Paying Federal Deficits

Paying Federal Deficits: Looking Out for the Larvae
by Bill Bonner
The Daily Reckoning
 London, England 
Friday, December 2, 2005

Bill Bonner discusses how our current generation gives short shrift to the wisdom of the dead and stiffs the unborn, particularly with regard to Paying Federal Deficits.

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We are on the train to Paris this morning. Our thoughts rumble along the tracks along with the rolling stock.

"Fish gotta swim; birds gotta fly…and people who run empires gotta act like damned fools."

We were explaining to the editor of MoneyWeek magazine, yesterday, how the United States (and Britain) got themselves into the Iraq mess and how the United States got itself into more than $50 trillion worth of government and consumer debt…and how, in general, the world works.

It's not that anyone is doing anything "wrong" necessarily, or even particularly stupid, they are just doing what they have to do to play their roles. Our job here at The Daily Reckoning is not to pass judgment nor offer advice, but merely to try to understand the plot and guess about what happens next.

It always surprises us when reporters ask - yes, the mainstream media does occasionally ask our opinion - "what should Greenspan do?" or "How can a correction be avoided?"

"Well, " we reply, "nothing. There is nothing that can be done."

Let us imagine that you were alive at the time of Adolph Hitler. And let us suppose that a reporter had asked you: "What should the Fuhrer do?" The answer would have been obvious:  "Take off that silly uniform, lay off the Jews, and mind your own business."  But it would have been completely gratuitous, too. Adolf had to be Adolf. He couldn't be Michael or Ibrahim. 

In public affairs, prescription is largely a waste of time. It's a distraction. You begin to spend your time wondering about the way things should be, and then you start to see things the way you would like them to be, rather than the way they really are.

"Don't you believe in free will," asked a friend recently. Are we not masters of our own souls, and captains of our own fate? No…not really. But whom can we blame but ourselves? In private, it's probably best to think you are responsible for what happens to you. But in public? Are you responsible for what the Bush administration does or for what happens to the global economy? Could you do anything about them? Could anyone?  Mass man is an imbecile…there's no use trying to tell him anything. You might just as well lecture ground squirrels on their table manners.

No, dear reader, we are much better off merely trying to figure out what mass man, and his leaders, are up to, and worrying about our own destinies…rather than those of the empire.

Well, what is going on, really? Well, we don't know. We have to look through our glass darkly, along with everyone else. What we see is a great empire rolling over. 

But wait - we know what you're thinking. This great empire didn't start rolling over yesterday. And even if we're right about it, you can still make a lot of money. So, forget the big picture stuff, just tell us what to buy.

Our guess is that the turning point came in the 1970s. That was when America's trade balance turned negative. It was also when the dollar was finally cut loose from gold, and when globalization really began to change the world. Since the early '70s, real hourly wages - in terms of spending power - have gone nowhere. More recently, they have been going down. 

Nevertheless, there was a huge stock market bull in 'the '80s and '90s - one that still has not corrected. Then, came a huge bull market in real estate. Had you invested in stocks in 1980, sold in 2000, and put all your money into San Diego real estate…well, whew! The rollover of the great Anglo-Saxon empire can be damned - you've done quite well.

So, how can you be sitting pretty 20 years from now - assuming we're still alive - despite the decline of the empire? We're not smart enough, nor not fool enough, to think we know. But we can make a guess as well as anyone.

Stocks, bonds, and property - in America and most of the Anglo-Saxon world - are living on borrowed money and borrowed time. Fish gotta swim; birds gotta fly…and bull markets gotta turn into bear markets. About stocks, for example, we just offer more evidence of how expensive they are, and how fraudulent the figures have become. "Next year could …be the year that the U.S. stockmarket finally succumbs to the bear," writes Philip Coggan in the FT. Stocks have been buoyed up by good earnings numbers, he says. But the numbers lie. Companies count as profit the "assumed" rate of return on their pension fund assets, he explains, regardless of what the real numbers are. This has had the effect of inflating profit figures by about 20% on the S&P 500.

On the other hand, bear markets gotta turn into bull markets, too. That is half the reason gold has doubled in the last five years, and now hovers near where it was when Alan Greenspan first sat down in the cushiest chair at the Fed. Gold was due for a bull market; it had gone down for the previous 20 years. But the second reason is more intriguing, and even more promising.

Alan Greenspan may say: "Gold is where it was when I arrived at the Fed. There. I've done my duty. I've left the empire's finances as I found them." But it is not so. By almost any measure, the nation's finances are in far worse shape today than they were in 1987.

Americans owe far more money to far more people than they did then.  They have bigger houses, newer cars, and more electronic gadgets. But they have more bills to pay and no more money to pay them with. One small fact:  the U.S. government has borrowed more money from foreigners in the last eight years than all previous administrations since the time of Washington. 

That is why gold has gotta go up some more.

More news from Aussie Joel and The Rude Awakening…

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Dan Denning, reporting from Down Under…that's right, Australia:

"Gold, Gold, Gold…Crashing through the $500 mark, the yellow metal is looking robust, healthy and promising. Here are some reasons for the metal's sure footing…

The Rude Awakening

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Bill Bonner, back on his train between London and Paris, with more thoughts…

*** Gold hopped up to $504 this morning. Given the renewed interest in gold, Chuck Butler and his trading partners at Everbank have elected to keep their Bullion C.D. open until December 16, 2005. That's two weeks from today. This is a great way to tie your savings to the rising price of gold,

Everbank's Bullion C.D.

*** Aside from gold, where can you find investments that are likely to be winners in the next 10 years?

How about an economy that is growing twice as fast as the United States and three times as fast as Britain? How about one with more consumers than both Britain and America put together?

But this is not just another credit-juiced consumer economy waiting to fall apart. This is a place that makes things at competitive rates, whose manufacturing sector grew by 7.3% in 2004.

We're talking about India, of course. We don't know anything about the place; we've never been there, but we have in our hands a report prepared by the editors of MoneyWeek that makes us think we should learn more about it. If the world is rolling over on the Anglo-Saxon empire, what is rolling up the other side? China, from all we have read, is a centrally controlled economy, far too dependent on American consumers.  We've heard of people putting money into China; we've never heard of anyone getting it out. India, on the other hand, at least has a legal system that we're familiar with - one that imitates Britain's. It's not that you can expect any more justice in India than in China, but at least you know what injustice to expect. 

Unlike the United States, India's wages are growing along with the economy. Yes, there are millions of desperately poor people, but there are also millions of people who are desperately rich. They have money, and they're earning more every year. What they don't have is all the trappings of modern consumer society. New cars are selling at the rate of 100,000 per month. New mobile phones are flying off the shelf at the rate of two million per month. You name it; sales are sprouting wings.

People are educated, and willing to work. An ad placed by Google for its office in Bangalore drew 100,000 applicants. 

How do you invest in India? The report suggests buying stock in one of the country's leading banks. Only one in 50 people in India have a credit card. The potential for growth is huge, but the stock sells for only seven times next year's earnings. Again, this is not a recommendation. We don't know enough about it to make a recommendation, but it sounds as though it is worth looking into.

MoneyWeek's report on India was written for British investors. DR readers might find this latest research briefing from Agora Financial useful:

India's $200 Billion Secret

*** "The gap between those at the bottom and those at the top is growing," says the Economist. The bosses keep increasing their compensation; the working stiffs cannot. The ratio between CEO pay and production-worker pay has risen to 431.

Here too, people will ask: "what can be done?" Since there are more production-worker voters than CEO voters, legislation is likely to result - raising taxes on the rich, while raising minimum wages for the poor. This democratic impulse, however, will be dulled somewhat by the needs of party hacks to solicit campaign contributions from CEOs. They pay attention to CEOs for the same reason that Willie Horton gave for robbing banks: that's where the money is.

Here at The Daily Reckoning we ask not what can be done for your country, but what you can do to protect yourself.

The solutions are obvious. First, sell stock in companies that over-pay their CEOs. We say that not as a prole, but as a CEO ourselves. We've been at the head of a minor corporation for the last 30 years; we know we're easily replaced.

Second, do not be a production worker. There's no money in it…and no future. There are millions of people in Asia ready to do the same work for much less money. Get a job in management. Then, take advantage of the lame-brained shareholders yourself. 

*** A reader writes:

"Dear Sirs,

"If 'Empire of Debt' is in competition with Oprah's book club…why don't you also send a copy to Oprah for review?  Perhaps she'll put it on her list, millions of lumps will read it because its on the list; perhaps she'll discuss it on her show…even invite you all to discuss it with her. Okay, so maybe being on Oprah isn't your wildest dream but you might have a better shot at getting her to pay attention, and through her get the country to pay attention, than congress - sad to say but true. Either way, it is worth a shot.

"With admiration I am,

"Sincerely,

"Mickie B. Whitley
Brooklyn, NY"

Mickie, we're on it.

Of course, we expect to get about as much reaction from Oprah as we got from the Senator on the Senate Finance Committee, yesterday. But who knows? Maybe Oprah is due to discover she's a closest Essentialist.

Stayed tuned…

*** The word essentialism has been used to describe other crackpot strains of philosophy. But no one has a good grip on it, so we took it for ourselves. Although it is a creed derived from studying the markets, it applies to the rest of life.

To help further the study of essentialism, we have updated the Essentialist Glossary. Now it's hosted on the Daily Reckoning web site for free.

Here's one of our favorite entries:

Unified Theory of Greed (UTG): The insight that we are all greedy SOBs, but the real SOB is the guy whose greed - whether for power, money, or love - is not held in check by his wife, the market, or the law.

For new entries to the Essentialist Glossary, look here:

Essentialist Glossary 

*** The book also received these mainstream mentions yesterday:

Empire Falls - SmartMoney.com

Repeating History - Dow Jones' MarketWatch.com

*** And…if you missed it yesterday, Addison reopened the Agora Financial Reserve for Platinum memberships December 1st through January 1st, 2006. If you like the research and investment ideas we publish, you cannot get a better deal than the Platinum Reserve. I recommend you take a look

Agora Financial Reserve Platinum Membership - discounted until Jan.1, 2006

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The Daily Reckoning PRESENTS: What must bother the dead more than being ignored is the ingratitude of the living. The hard lessons were passed along as an heirloom, but instead of displaying them on the mantle, along with photos of the departed ancestors, they were shoved into a forgotten drawer. More musings from our own Bill Bonner, on the value of dead people.

LOOKING OUT FOR THE LARVAE
By Bill Bonner

We have not been timid about pleading the old man's case. He has spent a lifetime learning how things work, and now, he is ignored. He has committed the seven deadly sins…the classic ones, and a few more he invented. He has seen the result, but does any young whippersnapper ask his advice? No. Every callow sprig wants to make the same errors. Gluttony…avarice…pride. He feels he has a right to them. He envies those richer than himself, and covets his neighbor's wife…as well as his new BMW. "There is no use telling him anything," says the geezer to himself, "He won't listen." 

How many times has the old man burned his fingers? He is not twice shy, but four or eight times shy. There's a lesson in there worth knowing, but the young man next door sticks his fingers into every socket, stove, and toaster-oven he can find. So has the old farmer reaped as he sowed; he could tell the young a thing about planting things: "You gotta be careful about what you put in the ground," he says to himself. But who asks?

And so, the old investor did 'buy high' on more than one occasion. "No, that's not the way to do it!" He is dying for the opportunity to tell someone. "The way to do it is to buy low, then sell high." Still, his sons and daughters buy Google at more than 50 times earnings, and are proud of themselves for doing it.

Paying Federal Deficits: The Dead Are Buried

We have made the point before. The old are ignored. The dead are buried. No stockbrokers ask for their custom. No pollsters ask their opinions. No politicians are so desperate for votes that they plead for them in cemeteries. More's the pity, but that's just the way things are. Each generation has to learn its essential lessons the hard way.

What must bother the dead more than being ignored is the ingratitude of the living. The hard lessons were passed along as an heirloom, but instead of displaying them on the mantle, along with photos of the departed ancestors, they were shoved into a forgotten drawer. They were not even admired, let alone honored. What get put on display are the family silver, the wealth, and the patrimony that one generation leaves to another. You'd think the living would at least be grateful for that.

But no, they hardly notice.

They take six thousand years of accumulated progress and wealth for granted, as if they had figured it all out for themselves. Granted, the present generation invented the Internet, but only because generations in front of them had figured out how to generate electricity, rig up phone lines, work copper and plastics - and a million other things. As Sir Isaac Newton put it, he was able to see things that others had not, because, "he stood on the shoulders of giants," who came before him. And yet, the living act as though they had not only created the whole thing from scratch, but invented sex, too!

paying Federal Deficits: Stiffing the Generations To Come

But we write today neither to blame the quick, nor to thank the dead. Instead, we write on behalf of a group that is neither quick nor dead: the group that has not yet been born yet.  Today's leading generation not only ignores the stiffs that came before it; it stiffs the larval generations to follow.

In a letter to James Madison, Thomas Jefferson asked how, "one generation of men has a right to bind another." He concluded by saying, "No generation can contract debts greater than may be paid during the course of its own existence."

But contracting debts greater than may be paid during the course of its own existence is precisely what Americans are doing. In fact, they are contracting debts that increase over the course of their own lifetimes. 

George W. Bush will go down in history not as a great war president, we recall predicting earlier this week, but as the greatest debt-beat president the country has ever had. In his few years in office, the feds have borrowed more than $1.05 trillion from foreign governments and banks. This is more than all the rest of the nation's administrations put together, from 1776 to 2000. 

Last month, the U.S. national debt passed the $8 trillion mark. This year's budget deficit alone added $319 billion to the country's obligations. According to the feds themselves, deficits will rise to $873 billion per year within 10 years. Two years more and they will be at $1 trillion per year, with a national debt edging up to $20 trillion. By 2017, annual deficits are supposed to reach $2 trillion per year.

These figures are not just guesses. They're projections based on boondoggle laws already on the books. 

According to the Bush-friendly Heritage Foundation, federal deficits are expected to rise to $1 trillion per year, by the year 2017, with a $16 trillion national debt, twice today's level. After that, deficits should grow to $2 trillion per year,

Public debt is a remarkable thing. Through generation after generation, over thousands of years, each one usually left the world a little bit better off than it found it. More land was placed under cultivation; more animals were tamed and corralled; more houses were built; more factories were put up. 

Occasionally empire builders, adventurers, or natural calamities set things into reverse.  After the collapse of the Third Reich, for example, Germans found themselves with a pile of rubble and armed occupying troops on every street corner. Still, the little Kraut born in Dusseldorf in 1945 entered the world almost completely free of debt! He could rebuild, and enjoy the fruits of his own industry.

 Paying Federal Deficits: Making Sure He Doesn't Get Away

Today, the child born in America practically has an electronic ankle tag put on him immediately. He's got his share of about $50 trillion in obligations to pay; they need to make sure he doesn't get away. As far as we can tell, no other generation in history has ever been burdened to such an extent with the expenses of its parents. 

Even in the private sector the 'get it while you can' attitude crushes the next generation.     In the third quarter of 2005 alone, Paul Kasriel of Northern Trust reports, U.S. households spent $531 billion more than their after-tax earnings. About half of that money came from "equity extraction." In other words, the present generation is selling off its houses one room at a time. By the time the tadpoles come of age, there will be nothing left.

Consumer spending has risen to 76% of the economy; before 2000, it was only two-thirds. The savings rate has fallen to less than 2%. Student loans outstanding have risen more than 800% since Ronald Reagan took office. Mortgages are up nearly 900%. Credit card debt is up more than 500%.  

Finding no better source on the subject, we quote ourselves:

"America's debt will not be paid by those currently working, nor even by those currently breathing. It will be pushed on to the next generation…and the next. One generation consumes, the other pays. What the first enjoys as a blessing comes to the next as a curse."

It doesn't seem fair.

Bill Bonner
The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount - just click on the link below:

Empire of Debt: The Rise of An Epic Financial Crisis

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