National Bankruptcy, Part II

National Bankruptcy, Part II
by Bryon King
The Daily Reckoning
Tuesday, August 2, 2006

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• Things are heating up…rising prices + slowing economy = stagflation…

• First, you fight the 'flation, then you move onto the stag…the marginal consumers' knees are wobbling…

• Good news: Wal-Mart has decided to help save the planet!…the cheapest labor one can get is their own children…and more!

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It's too damned hot
It's too damned hot
I'd like to swoon with my baby tonight,
But it's too damned hot

America is sweltering. It is 115 back on the East Coast, say the papers. Local governments are mobilizing to try to prevent people from getting cooked. Boston is even said to have a system of automatic phone calls, urging people to check on their neighbors. And thus has even the spirit of neighborliness been hollowed out in the modern world, reduced to a phone message from a machine.

We recall the news from New Orleans after the flood. Six weeks after the event, a man finally decided to check on his own mother. There she was, it turned out, right where he left her - in her bedroom. But she was less talkative. Less warm and friendly. Less energetic. She'd been dead for at least five weeks. Too bad New Orleans didn't think of that automatic phone system.

The heat is said to be putting a strain on everything: energy, nerves, and money. Our guess is that everything is under strain already. The latest figures show consumer spending still going up, but barely. Meanwhile, inflation - even by the Fed's measure - is at its highest level in four years. If we're right, the higher prices and higher mortgage payments (minimum payments are now about 50% higher than they were a year ago) are forcing consumers to cut back. Consumer spending is two-thirds of the entire economy, so any pullback by consumers means an economic slump. Rising prices added to slowing economy equals stagflation.

If you are going to fight stagflation, you have a choice: you can strike at the stag or the 'flation, but not both at the same time. The stag needs lower interest rates to kill it; the 'flation thrives on them. To kill 'flation takes higher rates, but high rates just make the stag stagger even more. Is that clear, dear reader? Never mind. The point is, you have to fight one and then the other. And the one you have to eliminate first is inflation. To fight the stag you're going to need some kind of stimulus. But the stimulus won't work as long as people expect it to increase prices. Central bank legerdemain only succeeds by trickery. When people catch on, the magic disappears.

So, the Fed has to go after inflation. That is why Ben Bernanke has been raising rates; he knows he has to have inflation under control or he can't fight deflation. Short rates have been notched up 450 basis points already - the most in 40 years. Is 'flation' beaten? Not according to the news reports.

But we will take an additional guess. Our guess is that the Fed cannot pursue the fight against inflation - even if it hasn't yet won, because the stag is staggering. The marginal consumer's knees are wobbling. He is feeling the heat already. Beads of sweat are on his forehead. His hands shake. Raise rates again and he will fall on his face. The rate hikes are over.

[Ed. Note: Stagflation - the investment killer - is rearing its ugly head once again…but you don't have to let it crush your wallet. In fact, we have 11 simple, low-risk investment ideas to arm yourself with to keep your portfolio healthy for the rest of the year. Find out what lies ahead for our economy and what strategies you can use to make the second part of 2006 more profitable than the first:

A Midyear Update for an Insane Economy

Let's turn to the Desidoorun Saloon to see what else is going on…

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Justice Litle, reporting from Reno, Nevada:

"Apparently Castro's brother is even more radical than he, but only five years younger (Fidel 80, Raúl 75). A free market revolution in Cuba…now that would be something - 47 years is a long time to stagnate."

For the rest of this story, and for more market insights, see The Daily Reckoning's blog:

What Now, Cuba?

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And more thoughts…

*** With global warming on the tip of everyone's tongue, it looks like Wal-Mart has found the perfect way to save its faltering public image…

According to Fortune magazine: "Wal-Mart…has decided to help save the earth."

Phew. Just when you thought all was lost, Wal-Mart swoops in with their new a public relations campaign to save the day.

We hate to be pessimistic, as the ideas for how they can cut down their waste and energy use looks good - on paper. But somehow, we get the feeling that this new green crusade might turn out like founder Sam Walton's 1985 "Made in the U.S.A" campaign - all talk. Think about it - how can you stick by your Everyday Low Prices without all that cheap labor from faraway lands?

We're all for change - and who doesn't want to try to save the environment? But how realistic is this green initiative? Eventually the question of what's good for the planet and what's good for business will arise - and you can bet business is going to win that battle.

*** It is the good ol' summertime here at Ouzilly. This has nothing to do with money, but in the summer we permit ourselves a little more lighthearted commentary on things that really matter.

We got back from Vancouver on Saturday. Maria came back from her acting camp in Italy on Monday. Jules and Henry came back from Paris on the weekend. Edward was here already, enjoying playing with his cousin…and the four children of a friend from America.

At dinner last night, we had a liberal feminist from New York seated next to a fundamentalist Christian…and, of course, the family itself…each with his or her own view of how things should be done. Our fundamentalist friend said grace; our liberal friend looked embarrassed…or was it contemptuous? It was like she was expecting an art show and found herself in a tent revival.

We always encourage people to visit in August. It is the only month we are reliably in one place, with a little time on our hands to visit. But the group is usually so large, we need help in the kitchen. This year, we advertised, and got Carol, a woman from Alabama. Rather than typical French fare, we're having grits, biscuits and fried green tomatoes - helped along with a flood tide of cheap Gaillac wine.

Yesterday, Carol found some pigs feet in the freezer and cooked them for dinner.

"Eeewww…" came the protests.

But Carol redeemed herself with the dessert course - a rich pound cake. "Hmmm…" came the approvals.

So, we are rediscovering American cuisine. And rediscovering each other.

"Play something for us, Jules," said Elizabeth after dinner. We recalled when Jules sang a solo in church at the age of eight. His voice was so pure, so perfect and true, it brought the parishioners to tears. Now, at 18, his voice has lost its choirboy timbre, but it is still true. This time, he sang "Hallelujah" by Leonard Cohen, accompanying himself on the guitar. Again, we were all misty-eyed at the end.

Every child has the ability to bring his parents to tears, Jules more than most.

Jules doesn't think he should have to work in the summer.

"Why should I?" asked Jules, "Dad is always getting me to help him with his own projects…like that stonewall. But he could perfectly well hire someone to do it. It's just a form of egotism…to make others do what you want them to do. It's not a necessity for the family. We don't need that wall. I don't care if it's never built. And, besides, he could certainly pay a professional to do it. I'm not a child any more, and I don't think I should be forced to do this kind of thing."

"No…Jules," we replied. "We don't think you should be forced to do it either. We think you should do it because you want to help."

"But I don't want to help…" came Jules response.

 *** "Yes, poor, Clothilde," said Pierre yesterday, bringing us up to date on a common friend. "She was diagnosed with breast cancer. She's very religious, so she prayed to the Virgin Mary and hoped for the best. But it wasn't enough. And she seems to have waited too long…now the cancer has spread.

"But that isn't the whole story. She's also in love with a local guy. You know, she's over 45 and I guess she must be feeling a little like this is her last chance. And she's been pining for this guy for years. So, when the doctor advised her to get a mastectomy, she figured it would spoil her chances with him. So, she did nothing.

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The Daily Reckoning PRESENTS: Today, Byron King wraps up his look at the history of bankruptcy and how not confronting national debt has ultimately led to the destruction of empire. Read on…

NATIONAL BANKRUPTCY, PART II
by Byron King

Early American law closely followed English law. Hence, the legal process of bankruptcy was available during the first days of American colonization. Bankruptcy proceedings and remedies followed the English template and occurred from the British Maritime provinces of Canada to the Massachusetts Bay Colony to the Virginia settlements. English bankruptcy procedure spread wherever English colonization carved a trail. The State of Georgia was founded as a "debtors' colony," to which English debtors were sent in lieu of debtors' prison in England.

The concept of "indentured servitude" became established in the Colonies, as both a means of emptying the English jails and of populating the New World with a labor force. The religious nature of many early American settlements provided an overt intellectual foundation, if not also a moral justification and a stern warning, for what followed. One verse that was oft cited was Proverbs 22:7 - "The rich rule over the poor and the borrower is slave to the lender."

Indentured servitude was a means by which debtors could work off their debt through physical labor to benefit the creditor. Many individuals in England, looking for a way out of a system stratified by class and rigid economic limits, booked passage to the New World by signing up as indentured servants to pay the fare. The indentured servitude concept evolved to where creditors bought and sold indentured servants in a manner that paralleled slave ownership. Instead of being based on race, however, indentured servitude was based on economic condition and debt. The worth of any given indentured servant could actually be reduced to a net value.

In pre-Revolutionary America, indentured servitude became an established legal remedy. There was a well-defined system of chasing down, apprehending and returning indentured servants who had "escaped" from their situation, which formed the model for later fugitive slave laws. One of the most famous indentured servants in American history was a young man named Benjamin Franklin, whose later views on avoiding and staying out of debt were very much formed and informed by his early indentured experiences.

It is interesting to speculate what would have happened in the early exploration and development of North America had France followed a similar path in its bankruptcy laws and procedure. France, too, had many poor people and not a few debtors who owed quite a bit of money to creditors. But instead of adopting a national policy to send its poor and indebted to the New World, France sent Jesuit priests (and some explorers and traders) to its territories in Canada.

Apparently lacking an understanding of the use to be made of indentured servants in overseas colonies, France kept much of its debtor class at home. French society and legal process was content merely to throw the debtors into a French version of debtors' prison. In many instances, French authorities took these "sweepings of the jail," as they were called, and put them to work serving in the army and fighting wars with France's neighbors.

So in the 17th and 18th centuries, Britain sent debtors to the New World. France sent priests and a few trappers and traders, and remarkably few women. After a century of such divergent immigration patterns, France was confronted with a populous group of English-speaking, British-controlled colonies to the south of its own holdings in Quebec, Ontario, and beyond Michigan and Wisconsin to as far west as the Rocky Mountains. And by the 1750s, the English-speakers south of the Great Lakes were expanding west into the French territories of the Ohio River Valley.

Thus, there came a time when French interests came into direct conflict with the expanding colonial and demographic interests of Britain. Open warfare between Britain and France erupted in western Pennsylvania (involving, by the way, a young Virginian named George Washington). The French enlisted Indian allies and waged the Seven Years' War (1756-1763). This war expanded from its roots around the Great Lakes region to oceans and colonies throughout the world.

At one stage of the fighting in North America, the French and their Indian allies pushed English settlement back east of the Appalachian Mountains and into present day York County, Pa. (For the next 200 years, the collective memory of Indian atrocities toward white settlers during this war would carry great weight in the thinking processes of both colonial, and later U.S., policies toward the otherwise native Americans. This is another discussion for another time.) But eventually, the manpower and resources of the British territories prevailed against the French. Not a few formerly indentured servants in Colonial America "bought" their freedom with service to the English king during the Seven Years' War.

The Seven Years' War put an end to French territorial expansion in Canada and severely curtailed what the French were able to do in their lands west of the Mississippi. At war's end, Canada became a British territory. In the late 1770s and early 1780s, the French monarchy attempted to regain some advantage in North America by supporting the U.S. Revolutionaries who were fighting against the British. Famous names such as Marquis de Lafayette and Comte de Rochambeau assisted the Americans ashore. And it was a French fleet under Comte de Grasse that sealed the fate of the British under Gen. Charles Cornwallis by trapping the British Army at Yorktown in 1781.

But fighting a battle for empire is expensive, even for a French king. By the late 1780s, the French leadership had to summon together a legislature for the purpose of raising revenue to meet the otherwise unpayable debts of the French nation. Once convened, the legislature had a few ideas of its own. And the French monarchy, having no emigration outlet for its vast debtor class, ultimately faced many of its impoverished citizens in the streets of Paris during the French Revolution in 1789.

The French Revolution was an outgrowth of the need for the French government to confront its national debt. This revolution was truly an example, writ large, of the ancient Roman concept of bancus ruptus, except that in this case, the French people smashed the entire national system of governance and a whole lot more. The national debt of France was a result of a long series of efforts by the monarchical government to gain and hold empire. Yet the French effort to gain and hold empire did not include a national policy of "exporting" large numbers of the nation's poor people to distant lands where they could find some hope, if not make trouble for others.

The French Revolution gave rise to Napoleon. And in 1803, Napoleon found himself badly in need of funds and facing an indefensible situation in North America. So Napoleon sold France's Louisiana Territories to a young and rising United States of America and its ambitious and prescient President Jefferson. The price for the Louisiana Territories was all of three cents per acre. For France, this was truly a national bankruptcy sale.

Until we meet again…

Byron W. King
for The Daily Reckoning

Editor's Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. He is a regular contributor to the free e-letter, Whiskey and Gunpowder, which covers resources, oil, geopolitics, military history, geology and personal freedom. To get your free subscription, click below:

Whiskey and Gunpowder

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