Baltimore
is full of strange and curious things; it is home to bouffant hairdos,
the Formstone Preservation Society and other wonders. Filmmaker
John Waters makes the city his home, he says, because it is the
tackiest metropolis in America. He is inspired by it in the way
that other artists are moved to poetry by Paris or Rome.

But
what caught our eye last night was not art but advertising. A block
or two from the huge billboard with the provocative headline –
Who’s the Father? DNA Paternity Testing… – sits another intriguing
sign of the times:

BANKRUPTCY!
Chapter
7 – $50
Chapter
11 – $100

In
America, in the springtime of the third year of George W. Bush’s
rule, we conclude, bankruptcy has become as popular as weight-loss.

The
sign is not merely an invitation, but a reproach. Bankruptcy rates
are hitting records despite the best efforts of those who manage
the economy.

In
his Congressional testimony last week, Alan Greenspan sailed through
his customary delusions – that additional mortgage debt is
good for consumers…that technology has brought a New Era to the
economy…and that modest productivity increases have some exceptional
quality as yet unnamed.

He
was cruising in the wake of John Snow, U.S. Treasury secretary who
made the following remarkable comment to the G7 finance ministers:

“…the
United States is not growing fast enough and neither are you, but
we are growing a lot faster than you…We get complaints from our
friends around the world who say, ‘your current account deficit
is so high.’ And our response is: ‘Yeah. You know why? Because you
don’t buy enough from us. And because we provide the highest risk-adjusted
returns on capital in the world, so your capital flows over here.
So why don’t you take steps to improve your domestic economy so
you’ll be stronger and buy more from us? And you might think as
well about steps to improve return on invested capital, and then
capital would flow your way as well as to the United States.”

“The
fact is,” and the head of the Treasury department may have been
tempted to toss his head back a few degrees as he made this point,
“the American economy is strong. The underpinnings are good.”

And
yet, on the corner of Charles and Lombard streets, bankruptcy is
such a good business it is worth advertising for new clients.

There
are other signs that the underpinnings of the U.S. economy are not
as good as Mr. Snow thinks. In addition to bankruptcies and unemployment,
business profits as a percentage of GDP have fallen to their lowest
level in about 40 years.

No
mention of this has been made by either the Treasury secretary or
the Fed chief. And yet, without profits, why would people invest
in new machinery, new ventures, new employees? How could the economy
grow? Why would stocks go up?

Another
question worth asking: what is going on? How is it possible for
an economy to be ‘strong’ with people going broke at a record rate…and
businesses unable to make any money?

And
why would profits decline – even as productivity increases
and technological marvels proliferate?

Hearing
no answer from the authorities, we offer one ourselves:

The
world’s central banks’ reserves increased only 55% in the last 20
years of the Bretton Woods/Gold Standard period – ’49 –
’69. But then, the Gold Standard was replaced by the Dollar Standard.
Dollars being easier to replicate than bars of gold, central bank
reserves rose 2000% in the next 33 years.

That
kind of money was bound to tempt people; all over the world bankers,
consumers and investors gave way to an orgy of credit excess like
looters at a liquor warehouse. Soon, they were all drenched in the
stuff.

The
Nixon Administration put a final end to the Bretton Woods/Gold Standard
in 1971. Four years later, stocks bottomed out in America and the
Great Boom began.

Trillions
of dollars sloshed around the world, creating booms…and then busts.
Japanese companies – selling to Americans – were the first
ones to get soaked. Then, Japanese share prices sprouted…followed
by kudzu-like growth in Japanese real estate…and bonds. Then,
other Asian nations boomed – and busted. And then, it was America’s
turn. Stocks had begun to pullulate in the late ’70s…by the late
’90s they burst into spectacular, intoxicating full flower…succeeded,
as in Japan, by real estate and bonds. Since 2000, U.S. stocks have
wilted somewhat, but the heady growth in real estate and bonds continues.

Americans
had what appeared to be a big advantage; they were the ones who
got to create ‘money…out of thin air.’ But there was a price to
be paid for being so close to the source of such stimulating libations;
Americans dipped their cups in more deeply than anyone. And while
they drank, the source of their wealth slipped away.

“For
generations it has been an economic truism and a matter of simple
common sense,” begins Dr. Kurt Richebächer, “that in essence,
a person or a nation can only become richer if it consumes less
than it produces.” What America produced and exported was cash and
credit. Trillions of dollars’ worth. Foreigners produced cars, televisions,
food, vacations – anything and everything that they could trade
for dollars. This is the trade of which Secretary Snow is so proud.
It has resulted in a mountain of empty containers at U.S. ports
(they come in loaded…they do not leave, because America has little
to export, except money) and mountains of dollars piled up overseas.

The
treasury secretary seemed not to notice it, but it also ruined the
profitability of U.S. businesses, stifled real incomes of American
workers and pushed millions of jobs overseas. American businesses
pay their workers in dollars. Normally, they could expect the money
to come back to them – as the employees spent it on the goods
they produced. Instead, it goes into the hands of foreign producers,
who do overseas what might have otherwise been done at home –
build factories, hire workers and make profits.

And
what did they do with their profits? As Mr. Snow tells us, they
bought U.S. dollar assets – thus enabling Americans to keep
buying. In the late ’90s, they bought stocks. Recently, especially
for the Japanese, the buying has shifted to U.S. bonds.

While
the effects of so much apparent prosperity continue to splash here
and there, the world begins to wonder about the source of it. The
dollar has lost 31% of its value against the euro in the last 18
months. Against gold, it has lost a similar amount. Has the Great
Boom of the last quarter century already turned into a Great Bust?

June
4, 2003

Bill
Bonner [send
him mail] is the
founder and president of Agora Publishing, and the author of The
Daily Reckoning.