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We Owe It to Ourselves

The Dow is going to 12,000, according to the latest cover story in Barron’s, the leading investment daily. That’s what the “portfolio chiefs” say in its latest “Big Money Poll.” What a shocker. People who make a living on Wall Street think stocks are going up. Have they ever thought they were going down? Not in our memory.

And here in London, columnist Irwin Stelzer has a bout of hallucination in the Sunday Times. “The normal nervousness of investors and market watchers has been converted into paranoia,” he claims, when in fact all the news is good. What are investors worried about, he wants to know. Why is gold going up?

The happiness mongers are out in full force. Something must be amiss.

Unlike them, we don’t claim to know better than anyone else what the future will bring. Instead, we look to the present and try to see what it has brought already. And, what we see is a public as short on worry as it is on cash. And that, dear reader, is precisely why the economic news is so good, because consumers are spending their fool heads off. People are still buying houses, as Mr. Stelzer points out. The GDP is still increasing.

Why? Because people are spending money they haven’t earned yet. Worried people don’t do that.

Meanwhile, debt levels are soaring. Bankruptcies are increasing. Inventories of unsold houses are mounting. Even the pawnbrokers report that business is picking up briskly.

We have to wonder whether Mr. Stelzer will turn out to be like the young ship’s officer on the Titanic, who commented — after it hit an iceberg — on how he thought the orchestra never played better. He had not bothered to look below decks.

Naturally, the dollar is sinking. The U.S. deficit has now reached 7% of GDP, but that is just more good news in Mr. Stelzer’s book. It “will correct the imbalances gradually,” he predicts…as if he knew. As the dollar sinks, the price of oil rises and so do consumers’ costs. Even at today’s prices, according to the Times writer, gasoline is not as expensive, in real terms, as it was three decades ago. Well, that’s a comfort. The poor homeowner can barely make ends meet as it is. Imagine what a fix he will be in when the price of oil goes higher.

Even Thomas Friedman at the New York Times thinks the biggest challenge facing the United States today is oil, but the black goo is way too slippery for a writer as slow and clumsy as Friedman.

As the Times’ leading columnist, the man has achieved fame and fortune not merely beyond his merits, but so much beyond belief that it is as if a draft animal had won the Nobel Prize in physics. True to form, in his column today he gets so tangled up in his loopy ideas, he practically strangles himself.

On the one hand, he points out that high oil prices enrich evil regimes around the world. On the other hand, high energy prices help reduce demand for oil in America, which should lower prices. And then, poor Friedman runs out of hands.

Giving up on analysis, he switches to political action! He proposes a new political party, “something like the ‘American Renewal Party,’ that would focus on energy policy as its key platform position:

“My gut says [Friedman listens attentively to the gurgling of his own repulsive body parts] that some politician…will take a flier on telling Americans the truth [maybe his gut never met a politician…he should have gone to the very bottom of the GI track].”

What truth does the columnist long to hear? Alas, here is where the cords of reason begin to cut into his own cushy neck:

“The only way Americans are ever going to enjoy relatively cheap gasoline again is if we raise the price…and fix it at that higher level…so investors know it is not coming down.”

That should do it, dear reader. Oh, we do hope the American Renewal Party gets up and running. What fun it will be to see what these clowns do next!

Two days ago, the dollar sank to its lowest level against the euro in almost a year. Gold rose…up $1.30 on June contracts.

At this point, we anticipate a correction in the price of gold, but not a correction in the silly opinions of the happiness mongers. That will take a gold price well over $1,000 an ounce.

u2022 The Harvard Political Review, er, reviewed Empire of Debt. Here are the money paragraphs:

“Although Bonner and Wiggin raise very serious concerns in their description of America ‘s indebted society, their argumentation is often overly simplistic. Federal debts are now the highest they have ever been, but as a percentage of GDP debt levels are at a relatively modest 40 percent. During the economic boom after World War II, an era that the authors laud as one of the peaks of American economic power, the debt-to-GDP ratio reached 109 percent. Growth rates are of course much lower than those of developing countries, but considering the per-capita incomes they are starting from — eight times less in China than in the United States — this comes as no surprise. “Moreover, much of the current account deficit is comprised of cheap, easy-to-produce imports such as textiles and toys; America still hold an edge over most countries in the production of technologically sophisticated goods, and it is ultimately technology that fuels productivity growth, not how much a nation can cut its costs. These criticisms are symptomatic of the authors’ general tendency to oversimplify vastly complicated economic issues, many of which are still hotly debated in economic circles today.

“The fact is, there is a reason that trained economists and financiers are not running for cover and, contrary to the contention that they have all been deluded by the trappings of the American empire, it is much more reasonable to believe that such a catastrophe is neither imminent nor will it be as disastrous as Bonner and Wiggin claim. Empire of Debt fails to tackle the complexities of the economy and consequently presents a misleading picture of the actual state of affairs.

“In the end, the authors take an excessively alarmist stance that is founded on an irrational fear of debt. The best reason to read this book is for the interesting historical anecdotes, not as an introduction to macroeconomics.”

Forgive us, dear reader, for being overly simplistic, but we do have hard time imagining how this economy, global or otherwise, will yield enough revenue to help the United States finance its current $44 trillion in obligations.

Of course, we never claimed to be “trained economists.” That is the purview of muckity-mucks at Harvard. In Empire of Debt we trace the DNA of the idea that “deficits don’t matter” straight back to a team of “7 Harvard and Tufts Economists.” In 1937, they advised FDR: “It’s a public debt…we owe it to ourselves…therefore we never have to pay it back.”

We wonder what the Chinese, Indians, South Koreans, Russians, or Swedes think of such brilliance? Oh, that’s right, they’ve already told us.

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.