam Hussein was until August,
1990. Bush went to the UN to get the support of that impotent international
bureaucracy. He thought the UN was the best place for him to build
support for his invasion. This was one more example of the transfer
of American sovereignty to the UN. Now his plan has backfired. If
Hussein sticks with his side of the bargain, Bush will not get his
coalition. He offered Hussein an out, using the UN as the escape
hatch, and Hussein took the gift.

If
the weapons inspectors find nothing, Hussein will be in a position
to appeal to UN nations to start violating the US oil embargo. There
will be support for that, since everyone wants more oil and cheaper
oil. The case against Iraq will seem far less legitimate if Iraq
is cooperating.

Bush
backed Hussein into a corner: submit to the UN or else be removed
from power by an invasion. Bush was not bluffing about the invasion.
Afghanistan showed that. He may have been bluffing about the weapons
inspectors because, as the pundits kept telling us over the weekend,
Bush had put so many restrictions on the offer that Hussein would
not take it. But, when the choice was between inviting in UN weapons
inspectors vs. the complete loss of power, Hussein decided to maintain
power. Isn’t that what Bush had led us to expect with his description
of Hussein as a dictator? Why this decision comes as a surprise
to anyone is beyond me. Bush gave him an escape hatch, and he took
it.

It
is not clear what Bush’s next move will be. Hussein has boxed him
in for the time being. All the "axis of evil" rhetoric
has been put indefinitely on hold, unless Bush is ready to invade
Iran or North Korea. Bush has bet his presidency and the Republican
Party’s future on dealing with the axis of evil, but now that program
has been put on hold. Until and unless Hussein decides to toss out
the weapons inspectors, he has Kings-X from Bush.

If
Bush decides to invade anyway, the Democrats and our European allies
will join forces to label him as impatient and needlessly reckless.
Every body bag would hurt him. This would force Republicans in Congress
either to vote with the Democrats (bad politics) or else side with
an impatient President who did not keep his word to the UN. I presume
that Bush knows this.

If
the weapons inspectors find no weapons of mass destruction, then
Bush’s case against Iraq will collapse. If they do find them, and
Iraq destroys them under UN supervision, the same holds true. Hussein
will get a new lease on political life. If he can outlast Bush II
the way he outlasted Bush I, he wins. When Bush II is gone (2005
or 2009), Hussein can go back to normal. Bush’s successor will not
have 9/11 to motivate him to launch a personal crusade against Iraq.

Bush
can still be perceived as a statesman if the Iraq threat is eliminated,
assuming there ever was an Iraq threat. He needn’t suffer politically
from his offer of peace to Iraq. He can present himself as a man
of peace. But he won’t get his war, and he will have to switch his
rhetoric and his political positioning. He will have to go back
to domestic issues. The main one is the economy. It isn’t a good
issue for the Republicans. Not yet, anyway.

GOOD
NEWS FOR THE STOCK MARKET

The
avoidance of a war should be good news for the stock market. We
shall see if investors assess this development as economists would.
War is destructive. It reduces the supply of consumer goods and
therefore consumer choice. So, the avoidance of war is good for
the consumer.

If
the market still struggles, then this will be evidence of underlying
forces in the market that even the avoidance of war cannot overcome.
It will indicate that the crisis in profits is so great that even
the prospect of peace is insufficient to persuade business decision-makers
to begin committing a large portion of earnings to capital expansion.

The
key to prosperity is capital expansion: tools of production. Businesses
have refused to expand capital for seven consecutive quarters —
a record in our generation. Businessmen see that the U.S. economy
is stagnant, even though consumers are still buying large-ticket
items — cars and homes — because of low interest rates.

This
is an economy driven by caution on the part of entrepreneurs and
lack of caution by consumers. Businessmen see that the spending
binge cannot go on indefinitely. They are holding back, refusing
to commit to new projects. They are in duck-and-cover mode, like
school children in the 1950′s, hiding under their desks. For school
children, this was a drill. For businessmen today, it is more than
a drill. It is a way to survive the shock wave of consumer exhaustion
when it hits.

For
consumer spending to continue in the face of low economic growth
and outright capital contraction — using up the nation’s tools
of production — there must be a continual extension of credit.
The Federal Reserve is supplying it. We have seen this for over
two years. Banks can borrow at 1.75% and lend at credit card rates
of 20%. They will do this until their borrowing rates rise, or credit
card rates fall, or default rates rise. The latter is happening;
the former are not. So far, the default rate has not threatened
bank profitability. But at some point, it will.

The
problem facing borrowers is that the lack of investment by businesses
will eventually lower workers’ productivity. The steady upward move
of productivity and real wages will stall. At that point, the Federal
Reserve will face its moment of truth. To continue today’s monetary
policies will then produce price inflation. This will raise long-term
rates. The housing market, driven by low rates, will stall. Prices
will cease to rise. Some home prices will fall, especially those
homes owned by the upper middle class, whose members do most of
the investing. Home owners will find themselves saddled with long-term
debt without much equity. Making their monthly mortgage payments
will crowd out their other spending.

This
is why I think the FED will continue to inflate the currency. It
will not allow price deflation and the resulting economic contraction
that is based on the fear of falling prices. That would threaten
the solvency of the real estate markets, the way it has in Japan.

Today,
the consumer computer industry has collapsed because consumers don’t
need the latest and the greatest. They know that if they wait six
months, they can buy a far hotter machine if they really need one.
So, they have stopped buying. The advertisement revenue of the computer
publishing world has collapsed. The FED does not want that experience
to spread to industries beyond consumer computers. If consumers
hold off in making purchases because they expect lower prices, this
reduces consumer demand for goods and services. The good side of
this development — rising thrift, debt-reduction — is
considered a liability in Keynesian economic analysis.

DON’T
BUY NOW, DON’T PAY LATER!

That
old phrase, “buy now, pay later,” has changed the way that Americans
run their lives. They have become present-oriented, which is why
they are willing to run up credit card debts of $8,000 per family.
This is why they are willing to pay 20% per annum on this debt.
The problem is, they find it difficult to switch back to future-orientation:
“Don’t buy now, don’t pay later.” When the plans of forecasters
are based on the continuation of consumer preferences, anything
that changes consumer time-preference (future-orientation) will
wipe out trillions of dollars of on-paper capital. The economy would
have to be re-structured to accommodate the new attitude toward
thrift.

I
don’t expect a major reversal of two generations of time-preference.
Attitudes die hard. We are now seeing old people being sucked into
the tar pits of credit card debt. They refuse to cut their spending.
They refuse to acknowledge that the golden years of retirement are
years in which personal budgets must be radically re-structured.
Meanwhile, FED policy has cut retirement income by lowering interest
rates.

Either
you cut spending or you find ways to increase your income. It’s
technically easier to cut spending. "A penny saved is 1.4 pennies
earned, depending on your tax bracket." But habits are hard
to break. Going on an income diet is a shock to newly retired people.
It’s like an athlete who consumes large quantities of food during
his playing career, and then must cut his food intake by 50% or
more when he retires and stops training daily.

We
all know how hard it is to change our diets and lose weight permanently.
We all know that when we grow old, we will have to exercise if we
don’t want to turn into broken down heaps. But we are all in Scarlett
O’Hara mode:

"I’ll
think about it tomorrow."

I
watched an interview with Jack LaLanne two nights ago. At 87 —
almost 88 — he lifts huge weights, does exercises that I could
not possibly do, and looks 70. He does this for two hours a day.
Every few years, the same interviewer comes back to do another interview.
LaLanne makes him exercise with him, and of course the poor schnook
cannot keep up. Who could? He may be 45. This time, he told Jack,
"I want to come back and interview you when you turn a hundred."
Jack replied: "Let’s hope you live that long."

The
next morning, I saw a Jack LaLanne infomercial for the Jack LaLanne
juicer. Old Jack is still making a good living by not wearing out.
The personal price he pays in relation to the income he receives
is low. So, he keeps paying the price. Also, he established good
habits early. Yet I read an interview with him years ago in which
he said that he hates to exercise. He says that he varies his routine
constantly to overcome boredom.

He
is exceptional. Also, he has found a way to convert physical pain
into a lot of money. Most people cannot do this. Their present pain
must be borne in the name of future benefits. There is no guarantee
that some disease or other disaster may not offset those expected
future benefits. In this sense, exercising is like living within
your means. There is no guarantee that a financial disaster may
not hit — a lawsuit, a terrible illness, or whatever. You experience
reduced pleasure now for the sake of less pain in the future, you
hope. But you must act in faith.

This
is why people would be wise to learn the self-discipline of thrift
early in life. Most people don’t do this. The society screams at
them, "buy now, pay later." What people rarely understand
is that getting into debt’s hole early in life keeps them in servitude
for years. People develop bad habits early that are difficult to
change later on.

All
of us should look at old age and say, "either I must find ways
to maintain my income or ways to cut my expenses." If you are
not into cost-cutting mode, then you had better be in income-extension
mode. If you refuse to face up to the reality of retirement, then
you will have a hard time making the transition to drastically reduced
income.

I
think it’s harder for most people to break a lifetime of spending
habits than it is for them to change a career of income-producing
habits. That’s why I keep hammering on the wisdom of building up
a home-based business or an alternative career to retire into. So
few people are willing to budget their present income, let alone
make rational projections of their income after age 65, that they
are caught flat-footed when they retire. They are not emotionally
able to cut their spending permanently by 60% in just one month.

YOUR
TREMENDOUS ADVANTAGE

You
constantly read serious material about the economy. Most Americans
don’t. You are aware of certain economic developments, such as the
inevitable bankruptcy of Social Security, that are not on the radar
screen of most Americans. You may have come to grips emotionally
with the reality of the effects on your future of this looming bankruptcy.
Very few people have done so.

You
an advantage over your peers, whatever your age group is. You will
not be blind-sided by the economy or the political crisis that it
will create. You will have taken steps to insulate yourself. Anyway,
I hope you will have done so.

The
biggest advantage you have is information, but this must be transformed
into action. As James wrote almost 2,000 years ago, But be ye doers
of the word, and not hearers only, deceiving your own selves. For
if any be a hearer of the word, and not a doer, he is like unto
a man beholding his natural face in a glass: For he beholdeth himself,
and goeth his way, and straightway forgetteth what manner of man
he was (James 1:22-24).

Knowing
what lies ahead and doing nothing to prepare for it is foolish.
It does nobody any good to say to himself, "I told you so!"

Do
you know where your money goes? Do you use Quicken? Are you systematically
reducing your expenditures and allocating money to investments,
especially investments in personal education that will enable you
to stay in the work force after age 65?

If
you are, then you are taking seriously these newsletters. If you
aren’t, then you are like the man whose doctor tells him to change
his habits or else risk a heart attack, and yet the patient refuses
to change.

CONCLUSION

Changes
in strategy are required from time to time. President Bush must
now change his military strategy or else suffer the political consequences.
He talked himself into a corner last week. Saddam Hussein has now
called his bluff.

We
cannot forecast everything with precision. We can at best plan for
long-term developments that are in the pipeline, such as the demise
of Social Security. A bad plan is better than no plan. You can revise
a bad plan. It is the self-discipline of following a plan that is
crucial in the long run.

Most
Americans have no long-term economic plan. They have no awareness
of what is coming. Presumably, by now you are not in this condition.
You are at least putting together a personal plan.

Budgeting
is the key. There are two budgets: time and money. For most people,
the time budget is more important. If they would work to convert
time into money, or into capital that will eventually produce money,
they would come out ahead.

A
friend of mine is a retired engineer. He happened to get involved
teaching part-time in a local Christian high school. He taught students
how to build a robot.

There
is an annual national competition for high schools: robot
competition. The robots literally compete against each other. His
students won first place in Arkansas last year, and won fourth place
regionally. A school with 45 high school students defeated public
school high schools all over the 14-state region: Texas, Oklahoma,
Arkansas, etc. The team also won the Founders Award nationally as
the best design for the goal assigned. The school has now hired
him full-time. He teaches math, physics, robotics, and worldview.
He is paid very little. But he likes what he does. The money isn’t
why he does it.

The
man who created the school has a similar story. He came to NW Arkansas
to retire. Seven years ago, he got bored. So, he began a school.
Today, it has 240 students, K-12. The building is home-brew. It
looks like an abandoned warehouse from the outside, but inside,
it’s clean. It uses donated carpets and used desks. He is building
it on the cheap.

Why
bother? Not to make money, but to have influence. He has a new career.
He is not going hungry. He is having fun. The students are getting
a first-rate education.

This
is also the reason that Burt Blumert runs the Center for Libertarian
Studies, and acts as publisher to this website. It’s also the reason
he’s still in the coin business.

Budget
your time and money now so that you can have fun doing something
useful after you retire from a job that isn’t much fun. If you do
this, you won’t go hungry or get bored to death — literally
— when you retire. As Jack LaLanne told the interviewer, retirement
is a death sentence for a lot of men.

September
28, 2002

Gary
North is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s twice-weekly economics newsletter,
click
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.

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