Snow Job

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.


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