Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future
The Daily Reckoning
Monday, February 8, 2010
Joel Bowman, checking in from Tokyo, Japan...
The past few weeks have not been easy for the Japanese.
First off, the nation's largest company, Toyota, was forced to issue a recall for automobiles on three continents after it was revealed that the brake pedal on certain models had a tendency to "get stuck." Consumers have become rather attached to the brake accessory on modern automobiles and didn't take kindly to Toyota's technical oversight. The company was forced to issue a worldwide public apology...then added that it will shut down five assembly plants in the US.
Then there was the somewhat embarrassing news - in the same industry, no less - that China has overtaken Japan as the world's largest car manufacturer.
And, of course, there was that other stroke of bad fortune when ratings agency Standard & Poor's threatened to downgrade the Japanese government's credit rating, noting that Prime Minister Yukio Hatoyama is moving too slowly to reduce the nation's soaring debt levels.
Bad luck in threes, you say? Hmm...
Your editor is gallivanting around Tokyo at present, enjoying the spoils of the deflationary spiral but ruing the stubbornly strong local currency. Prices continue falling...but the yen refuses to give an inch, even under threat of credit downgrades. Even so, a room that once went for ¥30,000 can now be had for a fraction of that amount. Restaurants and retailers engage in ruthless price wars in an attempt to stimulate demand from persistently frugal Japanese consumers. And, while Tokyo is by no means a "cheap" city to visit, it's decidedly more affordable than it would have been back in the bubble years, before The Land of the Rising Sun underwent one of the most dramatic deflationary periods in modern economic history. Last year, while consumer prices among industrialized economies recovered about 1.3%, they fell almost 2% here in Japan.
But as Japan's appetite slows, the rest of Asia grows ever hungrier. Along with South Korea, this tiny stretch of islands currently commands an inordinately large share of the world's natural gas supply. Now, that trend is changing. As Chris Mayer observed in last Friday's edition of The 5-Minute Forecast, there are new players in the demand for this clean-burning fuel...and new ways to profit by investing in it...
"Australia is on its way to becoming to natural gas what the Middle East is to oil," observes Chris, fresh back from leading a tour of investors around your editor's country of birth. "This could become Australia's biggest resource boom yet," he assures us.
"Asia is the fastest growing market for liquid natural gas (LNG). Currently, Japan is the largest buyer. Japan and South Korea together make up 53% of current global regasification capacity. (That is, the ability to import LNG and turn it back into a gas for consumer and industrial use.) But demand elsewhere in Asia is catching up:
"So how will the market meet this surge in Asian demand? That's where LNG from nearby Australia comes in. The amount of money going here is just staggering. The Gorgon project alone - a joint venture between Exxon Mobil, Chevron and Shell in Australia - will cost some $50 billion. It already has supply contracts from India and China worth $60 billion and will surely get more before it opens in 2014.
"There are other firms pushing ahead with aggressive LNG ambitions. Woodside Petroleum, an Aussie oil and gas company, wants to be the leader in LNG by 2020.
"As a result of all this activity, Australia will challenge Qatar as the world's largest LNG exporter. One analyst quoted here said: 'The numbers are phenomenal. When you look at them, it's mind-boggling. It's going to be LNG boom times.'
"It's quite possible that in the next decade, LNG will surpass coal as Australia's most valuable export. The government is certainly supporting LNG projects - it will add a gush of tax revenues to its coffers. Look at what oil did for the Middle East; the same kind of thing could well happen for Australia."
[Ed Note: For a meager price of admission, you can get Chris' favorite ways to play this coming boom, right here.]
And now for today's essay...
---------------------------------------------------------------The Daily Reckoning PRESENTS: Over the past few weeks we've dedicated this Monday "slot" to a series of fiscal responsibility essays penned by David Walker, former Comptroller General of the United States. In this week's installment, Mr. Walker takes a look at the lessons of history and ponders what the future holds for the once almighty American Empire. Please enjoy, and send your comments to the address below...
What the Past Tells Us
David Walker
New York, New York
Perhaps because we are a young country, Americans tend not to pay much attention to the lessons of history. Well, we should start, because those lessons are brutal. Power, even great power, if not well tended, erodes over time. Nations, like corporations and people, can lose discipline and morale. Economic and political vulnerability go hand in hand. Remember, without a strong economy, a nation's international standing, standard of living, national security, and even its domestic tranquility will suffer over time.
Many of us think that a superpowerful, prosperous nation like America will be a permanent fixture dominating the world scene. We are too big to fail. But you don't have to delve far into the history books to see what has happened to other once-dominant powers. Most of us have witnessed seismic political shifts in our lifetime. In 1985, Mikhail Gorbachev settled into his job as the Soviet Union's young and charismatic new leader and began acting on his mandate to reenergize the socialist empire. Seven years later that empire collapsed and disappeared from the face of the Earth. Gorbachev runs a think tank in Moscow now.
In a sense, the larger world is starting to resemble the nasty and brutish life that long has characterized the corporate world. Just ask Jeffrey Immelt, chairman and CEO of General Electric. Of the twelve giants that made up the first Dow Jones Industrial Average in 1896 - all of them once considered too big to fail - only GE remains. The other towering names of the era - the American Cotton Oil Company, the US Leather Company, the Chicago Gas Company, and the like - all have faded away. And as GE stands against the winds of today's financial challenges, ask Immelt whether there is such thing as a company that is too big to fail.
I love to read history books for the lessons they offer. After all, as the homily goes, if you don't learn from history, you may be doomed to repeat it. Great powers rise and fall. None has a covenant to perpetuate itself without cost. The millennium of the Roman Empire - which included five hundred years as a republic - came to an end in the fifth century after scores of years of gradual decay. We Americans often study that Roman endgame with trepidation. We ask, as Cullen Murphy put it in the title of his provocative 2007 book, are we Rome?
The trouble is not that we see ourselves as an empire with global swagger. But we do see ourselves as a superpower with global responsibilities - guardians if not enforcers of a Pax Americana. And as a global power, America presents unsettling parallels with the disintegration of Rome - a decline of moral values, a loss of political civility, an overextended military, an inability to control national borders, and a growth of fiscal irresponsibility by the central government. Do these sound familiar?
Finally, there is what Murphy calls the "complexity parallel": Mighty powers like America and Rome grow so big and sprawling that they become impossible to manage. In comparing the two, he writes, one should "think less about the ability of a superpower to influence everything on earth, and more about how everything on earth affects a superpower."
A superpower that is financially reliant on others can be vulnerable to foreign influence. The British Empire learned this in 1956, when Britain and France were contesting control of the Suez Canal with Egypt. The Soviet Union was threatening to intervene on Egypt's side, turning the regional dispute into a global showdown between Moscow and Washington. The Eisenhower administration wanted to avoid that, and the United States also happened to control the bulk of Britain's foreign debt. President Eisenhower demanded that the British and French withdraw. When they refused, the United States quietly threatened to sell off a significant amount of its holdings in the British pound, which would have effectively destroyed Britain's currency. The British and French backed down and withdrew from Suez within weeks.
The US dollar has never come under a direct foreign attack (though its vulnerability is growing). A direct foreign attack would result in a dramatic move away from the dollar. That would lead to a significant decline in its value, as well as higher interest rates. This is often referred to by economists as a "hard landing." In lay terms, it's more like a crash landing. Still, Americans have become intimately acquainted with the shocks of financial instability. Americans of a certain age still vividly recall the depths of the Depression in the 1930s and the chaos of inflation and long gasoline lines during the oil shock of the 1970s. We will also remember the financial collapse that began in 2008, and we pray for nothing worse. Some of our smartest financial thinkers are praying right along with us. "I do think that piling up more and more and more external debt and having the rest of the world own more and more of the United States may create real political instability down the line," investor Warren Buffett has said, "and increases the possibility that demagogues [will] come along and do some very foolish things."
Regards,
David Walker
for The Daily Reckoning
Joel's Note: Mr. Walker served as United States Comptroller General from 1998 through to 2008 and is now the President and CEO of The Peter G. Peterson Foundation. He is also the author of Comeback America: Turning the Country Around and Restoring Fiscal Responsibility, from which the above essay is excerpted.
Daily Reckoning readers may also recognize Mr. Walker as the protagonist in Agora's economic documentary, I.O.U.S.A. If you haven't seen it yet, or would like to add a copy to your DVD collection, you can grab one for free, along with a subscription to theCapital & Crisis bailout report, here.
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And now to Bill who has today's reckoning from Baltimore, Maryland...
It was "snowmaggedon" here this weekend. On Friday the city was on the verge of panic. Governor O'Malley announced that snowfall might reach 30"... Salt trucks were everywhere... They were lined up around the beltway like the National Guard waiting to stop an invasion...
..and everywhere people went home - or went out to buy food, movies...the essentials...
"How much wine do we have stocked up," we asked Elizabeth.
"Not enough..." More below...
There was a storm raging on Wall Street too. And by the end of the day, traders, investors and speculators probably wished they had stocked more alcohol for the weekend.
The Dow was up 10 points. After being down 100 points. Gold fell $10.
"Clearly we have entered the worry, fear camp," said one pro.
Unfortunately, today's action was not as clear-cut as we would like. There was no bounce back. And no further decline. Our guess is that stocks will probably trend downward for a long time. Most likely, the long-awaited - at least by us! - resumption of the bear market has begun. We've had our crash. We've had our bounce. Now, we'll take the long slide down to the ultimate, final, this-is-where-it-stops end.
Listening to the radio this morning, the announcer told us that only "essential" government employees had to report for duty this morning. We wondered if any of them really were essential. Surely, not the fellows who are watching after the African horned beetle. Surely, not the ones who are designing a new health care overhaul for the nation. Surely, not the ones who are coming up with a revision to subsection 4.503.02 of the Internal Revenue Code dealing with unlicensed backdated further codicils of provisions dealing with gifts to one-armed wonton turners who are beneficiaries of insurance policy proceeds upon which sufficient basis has been revoked because they failed to read the fine print. Or something like that.
Take out all the non-essential federal employees? Who's left?
Anyone? Probably a couple guys in the Pentagon who make sure the Canadians are not amassing troops on the border.
But that is another subject, isn't it? Not exactly. The federal payroll is the only payroll in the nation that is expanding. Government is a growth industry. Just about everything else is in decline.
Wait. The latest number from the feds tells us that joblessness declined by 0.3% last month. Do you believe that, dear reader? Where's the SEC when you need it? Aren't the feds misleading investors - intentionally?
There was another ad on the radio this morning asking for census takers. More federal employees! Why not get the non-essential employees to count people?
We don't have a separate count, but we wouldn't be a bit surprised to find that the feds' unemployment number hides as much as it reveals. After all, as near as we can tell, we're still in a period of private sector de-leveraging. That means fewer jobs. The mistakes of the bubble era must be un-done. Jobs must be eliminated. And employment won't rise again until the private sector can find ways to put people back to work at a profit.
But how?
Now, back to our thoughts...
What a delight it would be to have some inflation! Yes, dear reader, that's the real reason that fiscal stimulus appears to work. That is, that's the reason inflation can sometimes boost employment. It creates inflation. And inflation lowers wages. Lower wages make it cheaper to hire people. And they make US output more competitive on the world market - so exports tend to increase.
And one other thing. Inflation reduces the debt burden. Right now, debt is crushing the private sector...and the whole economy. But it will soon crush the public sector too. Nouriel Roubini says government debt is a "ticking time bomb." He's right.
That's why the government would love to have some inflation. Trouble is, inflation is harder to conjure up than you might think.
The more we see the Geithner, Bernanke, Summers team in action, the more convinced we are that the nation is headed for serious trouble.
Alan Greenspan was a knave, no doubt about it. But he understood how money worked. He was even a follower of Ayn Rand and a member of the libertarian 'collective' in New York. When he joined the president's council of economic advisors, Rand was on the scene. She said she had 'her man in Washington.' Trouble was, her man was a sell-out. His convictions were no more solid than ocean foam. They disappeared as soon as he got to the capitol. After that, he spoke in gobbledygook sentences that no one could decipher...and played the game.
Here at The Daily Reckoning we don't particularly like sell-outs, hypocrites and turncoats. We have our principles. And we wouldn't turn our back on our own convictions. Not for less than, say, $10,000.
The current team, on the other hand, are not sellouts. They're fools. They really have no idea what is going on. They think the problem with the economy is that consumers and bankers have gotten the jitters. They believe that a lack of demand is the root cause of a weak economy. So, all they have to do is to replace the missing private demand with demand from the government.
Anyone who bothered to think about it seriously for a few minutes would see that demand is not what causes an economy to grow...or what makes people prosperous. People always have demand for goods and service. Demand is always, theoretically, unlimited. It's the purchasing power that is lacking.
And purchasing power comes from earnings - both accumulated and current.
The key to a real recovery is to increase earnings - not increase demand/consumption. How do you do that? Well, if you're a government economist, you can't do a bloody thing but get out of the way. You have to let private businesses find ways to make money...which they then share with their employees.
Think Summers, Bernanke and Geithner will get out of the way? Not a chance...
By the time the first snowflakes appeared about 11AM on Friday, we almost felt sorry for them. They were met by such overwhelming firepower from the local highway snow removal teams, they didn't have a chance. But they kept coming. Like soldiers at the Somme they threw themselves on the barbed wire. They took the salt! And their comrades- in-arms kept coming.
By 3PM, the highway crews were still in charge...giving themselves thumbs up when they passed each other. The roads were wet, but clear. Crews laid down salt as the snowflakes - more numerous than the stars in the heavens or the dollars in the federal deficit - kept falling to ground. But by 4PM a white coating began to appear on the road. Temperatures were falling and the snow was beginning to stick.
Snow built up slowly...then more quickly. The salt trucks were running out of time and ammunition. And by 6PM the battle turned. Now, the snow came heavily - and stuck. The road crews switched to using their blades. But it was no use. They were outnumbered and outgunned. The snow kept coming. First the side roads were lost to a thick blanket of snow. Then, the major roads were lost too. Finally, US I-95 - the nation's main East Coast artery - was in enemy territory.
We drove down I-95 about 7PM. We had picked up Maria at Pennsylvania Station in Baltimore. She came out dressed like a movie star...in a wool coat with fur collar and cuffs. The cab drivers stared as she got in the pick-up and gave her father a kiss on the cheek. Then, we were off.
The highway was a total mess by that time. There were casualties on both sides of the road...abandoned vehicles, cars stuck in ditches, tow trucks and rescue crews trying to get people back on the road. We had taken the precaution of loading some cement blocks in the back of the truck. It slipped a few times, but it never slid off the road. You couldn't tell the road from the shoulder. There were no lanes...and little traffic. We just tried to stay away from other drivers...and steer our pick-up in the tracks of the big truck in front of us.
By 8PM the snow was master of the field. The road crews admitted defeat. There was not a single road in all the Baltimore-Washington metropolitan area that was safely passable. They were beaten. Radio announcements told civilians to get off the roads and stay off...until the snow removal troops could regain control of the situation.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com The Daily Reckoning - Special Reports:
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