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Today's Daily Reckoning: Bankers Pull Another Fast One London, England Friday, February 13, 2009 --------------------- *** Chinese are looking for ways to diversify out of the dollar...European economies are falling like a rock... *** Protectionism is just the reaction, not the cause...the United States sees its biggest GDP drop since ’46... *** The difference between now and the 1930s...dollars are just afloat on a sea of debt without gold to anchor them...and more! --- Special Offer --- Penny Pinching Pays Off BIG In tough times, every penny counts. Especially when that penny can be turned into something a little more valuable... Click here to learn how to turn those little pieces of copper into solid gold. --------------------- “We hate you guys...” Mr. Luo Ping, director general at China’s Banking Regulatory Commission, speaking in New York on Wednesday, shared his opinion of U.S. bailout policies: “Once you start issuing $1 trillion-$2 trillion ...we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.” Reports in the press this week say that China is considering ways to diversify out of the dollar. The Chinese are no fools. They see what is coming. And they know what it will do to them – the holders of the largest pile of dollars ever assembled. The Financial Times made it perfectly clear to them in a cartoon yesterday. It shows Barack Obama in front of a huge smoking trashcan filled with dollars. The president is pouring on gasoline. Yes, dear reader, Mr. Ping has caught on. And the rest of the world is catching on too. The feds are printing trillions of dollars...and dumping them in banks and zombie corporations. They’ve got out their Zippo lighters...their firestarters...their kindling and crumpled paper. But getting this blaze going is harder than most people think. It could take months...or even years. Yesterday, the Dow held steady. But oil continued to sink. The price per barrel fell below $35. France is officially in recession, says today’s La Tribune . GDP fell at a 1.2% rate in the last quarter, the government announced. A decline of 1% is expected for 2009. Spain is in a worse recession. Property sales are off 30%. The GDP is expected to decline 3.3% this year. And unemployment is projected to reach 19% by 2010. “Falling like a rock,” says La Tribune of Spain’s economy. Meanwhile, “India set for slowest growth in six years,” says the FT . “Austria warns of dangers in potential Ukraine ‘catastrophe,’” continues the gloom and doom. And in Japan: “Deflation fears grow as wholesales prices fall.” “Pioneer lays off 10,000 workers...” World trade is collapsing. Now everyone is complaining about ‘protectionism.’ The next G7 meeting has protectionism – and how to avoid it – at the top of the agenda. But protectionism is just the reaction, not the cause. Trade is collapsing because people have become reluctant to spend, invest or lend anywhere – especially, far from home. The guy who invented the shipping container industry works in the office above us, here in the “Sea Container Building” in London. You know, the building with the gold balls on the roof. He’s an American from Kentucky who later got into the railroad business and went broke. But after WWII he figured out that shipping could be made much more efficient by putting goods into metal containers and using big cranes to stack them on ships. Thanks to his innovation, globalized trade got a huge boost. But now, for the first time in its 53-year history, container traffic is going down. In the last four months, not a single new container vessel has been ordered. China – the planet’s largest factory – is making, selling and shipping less stuff to the rest of the world. Exports to the United States are down 10% year on year; exports to Europe are down 17%. In the United States itself: “CEOs see grim economic outlook...” “Biggest GDP drop since ’46...” “Toll Bros. first quarter revenue down 51%...no end in sight to real estate trouble...” “Caterpillar to cut 2000 jobs...” The headlines are nearly unanimous: it’s deflation that menaces the world, not inflation. But Sparky Benarnke...and Barack “House-o-fire” Obama...are on the case. They’re not going to rest until they get that darned conflagration going. Eventually, they’ll get a small flame started... And then, watch out...it could burn, baby, burn... like a brush fire in Australia. And that’s when the Chinese will really hate us. *** “Fears of a return to the 1930s are too pessimistic,” writes David Bowers in the FT . Au contraire, they seem too optimistic to us. In the ’30s, the feds still had a residual respect for law and order. So did the public. When the Roosevelt administration went about taking control of the economy, it had to fight against the courts the whole way. As many as 1,600 injunctions were issued to prevent the feds from carrying out their grandiose plan. When these cases got to the Supreme Court, the court threw out key parts of Roosevelt’s program as unconstitutional. The U.S. Constitution was meant to limit was government could do. Apart from the express undertakings described in the document, all other things were supposed to be left to the states and to individual citizens. Nowhere in the U.S. Constitution was there any mention of an “industrial recovery” program, for example. So the Supremes threw it out. Then, Roosevelt attacked the court itself. He argued that “nine old men” should not be allowed to stop progress. He tried to pack the court with more justices ready to do his bidding. This was too much for Congress to swallow; even his vice president was against it. The amendment to increase the number of Supreme Court justices failed. But then, the old men themselves failed. They died. And as their mortal envelopes got packed in the dirt, new justices were appointed – such as Felix Frankfurter and William O. Douglas – who were willing to go along. This time there is practically no resistance. President Obama enjoys support, both wide and deep. The public is behind him. Congress is on his side. And the courts have long since given up trying to limit the power of the federal government. Everyone wants something for nothing. And everyone believes he can get it from the feds. As a result, we’re looking at trillion dollar deficits – as far as the eye can see. That’s not all, of course. Back in the ’30s, the dollar was still linked to gold. The price was set by law and dollar holders were free to convert their dollars into gold at the statutory price. In order to devalue the dollar, the Roosevelt administration had to call in the nation’s gold – making it illegal for private citizens to hold the yellow metal – and then revalue gold upwards. In a stroke of a pen, debts denominated in dollars were clipped 60%. Now, there’s no need even for the pen. Dollars float on a sea of debt...with no golden anchor to windward. All it takes is a whoosh of inflationary breeze and the buck is off! No need for calling in gold. No need for legislation. In a few days, the value of the dollar could be cut in half...or by 75%...or more. And who’s going to protest? The Chinese? Yes...but they don’t vote in U.S. elections. Although the dollar is no longer bound to gold, smart investors still see it as the ultimate store of wealth...and so should you. Hedge your investments against the imminent demise of the dollar by holding onto some gold. It’s easier than you think. See here . Keep reading for today’s essay... --- Special Offer --- How Ordinary Investors Cash in on Huge Profits You don’t have to be a stock market genius to clean up – even in this environment. This system makes it easy – it even tells you when to buy and sell. Keep reading to find out how to turn $200 into $1.2 million... Guest Essay: The Daily Reckoning PRESENTS: Throughout the United States and Europe, the public and government want their bankers’ heads on a platter. But is it all an act? After all, in a depression, everyone has to play their part. Bill Bonner explores... BANKERS PULL ANOTHER FAST ONE by Bill Bonner Last week, the New York Times proposed “10 Questions Bank CEO’s Should Face.” Among them: “The Treasury has proposed a $500,000 cap on executive compensation... Many of you have complained that you will lose your top talent. Are those the same people that helped lose your banks billions?” Oh, you jokers at the NYT . Touché! Yes, it’s “open season” on bankers. And check the new dictionary. The word ‘banker’ has become synonymous with “reptile” or “scalawag.” Drivers will soon be using it on the street. “F**** banker!” they will yell to the car that cuts them off. “Scumbag Millionaires,” the Sun called them. English bankers got slapped around on Monday. Then, on Wednesday, it was the Americans’ turn. They were summoned to Washington by Congressman Barney Frank; be prepared for a “public flogging,” the New York Times warned them. In Paris, meanwhile, the bankers tried to stay ahead of the lynch mob by proposing to cut their own bonuses. Everybody wants to kick the bankers when they are on the ground. Heck, we’d do it too...but the crowd around them is so thick; we can’t get a boot in edgewise. Besides, there are bigger charlatans still standing. After all, bankers were just doing their jobs – separating fools from their money. What about those who were supposed to be protecting the fools? But we are in a depression. And everyone has to play his part. The politicians feign moral outrage. The bankers feign contrition. The spectators feign to know what was going on and have a good time. It’s a show with a subplot, we think. In the interest of seditious mischief, here we undertake to deconstruct it. First we begin with a critic’s remark: this is a well-rehearsed storyline. When the losers are unhorsed, they are almost always spat upon. Louis 16th’s severed head was held up and subjected to “atrocious and indecent gestures”...Mussolini was hung on a lamp post. The bankers seem to be getting off easy. Now, a comparison: the farce of ’09 is nothing compared to the great show put on following the ’29 crash. The weakness of the present spectacle is the cast. The chief American protagonist – Barney Frank – is no match for his role model, Ferdinand Pecora. Pecora was “the most brilliant lawyer of Italian extraction in the US,” said the TIME magazine report of March 6, 1933. He “finished public schools at 12. At 18, after loping through his brother’s law books, he was managing clerk of a law firm. Even on the most complex cases (which he, tireless, likes best) he never needs notes, never forgets a word of testimony once it is on the record... At 47, his black eyes flash, his black hair bristles.” But then, the victims are no match for Charles Edwin Mitchell either. “Billion Dollar Charlie” earned more than a million dollars in ’29, when a million dollars was still real money. Senator Carter Glass said that he “more than 50 other men is responsible for this stock crash.” But, as TIME reported, “neither the directors nor any other Manhattan banker knew anyone who, they believed, could do an equally good job of carrying the bank safely through storm and strife. That he has done the job, Ferdinand Pecora would be the last to deny. The statement of National City Bank [Mitchell’s] was, on Dec. 31, 1932, the envy of nearly every bank in the US.” Still, the depression was on and Mitchell was damned for it. By 1933, he was out of a job. And now Jamie Dimon, Lord Stevenson, Andy Hornby, John Mack, Vikram Pandit, and Sir Fred Goodwin are in the dock. ‘Yes, we have erred and strayed like lost sheep,’ the bankers chant. “We are profoundly, and I think I would say unreservedly, sorry...” said Lord Stevenson, formerly of HBOS, on Tuesday. But “UK bankers find sorry is not enough,” judged a headline on Wednesday morning. “I want groveling,” wrote an opinionist to the LA Times . “I want show-trial sweating and stammering. I want their nine-figure bonus checks endorsed over to the rest of us...I want blood...” Be careful not to over-act, is our advice. Viewers might catch on. In London, the Guardian announced its own 12 questions to put to the bankers, including “why should profits be private, but losses be socialized?” Uh...that is a good question, but it is put to the wrong person. Why the bankers would want to offload their mistakes is a question even a Guardian reader could answer. Why else would they humiliate themselves publicly? Why would not a one of them dare show any fight? The pols control the money now; the bankers know it. The question is better put to the inquisitor than to his victim. Why would the government wish to take on the losses? There, the answer is fairly easy too – power. Besides, it’s not their money; it belongs to the same mouth-breathing yahoos who are enjoying the show. In fact, we have other questions we’d like to put to Barney Frank, John McFall and the rest of these sanctimonious meddlers: How many of you jackasses went short the financial sector? And if you’re so smart, why didn’t you warn the public about the housing bubble and the toxic asset meltdown? If your committees...and your armies of regulators at the SEC, FHA, FDIC, FSA or other agencies...could do nothing to prevent the crisis, what good are they? And how cometh it to be that the biggest financial fraud of all time took place right under your own employees’ noses? So you see, dear reader, how deliciously the plot turns? In the bubble years, the bankers ripped off the public...pretending to make them rich, of course...while the regulators looked the other way. Now, the politicians create a distraction, pretending to punish the bankers, while together they pick the public’s pocket for $3 or $4 trillion more. The bankers are judged guilty; but the audience hangs. 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, is available now by clicking here: Mobs, Messiahs and Markets