A Torrent of Darkness, Part II
A Torrent of Darkness, Part II
by Byron King
The Daily Reckoning
Wednesday, June 28, 2006 --------------------- - With so many dollars around, the odor of money is overpowering…using the war to get something for nothing…
- Wealth Without Work…you never know what's waiting around the corner…
- Don't get caught up in the inflation worries - what we might have is the recipe for deflation…and more!
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The Agora Financial Reserve Is Open… The Agora Financial Reserve is open…join now and get all of our top research - for life. Make sure you secure your membership soon…this offer is only good until midnight on July 30, 2006. Click on the link below for a letter from the Reserve Founder: Agora Financial Reserve - Open Until July 30 --------------------- Frederick the Great was once asked why it was that he chose his officer corps only from the Junkers of Prussia, rather than other groups. Why not a clever baker's son from Dresden? What's wrong with a solid farmer from Pomerania? "Nein," he replied, explaining his preference for the Junkers, "Because they will not lie and cannot be bought." Great empires depend on a reliable professional class of military officers, administrators and businessmen. Britain had them when it ruled the waves. They came out of the public (we would call them private) school of "Tom Brown's School-days," and were packed off into the Her Majesty's civil service. Many were incompetent. But few were dishonest. America never really had a specific class of civil servants; the place was always too big and too mobile. As good a military man might spring from the coalmines of West Virginia as from the citadels of the East Coast elites. So might a good businessman arise from the cattle ranches of Texas as from the counting houses of San Francisco. The history of World War II, for example, is the tale of how they came together and got the job done. They too were often hopelessly naïve and incompetent - compared, say, to the more experienced Germans. But very few stole. Very few lied. Very few shirked, ducked, or jived. But now, more than half a century later, they have all got the scent of the dollar floating in their nostrils. The fumes of it seem to intoxicate them; they'll say anything to catch the smell of the green. A heavy whiff…and they're ready for an offer. There are so many dollars around; the odor of money is overpowering. Thus, we hear the stories of outrageous executive compensation in America. They are no Junkers. Instead, they pack "compensation committees' with cronies and crooks who throw them juicy contracts. They juggle quarterly earnings and pull out bigger bonuses from the hat. They twist the numbers so much you'd think they worked for the U.S. Labor Department - where, in the throes of what once was quaintly called "public service," we find other figure-benders at work, bamboozling the public. And even out on the periphery of empire, where U.S. soldiers risk their lives, the incorruptible Junkers have died out. According to the press reports, the lure of money is irresistible. Billions of dollars are being squandered. Sweetheart contracts with Bush supporters, bids that are rigged or jigged, products never delivered, jobs never completed…or even begun. It is as if the money-grubbers realize that the war were not real, and use it only another chance to get something for nothing. Back in the homeland, the common man has picked up the scent, too. He has sniffed his way to Wealth Without Work in the form of housing price increases. He does not have to build a better mousetrap. He no longer needs to work harder or save more. Honesty doesn't seem to help him. Can he be bought? Are you kidding? It is just a question of price. As long as house prices keep rising 10% per year, anyone can have his vote. And so, house prices rise, and he takes the money and binds himself - like slave to master, like knave to lord - to mortgage payments, Social Security and federal handouts. He is no sturdy, independent Junker. He cannot afford to be. Instead, he too has become a Fed-watcher, for he knows that another couple of rate-rises will wipe him out. But every bad thing finally comes to an end. That this too will pass we don't doubt. How it will pass and what will pass with it, we wait to find out. More news from the Desidooru Saloon… --------------------- Justice Litle, reporting from Reno, Nevada: "The takeaway from this rambling is that private enterprise developments are sowing the logistical seeds for the next evolutionary step in the global financial system." For the rest of this story, see our blog: Evolution in Global Finance --------------------- And more views from Mr. Bonner… *** Has it been four years ago already? Are we really that old? It seemed so simple back then. We watched the bubble in Japan pop at the beginning of the '90s. Then, we watched as the U.S. stock market, led by techs, repeat the same pattern. Every excess, absurdity, and extravagance that had made fools of the Japanese made cretins in America - only 10 years later. Come the year 2000 and we thought we knew what would happen next. In fact, we were so sure of it we wrote a book arguing that the United States would follow Japan's example…with a long, slow slump that would take stock prices down 80% and make consumer prices fall and push the economy into recession. Everything that should happen eventually does. But fortunes are lost betting when and how. The market can fail to do what it is supposed to do longer than you can stay solvent. In the event, tech stocks did fall 80%. The Dow was going down, too, and the U.S. economy went into a recession. But then, peculiar and irregular commandos struck the World Trade Center towers in New York with commercial jets and the American public with panic. George W. Bush and Alan Greenspan joined forces to unplug the biggest gush of liquidity the world has ever seen. Taxes were cut. Spending was increased. And the Fed cut the price of money to below the prevailing rate of consumer price inflation. The resulting tide of cash and credit swirled all boats up. But did the feds actually side step the correction the country needed? Or, did they just postdate it and make it worse? Inflation is now the big worry, say the papers. We say, don't believe it. *** Robert Reich, Labor Secretary under Clinton, seconds us. "Deflation, not inflation, is what Ben Bernanke should be worried about," Reich says. "Each generation, in its determination to avoid the nightmare it does remember, runs the danger of over-reacting, and thereby bringing on the opposite trauma. A generation ago, economic policy makers paid too little attention to inflationary forces then building in the American economy. Eventually, Paul Volcker had to break the back of inflation by raising interest rates sky high. That put the economy into a severe recession. Now Bernanke and company are paying too little attention to deflationary forces building in America and the global economy. "Bernanke fears that today's economy resembles the one that began to overheat the 1970s. But he's wrong. Labor unions today don't have nearly the power they did then to get wage increases. Big companies don't have nearly the power they did then to raise prices. Global wage competition is keeping a lid on American wages, just as global price competition is pushing down on American prices. Meanwhile, fancy computer software is allowing rivals all over the map to erode almost anyone's market share. Who's going to raise prices in this environment? "What's more, there's no reason to raise prices. Productivity has been soaring over the last five years while the median wage has been stuck in the mud. Wages, remember, constitute about 70 percent of the cost of doing business. So how can price pressures be building? Bernanke and company worry the U.S. labor market is heating up. They're wrong here, too. Despite what look like rosy employment numbers, a smaller proportion of the American labor force is employed today than it was in 2000. Millions of people don't show up on the unemployment rolls because they're too discouraged even to look for work. "The price increases we're now witnessing are not due to excess demand over limited productive capacity, which causes inflation. They come mainly from soaring prices for energy and raw materials. These commodities are being bid upward because of China's rapid growth, but take a closer look and you see something else going on. Much of the increase in commodity prices is being driven by speculators who expect prices to continue to rise. In other words, part of what we're seeing are speculative bubbles. Such bubbles can burst any time. The fact is, the global market is glutted with productive capacity, and that's not chiefly because of the huge gains in American productivity. If you really want to see a glut, take a look at China. "If anything, there's too much capacity relative to demand. This is a recipe for deflation. Prices can begin to drop because buyers hold off, expecting further price decreases. It happened in Japan in the 1990s. It's already starting to happen in certain housing markets in the United States that had been red-hot but are now cooling so fast home prices are dropping. Deflation is often accompanied by stagnant or falling wages, which make it harder for consumers to afford to buy. Look what's been happening to American wages. "The Fed and other central bankers around the world are raising interest rates because they're fighting the last war. But they already won that war. Inflation is no longer our biggest threat. They ought to be worried about the war before the last one, and the specter of deflation. They're in danger of losing that war even before they know they're in it." Maybe we were not wrong, just early. Pushing up interest rates to fight inflation and "load the gun," the Bernanke Fed could help trigger the Japan-style slump we saw coming five years ago. *** A dear reader offers a look into the not-so distant future… "A bit of clarity seems to be boiling out of the soup," he writes. "The fed bares its chest to fight inflation (hasn't anyone noticed-inflation is already here, how can they be hiding it in reports, anyone who buys anything must certainly see huge inflation in everything that is purchased). "They raise rates two or three times more (almost stalling the economy). U.S. debt, and thus U.S. dollar become much in demand as 'emerging markets' looking for some Rock of Gibraltar flock to the U.S. dollar and the relatively high rates. "Now as the economy starts grinding sideways at best…the Fed prints a few trillion dollars to 'pay debt' and then everyone in the world is left holding a bunch of dollar denominated instruments that are now suddenly worth 20% to 30% less due to dilution. "Of course, they go on another round of interest rate drops to spur the economy, dropping demand for T-bills, and increasing demand for stocks…but of course, the E part of P/E is already challenged. So now what? Excess liquidity going into art? "Nearly simultaneously, ARMs are up, people start struggling and defaulting on loans and being just tight on money. Now housing begins being sold by banks and in fire sales to avoid bankruptcy. Those who don't default will be upside down on their mortgage, and even the remaining 'value' of the too big house, too quickly depreciating and too expensive to maintain, will have lost 20% to 30% of its value (related to U.S. dollar) "Looks like a great plan to me, I think it can work. It gets the rest of the world to share in some of our costs as world policeman, also cost shares our excesses of living beyond our means, and then puts the middle and lower class into 30 years of indentured servitude as they are locked into an upside down house. "Only trouble is turning all my USD denominated stuff into other stuff, and quickly." --- Advertisement ---
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