All The President's Power, Part II

The Daily Reckoning
Bill Bonner
Miami, Florida
Thursday, February 2, 2006

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Alan Greenspan has been away from the taps at the Fed for more than 24 hours now. But the juice still flows. So far, so good. This reminds us of a joke our grandfather used to tell. The poor man was a major depositor and on the board of directors of a bank when the Great Depression hit. Rumors flew around that the bank was going belly up.  So, he rushed over to the bank to take out his money. "Wait a minute," said the manager. "You're a director. If people see you taking your money out, they'll know we're in trouble. Then there will really be a run on the bank and we'll go under."

Our grandfather was a good-hearted fellow. He left his money in the bank. The next day, the bank went bust…and he lost everything. Most of his possessions were sold off, but at least he managed to hold onto his sense of humor. He recalled that during the darkest days in the early thirties, broken men would take the elevator up to the top of the First National Bank downtown and jump off. One of them was heard to remark as he went by the 9th floor: "Well, I'm all right so far."

Yes, the maestro is history. And yes, we are all right so far.

But we left one Big E unmentioned yesterday - the world's Experimental money system. And it is heading straight for a crack up. Since August 15, 1971, central banks have embarked on a bold test. Until now, every time central bankers tried to operate a money system based on nothing more than faith, goodwill and careful custodianship, it has been a dismal failure. We have explained why many times. 

Central bankers can only control the quantity of the money they create…or the quality.  They cannot control both at the same time. Since they always tend to err on the side of quantity (who doesn't like more of the green stuff?), quality suffers. Soon, there is more and more money around…until eventually, even investors notice and they begin to worry about it. They then want to exchange their money for things of unblemished quality - like gold. Gold doesn't lose value for a good reason: its quantity is limited by nature. Rarely does the world's supply of new gold exceed 2% or 3% per year…nicely - almost divinely - in line with GDP growth.

Alan Greenspan once knew this very well; he wrote essays about it in his early days…noting that gold backing for currency was necessary to keep central bankers honest. Otherwise, they won't be able to help themselves, he predicted; they will press down so hard on the money quantity pedal that money quality will go haywire.

No one pressed down harder than Alan Greenspan. He jumped on it with both feet. More money and credit was created during his time at the Fed than under all the U.S. Treasury secretaries and Fed chiefs put together. The value of the dollar - in terms of what it will buy - was reduced by half during Greenspan's 18-and-a-half-year service. Our guess is that that is just the beginning. The quality of the dollar will continue to erode until there is nothing left.

The price of gold is telling us that more and more people are getting worried - not just about the dollar, but about all paper currencies. Their fretting couldn't come at a worse time. This quarter, the U.S. government needs to sell a record amount of dollar-denominated debt. Last week, it was reported that the amount was even larger than previously reported. Things have not gone as smoothly as the government expected. -  So now, the U.S. Treasury will borrow more than $180 billion during those three months. And yesterday, we saw that the feds have already crashed through the legal debt ceiling, though no one seems to care any more.

"The last time so much long-dated paper gushed from the Treasury," notes Grant's Interest Rate Observer, "In February 1996, 10-year yields rocketed to 7% from 5.6% in just four months." Lenders will be spoiled for quantity, but starved for quality. 

In addition to the feds' borrowing needs, the private sector is looking to sell $250 billion worth of new bonds in the first quarter. Hedge funds, as we observed ourselves last week, have stopped hedging. Instead, they're in there with all the other yield-grubbing speculators, buying up dicey bonds to get an extra point or two of earnings. So far, they seem to be doing well…thinking only about the return on their money. When they - and foreigners - start thinking about the return of their money is when the bottom will fall out.

Rome was conquered after the empire lost control of its army and then its frontiers.  Lacking enough homeland boys to do the job, barbarian soldiers were paid to police the borders. Then, the barbarians figured they might just as well take over completely. 

Fifteen centuries later, Americans lose control of their money. Lacking sufficient savings in the homeland, and unable to balance its income against its outgo, the United States is forced to get its savings from abroad. Ben Bernanke is supposedly at the head of the group of bankers that sets U.S. short-term interest rates. That's what we read in the paper. But if overseas central bankers and foreign investors fail to raise their hands at the next Treasury auction, we will find out who is really in charge.      

[Ed. Note: Bernanke has promised to uphold all of his predecessor's policies, which isn't good news for our economy - or us. Chances are, following in Greenspan's footsteps means he'll keep encouraging our irrational confidence in the economy - confidence that is based on a shamelessly fraudulent farce of trumped-up statistics…and that's just the tip of the iceberg.

Statistical Deceptions

More news from our team at The Rude Awakening…

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Eric Fry, reporting from Manhattan:

"America's rollicking housing boom appears to be winding down…but it may not be over just yet. So, to those folks who might be itching to short the housing stocks, we'd offer a modest suggestion: Don't scratch."

For the rest of this story, and for more market insights, see today's issue of

The Rude Awakening

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Bill Bonner, back in Miami with more opinions…

*** Addison's out on the media trail…and getting some big hits. Yesterday, he made an appearance on CBC Canada, our neighbor to the north's largest radio station - and today he did an interview on ABC News Now.

But - the true highlight of Addison's day: Playing ping-pong at The Motley Fool headquarters in Arlington, Virginia.

He'll be back tomorrow with a full recap of his interviews and his tour of The Motley Fool.

*** The British papers howled on Tuesday. The 100th British soldier has just been killed in Iraq. Another one goes down every 11 days. The English have had enough.  Practically every editorial demands a pullout of U.K. troops. "How many more will have to die for this folly," asks a mourning father. Another grieving parent accuses Tony Blair…as if he had killed the boy himself!

The London press is so much more energetic, lively and entertaining than its American counterparts. "How Many More Mr. Blair?" asks the Daily Mail headline. Inside are photos of all the dead soldiers.

Times change. Gone are the days when Britain could lose 20,000 men in a single day in some imbecilic campaign on the Somme. Back then, Britain was still an imperial power desperately trying to hold onto the glory days. No price seemed too high. Now it is merely on the rump of America's empire…even 100 corpses seems like too many.

*** Newmont reached over $60 recently. We bought the stock at $25 several years ago.  We should have bought more, but we are not very good at investing. We just can't seem to take it seriously. Even when we make money, we get little pleasure out of it.  And why should we; we haven't really earned it. 

On Sunday, we reflected on our own peculiar attitudes toward money. One of our partners has a much more levelheaded approach. He has a balanced portfolio of stocks, bonds, and real estate. He earns good money on it. It's relatively safe. He's fixed for life. Often, he cautions us to do likewise.

But we just aren't interested. We make enough from our writing and our business to live reasonably well. If we had more free cash, we'd only be tempted to buy more land in Argentina. But what would we do with it? 

You may recall that we invested in an old chateau in France. We thought at the time, that it was probably a bad investment. What we didn't know was how bad it really was. 

"Madame Bracheriche was out at the place last week," Pierre filled us in. "She threatened to shut down the whole job. You know, they're just now finishing all the dry wall and getting ready to paint. And we're already at least two months behind schedule on the renovations. We won't even mention the cost overruns…"

We will mention them. Your editor has done a lot of renovation work in his career. He enjoys it. So when he looked at the old place, he thought he could make a reasonable estimate of how much it would cost to fix it up. He did so. Then, he doubled the number just to give himself a margin of error.

He should have quadrupled it. 

"Well, none of it is our fault," Pierre explained. "Once the Historic Commission and the Agency for Public Buildings got on our case, our goose was cooked. We had no choice but to do what they required."

What the Public Buildings inspector required was a handicapped ramp…handicapped bathrooms…firewalls and fire doors…smoke signals…smoke extractors…and sundry other expensive changes (expensive in a large, old building). What Madame Bracheriche of the Historic Commission required was that everything look exactly as it did before we began restoring the place.

How can you put a handicap ramp onto an 18th century building and still have it look original? They didn't seem to care about cripples back then; we guess the poor gimps had go somewhere else. 

In the end, what was required was a lot of back-and-forth negotiating between the two public authorities, and a building so expensive that your editor no longer feels he can afford it. Besides, he can't take pleasure in it anymore. Down in Argentina, the rocks are so cheap he can stumble over them, crack his knee and still smile. In France, the old stones are so expensive just looking at them hurts.

"Pierre…we're going to sell that place."

"Are you crazy? Who would buy it?"

"Well, I bought it, didn't I?"

"Yes, but…where will we find another investor like you?"

"Hmmm…."

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The Daily Reckoning PRESENTS: In the second part of this essay, The American Conservative magazine's Thomas Woods examines how the power our nation's leaders have wielded has grown throughout history - and how this abuse of power is justified. Read on…

ALL THE PRESIDENT'S POWER, PART II
by Thomas E. Woods, Jr.

Woodrow Wilson, Theodore Roosevelt's Democratic opponent in the 1912 presidential race, largely shared TR's view of the presidency, belying claims then and now that that election represented a titanic conflict of clashing ideologies. Wilson himself admitted his inability to discern any major differences between the two parties, apart from the Republicans' greater allegiance to the protective tariff.

In Constitutional Government in the United States, Wilson described the president in terms that TR could only have cheered:

"The nation as a whole has chosen him, and is conscious that it has no other political spokesman. His is the only national voice in affairs. Let him once win the admiration and confidence of the country, and no other single force can withstand him, no combination of forces will easily overpower him. His position takes the imagination of the country. He is the representative of no constituency, but of the whole people. When he speaks in his true character, he speaks for no special interest. If he rightly interpret the national thought and boldly insist upon it, he is irresistible; and the country never feels the zest of action so much as when its President is of such insight and calibre. Its instinct is for unified action, and it craves a single leader."

The president, said Wilson, is "at liberty, both in law and conscience, to be as big a man as he can."

"Conservatives," reports historian Arthur Ekirch, "complained of the usurpation of authority by the government and its executive branch" during the Progressive Era. Even one of the presidents during the Progressive Era voiced misgivings: William Howard Taft, a man of sober disposition who was much more at home on the Supreme Court than he ever was as president, vainly warned of this growth in presidential power and of the great difficulty in keeping that power restrained once unleashed. He was swimming against an overwhelming tide.

The danger of the view of the presidency delineated by Theodore Roosevelt and Woodrow Wilson is not simply that in the name of doing the people's will the president will disregard the separation of powers or other important institutional restraints. Another peril is that the president may define the people's will in a self-serving way and then carry out his own agenda in the name of serving the people.

Throughout 2005, for example, President Bush ceaselessly insisted, supposedly on behalf of the American people, that our country would not give in to car bombers, that we would accept nothing less than victory and similar sentiments drawn from the administration's traditional boilerplate. This in spite of poll numbers that clearly indicated the people's restlessness about the war and their desire to see Americans withdrawn from Iraq relatively promptly. So on behalf of what "American people" has Bush been speaking? Is he uniquely equipped to divine the "general will" that transcends such crude means of discerning public opinion as actually asking people what they think?

To be sure, the polling data have not always been easy to comprehend and may reflect Americans' ambivalence about what the United States government should do now that it has involved itself in Iraq. The point, though, is that this ambivalence certainly precludes sweeping presidential pronouncements about what the American people want and how the chief executive might bring about a swift realization of their desires.

During the 1930s, the ill-fated Ludlow Amendment would have required a national referendum before the nation could be committed to war. (Exceptions were made for outright invasion of American soil.) President Franklin Roosevelt was staunchly, even furiously, opposed. Once again, the president, who arrogates to himself the responsibility of carrying out the will of the people, turned out to be relatively blasé about finding out their actual opinions.

The very initiation of the war in Iraq constituted a breathtaking exercise of presidential power but one that has grown so common that it is hardly even noticed or commented upon any longer except by the occasional isolated constitutionalist. Until 1950, when Harry Truman committed American troops to Korea without a declaration of war from Congress, it was generally understood that the intent of the Constitution's framers had been that while the president, in his capacity as commander in chief, would direct American wars, Congress was to declare them. So momentous a decision could not be reposed in the hands of a single man.

Point this out today-as I did in The Politically Incorrect Guide to American History-and you find yourself on the wrong end of a lecture by indignant neoconservatives. The president has deployed troops abroad hundreds of times without the consent of Congress, they insist.

So what of these hundreds of cases of presidential warmaking? This claim originated-surprise!-with the U.S. government itself. At the time of the Korean War, a number of congressmen contended that "history will show that on more than 100 occasions in the life of this Republic the President as Commander in Chief has ordered the fleet or the troops to do certain things which involved the risk of war" without the consent of Congress. In 1966, in defense of the Vietnam War, the State Department adopted a similar line: "Since the Constitution was adopted there have been at least 125 instances in which the President has ordered the armed forces to take action or maintain positions abroad without obtaining prior congressional authorization, starting with the 'undeclared war' with France (1798-1800)."

I have argued elsewhere that the quasi-war with France in no way lends support to those who favor broad presidential war powers. As for the rest, the great presidential scholar Edward S. Corwin helpfully observed that this lengthy list of alleged precedents consisted mainly of "fights with pirates, landings of small naval contingents on barbarous or semi-barbarous coasts, the dispatch of small bodies of troops to chase bandits or cattle rustlers across the Mexican border, and the like." In other words, the "hundreds of times" argument, like so much else about the imperial presidency, is a grotesque fraud.

As for the delicate souls whose consciences were so deeply troubled by George W. Bush's unilateral initiation of war in 2003, where were they in 1999 when Bill Clinton, acting through NATO and siding with the Muslims of Kosovo, orchestrated a bombing campaign against Serbia without the consent of Congress? David Gray Adler, an expert on foreign policy and the Constitution, went so far as to call Clinton's action against Serbia "one of the most flagrant acts of usurpation of the war power in the history of the Republic." That's saying something, since presidents from both political parties had openly defied the Constitution's distribution of war powers between Congress and the president for nearly half a century by the time of the Kosovo intervention.

Clinton's disregard of the Constitution, Adler argued, was unique since it was "the first time in our history that a president waged war in the face of a direct congressional refusal to authorize the war." Adler is right: legislation that would have authorized the president to conduct his air war against the Serbs failed to pass the House on April 28, 1999, but Clinton went forward with his military plans anyway. "Clinton's defiance of the House vote," Adler concluded, "raised arbitrary executive power to a new and dangerous pitch." Apart from a few pockets of principled resistance here and there, where were our present guardians of constitutional liberty?

"The contest for ages," Daniel Webster once said, "has been to rescue liberty from the grasp of executive power." The contest today, on the other hand, far from an effort to limit executive power and its inherent dangers, amounts instead to a struggle to gain executive power in order to wield it against ideological adversaries and on behalf of some political agenda.

This is what Robert Nisbet meant when he noted in the wake of Watergate that that scandal's long-term impact would not be to weaken the executive, since even Richard Nixon's liberal opponents still believed in a strong presidency-provided it was occupied by one of their own. "There are too many powerful voices among intellectuals-in press, foundation, and elsewhere-that want a royal President provided only that he is the right kind of individual."

The lesson that all too many conservatives seem to have drawn from the Clinton years is not that executive power needs to be better defined and controlled but that it needs to be exercised by a Republican. Likewise, one might think two terms of a George W. Bush presidency would teach the Left a thing or two about executive power, but for all their carping at the president, most liberals seem quite happy with the status quo as long as the president issues executive orders on behalf of fashionable causes. Then when another neoconservative takes office and uses that power as George W. Bush has, the Left will trot out its now familiar routine of shock and indignation. Some opposition.

Both liberals and at least some conservatives must share the blame for contributing to an ideological climate of which the inevitable outcome is the unrestrained executive under which our Republic now groans. Ultimately, though, apportioning responsibility for this transformation of the presidency, in which its occupant can flagrantly and defiantly violate the law, is of much less urgency than addressing-and, one hopes, correcting-the present debacle.

Former congressman Bob Barr, a conservative from Georgia, has it right: "The American people are going to have to say, 'Enough of this business of justifying everything as necessary for the war on terror.' Either the Constitution and the laws of this country mean something or they don't. It is truly frightening what is going on in this country."

Regards,

Thomas E. Woods Jr.
for The Daily Reckoning

Editor's Note: Thomas E. Woods Jr. is the author of the New York Times bestseller The Politically Incorrect Guide to American History. The above essay originally ran in The American Conservative magazine, a publication that aims to "ignite the conversation that conservatives ought to have engaged in since the end of the Cold War, but didn't."

To learn more about this magazine, and to find out how you can receive 5 free trial issues, see here:

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