The absence of history is the absence of adversity. Nothing goes wrong. No need for puts. No need for savings. No need for insurance. We quote the Great Mogambo: “Ha, ha, ha, ha…”
Ad-ver-si-ty. Our guess is that it is under-priced and under-appreciated. This morning, we pause briefly to laugh at Gilder and Fukayama and Bernanke and Bush. We thank the whole team of dreamers and schemers, world improvers and mountebanks who make our job so entertaining.
First, we turn to Paul Ford, of Harper’s Weekly, on how the triumph of democracy has transformed Mesopotamia:
“Thirty beheaded corpses were found in Baquba, Iraq, and 10 more bodies were found in Baghdad, where the homicide rate had reached 33 per day. Shiites were abducting Sunnis in bright daylight on crowded streets. ‘If the Americans leave,’ said one Sunni man (whose brother had recently been executed after being tortured with power tools), ‘we are finished. We may be finished already.’ In Miqdadiya, near Baquba, militants attacked a prison, killed 20 people, and freed 30 prisoners. A doctor in Baghdad admitted to killing 35 policemen and soldiers who were being treated at his hospital. American and Iraqi forces said they had killed 17 Shiite militiamen at a mosque in Baghdad; Iraqi television showed corpses in a prayer room.”
We guessed that the campaign in Iraq would be a mess. If we were a better man, perhaps, we would take no perverse, schadenfreude in being right. But we’re only human, and like all humans, we slip into sin and error as eagerly as we put on a new sweater. That is why the dollar is doomed — the war on terror, and the empire too, dear reader. We may drive a Mercedes and watch cable TV, but we are still heirs to the same slimy beasts that crawled out of the warm sea — with hearts so feeble, they were expelled from Eden.
Meanwhile, on the money front, we return to George Gilder’s preposterous notion that record debt levels don’t matter — because our houses are worth more. It is true that debt would be no problem if history really had stopped. But, the trouble with debt is that it can’t stand adversity.
The Economist published the following figures for money supply growth in various countries over the last 12 months: Australia +9.1%, Britain +11.7%, Canada +7.7%, Denmark +14.7%, U.S. +8.1%, the Euro area +7.3%.
Everywhere you look, the money supply is going up twice or three times as fast as GDP. Where does all this money go? Liquidity, like rainwater, has got to go somewhere. What has been going up two to three times faster than GDP? House prices! In other words, the supposed extra “wealth” that Americans enjoy is not real wealth at all. It’s just inflated asset prices. Too bad monetary officials didn’t inflate at 20% per year, or 100%. Perhaps they might have taken a page from the Argentines in the ’80s or the Weimar central bankers of the ’20s; they might have just recalled all existing dollars and added three or four more zeros. Think how rich we’d be then!
No, dear reader, it is not that simple. You can’t get rich just by printing money, and you can’t get rich by going into debt. The deeper you are in debt, the more exposed you are to ad-ver-si-ty. Just a small tide of setbacks and you are underwater completely. Even a hedge fund run by Nobel Prize winners — Long Term Capital Management — was drowned like a kitten after its managers took on too much debt. All of their studies told them that Russian bonds would come back to a normal trading range — and they were right. The bonds did regress to the mean, but the poor geniuses at LTCM couldn’t wait. They had borrowed too much money.
Most households are not run by geniuses; ordinary people with a limited line of credit run them. The typical family spends what it earns — and then some. It is already up to its neck in debt.
On Tuesday, the Fed raised its key rate by 0.25%. The water is rising.
Bill Bonner, with more thoughts, reflections, and ironic laughter…
u2022 “‘I’ve been coming to this conference for 15 years,’ a suave looking gentlemen whispered into a cell phone,” writes Addison, reporting from the Grant’s Spring Conference at the St. Regis Hotel in NYC. “We were on the 20th floor of the hotel overlooking Central Park, gazing at Tavern on the Green, the Dakota building looming in the distance.”
“‘Normally there are only about 100 people here,’ the gentleman continued, ‘but now you can hardly get a seat. There’s standing room only!’ He let out a generous guffaw. Perhaps they’re all here to see former Fed Chairman Paul Volcker take a poke at Ben Bernanke. Perhaps, Jim Grant’s tongue-in-cheek contrarianism is coming into vogue. In any case, there are a lot of well-healed iconoclasts — investment bankers, money managers, hedge fund guys — at this conference discussing some fairly aggressive strategies for making money in the world today.”
u2022 You can make a lot of money by watching what bankers are doing — just remember to do the opposite. In the 1980s, Texas banks poured money into the Houston oil economy. We remember reading stories of wildcat lenders drinking champagne from cowboy boots. Of course, then the price of oil collapsed and weeds grew up in the new housing developments. And who were the lenders to the Third World, just before the debt sold down to pennies on the dollar? Bankers only missed the Tech Bubble through no fault of their own. The scrappy young dot.com hustlers found that they could get even more money out of the gullible public and on easier terms — they didn’t even have to pay interest!
But at just the moment the Tech Bubble reached its zenith, Britain’s central bankers and its chancellor found a way to make up for lost time. All over the world, economies were in the middle of the biggest explosion of money and credit of all time. Central banks were greasing up their printing presses, trying to keep up with the stacks of dollars arriving in their vaults. And gold — that age-old antidote to financial trouble — had been going down for 20 years. Was there ever a worse time to sell it? We can’t think of one. Yet, the Brits unloaded much of their remaining stock of the yellow metal, getting about $6 billion in return. If they’d waited until yesterday, they would have gotten twice as much. But that is history. What about the future? What are the banks doing now? What can we learn that might be useful?
Paul Kasriel, at Northern Trust, tells us the obvious: that U.S. commercial banks have record exposure to mortgage debt. In 1985, the mortgage market represented only 30% of their assets. Now, it is 62%. Not only that, much of their other lending is indirectly linked to mortgages. They lend to hedge funds, for example, that use the money to buy mortgages. If push comes to shove, says Kasriel, the banks will lose in two ways — their mortgages will go bad and the hedge funds will default.
The median new buyer in 2005 put down only 2%. More than 40% put down nothing at all. How will these people respond to adversity? Will they not just walk away? Most defaults occur in the third or fourth year of a mortgage, we learned today. Half of all outstanding mortgages are in their third or fourth year now. The default rate is rising. The bankers, in other words, stand in the same deep pool of debt as their customers. Everywhere, the water is rising…to their chins.
We, dear reader, want to make sure that we are on solid ground — on the bank…with a picnic lunch and a bottle of wine.
u2022 The bodies pile up with the ironies. You’ll recall the chatter after 9/11. “Irony is dead,” said the numbskulls. Then the situation was crystal clear — at least to them. The good guys wore white hats. And then, the good guys announced a very peculiar “War on Terror,” which is to say, a war against nobody in particular. They put on their combat helmets and attacked Iraq, which was nobody in particular, and had no truck with terrorism at all.
After subduing the country, the Iraqis went to the polls, held up their purple fingers, and then began killing each other. According to today’s International Herald Tribune, the people doing most of the killing — the biggest terrorists in Iraq — are the Shiite militias, sponsored, supported, or condoned by America’s own puppet government. That is the source of the trouble between the U.S. Empire and its new vassal state. The U.S. Empire’s much advertised “War on Terror” puts it at odds with its equally advertised “Democracy For Mesopotamia” project. We don’t know God’s Own Plan. We don’t know how it will turn out, but “not well” is probably the best way to bet.
u2022 “Not well” is probably also the best way to bet on the outcome of the France’s current troubles. There too, we are witnessing history aroused from her slumber and ready to kick butt.
What we are seeing is an illustration of what happens to institutions — even modern democracy. In theory, democracy is the end of history. People can vote for needed reforms. They can “throw the bums out.” So, there is no longer the need for revolutions to topple unyielding, self-serving governments.
But, that’s not the way it works. As an institution ages, more and more people find a way to take advantage of it — to game the system. These people have no interest in disturbing the status quo. Indeed, they put themselves in positions of power and find ways to prevent change: by controlling the media, the election process, gerrymandering districts, and so forth. When you read the newspaper, for example, you are not reading “what really happened.” You are seeing what happened as interpreted by a particular class of people, with a particular background, and a particular dog in the race. Practically every headline and every editorial reflects the unconscious bias of the existing institution and its supporters.
Just as it is almost impossible to defeat a member of Congress, so is it almost impossible to reform a system in which so many people have an active interest. That is what the French are discovering. They’ve made life cushy for the controlling classes, and paid off the lower classes with bribes. Young, aggressive, entrepreneurial French people often leave the country; there are more than 100,000 of them in London alone. What is left — people who don’t want to change the system; they want to be a part of it. A poll reported yesterday, shows that three out of four young French people want to work for the government.
Everything decays, degrades, degenerates, and ultimately dies, dear reader — even modern democracy and modern capitalism. We are sorry to have to tell you, but what kind of world would it be if they didn’t?
u2022 Yes, it was inevitable. Globalization is beginning to take small bites out of industries previously thought inedible. We’re talking about education and health care. People go to Rio or Mexico for cosmetic surgery, we are told. They may even go to India for a heart operation. The English slip across the English Channel to take advantage of free medical care — of high quality, too — in France. And now comes news, in London’s Sunday Times, that the English are sending their children to private schools abroad in order to save money. We have friends who send their son to Winchester School in Britain. The tuition, they tell us, is about $40,000 per year. The average British boarding school, according to the Times, now costs about $30,000 a year. The International School in Bangalore, by contrast, only costs about $15,000 per year. Hilton College in South Africa charges about $17,000.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.