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The Daily Reckoning Friday, November 13, 2009 The Dow dips...gold holds above $1,100...but no signs of panic yet, What's this? Merkel is joining the fool's parade! Investing in Argentina, a tale of two families and much more... --------------------------------------------------------------- Bill Bonner, en route back to London, reports... Et tu, Angela? Yes, dear reader, even our heroine, Angela Merkel, is joining the fools' parade. In a front-page feature in yesterday's International Herald Tribune we learn that Ms. Merkel is bringing Germany in line with the rest of the world - by increasing the public deficit to over 6% of GDP. "Germany chooses growth over paying debt," says the misleading headline. But 6% is only half the US level...and the UK is nearing 15%! More below... --- But First... 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But if you want to be an "international man," as our friend Doug Casey termed it, you have put up with some inconvenience. Why would you want to be an "international man?" As another old friend, Marc Faber, observes, it pays to travel. You get a broader perspective. And you realize that many things your compatriots take for granted others take for absurd. "The more you look, the more you see," is our dictum. One thing Americans take for granted is that they will always be the richest, most successful people on earth. They think that because that is what they have always known. The US economy became the biggest in the world before 1900. Americans had just what it took to become the richest people on the planet. They worked hard. They saved their money. They had little government interference. They had the industrial revolution at their backs...and nothing in their way. And they had a dollar that was 'as good as gold.' By the time the baby boomers were born the US had such a big lead over the rest of the world, it seemed like nothing could stop it. Free enterprise guaranteed new innovations and new wealth. Democracy guaranteed a political system that would adapt to the needs of the evolving economy. But nothing lasts forever. As it matured, the US economy and its political system became more and more rigid and more and more costly, with handouts and bailouts...at every level. Large companies are protected. Millions of people are encouraged not to work. The whole financial industry is dipped in honey. And the whole population is urged not to save, but to spend. Why bother to save for retirement; there's Social Security. Why bother to save for health care emergencies; there's the government's new overhaul of the medical system! Why bother to save at all; the government has fixed short-term rates so low you get nothing for your trouble. On our travels what we notice is that there are a lot of smart people in the world. And they're all sweating, striving, and angling to get ahead. You never know who will win the race, but you can be sure that no one will stay in the lead forever. "US Wages Out of Balance," says The New York Times. It is pointing out the obvious. Americans are paid too much, compared to other people in the world who work just as hard and who now - thanks largely to the feds - have as much or more capital than we do. Wages in the US will come down - probably thanks to unemployment and inflation. So will US living standards compared to the rest of the world. Meanwhile...back to Angela... Generations of German central bankers learned their lesson. They saw what happened when hyperinflation ran wild in the '20s. The middle class was wiped out in a matter of days. People lost faith, not only in the Deutsche Mark, but in Germany itself...and in all the old values. The next thing they knew, the Chancellor was wearing a silly uniform and they were on the road to Hell. More recently, the last generation of German central bankers worried about the euro. They had no doubt about themselves. They had the backbone to protect their new currency. But what about the Italians? And the Greeks? And the Irish? Well, they can fret no more. Now, the German deficit is higher than the Italian deficit. Why would they do such a thing? They have the usual poppycock explanations - countercyclical spending, the need to maintain social services as tax revenues fall, the need to bailout the East, (see below) etc. But the real reason is that the old German economists are dead. One of the last of them was our colleague Kurt Richebächer. Every time we saw him, Kurt would complain about American and English economists. "Ya...you Anglo-Saxon economists are ruining the world," he would say. Kurt had no truck with Keynesianism. Or monetarism. Or any other of the fads in economics. Besides, he had lived through Germany's hyperinflation, the rise of National Socialism, WWII, partition, and finally, reunion. He knew that there were no free lunches...no easy fixes...and no panaceas. He knew too that people who promised miracles were dangerous frauds. Wealth is created by work...saving...innovation...investment...and perseverance. There are no miracles. No short cuts. While wealth is created by work and saving, it is destroyed by consumption and debt. When you borrow money, you have to pay it back. Then, you must draw down your wealth...reduce your living standard...and cut into the capital you laid away in years past. You can try to squirm and dodge...but you just make the situation worse. Kurt was right. But now Kurt is dead. A new generation of economists has taken over. Born after the war, they know hard times only from movies and history books. They haven't forgotten the old truths; they never learned them. Instead, they probably did their training at Harvard or Chicago...and studied nonsense...such as the Efficient Market Hypothesis and Modern Portfolio Theory. They think the key to prosperity is spending. Consumers spend until they can't go on. Then it's up to the government. That's why the Germans are running such a high deficit. The think they need to keep up spending - at all costs - in order to boost the economy. As Kurt used to point out, it makes no sense theoretically...and there's no evidence that it works in practice either. Every time governments have intervened with large dollops of countercyclical spending they have made a mess of things...either by stimulating the private sector to further acts of reckless insolvency...or by blocking the process of correction. It's all claptrap. Angela, you should be ashamed of yourself. --- Introducing the Options Hotline Guarantee --- Our readers could have turned $5000 into $1 million in just over 5 years "Each week, I tell my readers to make just 1 investment buy. And since November of 2006, not one pick has lost value! It's no wonder our readers could have turned $5,000 into $1 million in just over 5 years! Now, we're quickly closing in on $2 million - currently at $1,892,043.04! "Read on to find out how to start making huge gains!" - Steve Sarnoff, editor Options Hotline --------------------------------------------------------------- And back to Bill with a few more thoughts... Dave Rosenberg says the unemployment rate is headed to 12-13%. And then, it's going to stick at more than 10% for a long time. "Think about it. We haven't yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began. "So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over - perhaps even years." Like we keep saying...get ready for a long, Japan-like slump. But here's a headline that offers hope for a brighter future: "Unions prod Obama to fix ailing airline industry" On the surface of it, the idea is absurd. What does Obama know about airplanes? Who would want to fly in an airplane with Obama in the pilot seat? But the headline reveals today's most popular delusion - that the government can fix everything. In fact, there is no evidence that government can fix anything other than the problems it has caused itself. And then only in rare, accidental moments of lucidity. But that doesn't stop people from hallucinating. They think Obama can fix the auto industry, by paying people to buy a new car. And they think he can fix the housing industry too - by extending the new buyer tax credit. It doesn't occur to them that the problems in the housing industry are almost exclusively the fault of the federal government in the first place. The feds subsidized mortgages, encouraged mortgage lending to people who should have been renting, and lowered interest rates. These fixes created a bubble in the housing sector. No bubble expands forever. Eventually, they all blow up...which is what happened. But let's go back to flying machines. The gist of the AP article is that unions want more regulation. The deregulation that began in the Carter Administration produced lower fares, they admit. But it also increased capacity. And now that the economy is in a slump, the extra capacity is a heavy burden to the entire industry. "Airlines are offering the fewest seats to passengers, measured by available seats and distance traveled, in more than a decade. They have shed more than 158,000 full-time jobs since employment peaked in 2001 and lost an estimated $33 billion over the past decade. Thirteen airlines have filed for bankruptcy in the past two years." Airlines are cutting back and laying off workers. Someone - O! Bama! - should put a stop to it! Seems to us that the fly-boys are doing what they ought to do. Any interference by the feds will, once again, only make things worse. More for our Dear Readers below, but first, here's today's essay... --- But First...The NYSE Is For Ninnies! --- When the bailout money runs out, the NYSE and the "regular" buy and hold stocks traded on it are going to be in for a hell of a correction. When that happens, one little-known market could be set for a 30-year bull. Will you position to take profit, or lose your life savings with the rest of the ninnies? This step-by-step report may help you answer this very important question... ------------------------------------------------------------ The Daily Reckoning PRESENTS: Ever wonder what Mikhail Gorbachev did before he was a handbag model? How about the results of that great planned economy experiment... That ever make you scratch your head? Well never fear, dear reader, Bill offers provides these answers, laced with his characteristically sardonic wit and insight, in today's essay. Please enjoy... Ostalgie: The Haunting Fear that Others are Diddling the System Better Than You Are By Bill Bonner Rome, Italy Only a moron would allow economists to make decisions for him. So, this week, we give thanks to morons. We're referring to the dumbbells who took part in the largest and longest and most complete test in economic history. Two generations and 20 million of them. The poor lumpen of Mitteldeutschland proved that capitalism - even with heavy state interference - delivers the goods better than a planned economy. Readers may know Mikhail Gorbachev as a fellow who advertises Louis Vuitton luggage. But before he made it big as a mannequin, he was the top man in the Soviet Union. It was not an easy job. The empire was falling apart. So, in a rare act for a public official, Gorbachev told the Soviet people the truth: "We can't go on like this," he said in 1986. Three years later, on November 9th, 1989, the test was over. What they were going on with was a system of compulsory economics - in which bureaucrats made the key decisions. They decided how much capital to allocate to what sector...how many people to employ...how much to charge for the output, and so forth. Of course, in order to make these decisions, Soviet economists had already discovered that they needed to make a lot of other decisions too - such as where people would live, how much they would earn, what they would do, and which of them would be starved to death. So, it was a very controlled experiment. Conditions were so miserable in the East that the government needed a vast network of spies and gulags to keep the malcontents from ruining the test. Still, 5,000 people fled to the West. 136 were killed trying to get over the wall that separated West Berlin from the East. The results were obvious even before the test began. Ordinary people, looking out for themselves, always make better decisions than economists working for the government. Taxi drivers are better at getting people from place to place. Automobile manufacturers are better at making cars. Bakers bake better bread. Consumers buy what they really want. And capitalists make better investments. But just because a thing is absurd doesn't mean it is unpopular. There are people who get upset when they discover that there is H2O in their drinking water. There are also people who want aparatchiks to make their decisions for them. And recently, there are more of them. Many Germans in the East long for good old days when things were under control. They call it 'ostalgie.' After a bit of food and a roof over his head, a man becomes more concerned with status than with survival. It is not how rich he is that matters; it's how rich he is compared to those around him. Status brings reproductive advantages, say the socio-biologists. But it brings disappointments too. And envy. So wicked and destructive is the urge to envy that the Catholic Church banned it as a cardinal sin. Societies suppress envy in a variety of ways. Some tax the rich. Some force everyone to wear the same dreary clothes. Most level the population by sticking everyone into the same education, retirement and healthcare systems. Capitalism doesn't make anyone rich. It only allows people to compete for wealth on more or less equal terms. Naturally, some are better at it than others. Most people prefer alcohol, television or jobs on Wall Street to the rough and tumble of real enterprise. And almost everyone is prey to bubble delusions, hoping to get something for nothing from the latest fad investment. And then, when capitalism corrects their mistakes, they turn ostalgic, longing for the state to intervene and rig the game in their favor. "After the wall fell: capitalism is a disappointment" says a headline in yesterday's Montevideo paper, La Republic. A poll showed that of people asked in 27 countries only 11% thought capitalism was working properly now. We're surprised that anyone thought so. With so much finagling by the feds, it's a wonder that it works at all. But even among the complainers, few suggest a return to the policies that wrecked East Germany between 1949 and 1989. Instead, what they want is a kinder, gentler form of capitalism with the state as a benevolent partner. Full employment, with Audis. Guaranteed health and retirement benefits, with wifi and cappuccinos. Unlimited government bailouts, but without state bankruptcy. Alas, the lumpen are worse at rigging the game than they are at playing it. The elites are better; that's why they're the elite. They use corrections the way a general uses a cease fire - to strengthen their positions. They connive with the government for more regulations to keep out competitors, bailouts to protect them from their mistakes, and handouts to enhance their status. That's why, scarcely a year after they were all on the edge of insolvency, the world's big financial firms are paying the biggest bonuses ever. Does rigging the system like this make people better off? Many thanks to those teuton guinea pigs again! They conducted another test. After the wall came down, the Federal Republic in Bonn decided to intervene in the Eastern states in order to lift the ossies out of poverty and put them on a level playing field with the West. Beginning in 1991, the West transferred an amount equal to 4% of GDP each year to the East. Public works. Public health. Public education. Welfare! Handouts! Bailouts! Unwittingly, which is the only way to do this sort of thing, they were merely adding to the test data. For next door was the Czech Republic, which also suffered under the Soviet boot, also engaged in absurd and counterproductive policies, and also flew the coop as soon as the Soviets dropped their guard. The Czechs had no rich relatives. They had no source of free money. They had no booming economy that they could join. No money. No port. Not even a language anyone else could speak. Well, guess who won that race? The Czechs, of course. GDP growth rates in the Czech Republic pulled ahead of those in East Germany in the early '90s; since then, they've been pulling farther and farther ahead each year. Regards, Bill Bonner, for The Daily Reckoning Joel's Note: Did you know, Bill writes books too? Ah yes, of course you did. They're New York Times bestsellers, after all! The question, then, is do you own one of them? If not, we suggest starting at the beginning. Bill and Addison's classic, Financial Reckoning Day, was just updated (new charts, additional chapter, etc.). So, if you're interested in a fluff-less, spin-free weekend read, it's a great place to start. Grab one here. ------------------------------------------------------------------ And, with a few final thoughts for the week, Bill continues... "Would you encourage foreigners to invest in Argentina," asked a reporter in Cafayate. Our reply: "Much of the world is going through a downswing of the credit cycle. Argentina doesn't have and didn't have much credit. So it will be spared the big problems. But it sells farm produce to the rest of the world. It has to expect a period of sluggish sales and soft prices. "I don't know if I would advise foreigners to bring their money to Argentina. But I would advise everyone to diversify beyond their home country - especially if they are American or British. Generally speaking, it appears that the go-go finance-based economies of the Anglo-Saxon world have peaked out. They lived on credit. Now, they die on credit. And they will find it very hard to shift their economies from credit-fueled consumption to investment-driven production and export. The competition is too stiff. America is a high cost producer. It can't compete easily with the developing and emerging economies. So, it will just have to get used to a lower standard of living. That means lower asset prices too. Which is why an investor - broadly speaking - can anticipate a higher rate of return from his investments in India, Brazil and even Argentina, over the next 20 years, than he can from the US." But isn't Argentina full of crooks, booty-shaking tango dancers, escaped Nazis and Norteamericanos on the lam? A friend of ours thought so. She was having lunch at a nice restaurant in La Recoleta, one of the nicest parts of town, when someone stole her purse. Poor thing, we were afraid her trip was ruined. But then, she got this email: "Hi good afternoon, my name is Emiliano, is that i work doing maintenance of parks and squares in the area of palermo, and in one of the trash bins encontre a series of documentation to its name and among other things i could detect this mail. "That is why i warn that i have the papers mentioned, licenses, passports, credit cards, etc. without more and in anticipation of any response on their side and wishing you are with their belongings, i leave my mobile Phone in order to combine a meeting so that you can restore their belongings, but more, i dismissal of you carefully." She writes: "This 'Santo Emiliano' is now and always will be the patron saint of Buenos Aires. He has restored my faith in humanity by going beyond his job tidying up the beautiful local parks and helping a total stranger to once again see the real beauty of his city. He explained that he enlisted the help of many friends to compose the email above. I get teary-eyed thinking about it. I can't wait to meet him and try to explain to him in my broken 'castellano' that he is working in the wrong municipal department and should be promoted to the head of the department of tourism! "Ah, the world is once again a nice place to live." And lastly... "I must say," Elizabeth began, after hanging up the phone. "Being married into your family is an enriching experience." Elizabeth comes from a good New York family. Her ancestors were ambassadors, officers in Washington's army, heiresses and socialites. She went to private schools and then to an Ivy League university. Poor thing. She had never had much contact with Irish riff-raff, tobacco road farmers, and lowlife financial publishers. She can thank your editor for introducing her. She had just been talking with one of our cousins. Well, the wife of a cousin who died suddenly last week. He was only in his 50s and seemed like a nice enough fellow. But he was no Harvard-trained go-getter. "I felt so sorry for her [the widow]," Elizabeth continued. "Your cousin hadn't worked in years. He was on disability. I'm not sure what that is. Some sort of welfare, I guess. He didn't look disabled when we met him two years ago. He was such a big, strong man. "But when he died, he left his wife with no source of income at all. She's applying for disability too. She has no income at all. I don't think they have any savings either. And her disability status hasn't been approved yet. It hasn't come through. I wanted to tell her that we'd help her but I felt a little awkward. I've only met them a few times. You should do something... "There is a whole world out there that I didn't know anything about...that lives and thinks in a much different way than we did. They're very nice. I like all your family. But they have very different attitudes and habits than what I'm used to. I wonder what caused it. Maybe they probably worked hard when the steel mills were operating. But then, when the mills shut down, maybe they got in the habit of getting paid not to work. I don't know...but it's very strange." "What do you mean," was our reply. "Your family didn't work for generations. They inherited wealth and spent it. They spent money they didn't earn. My family did the same thing. They just spent wealth from other families...and didn't get as much of it." Enjoy your weekend, Bill Bonner for The Daily Reckoning   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.