Dancing at the End of the World

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We bought this place in the Poitou region of France nearly 10 years ago. On Saturday, we feted the end of summer with a big party, inviting everyone we knew…along with an international group of associates who had come for a business conference.

Tout Paris was there…

Well, tout Poitou, at least.

"It’s amazing how many friends you’ve made in the area," said a visiting American. "I had heard the French were hard to get to know — especially in the countryside." "Yes, the French are reserved. But they’ve been very nice to us," we replied, "in the way that people are nice to a blind man or a mental defective. They knew we were helpless and clueless…"

"Currently, net national savings in the United States is only about one-half of 1%," continued our explanation of the coming end of the world. "Which means, we do not have the savings needed to build new factories — assuming we wanted to — or to live beyond our means. So we have to borrow from the rest of the world. That’s why our current account deficit has reached over 5% of GDP — about $600 billion per year."

The current account deficit had no more effect than net savings. The blond woman’s eyes wandered; she was looking for a path to beat a retreat. She wanted to dance…to play…to throw her head back in idle, silly laughter. A dull economist can no more entertain a lively woman than a stand-up comic can make a dead accountant smile.

"We have to take up the world’s savings — about 80% of all the savings of everyone on the planet, just to keep spending money at the same pace. And for a long time, we wondered why the foreigners would send their money to America. The United States controls the dollar…in which their loans are calibrated. And everyone knows the Fed will inflate the dollar over time — did you know that it’s lost 95% of its value since the Fed was set up in 1913? — so it must be a sucker’s bet to take a big position in dollar-denominated paper. It was pretty obvious what could happen:

The dollar would crash, and all those foreign holders of U.S. paper would wish they had never heard of dollars. It would turn out to be like lending money to Argentina in the 1980s…or to Germany in the early ’20s…or Russia before WWI.

"But look what is happening. Long-term yields are still going down…or at least staying steady. Bonds are going up. And commodities — it is hard to believe, but they are going down. And the dollar? It’s actually going up.

"We referred to what we called the u2018GUDD’ world of the last couple of years — gold up, dollar down. But that world seems to be stalled. Or even reversed. We don’t know yet.

"But it looks as though the Asians could come out of this in good shape, after all. They’ve done the right thing…at least as far as saving and capital investment are concerned. If the world continues to go into this long, slow, soft decline that we predicted in our book…well, all that paper they’ve accumulated in dollars will be worth more, not less. And they’ll be able to cash it in against real assets in the United States.

"You know, we keep telling readers that it will a supremely elegant development if Americans should sell Manhattan to Asians for trinkets — computer games, flat-screen TVs and other geegaws — after buying it from Indians for $26 worth of trinkets 350 years ago."

We presumed that "long-term bond yields" had stirred about as much interest as "net savings" and "current account deficits." We expected her to tell us she had to go to the powder room. But she surprised us…

"It’s not the economic situation that worries me; it is the political situation. The whole world has a kind of fin de siecle air to it. In France, we cannot continue living as we have. Everyone knows it, but no one does anything about it. No politician will dare say anything.

"Young people get paid not to work. If you are unemployed, you can live better than if you have a job. So you can’t find anyone to do anything. All the old artisans are dying off or retiring. You have to do everything yourself. And the government keeps making more and more promises to everyone — especially to government employees. Who’s going to pay for all of this stuff?

"And then, what you are telling me makes me think the situation in America is not much different. People expect something that they cannot ever have — to live better than they can really afford. How can that continue…?

"And there is all this talk of a war against terror. From time to time, people seem to like war. I guess it diverts them from other things…

"But I’m not going to worry about it…"

"Yes, what would be the point…? Shall we dance?

"Yes, let’s…"

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.

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