The Daily Reckoning
When Scams Collide
Paris, France
Friday, September 12, 2008
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*** Is there no limit to how much the government can borrow? How much it can spend? Won’t there come a point when the dollar loses value...and when creditors get scared?
*** A leak in the Bubble System...the U.S. trade deficit is unexpectedly large...
*** The days of laissez-faire are over...we don’t know how low gold can go – but we do know how low stocks and bonds can...and more!
Boys do it. Girls do it. Airlines do it. Even towns, bars, and banks do it.
Lehman Bros. looks like it might do it.
“Lehman Races to Find a Buyer,” says the Wall Street Journal . If it doesn’t find one it will have to do it.
But can our nation do it?
When you can’t beg, borrow or steal the cash to pay your current obligations, you go bankrupt. That’s why the feds stepped in and took control of Fannie and Freddie. The mortgage lenders needed cash. And at the rate of interest private lenders wanted – to protect themselves from the unlikely chance that Mac and Mae might not be able to repay – it looked like they would never be able to get themselves out of their $100-$200 billion hole.
“Imagine that you have a note from a company that is doing poorly,” writes colleague Simone Wapler in the new French edition of MoneyWeek magazine. “You’re afraid, because if the company fails, it won’t be able to pay the note, and then you’ll be in trouble too. But the owner of the company comes and tells you not to worry. He says he’ll bailout the company himself. But knowing that the owner is himself deeply in debt, are you reassured?”
In the present case, the Mother of All Bailouts is underway...and the Mother of the Mother of all Bailouts is none other than the biggest debtor in the entire world. In fact, so great are its debts and obligations that there is no way it could ever repay them, at least not honestly – and everyone knows it.
As to all that, the facts are clear; but beyond the facts we find nothing but guesswork and question marks. As long as people have confidence in the dollar, there should be no problem, right? But how long can people have confidence in the dollar when its custodians are spending it so freely? U.S. government expenses are soaring...just as receipts decline. We already have a deficit of about $400 billion. No one knows how much the bailout of Fannie and Freddie will add, but it could be hundreds of billions.
And if the slump continues, we could soon be looking at a deficit of $1 trillion. Some analysts – notably, Albert Edwards of Societe Generale – are warning against deficits of $2 trillion. Is there no limit to how much the government can borrow? How much it can spend? Won’t there come a point when the dollar loses value...and when creditors get scared?
The answer to those last three questions is: yes. And that is what will make the next few years so entertaining; we’re going to find out how much the United States can get away with before it goes broke.
“But wait, you’re missing something,” says a colleague. “There’s a worldwide slowdown. Just look at Lehman Bros. Liquidity is disappearing, not increasing. That means people need ready cash. And the world’s readiest cash is the greenback. And look what’s happening already. The dollar has risen against the euro by about 15% from its low. Yesterday, the euro fell below $1.40.”
He might have added that when the credit bubble sprang a leak a year ago, it marked not only the end of the credit expansion, but also the end of the whole Bubble System.
You’ll remember how it worked, dear reader; we described it many times:
Americans bought things they didn’t need with money they didn’t have. The borrowed dollars went to Asian manufacturers (and more recently to oil exporters). Instead of flowing back to the U.S. Treasury, accompanied by a demand for payment in gold, as could have occurred before 1971, the dollars backed up overseas. In fact, local governments had to print more of their own currencies to buy the dollars. The result was a huge ocean of liquidity – dollars, yen, yuan, rubles, pounds, euros – which then drove up prices for assets all over the world. Houses, stocks, bonds, diamonds, watches, paintings – everything got lifted up by this tide of easy money. Gold soared over $1000. Oil reached almost to $150 a barrel. And numbskulls paid millions for Damien Hirst’s silly confections.
But last year, someone pulled the stopper. All of a sudden, the world’s liquidity began to drain away. The U.S. consumer is reluctantly slowing down. Not that he wouldn’t like to keep spending and borrowing in the style to which he became so accustomed; but those happy days are over. He’d like to spend...but he has run out of money and credit.
Without that reckless spending, the world’s economy must slow down. Because the liquidity pump – the Bubble System that delivered cash and credit all over the world – has been turned off.
At least...that’s how it looks to us this morning...
*** But wait! Here comes the latest figure for the U.S. trade deficit. It’s $62.2 billion for last month. Unexpectedly large. Looks like the Bubble System hasn’t completely come to an end. The United States is still pumping out liquidity. About $2 billion per day. How long can this go on? Longer than we thought...but not forever.
*** “Lawmakers seek to curb speculators,” was a headline in yesterday’s financial press.
Just as we predicted; the days of laissez-faire are over. According to the news item, three democrats are leading the charge, waving a report that claims that speculators take advantage of trends and actually influence prices. Can you imagine anything so outrageous, dear reader? People guess what direction the wind is blowing and turn their sails to capture it! Then, these unscrupulous buyers and sellers move prices! What do they think this is, a free market?!!! Those last three exclamation points are meant to show you how indignant we are, here at The Daily Reckoning headquarters. Someone should do something! Government should set prices at a level that is fair for everyone...and leave them there.
Well, good for the democrats! Good on you...you three amigos...you champions of the little guy! You heroes of the war against greed!
You morons!
*** Gold fell another $16 – to $746. Investors are still up over 12 months ago – but barely.
How low will gold go?
Again, we turn to our MoneyWeek editor here in Paris, Simone Wapler:
“Technically, our graphic analysis tell us that gold is still going down and could test the $720-$740 range.”
We don’t know how low gold will go. But we know how low stocks, bonds and the dollar can go – to zero. And, while we’re not making any forecasts, we’re happy to hold gold at least until this period of transition is past. Remember, there are times when “he who wins is he who loses least.” This is probably one of those times. Take advantage of the low price...and pad your portfolio with gold .
The Daily Reckoning PRESENTS: A presidential campaign is often described as a horse race; a demolition derby is more like it. The candidates are always backing up – and smashing into their own scams. Things aren’t much better in the financial world either. Read on...
WHEN SCAMS COLLIDE
by Bill Bonner
The dewy Democrat rolled along smartly in his new “change-mobile.” Then, under pressure from the knuckleheads in his own party, he reversed to pick up that babbling hack, Joe Biden, as his running mate – and ran right into his own fraud. Biden is to Obama what Monica Lewinsky’s blue dress was to Bill Clinton – the dumb thing that reveals the spoken lie.
Biden demolished his own presidential campaign in 1987 by pretending to be British Labor politician Neil Kinnock. Not only did he recite Kinnock’s lines about being the first in his family to go to university, he also stole his identity, claiming that his father had worked in the coalmines. His own father was actually a polo-playing car salesman from Baltimore. But if the media hadn’t stopped him, he probably be collecting Kinnock’s pension by now.
Apparently, the better you know Biden, the less you like him. In his home state, 97% of voters refused to back him in the presidential primary. But that was Biden in the ’80s. In the ’00s, Biden is, supposedly, on the ticket because he knows who Saakashvili is. In truth, he’s there because the old nags in the Democratic Party wanted someone they could trust on the ticket – a real go-along, get-along backslapper. They turned to Biden, in other words, not for change, but to avoid it. And now, Obama and Biden are trailing in the polls. Americans don’t mind a liar in high office; but they’re suspicious of one who can’t keep his lies straight.
Meanwhile, over in the Republican camp, that tough old salt, McCain, has come about smartly, outmaneuvering the Dems by choosing a baroque woman from Alaska as his #2. But here too, he’s run into his own humbug. If military experience were so important to the nation’s top office, you’d think he – at 72 years old – would want a serious chief mate to take command if he were struck down. Ms. Palin’s military experience is limited to 22 months as captain of the Alaska National Guard. Then again, she might be an improvement over McCain anyway.
His right to rule, McCain says, comes from his superior command of the military situation. But the claim looks counterfeit. During his tour of duty McCain, lost five U.S. Navy aircraft, four in accidents, one in combat. The first one went down in Corpus Christi Bay when he was practicing landings. The second crash occurred over Spain, when he was flying too low. He took out some power lines and bailed out. Number three was wrecked when he was flying into Philadelphia for an Army-Navy football game. The fourth one, at least, was not his fault. An accidentally-fired rocket hit his plane when he was waiting to take off. The resulting explosion killed 134 sailors, destroyed 20 aircraft and nearly sank the ship. Finally, in 1967, he got shot down, roughed up...and then, by his own admission, collaborated with the enemy in order to save his skin. Maybe getting shot down was just bad luck too, but sailors are a superstitious lot. They’d probably give the heave-ho to this right Jonah rather than set sail with him as captain.
Of course, the financial world too is full of mountebanks, cads, and imposters. Who can forget Alan Greenspan’s famous remark that a nationwide decline in housing prices was “most unlikely?” Or Ben Bernanke’s suggestion a year ago that subprime losses wouldn’t exceed $100 billion (they’re now about $500 billion, and still growing)? Or bond appraisers’ Triple A ratings for what turned out to be junk debt?
“I have enormous confidence in BSAM [Bear Stearns Asset Management] and the ability of our talented professionals... You can count on us to deliver,” wrote James E. Cayne, CEO of Bear Stearns to his customers a year ago. The talented professionals on Wall Street did make good work of it, taking the bumpers off portfolios all over the world.
But it is where the scam of government – that every citizen can live at the expense of everyone else – meets the scam of finance – that we can all get rich without working, saving, or taking any risk – that the biggest wrecks occur. Last Sunday, we heard the rubber squeal: the U.S. government took control of Fannie Mae and Freddie Mac – America’s government sponsored mortgage backers. The Financial Times dutifully reported that this nationalization – the biggest in history – will cost the government $200 billion. USA Today reported only that it put the taxpayers on the hook for “trillions.” Asked the question by a reporter, Mr. Paulson, Secretary of the Treasury and the man who should know, replied: “We didn’t sit there and figure this out with a calculator.”
Thus did he drive the nation into the most dangerous intersection in economics – blindfolded. But did bond investors cover their eyes – aghast at the accident that is about to happen? No, they bought the government’s paper! Yields fell. Did the taxpayers cringe and howl, in pain and outrage, at the huge new burthen placed upon them on Sunday night? No again. Of course, a nation that robs Peter to pay Paul won’t get a whine out of Paul. But what did they think? That they were all Peters? That they would never have to pony up a cent? But there is the point of collision right there. The taxpayers believe the credit of the United States is an unstoppable force. Investors believe the dollar is an immoveable object. Both believe the United States is crash-proof...and that no one will ever have to pay for its bailouts, its bamboozles, and its busted-up humbugs.
Check your airbags.
Enjoy your weekend,
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 national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis .
Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics , written with co-author Lila Rajiva
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