Joining the Near-Poor

"More Americans join pool of u2018near poor,’" runs a headline in today’s International Herald Tribune:

Over the weekend, Warren Buffet provided the evidence. He said that when he looked through the financial statements of lending companies he noticed that the entry for "interest accrued but not paid" was rising. What this means, he explained, was that people were having a hard time servicing their debt. And worse yet, the real estate casino on which they were depending, is cooling off. Toll Bros., one of the nation’s largest homebuilders, says new orders fell 33% so far in the second quarter.

And so, we return to a familiar theme, but one not quite exhausted: savings are available to serve you; debt is always your master.

"The debtor is slave to the lender," says the Bible.

Dear readers may wonder whom we are arguing with…or what question we are answering. It is an obvious one; you may want to neither borrower nor lender be, but if you have to make a choice, it is better to be owed than to owe.

That is the big difference between a trade deficit and a trade surplus. In the former, you gradually become a slave to your trading partners. The larger the deficits, the more you tend to owe them. In the latter, they gradually become slaves to you. That is what is happening with the Chinese and Japanese. They have now become our creditors; they can enjoy income from their U.S. paper while we struggle to keep up with the debt.

But who will turn out to be the greater fool, the one who buys what he can’t afford, or the one who lends what won’t be repaid?

Americans, consciously or unconsciously, are betting on inflation. They are hoping their favorite swindlers at the central bank will continue to engineer a gradual devaluation of the dollar so as to ruin their creditors rather than themselves. The dollar lost half its value during the Greenspan years alone. And now, the Bush administration is adding more debt than all the other administrations in U.S. history combined. Inflation looks like a sure bet…a "done deal."

Commodities are rising. Health care, education, housing, energy — everything measured in dollars that the Asians can’t produce and Wal-Mart can’t put on its shelves, is soaring. Gold is rocketing. Gold is outperforming stocks, commodities, bonds, the euro, housing — everything.

How nice it would be if the empire’s creditors would go gently into that good night! They must read the papers. They must see the dollar going down and gold going up. Imagine yourself in the same situation; wouldn’t you be tempted to shuck some of that green paper in favor of the yellow metal? Wouldn’t you want to protect yourself?

But, according to lumpen-American economic theory, the creditors just stand there, stock-still, while the big inflation bus runs over them. Not only do they not sell their U.S. bonds and dump their U.S. dollars, they continue adding to their inventory, like collectors of Cabbage Patch dolls long after the fad has moved on.

God bless u2018em. But we doubt the lenders are quite as dumb as the borrowers believe. In fact, there could come a time — any minute, in fact — when the lenders wise up. The dollar could end its gentle decline…and drop like a stone. Then, the lending would cease, too. The U.S. economy would come to a halt, and all those people who are finding it difficult to keep up with their interest payments would suddenly find it impossible. The defaults and bankruptcies would multiply. American debt may be wiped out by inflation, but Americans will probably be wiped out first.

u2022 Up, up, and away…gold jumps over $700, a price not seen in 25 years.

Iran’s refusual to back down from their nuclear program, inflation worries, and a weaker dollar have all influenced this rise in price, as investors often turn to the yellow metal in times of uncertainty.

Our friends in the Far East are helping boost gold’s price as well, as its been reported that economists urged China to quadruple its gold reserves to 2,500 tonnes from the current 600 tonnes because its foreign exchange reserves had become the world’s largest.

Reuters reports: "James Moore, analyst with TheBullionDesk, said that a break above $700 in bullion was likely to generate fresh momentum as investors and speculators build on their bullish positions.

“u2018While the charts suggest the metal is overbought, the scale of buying flowing into the market seems set to drive prices ever higher with the metal’s $850 all-time high now a realistic target.’"

u2022 We are in a late stage of empire…when pandering to the masses has degraded many of our most important institutions. Congress faces the biggest challenges of our time — war and bankruptcy — like a jackass staring at a computer screen. The dumb beast knows something is going on, but he is incapable of figuring it out. Do voters "throw the bums out?" Not at all. They re-elect them more often than ever before.

And over in the private sector, corporate managers live it up at shareholders’ expense, and no one seems to notice. Lee Raymond, former chairman of Exxon Mobil, was paid $686 million over 12 years — an amount equal to $144,573 per day. What did he do that was so valuable it couldn’t have been done by some other clock-puncher at 1/100th of the price? No one knows.

Or take William McGuire, former CEO of UnitedHealth Group. The man took shareholders for $1.6 billion during his stay in the executive office.

At this stage of decay, the masses cannot tell a decent politician from an ordinary one; nor control the pay of their own hired hands.

u2022 Et tu, Stephen?

We think the end is nigh, because Stephen Roach, who can usually be depended upon for a view of the world economy as gloomy as our own, has suddenly brightened up. What happened to him? Some kind of brain event? Something new in the water? We don’t know, but now that the last bear has capitulated, the collapse can begin.

"World on the Mend," is the title of his recent essay. In it, he explains why the world is not going to hell in a handcart after all. "I am feeling better about the prognosis for the world economy for the first time in ages," he writes. "No, I am not prepared to give an unbalanced world the green light. But it’s time to give credit where credit is due: First, to globalization for holding down inflation. Second, to central banks for collectively embarking on policy normalization campaigns."

Roach sums up by saying, "I am delighted that the global economy finally seems to be taking its medicine. Let’s hope the cure works."

What is this medicine the world is taking? What is this miracle elixir that cures debt and deficits? What panacea has been developed in the secret laboratories underneath the Fed’s headquarters in Washington? How does it heal the sick trade imbalances and wipe away the ugly debt that blemishes the poor in America’s suburban ghettos?

Roach does not exactly say. We presume he refers to rate increases in the United States and the lack of rate increases in Europe. Now, he claims, "the world is going to collectively alter its game plan and respond…to the problems."

Oh, of course. That explains it.

Apparently, Mr. Roach has much more faith in public officials and public policy than we do.

We always turn back to the fundamentals…back to the essentials…back to basics. When a debt is run up, it must be paid off — by someone, somehow, sometime.

Sinning is more fun than repenting. A boom is more fun than a bust. Paying off a debt is likely to be less pleasant than contracting it.

Against those verities we have Mr. Roach’s newly found faith that the managers, manipulators, kibbitzers and regulatory parasites. The world’s central banks have found a way to coordinate their policies so as to "rebalance" the planet’s financial system and sustain its balmy growth indefinitely. Even if the Morgan Stanley economist had come to believe it, our guess is that he’ll regret having said anything.

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.