By Bill Bonner /
David Fuller is right. What we are really watching is the decline of
the United States of America...its currency...its capital base...and
its competitiveness in the world economy.
The feds can try to play out more lines of credit to strapped
families, but what they are really doing is giving them more rope with
which to hang themselves. The real problem is that American wages have
not kept pace with inflation...which means, the average American is
not as rich as he used to be. He can only pretend to be rich...by
exchanging more of his leisure time for dollars...and by borrowing.
Both of those "coping mechanisms," as Robert Reich called them, are
now exhausted. Now, he's going to swing.
Over the last 30 years, Americans believed they were on top of the
world. Everybody said so. And, logically, they should have been. It
was post Reagan Revolution, with the most modern, most capitalistic
economy in the world...with the latest technology, with the world's
best brains, with the top schools, and with Wall Street to "allocate
capital" in the best possible way. If workers couldn't get ahead in
this economy, they couldn't get ahead anywhere. At least, that was
what people believed.
But capitalism is a jungle, we keep saying, not a zoo. It lets animals
get fat, but only so they can be eaten by hungrier beasts.
To us here at The Daily Reckoning , it was fun listening to the
conceits and pretensions of the zookeepers. At the end of the '80s,
they announced their triumph over communism, apparently unaware that
their biggest potential rivals had just cut themselves loose from a
ball and chain. It is not even 20 years later, and both Russia and
China are already formidable competitors. China's reserves of foreign
currency, for example, are nearly 20 times those of the USA. And now,
if the Red Giant decides to dump dollars, America's economy will be
hit by a major crisis...and possibly paralyzed.
Then, near the end of the '90s, the dreamers thought they had found
some magic formula. America no longer needs savings, said the pundits,
because now our information technology allows us to create wealth
using 'virtual' capital...brain capital. "They sweat; we think," said
one genius, as if the Chinese and Russians couldn't think too. If this
insight weren't hilarious enough, Ed Yardeni went on to say that there
was a whole new species of human - those who understood this im****tant
new truth...those who "got it." Those who "didn't get it," were
destined to be left in the dust, he said. We were happy to remain in
the camp that was left behind.
Later, after the dotcoms blew up, another hallucination developed. One
that sophisticated financial engineering, combined with enlightened
macroeconomic management, had made market crashes and recessions
obsolete. The geniuses went to work with computers, proving that those
fancy derivative contracts (which they were selling) were completely
foolproof. They were supposed to run into problems only once in a blue
moon. "You're talking about sigma 25 events," they said, as if they
had a clue. Scarcely three years later, the moon was blue.
It was all great fun. Watching the show, that is. And it's not over.
Yesterday, the Dow rose more than 200 points. Richard Russell, the
keeper of Dow Theory flame, says the stock market is no longer
pointing to deflation...but to inflation.
Of course, the price of gold has been pointing to inflation for a long
time. It rose again yesterday - up to nearly $930. In Europe, too,
inflation is making headlines - it's at a 14-year high. Many people in
France, for example, think the euro (EUR) was a plot to increase
prices; they want the franc back. Painted on the wall of a Paris
building yesterday, we saw the citoyens' complaint: "Euro****ma" it
said.
And consumer inflation in China, at nearly 7%, is said to be "China's
latest ex****t."
But we are not writing today about the war between inflation and
deflation. Today, we're focusing our attention on a bigger story.
*** The headlines rarely tell you much about what is really happening.
They are like dispatches from the front. Inflation scored a victory in
the oil market. Deflation advanced on the retail stocks. One company
got killed. One trader blew himself up. A trendline broke through
resistance.
Behind these news stories is the story so big that scarcely anyone
notices it. The United States is losing ground. Its people are getting
poorer. Why? Because now, it's America that drags around the ball and
chain.
How much do Russia and China owe the rest of the world? How big are
their trade deficits? How many trillions have they promised their
retirees? Their sick? Their former employees? How high are their
taxes? How much do their people save?
On almost every score, the former communist hellholes have a huge
advantage over their North American competitor. The Chinese save
nearly 50% of their incomes; Americans save nothing. Russian tax rates
are less than half those of the United States. Both have positive
trade balances. Even in high tech, America has a negative trade
balance with the rest of the world.
Like Europe, America is chained to an aging population and democracy.
Both are bad for business. The baby boomers are beginning to retire.
They've already been promised the sun and the moon... And, once
they're retired, they're going to vote for the stars too.
That's why Republican strategists are telling their candidates: No
more tax cuts! The voters want to be sure there's money available for
them when they retire.
A little late for that. The government didn't really set aside money
in a 'lock box,' as Al Gore used to put it, for Americans' retirement.
It just took the money out of the general fund and put an I.O.U. in
the retirement fund. Now, those I.O.U.s are coming due. And what
politician is going to stand up to the biggest block of voters in the
country and suggest that they be cut back?
And unlike Europe, America has low savings rates...a negative trade
balance with the rest of the world, and few industries that can stand
the challenge of competition. Germany is still making cars at a
profit; the United States is not. France has its luxury products.
Switzerland has its precision tools.
In addition to the social charges, there is the big, leaden ball of
military expenses. The U.S. military budget is half of the entire
world's military spending, and represents 80% of the increase in world
military spending since 2005. The whole point of having such a big
military is to be able to push people around. But you have to make it
pay. Empires traditionally demanded tribute from the peoples they
conquered and/or protected. But the U.S. never got the hang of it. It
maintains garrisons of troops all over the world - at its own expense.
It thinks it is doing the world a favor; and it thinks it is rich
enough to afford it.
The biggest U.S. outposts are in Afghanistan and Iraq, which aren't
even in the military budget. When the war in Iraq began, we estimated
that it would end up costing a trillion dollars. And now that the
numbers are coming in, we have to admit that we were wrong. Instead of
$1 trillion, the Congressional Budget Office estimates that the war
will cost $1.7 trillion; the National Bureau of Economic Research puts
the tab at $2.2 trillion; and the Congressional Joint Economic
Committee thinks it will come to $3.5 trillion.
A trillion here...a trillion there...pretty soon, you're out of
money.
As we point out above, the United States is in danger. But the danger
cometh not from a bear market in stocks or a recession. Those things
are normal, natural and inevitable. Even if you could prevent them by
sending people money...you wouldn't want to. You'd just be making the
situation worse.
Americans' problem is that they've spent too much, borrowed too much,
and saved too little. That problem will not go away. It needs to be
corrected.
*** "That guy they nabbed in the Societe Generale scandal. He's just a
fall guy," explained a friend yesterday. "A sacrificial lamb. They
made a deal with him to cover up the bank's losses elsewhere. At
least, that's the rumor going around town. And it's probably true. You
can't believe anything the banks say. "
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