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Tuesday, June 29, 2009 How was Madoff different from the government's financing practices? US consumer confidence takes a hit... The Argentinean election results... Nathan Lewis on establishing an international currency...and more! --------------------- Special Offer --------------------------- With Gold, Who's Laughing Now? With all the flak you've taken for singing gold's praises, wouldn't it be nice to laugh back? Well, today's your lucky day...an opportunity to make up to 20X your money. We have only 45 spots left - so get in now! --------------------------------------------------------------- The Extraordinary Evil of Bernie Madoff by Bill Bonner London, England Let the punishment fit the crime! Poor Bernie. The man has been ordered to spend 150 years in the hoosegow. What for? Who did he kill? A century and a half seems a little excessive for a financial crime. You could hold up three liquor stores and rape a whole convent and still not get 150 years. With a little bit of good lawyer-ing, a history of child abuse in the family, and good behavior in the big house, you'd be back on the street in 18 months. But all the papers seem delighted. "Locked up for Life!" says one of today's headlines. The judge "threw the book at him," says another. His victims wanted him to get no mercy. The judge gave him none, imposing the maximum sentence. He is "extraordinarily evil," said the man on the bench. Justice has been done. Right? Here in the building with the gold balls on the roof, we're not so sure. We stand up for lost causes...die hards...and scalawags. Besides, we're not convinced that Bernie is extraordinarily evil at all. He seems much more like an ordinary evil to us. They say he defrauded investors out of $65 billion. The amount is unusual, but the crime is as common as income tax evasion. Who gets 150 years for evading income taxes? Heck, in civilized countries it's not a crime at all - but a civil misdemeanor, subject to fine and retribution, not punishment. But didn't he lie to investors? Well, yes...he exaggerated the returns investors were likely to get from his fund. But if you put every fellow on Wall Street who does that in jail, you wouldn't have any room for stick-up men and wife beaters. Isn't he the biggest financial scammer of all time? Well...he's the title-holder now. But he has a lot of competition close on his heels. Bernie's crime was taking money from people under false pretenses...and then being unable to give it back to them. How is that different from the financing activities of the US government? This year alone, the feds will borrow 50 times as much money as Bernie managed to take in during his whole 20-year career. They can only pay it back by borrowing even more money from more lenders. This is not very different from the typical "Ponzi" scheme, except that it's the government doing it. Eventually, the suckers are going to lose a lot of money. And when you balance Bernie's sins against his virtues, we're not sure the man doesn't come out at least as well as many of his accusers. While Bernie was pretending to make his investors rich, the SEC was pretending to protect them from Bernie. In fact, neither were really doing what they claimed. Which is to say, both are guilty of ordinary evil. As we pointed out yesterday, nothing is as dangerous as good luck. Madoff was not extraordinarily evil; he was just extraordinarily lucky. He was plying his trade when the feds were pumping up the biggest financial bubble in history. No wonder so much hot gas came his way. His luck ran out when the bubble popped. And now a court has found him guilty of fraud and a judge has ordered him locked up for a period equal to roughly the time between the end of the US War Between the States and the resignation of Richard Nixon. While Bernie is behind bars, the SEC and FED officials are still at large. Both are clearly guilty of dereliction and negligence. But, what is the point of keeping Madoff in prison? He represents no threat. Rather than pay $30,000 per year to keep him locked up, we suggest that he be forced to do community service work. He should be pressed into service as the next head of the Federal Reserve after Ben Bernanke's term expires in December. With Madoff in the big office, there would be no longer any illusions about what sort of bank the Fed is running. More news from The 5 Min. Forecast: "In America today, a cause for celebration, albeit a very subdued one: The US housing market has finally stopped accelerating into the abyss," writes Ian Mathias in today's issue of The 5. Check out the latest from Case-Shiller: "Both home price indexes delivered an annual return of negative 18% in April, S&P and Case-Shiller report today. While that's still a lousy number, it marks the third month in a row of flat-to-rising annual rates of return... neither the 10- or 20-city index has set an yearly record decline since January. "We hasten to note that home prices are still falling - S&P/Case- Shiller say home prices are down roughly 33% from their 2006 peak. But at least 'the pace of decline has moderated,' as S&P likes to say. "'Every metro area, except for Charlotte, recorded an improvement in monthly returns over March,' adds David Blitzer of S&P. 'While one month's data cannot determine if a turnaround has begun, it seems that some stabilization may be appearing in some of the regions. We are entering the seasonally strong period in the housing market, so it will take some time to determine if a recovery is really here. "'The stock market bottomed in March and measures of consumer confidence have turned upward. This report shows that these better spirits are also appearing in the housing market.' "Funny Mr. Blitzer should mention consumer sentiment. The Conference Board's measure of consumer confidence unexpectedly fell in June, the group reports today. Its index of consumer vibes slipped to 49.3, from a downwardly revised 54.8 in May... the Street was expecting a slight increase to 55. That's the first fall in consumer confidence since April." Wanna make sure you get The 5 - in its entirety - sent to your inbox, every Monday through Friday? You can...by becoming a subscriber to one of Agora Financial's paid publications, such as Resource Trader Alert. In the latest report, you'll learn about a little-known market that, if played correctly, could make you your first million. Get the full report here. And back to Bill, with more views on the news: Illusions are aplenty. In the popular mind, the slump of '07-'09 is coming to an end by Christmas. Practically everyone says so - including Ben Bernanke himself. All the bailouts and stimuli are paying off, they think. Soon, it will be business as usual. Yesterday, the Dow rose 90 points. Oil rose a bit too - to $71. The 10- year T-note rose too...with a yield falling below 3.5%. And gold held steady at $940. If the markets know what happens next, they're keeping mum. But this morning comes news that the Dow is off more than 100 points on news of a consumer confidence pullback. Apparently consumers are getting concerned about the jobs situation and the supposed 'economic recovery.' We have already told you, dear reader, why we do not expect business as usual ever again in our lifetimes. From WWII to 2007, the world economy had a single important driver - the US consumer. At the beginning of that period, he consumed because he earned. By the end of it, he earned because he consumed. That is, the more he was willing to borrow and spend, the more the whole world economy seemed to bubble up. But now, that era is over. As Jeff Immelt, head of GE says, "You're going to have a world where the US consumer won't be the main driver." Clearly, the US consumer no longer has the positive effect they once did on the US economy...and it's only going to get worse from here. Learn what you can do to protect yourself and your assets from the next leg down on the US downturn by reading this special report, found here. "Where was the SEC?" asked a sign outside of the courtroom where Bernie Madoff was sentenced. Good question. And guess what. We have the answer. While Madoff was taking in his billions...and the biggest financial bubble was preparing to explode...the SEC was asking questions - of your editor! Yes, dear...dear reader. All over the world, responsible authorities are demanding a more muscled approach to financial regulation. "Bernie Madoff's life sentence should galvanize regulators everywhere," says today's TIMES of London editorial, speaking for the majority. But it was not muscle that kept the SEC off Madoff's case. At the very moment when a freelance informant was tipping off the SEC about Madoff...the agency's goons were beating up innocent victims...and grilling innocent publishers: The New York Times reports: "The Boston office of the Securities and Exchange Commission began the investigation around 2001. Three years later, formal charges were brought against Mr. [Richard] Kwak and seven others. By the time the case went to trial, in 2007, only three defendants were left; the others had settled with the S.E.C. "In that 2007 trial, Mr. Kwak and another defendant, Stephen J. Wilson, were cleared of one charge, with a hung jury on the remaining charges. (The third defendant, who foolishly acted as his own lawyer, was found liable and fined $10,000.) "The S.E.C. retried Mr. Wilson in 2008. He was cleared. Finally, in March 2009, the S.E.C. retried Mr. Kwak, with the same result. The jury took less than four hours to exonerate him. "Mr. Kwak's life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker - he certainly can't afford to retire - he long ago lost his job with Morgan Stanley, where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was. "'It pretty well wiped me out,' he said a few days ago. He is extremely bitter." The story of our own brush with the SEC will have to wait for another day. It is still subject to a gag order imposed by our own lawyers. The case is still undecided - four years later. We can't tell the whole story yet...but we can pass along the moral of it now: anyone who believes government regulators will stop investors from losing money to fraudsters is dreaming... Stay tuned. The election results were counted up last night. The Kirchners - the husband and wife team that governed Argentina - lost. The winner was the man accused of drug dealing...Francisco Narvaez. As we remarked above, we're suckers for underdogs, die hards and scalawags. That is probably one of the reasons we like Argentina; it is all those things and more. It is a measure of the lost cause status of the pampas that news of the election was hard to find. We looked through the TIMES and found no mention of it. The International Herald Tribune did pass along the news - on page 4. Something went wrong in Argentina. The country was once a rival of the United States of America - with nearly the same income per capita...and about the same prospects. Now, it has less income per person than Chile and exports less beef than its tiny neighbor, Uruguay. What went wrong? Well, life is not exactly under our control. We doubt that a group of Argentines ever got together and decided to become a second rate country. Things happen. And here at The Daily Reckoning we watch...and wonder what will happen next. Until tomorrow, Bill Bonner The Daily Reckoning P.S. You don't have to let the topsy-turvy stock market control your ability to rake up gains...in fact, you can use a downturn in stocks to your advantage. There is a way that for every $1 someone else loses in a panic, you could calmly collect nearly $6. Get all the information here. --------------------- Special Offer --------------------------- The "Forever Oil Crash" Has Already Begun The era of "cheap oil" is long gone...but there are two investments that could give you a powerful shield against the fallout ahead - and have the potential to soar, despite the current market turmoil. Keep reading... --------------------------------------------------------------- The Daily Reckoning PRESENTS: Financial theorists divide the world of investments into two asset classes: the risk-free asset, and all other risky assets. With currencies mismanaged constantly by central banks, nothing today even approaches the ideal of a "risk-free asset." In marketing-speak, a vast demand goes unsatisfied, according to Nathan Lewis. Read on... How To Establish an International Currency by Nathan Lewis Binghamton, New York Citizens can be easily coerced into using the government's currency. Usually it is enough to demand that taxes be paid in that currency. Today, most governments make it illegal to use a foreign currency within their borders. People in other countries are beyond such simple mechanisms of control. For an international currency, there must be reasons to use the currency voluntarily. The best currency is the one that is most stable in value. Historically, the premier international currencies, whether the US dollar after World War II, the Dutch guilder in the seventeenth century, or the Athenian owl in the fourth century BC, were those reliably pegged to gold. Gold has been the superlative monetary standard for thousands of years. Even after the US dollar left the gold standard in 1971, it remained the most stable currency in the world, which allowed it to maintain its prominence up to the present day. There was no better alternative. During the 19th century, the US was considered an emerging market. The premier international currency was the British pound. In 1914, the British pound had been pegged to gold (with brief lapses) for 233 years. However, the beginning of World War I tossed all the European powers into turmoil, including Britain. The pound's link with gold was broken. People in Europe looked for a reliable store of their financial assets. They observed that the United States was untroubled by war and had by then a long history of gold-linked currencies and protection of property rights. In the 1930s, all European governments devalued their currencies again. The United States did as well, in 1933, but the dollar remained pegged to gold afterwards while most European currencies (and the yen) floated. World War II cemented the transfer of financial prominence to the US To put it quite simply: the US Treasury bond - denominated in gold-linked dollars - was the most reliable store of value in the world. Financial theorists divide the world of investments into two asset classes: the risk-free asset, and all other risky assets. With currencies mismanaged constantly by central banks, nothing today even approaches the ideal of a "risk-free asset." In marketing-speak, a vast demand goes unsatisfied. How could China establish an international currency? I predict it will happen when a person anywhere in the world is able to say: The Chinese government bond is the most reliable store of value in the world - the closest approximation to the "risk-free asset." Obviously, we are not there yet. How could the Chinese government promote this process? The Chinese yuan would have to be reliably stable in value. In the past, this has always meant a gold standard. Fiat floating currencies managed by bureaucrats are never very reliable, and have a nasty tendency of disappearing altogether. In the past, the international currency was always the one that remained pegged to gold, while the alternatives sank into chaos and devaluation. Chinese authorities may claim that their floating currency managers are better than the US or European floating currency managers, but nobody would believe them. The yuan would have to be a reliably independent alternative to the dollar, euro or yen. Since 1950, the yuan has had one form or another of a dollar peg. It is completely pointless to use yuan instead of dollars, if the yuan is pegged (tightly or loosely) to the dollar. The desire for stable exchange rates is entirely reasonable. However, the Chinese government has not established any record of being able to manage an independent currency. Simply having a floating currency is not enough. Both the euro and yen float, but they are not really independent of the dollar. Monetary policies at all three central banks are eerily similar. The Bank of Japan, in particular, seems to be subject to political pressure from the United States. If the dollar were to fall in value considerably, it is likely that the euro and yen would also be guided lower to avoid disadvantages to trade. They would all decline together, if not quite at the same speed. To put it a slightly different way: Even though people are getting nervous about the reliability of the US Treasury bond, neither the German government bond nor the Japanese government bond are clearly better. "The U.S. dollar is, quite frankly, not a very good currency. It would not be difficult to develop a better alternative - a currency pegged to gold. Once the Chinese authorities had demonstrated that they can manage such a system, people everywhere would flock to yuan-denominated assets." If China adopted a gold standard policy, this would establish true independence from the dollar. However, if the dollar fell in value considerably, then the yuan/dollar foreign exchange rates could change dramatically. Instead of about 7:1 today, perhaps it could go to 1:1 in the future. This would be due to a dollar fall, not a rise in the yuan. Many countries could not tolerate such a situation. Switzerland tried, in the early 1970s, but the trade consequences were too great. It would be quite unpleasant for China as well. However, China already has significant trade advantages, so even large forex moves like this could be withstood. The Gulf States - and Russia to some degree - have an even larger advantage in this regard. They have no real competition for their primary export, crude oil. A credible military remains, unfortunately, an important component of political independence, and consequently currency independence. The US is not likely to hand over its mantle of world leadership without complaint. While hostilities are unlikely, certain political pressures by the US can be imposed upon governments who, in schoolyard terms, seem like they can be pushed around. Japanese leaders remember the military exercises the US Navy conducted in Tokyo Bay in 1989, a rather blatant reminder of the Black Ships of 1853. Russia is well aware of political incursions in the former Soviet republics, and even Germany still hosts enormous US military bases. China is establishing itself as a military power. An alliance with Russia, and acquiescence among the other Asian states, would help establish real political independence. There remains a little problem of exactly how to manage a gold standard system. This is not very difficult, but the Chinese monetary authorities apparently have not yet mastered the basic concepts involved. Fortunately, there is now a handbook on these subjects - Gold: the Once and Future Money (2007), which is available in a Chinese edition. The US dollar is, quite frankly, not a very good currency. It would not be difficult to develop a better alternative - a currency pegged to gold. Once the Chinese authorities had demonstrated that they can manage such a system, people everywhere would flock to yuan-denominated assets. Lenders would demand that their loans be denominated in reliable, gold-linked yuan. Shangahi would become the financial capital of the world. Regards, Nathan Lewis for The Daily Reckoning Editor's Note: It's no secret that gold is the ultimate store of value - but can it really make you rich? Only if you are willing to take a chance...a big chance. Many investors have already taken the plunge...so many, in fact, that we can only let 45 more people in on this golden opportunity. Become one of the lucky few by clicking here. Nathan Lewis is the author of Gold: the Once and Future Money (2007), published by Agora Book Publishing and J. Wiley. Get your copy here. His website can be viewed here. --------------------- Special Offer --------------------------- You could have turned $5000 into $1 million in just over five years... Each week, readers to make just one investment buy. And since November 2006, not one pick has lost value! It's no wonder readers of this newsletter could have turned $5,000 into $1 million in just over five years! Now, they're quickly closing in on $2 million! Join them...   The Daily Reckoning - Special Reports: Investing in Gold: The 5 Best Ways to Invest in Gold US Recession: By far the Weakest Recovery Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...