Marx's Revenge

The Daily Reckoning
Bill Bonner
Delray Beach, Florida
Friday, February 3, 2006

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In the brave new world of the 21st century, no one is to blame for anything. That's what we took from the indelicate photo of the naked fat lady on last week's cover of Le Monde. At first, we thought it was an ad for liposuction. No, obesity, said the caption provided by the French public health service, is nothing to be ashamed of. "It is not anyone's fault. Nor is it unavoidable."

"Wait a minute," said Henry at the dinner table, troubled by the dialectic of it. "If it is not unavoidable, then you must be able to avoid it." So, if you don't avoid it, who's fault is it but your own?" Henry is studying logic in school; sometimes, we think we should have kept him at home.

Many people are "addicted" to overeating, explained the accompanying commentary. Eventually, they become obese.

"Why don't they just stop eating so much?" the 15-year-old wanted to know.

"Because they are addicted," explained his mother. "Like people who smoke or drink."

"But people stop smoking all the time!" replied Henry. He wasn't giving up.

"Yes, but it takes a lot of willpower," said his mother.

"Hmmm. You mean that people who are addicted to something lose control over themselves, so they don't have enough willpower to stop it even when they don't want to do it. But a lot of people do stop. So if they really don't want to do it, they just stop doing it, whether they're addicted or not? And I guess if you held a gun to a fat lady's head and said you were going to blow her brains out if she didn't stop eating so much, she'd probably find the willpower to stop…right?

"In other words, if people really don't want to be addicted to something, then they find the willpower to stop being addicted, which sounds to me like they really could have stopped all along, and if they didn't, it's their own fault."

"Oh Henry, not everything can be reduced to simple logic."

Addiction rises above logic, like rings of smoke over a burning Porsche. No point in talking to the mob that lit the match. And there is no point trying to make sense of George W. Bush's comment in his State of the Union address. "America is addicted to oil," the president observed.

America likes oil. She finds it useful. But is she addicted? Could she "just say no" if she wanted to? We don't know, but we suspect that if oil were much more expensive, she would use less of it. We hardly think the raddled old dame needs to check into a dry-out clinic or sign up for a 12-step program yet. Just let the market put the gun of higher prices to her head.

Americans could reduce their consumption of oil if they really wanted to. When they really want to quit, they will. And here we offer a leap of logic, an exuberant hunch, and a wild instinctive guess: The more expensive oil becomes, the less of it they are likely to consume.

We say that from on our own observations, as well as from basic economic theory. A friend recently bought a very fancy BMW. This is not one of those namby-pamby politically correct cars; it's a real old fashioned gas-guzzler. It gets about nine miles to the gallon, he said proudly. About the same mileage as the first car I ever owned - 40 years ago. See, some things never change.

At the margin, gasoline is an important part of the family budget. And at the margin, there is plenty of room for reduction. Our friend could have turned on NPR, bought a hybrid and smugly turned up his nose at SUV drivers. If the price of gasoline had hurt him enough, he would have.

Isn't nature beautiful? Have you noticed? Stunning starlets do not marry hopeless, poverty-stricken losers, do they? Why not? Nature! People do not make soup out of old sneakers or put watermelons on their heads. Why? There is no law against it. But nature has laws of her own! And guess what else. Ceteris paribus, people use less oil when the price rises. That's what natural, free markets do. They "regulate" the use of nature's resources. The more rare, more valuable something is, the higher the price. Fewer people can afford it. So, less of it is "consumed." It is the majesty of these free and natural markets - like the spread of a peacock's feathers, or the march of lemmings to their own suicide - that conservative politicians used to admire, if not protect. Everything happens so naturally, so relentlessly, and so seamlessly; there is no need to make a federal case out of it.

But here comes our president, with another campaign to improve nature. We gasp at the chutzpah of it. Our jaw drops at the appalling arrogance. We chuckle at the conceit behind and the consequences ahead. It is not enough for consumers to adjust their habits according to their own whims and circumstances, says George W. Bush; we need to set a national goal of replacing 75 percent of the nation's Middle East oil imports by 2025 with ethanol and other energy sources.

Why not 76%? Why not leave it to Americans individually to decide how much Middle East oil they want to buy? Why does the "market" work for jellybeans and patent medicine, but not for oil? We will not wait for an answer.

Replacing 75% of U.S. oil imports from the Mideast by 2025, writes our Daily Reckoning oilman, Byron King, is not a "goal," it is a prophecy. There is no way that the United States will be importing as much oil from the Mideast in 2025 as it imports today. The United States will not be importing much in the way of petroleum from the Mideast, nor from anyplace else. The oil just will not be there for one side to export, nor will it be there for the other side to import. Welcome to the future.

The big E. The world is running out of cheap Energy. Kuwait has announced that its main oil field, the super giant Burgan, has entered the phase of irreversible decline, Byron continues. At current depletion and decline rates, by 2025 Kuwait will be exporting negligible amounts of oil, and at prices that most nations of the world will be unable to afford.

The planners, who are connecting the dots of the past and mechanistically extrapolating out into the future with no allowance for Peak Oil, are living in a fantasyland. They are planning, if anything, for the failure of the American economy and the attendant decline of American civilization.

More on that Big, E and another Big E, below…

 [Ed. Note: Since Bush's announcement that ethanol was the cure for America's oil fever, many investors are sprinting to get their hands on ethanol-related stocks. But the "immediate beneficiaries" of Bush's comments, says Resource Trader Alert's Kevin Kerr, will be corn and sugar.

"The sugar market is exploding," he told MarketWatch today, "and it's showing no signs of slowing." Kevin's Resource Trader Alert subscribers have already made some major gains from sugar - and there will be more to come. To find out more about this commodities boom, see Kevin's latest report:

Get Rich Off Of Natural Resources

More news from Aussie Joel and The Rude Awakening…

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Eric Fry, reporting from Manhattan:

"Commodities are rallying…and because they are rallying, investors are buying them…and because investors are buying them, commodities are rallying. You get the idea."

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

When Gold is Google

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Bill Bonner, back in Florida with more opinions, thoughts and miscellany…

*** A word from Addison:

Yesterday, before heading over to Old Towne Alexandria to meet up with an old buddy for lunch, and a game of ping-pong, we did an interview at the ABC news bureau in downtown DC. Bono, the rock star turned debt-crisis manager, was giving a speech to the National Prayer Convention. His scruffy mug was being aired on a huge flatscreen TV in the lobby.

"Hey, you're going on after Bono," said friend and media 'handler' Bruce Robertson. Then the president got up and closed out the convention. We were on the air about four minutes later.

"Since when did you guys become mainstream economists?" our friend, Beirne White, asked us when we met up at the Starbuck by his office at The Motley Fool. Beirne used to work with us here at The Daily Reckoning and has been the focus of one or two of our essays over the years.

When he was on the case, and on the job, The Daily Reckoning was but an outpost on the intellectual periphery. Gold was trading at $253, after a 20-year bear market - and was one of the most despised investments a man could think of.

"I don't know Beirne," we said, thinking back to our interview, "we keep trying to come up with new things to write about. Things that nobody want to hear. But it's getting harder to all the time."

For a glimpse of the ABC interview, click on the following link:

The Debt Capital of the World

BTW, We lost to Beirne, 21-18, at the ping-pong table.

*** And back to Byron King and Peak Oil:

"The world produces & consumes about 84 million barrels of petroleum every day. (Leave out natural gas, gas liquids, coal, coal oils, etc. We are just talking oil from a hole in the ground.)

"There are 86,400 seconds in a day. So, each second of each day, the world is consuming about 972 barrels of petroleum…each second…of every day.

"By comparison, the average stripper well in the United States produces about five barrels of oil…per day. It takes almost two hundred days for a U.S. stripper to produce the oil that the world uses up in one second. Some of the stripper wells that Greg, Joel & I saw up in Titusville, Pennsylvania, last November, are producing about one barrel of oil per week. So, it takes a Titusville stripper (hey, catchy phrase) about 20 years to produce as much oil as the world uses in one second.

"OK, let's think big. There are some wells in the Saudi-Kuwait oil production axis (at Ghawar & Burgan) that produce 10,000 barrels per day. Damn good wells. Super wells. The entire production of one of these wells gets burned up in about 10.25 seconds of your average world economic activity. You would have to be almost an Olympics-caliber sprinter to be able to run 100 meters in less time than it takes the world to burn up the output of one of these super-wells.

Like I said, back to Peak Oil."

[Ed. Note: We'll have more from Byron on this subject on Tuesday…in the meantime, check out Whiskey and Gunpowder, where Byron is a regular contributor:

Whiskey and Gunpowder

*** And now switch to another Big E:

The experiment with a pure paper money system edges towards its inevitable, ineluctable, irresistible conclusion. Name one paper money that has lasted more than 100 years. You can't do it, can you, dear reader? No, you can't, because the longest-lived pure paper currencies are the one we use today. The dollar, and most other major currencies, have only been completely free from gold backing since 1971.

Will the dollar last another 10 years? Another 20 years? Another 50 years? We don't know, but even at the present modest rate of loss, the dollar will lose another half of its value by the year 2025. That will make the 1910-dollar worth about two-and-a-half cents.

Can you count on this slow, steady sinking of the dollar bill, or will it suddenly turn up its bow and slip below the waves before you have a chance to reach the lifeboats?

We don't know. So, we wear our life vests as if they were football jackets. Gold is back to levels not seen for two decades. And now, silver too, reached a 19-year high last week.

Soon, Americans will be addicted to both metals. But don't blame us!

*** And more views from sunny South Florida

"I know it's over," continued our friend with the BMW. "I've made a lot of money in real estate. But it's getting soft now. I can tell. And I'm just trying to get out of the speculative stuff as fast as I can before it melts down. But, of course, it can melt down faster than I can get out. That's what I'm worried about."

On the wrong side of the tracks, literally, our son rents an apartment. The place is so near the tracks themselves we were awakened by the sound of a freight train at 5:00 am, just in time to get up to write The Daily Reckoning. It sounded as though the train was coming through the living room.

The apartment itself is bright and sunny. It is also a real estate investor's dream, in that it is a "loft" style place, which is to say, the developer didn't bother to add any finishes. The walls and ceilings are made of cement. The surfaces are either metal or concrete. It's the latest thing; you can find hundreds of such industrial lofts today in any major city in the United States…or abroad.

This would sell for about $600,000, we were told. But there is no reason to buy. There are a lot of these places that are empty. It's easy to rent and the rent is fairly low. We only pay $2,400 a month, and we got the first month free. That means the owner is getting a gross yield of only about 4%. How is he paying his mortgage? Upkeep? Taxes? Condo fees? Unless the price goes up, he will lose money at about 10% per year.

"I think a lot of these places were bought by speculators. They were hoping the prices would go up, but they're building apartments like this all over town. God knows where all the buyers are going to come from," our son explained.

We looked out the balcony and saw a freight train rushing behind a building just like ours, but in that building, only about half the units had lights on. In the parking lot of our own building, only about a quarter of the spaces had cars in them. People had moved down here to get new lives - new style, new cars, new place, new weather, new girlfriends. But here, it seemed as though there was no life at all.

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The Daily Reckoning PRESENTS: For hundreds of years now, China, India and Russia have sat and watched as America took the lead in the world economy - but it looks as though these nations on our periphery are ready to take their place in the sun. Read on…

MARX'S REVENGE
by Bill Bonner

For the first time in two hundred years, the West (including Westernized Japan) faces real competition. The world's largest nations - China, India, and Russia - sat on the sidelines for most of the nineteenth and twentieth centuries. They were too remote and too backward to participate in the great boom that lifted living standards during the reign of the British Empire in the nineteenth century. GDP per capita rose from barely over $1,000 (in 1990 dollars) in the United States at the beginning of the nineteenth century to more than $5,000 by its end. China, on the other hand, had a GDP per capita of about $600 when the nineteenth century began.

By its end, the figure had fallen to around $525. Indian numbers were about the same, but in the other direction, with a small gain in the nineteenth century - probably the result of British colonial development. In the twentieth century, Russia, China, and India all became victims of self inflicted wounds; various forms of socialist claptrap took them out of economic competition.

But now they are back, and it is a whole new ball game, as they say. These countries are either on the periphery of U.S. imperial protection, or beyond the pale altogether. Either way, they benefit from the order created by the U.S. imperium. Foreign workers seem to be able to make anything we can make - but at much less cost. India is growing at 8 percent a year, China at 9 percent - Russia is booming too. In addition, they are turning millions of young people who can make things - graduates in the practical arts and sciences - better and cheaper than we do in the United States or Europe. What's more, the foreigners take the old virtues seriously.

They save their money - the saving rate in China is as high as 40 percent of the national income, according to off icial sources. These savings give them huge piles of capital with which to build more modern factories and more convenient infrastructure. The price of labor in the rich countries is too high. The average cost of an hour of someone's time in the United States - including social charges - is $20.73. The average cost of someone's time in China, on the other hand, is somewhere between 13.5 and 65 cents, depending on the source. As long as capital, expertise, and finished products are free to move around, it is likely that the two numbers will grow closer together.

The consumer doesn't particularly care who assembled his gadget; he only cares that he can buy it at the lowest possible price. Labor is a big component of the price of most things, so both manufacturers and consumers appreciate lower labor prices. Our old incompetent enemies have learned how to compete.

We were told that America became much richer because of Reagan's improvements, but if that is so, why did real wage rates not rise? A man sweats, humps, busses, totes, and schleps today, on average, for about the same wage he got before the Reagan revolution fired its first shot. But that is not to say that everything is just the same. Far from it.

Today, people own less of their own homes - homeowner equity (the portion not mortgaged) has fallen from nearly 70 percent in the late 1970s to less than 55 percent in 2005. Plus, the average person owes more money to more people than ever before. Household debt in the fall of 2005 is 113 percent of annual income on average; prior to1980, it was 58 percent. Today, fewer people have secure sources of money for their retirement. More than two-thirds of older households - those headed by people 47 to 64 - had someone earning a pension in 1983. By 2001, fewer than half did.

The Reagan Era came with relatively new idea, that people should be responsible for their own pension. Companies stopped offering fixed-benefit pension plans. But by 2000, old people were feeling the effects. They were not as well off as they had expected to be. When the holdings of typical households were analyzed, today's near-retirees turned out to be a little poorer, in constant dollars, than the previous generation was when it approached retirement in 1983.

Edward Wolff, an economist at New York University, looked at 18 years of household financial data from the Fed. Somehow he retained his sanity long enough to discover that "the net worth of the median older household …declined by 2.2 percent, or $4,000, during the period [1983-2001] to $199,900." We look on that fact in shock and awe. How could it be that after the biggest explosion of wealth-creation in the history of man, the average man is not richer, but poorer?

We recall the Carter years: The nation was at peace. Despite inflation, Americans were still getting richer. Wages were rising. The country still enjoyed a positive balance of trade, and the rest of the world still owed it more than it owed to foreigners. But in 1980, stocks had been going down for 14 years and bonds had been in a bear market that began in 1945. With eyes in the back of their heads, people must have looked out and seen nothing but trouble. The Vietnam War was still in the near background. And Richard Nixon. And Jimmy Carter himself. Americans were discouraged, we are told; they had lost confidence in themselves.

Then, along came Ronald Reagan with a message of hope, optimism, and something-for-nothing. The supply-side, the Laffer Curve! Suddenly it seemed possible to spend more… and still have more! Government could cut taxes - and get more revenue, said Laffer. Forget the deficit; it will take care of itself. Somehow. The average man f igured he could do the same: borrow more, spend more, and he would get rich. Pensions were out. Free people could look out for themselves. They could set up their own 401(k) plans and make money in common stocks.

All you had to do was buy the companies you liked. And the companies themselves no longer had to worry about their employees. Managers could focus on cooking the books to give the impression of maximizing shareholder value. America soon became "Shareholder Nation" - a whole country of capitalists, all getting rich in the freest, most dynamic economy the world had ever seen.

Now we see that the whole thing was a huge swindle. Supply-side policies never really increased the supply side. Government never actually lightened up to let people live their own lives in their own ways. Employees never quite got around to putting money into their 401(k) plans; they were too busy trying to keep up with the credit card bills. And managers soon realized that maximizing their own incomes with stock options, bonuses, and rich retirement plans was more rewarding than looking out for shareholders.

The shareholders themselves - the millions of lumpen pseudo-investors who owned mutual funds - couldn't tell the difference. They had neither the time, the money, nor the training to be real capitalists; they were merely chumps for Wall Street. And now, here we are, a quarter-century since Reagan won the White House: We are at war, with the biggest trade deficit, the biggest federal debt, the biggest financing gap, the lowest interest rates in 45 years, and the most consumer debt ever. In real terms, the average man earns less per hour worked than he did in the Carter years. And the typical household approaches retirement poorer than it would have been in 1980.

America was the world's biggest creditor when Ike was president. By Ronald Reagan's second term, about 15 years into the pax dollarium era, the nation slipped to net-debtor status. In the following 15 years, it broke all records - becoming the world's biggest debtor and the greatest debtor of all time. But Thomas Gale Moore, then a member of President Reagan's Council of Economic Advisors, must have anticipated Ben Bernanke when he noticed the United States crossing the creditor/debtor threshold in the mid-1980s.

Not to worry, said he, "We can pay off anybody by running a press, frankly, so it's not clear to me how bad that is …[becoming a net debtor]." In 1980, people still held parties when they paid off their mortgages. Paul Volcker said that he would bring down inflation rates, and he meant it. You could buy a stock for six times earnings and lend your money to the U.S. government for a 15 percent yield. Lenders demanded that much because they remembered the inflation of the 1970s. They knew that not every investment story had a happy ending.

The United States used to make things and sell them overseas. General Motors was our biggest employer; you could tell what year a car was made by looking at the tail f ins, they got better every year When Eisenhower was in the White House and William McChesney Martin was at the Fed, the United States had most of the world's gold and most of the world's credit. Foreigners owed us far more than we owed them. This happy state of affairs persisted until the reign of Ronald Reagan and Alan Greenspan, when the United States became a net debtor to the rest of the world and Wal-Mart - a retailer, not a manufacturer - became its biggest employer.

The foreigners own more and more of what used to be American wealth-producing assets. When Ronald Reagan arrived at the White House, foreign-owned U.S. assets were less than 15 percent of GDP. Now, they're over 78 percent. And they are growing rapidly. By 2003, net ownership of U.S. assets by foreigners had risen to $10.5 trillion, up from $9.2 trillion in 2003.

Under Ronald Reagan, Americans thought they had rediscovered their youth. They couldn't remember ever feeling more confident or more optimistic. Then, 12 years later, in George W. Bush, Republicans thought they saw their hero reincarnate, with another 20 years of prosperity ahead. And why shouldn't it be morning in America again?

We answer the question directly. It is not morning in America because it is evening. There is no bull market because there is a bear market. People are not getting richer because they are getting poorer. It is not 1981 because it is 2006. Readers who find this an unsatisfying explanation are reminded that it is not your authors who set the planets in motion around the sun and created man - such as he is - out of the dust of the earth.

Morning often looks a lot like evening - if you face the wrong way at the right time. But it is the opposite end of the day's cycle.

In 1982, interest rates were high and stock prices were low. In 1982, there were a few people who wanted to buy stocks, and many who didn't. In 1982, America, Inc., looked like a has-been economy. Its currency was widely considered near-trash and its bonds were described as "certificates of guaranteed confiscation." You could buy the nearly entire Dow for just one ounce of gold. Now it takes 22 ounces. The trend of the time, in 1982, was down. Then, as now, smart people considered it eternal. BusinessWeek proclaimed that equities were not just in a cyclical downturn, not just sick, but dead.

As the moon looked down in the summer of 1982, it shone on a wall of worry so high that only a knuckleheaded contrarian would think of climbing it. Every headline seemed to give another reason the bear market would last forever. Every poll showed that consumers expected it. Every price seemed to confirm the everlasting trend; the sun had set forever; the black of night was permanent.

And yet, at that very moment, had an investor turned around, he would have noticed a brightening in the eastern sky. Over the next 18 years, the sun rose higher and higher, until investors were so encouraged by the favorable growing conditions that they scattered their seed like confetti at a parade. Did anyone doubt that it would take root in the hard concrete of lower Manhattan's financial hothouse or the thin soils of the technology sector? But the year 2006, so far, is everything the year 1982 was not. Today, there are many people who want to buy stocks and few who don't. Interest rates are nearly as low as they have been in half a century and stocks are as high as they have ever been.

Consumers - who were relatively reluctant to spend in 1982 - pick their own pockets today. Figures from April 2005 show consumer spending increasing at five times the increase in wages and salaries. And housing is booming. In many parts of California, prices of houses are going up 10 times faster than the rate of core inflation.

Can these sunny trends continue forever? They never have before. And no theory of economics explains how they might. Instead, the typical pattern is for night to follow day. It is also typical for the dumb things people did when they were feeling flush to be corrected by recession and bear markets.

There is one more big difference. In the hot sun of the Reagan recovery, overseas investors, who had previously been cool on America, warmed up. Now, we start from a very different position. Foreigners have been hot for U.S. assets for years - an attitude we have come to count on, because we need $2 billion in capital inflows every day to cover our foreign- trade deficit. What happens as they cool off again? Of course, they will cool off. Americans cannot expect foreigners to support them indefinitely. Someday, perhaps soon, they will realize that their main customers cannot pay their debts; they will get tired of lending to them.

Then, the long, dark night will begin. It will not last forever. In our previous book, we foresaw a "long, slow, soft slump" coming. But just as every sunny day comes to an end sometime, so does even the darkest night. If Americans keep their wits about them, they can hope to get through it and begin another sunny period bright and refreshed.

Pete Peterson attempted to gauge the difficulty of even determining the burden we've now placed on future generations. "Estimates vary," Pete Peterson points out in Running On Empty, his vast inquiry into the impending bankruptcy of the US Government, "depending on methodology, but the numbers are all vast." Peterson points to studies done on the future obligations of the Social Security and Medicare trust fund alone. In 2003, the American Enterprise Institute projected a $45 trillion shortfall; $47 trillion countered the International Monetary Fund in 2004; the National Center for Policy Analysis and the Brookings Institution came up with $50 trillion and $60 trillion respectively in their own research reports published in 2003.

Those are all incomprehensibly large numbers, of course, but the biggest of the projections came in 2004 from Social Security and Medicare trustees themselves. They estimated the unfunded benefit liabilities to have a current value of $74 trillion dollars. As an empire matures, the imperial citizens believe more and more extravagant things. By the opening of the twenty-first century, Americans were spending more than they earned. Each day brought more new debt than real new wealth. Yet, between 2002 and 2005, every quarter showed growth in GDP. Americans mistook this growth for progress. They knew they had the world's best economy, its best system of government, and its finest culture. They could not imagine that they were growing poorer.

But here we turn again to the living and the dead for elucidation. Supplysider Jude Wanniski admits that real growth has come almost to a halt: In the United States, my own work shows that between 1945 and 1971, when the dollar was fixed to gold at $35 oz under the 1944 Bretton Woods arrangement, the real economy in the US grew by 4 percent per year. From 1971 when the dollar was floated to 2004, real growth of the US economy has only a pitiful 0.3 percent per year. The growth, such as it is, in the American economy, has come about by virtue of increased emphasis on the present tense. Americans came to despise the past and neglect the future. The lessons of the dead and the desires of the unborn were both ignored. Instead, all that seemed to matter was consumption in the here and now.

A dead man, F. A. Hayek, explains the consequences: "The economy in its entirety must continue to decline so long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock."

Without a theory, F. A. Hayek might have said, the facts are as mute. But by the year 2006, both facts and theories had become blabbermouths. The trouble was that the facts had been corrupted so they no longer told the truth. And the old theories that might have been used to interpret the facts had been abandoned in favor of new, more convenient delusions. Americans could now run up as much debt as they wanted, said the new theorists.

The American economy may or may not be "growing" in 2006. But if traditional, time-tested theories about how wealth and poverty are correct, thank God it is not growing more. Every step it takes moves into deeper into debt and closer to bankruptcy.

Regards,

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:

"Now Perhaps Someone Will Listen!"

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