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The Daily Reckoning | Friday, March 12, 2010 Global Economies Surge Forward US no longer the land of number ones Bill Bonner There was a time...not so very long ago...when Americans held all the top spots. We had the most...the best...the biggest companies. And the richest people. Those days are gone... MEXICO CITY (AP) - Mexican telecom tycoon Carlos Slim is the first man from a developing nation to become the world's richest person - a shift that underlines the loosening of America and Europe's stranglehold on the top spots in the billionaires' club. Slim's arrival at the top aroused both pride and anger in Mexico, where many see his fantastic wealth in a poverty-afflicted nation as a sign of what ails it. With a recovery in the value of his cell phone holdings pushing his estimated fortune to $53.5 billion, Slim jumped past Microsoft founder Bill Gates and investor Warren Buffett when Forbes magazine released its 2010 list of the world's wealthiest Wednesday. The rise of Slim, the 70-year-old son of an immigrant shopkeeper, is just a part of the emergence of billionaires in developing countries, Forbes reporter Keren Blankfeld said. She noted this year's top 10 richest also include two billionaires from India and one from Brazil. Here's another item in today's news: "China becomes world's biggest internet market," says a Reuters headline. There are more Internet users in China than in any other country, says the article. And more cars sold. And more concrete poured. Travel broadens your horizons, they say. More importantly, it humbles you. You realize that there are a lot more people doing a lot more things than you thought. All over the world, people bus, hump, schlep, toil and strain. Some work hard. Some work not so hard. Some work smart; others don't. But over time, fashions and circumstances change. What goes around, comes around. Those that did once ride so high now lie low... Yes, dear reader, the world turns. And traveling around...you get to see different parts of it...with different stories to tell... This morning's news tells us that 60,000 people are rioting in Greece...torching German cars and generally behaving badly. What's their beef? They're running out of money, running out of credit...and running out of time. Modern macro-economic policies have turned against them. (More below...) But they're not alone. The news from the plains tells us that Kansas might have to close half of its public schools...if it doesn't find a way to close its budget gap. The news from other states is not very different. Many foreign governments are in the same fix. Ireland has already begun its "austerity" programs. Italy and Spain can't be far behind. But what about the US federal government? No austerity at all. Just the opposite. The feds announced the biggest budget deficit ever - $221 billion for the month of February. In other words, per family, the American government spent approximately $2,000 more than it received in tax revenues. Hmmm....if it continues at this rate, it will spend $24,000 more than it receives per family this year. In round numbers, the typical family will pay about $25,000 in taxes...and receive about $50,000 worth of 'services.' Is that a great deal...or what? It's an absurdity...it's preposterous...it's weird and unnatural. And it can't last. It is only possible now because of the peculiar circumstances of today's financial world. Lenders, investors...Chinese creditors...give their dollars to the US government, believing it to be the most credit- worthy borrower in the world. But as the supply of US debt goes up the quality of it declines. Already, the US is - from a GAAP accounting point of view - bankrupt. (See below...) Lenders cannot reasonably expect to get their money back. But that doesn't seem to bother them. US debt still looks like a better bet than, say, Greek debt. But the world is full of surprises. What a shock it will be when the US finds itself in Greece's shoes! And here's Addison, with a few words on our favorite metal from Agora Financial's H.Q. in Baltimore, Maryland... Here we go again. Markets have caught a chill after signs of inflation fever in China. And that's not even the half of it. Let's dive in... Consumer price inflation in China hit a 16-month high in February - a 2.7% year-over-year increase. China's National Bureau of Statistics was quick to put out a statement reassuring everyone that "price rises this year will be moderate and controllable," but that's not enough to calm traders looking for excuses to feel jittery. And any news that might, possibly, at some point in the future, signal monetary tightening in China...well, that's enough to put the fear of God in them. Hence, the major US indexes opened down about 0.2% in the first hour of trading yesterday. The news is also an excuse for traders to bail out of gold, which clings to $1,105 as we write. So much for the short-term noise from China. But the Middle Kingdom is also making real news this week. We'll get to that in a bit, but first, we bring you this item to help put it in context. Right in line with analysts' forecasts, Uncle Sam's budget deficit for the month of February was $220.9 billion - the largest monthly total in history. For the first five months of fiscal 2010, the total is $651.6 billion, 10% ahead of last year's blistering $589.9 billion pace. The details are even fuglier. Total revenues: $107 billion. Total expenditures: $328 billion. Yes, that's only one dollar of revenue for every three dollars spent. We have just two words for this: Banana. Republic. So what does China make of numbers like this? As it happens, the National People's Congress is holding its annual session this week. During the festivities, Yi Gang, the head of the Chinese State Administration of Foreign Exchange assured the world that US Treasuries would remain a major component of China's reserves. We noticed he said little about whether China would actually add to its positions and soak up some of that additional debt racked up last month. Yi also pooh-poohed any role for gold in China's wealth management strategy: "It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves," he said. "I have 1,000 tonnes now, and even if I doubled that holding, according to current prices, that would be about $30 billion..." barely a drop in the big bucket that contains $2.4 trillion of China's forex reserves. Of course, that's what face the Chinese government puts on for the public. Yet "the volume of China's gold reserve in terms of its forex reserves only ranks fifth in the world, and is well below the global average," says Russell Hsiao of the Jamestown Foundation. Hsiao rounded up some interesting stories from Chinese media that shed additional light... The Guangzhou Daily reported in 2008 that China's central bank was considering raising its gold reserve by 4,000 metric tons. (It's currently 1,054 metric tons.) Ji Xiaonan, the chair of the supervisory board for major state-owned companies under the Chinese State Council's state assets commission, set an even higher bar last year - 6,000 tons by 2014, and 10,000 tons by 2019 According to the English-language website ChinaStakes, a senior official from the People's Bank of China (PBoC) suggested last year that China should "secretly increase its gold holdings" as part of a long-term plan - with the central bank buying up as much domestic production as possible. However it turns out, "the long-term implications of Chinese debates to increase its gold reserves," Hsiao concludes, "will have far-reaching impact on the stability of China's forex reserves and the yuan's ability to become the next reserve currency of the world. The question for Chinese leaders now appears no longer if, but how, that will come about." Indeed. [Joel's Note: Right now Addison is beta testing his brand new research service, tentatively titled Addison Wiggin's Apogee Advisory. Every month, Addison will deliver eight pages packed with two or three big- picture trends and ideas gleaned from his worldwide travels and "golden rolodex" of contacts. The service, in Addison's words, is aimed at "providing investment research for individual investors that will not only cover the nexus between money and politics, between Wall Street and Washington, but would crush even the finest research published by the Wall Street houses, such as they are." BUT... Exciting as the project sounds, Addison needs your help to fine- tune a few of the moving parts. With that in mind, he's offering the first three "beta-test" issues to Daily Reckoning readers free of charge in exchange for your feedback. (Tell him what you like/don't like, etc.) The first issue is due out this month, so if you want in on the ground floor, you'll have to be snappy. Here's a one-page form with all the details you'll need to get involved.] The Daily Reckoning Presents The Patsy Revolt of 2010 Bill Bonner "Masked youths...attacked the head of Greece's largest trade union, who was addressing the crowd, and hurled stones at the police. GSEE union boss Yiannis Panagopoulos traded blows with the rioters before being whisked away, bloodied and with torn clothes." The Daily Mail account put the blame for these disturbances on Germany's finance minister, who warned the Greeks that "the German government does not intend to give a cent." At least Bild, a popular German newspaper, was trying to be helpful. It suggested that Greece sell Corfu...and that Greeks get up earlier and work harder. Meanwhile, from Iceland comes news that every voter with an IQ above air temperature has cast his ballot against a bailout plan. The Icelanders were slated to make good $5.3 billion in bank losses. But why shackle common voters to the banks' losses? The plan was so outrageous and so unpopular that Iceland's normally compliant Prime Minister called for a referendum. Given a chance to vote on it, 93% said no. The other 7% probably read it wrong. Insurrection is in the air. In England, government employees are preparing the biggest strike since the '80s. In America, dissatisfaction with Congress is at record highs; four out of five of those polled say, "Nothing can be accomplished in Washington." Herewith, an attempt to deconstruct the rebel yell. By way of preview, it's not the principle of the thing, we conclude; it's the money. There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years - particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work - not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said. Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since. Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn't belong to them. Consumers could enjoy a standard of living they couldn't afford. And the financial industry could earn huge fees by selling debt to people who couldn't pay it back. Never before had so many people been so happily engaged in acts of reckless larceny and legerdemain. But as the system aged, its promises increased. Beginning in the '30s, the government took it upon itself to guarantee the essentials in life - retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save. As time wore on, more and more people lived at someone else's expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident was an opportunity for wealth redistribution. And every trend was fully leveraged. If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitizations to profit from segments of the market that had theretofore been spared. By 2005 even jobless people could get themselves into debt. Then, the bankers found ways to hide debt...and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector - it helped them to go broke. As long as people thought they were getting something for nothing, this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks' losses...and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn't worry about yesterday. So, the patsies are in revolt. Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports. The rioters can go home, in other words. The system will collapse on its own. Bill Bonner for The Daily Reckoning Joel's Note: Will you be joining us in Vancouver this year? Bill will be there...as will a world-class roster of contrarian thinkers and industry leaders, from fund managers to metals analysts to options gurus and even one Washington "insider" who actually gets what's going on...and knows how to fix it! If you've attended our annual Agora Financial Investment Symposium in the past, you know what an idea- packed event it is. Don't tire yourself arguing with imbeciles who think bigger government and less freedom are the way out of this mess. Instead, join a few like-minded libertarian souls up in Vancouver this year and learn how to best protect and grow your personal wealth. Visit this page for more info. There's a devil in the Dow... Sure, the market may have soared in 2009...but so too has unemployment, foreclosures, inflation and government debt! The fact is this so called "recovery" is rotten to the core, and when the long overdue market correction comes, life savings, college funds and retirement nest eggs will be wiped out. But, in the coming mayhem, a handful of savvy speculators will get very, very rich. You see, with every crisis comes opportunity. Grab Yours Here. Bill Bonner The Bull Market Is Over Bill Bonner The air is so hot and humid, here in Mumbai, you can boil an egg in it. Last night, we ventured out of the hotel for an authentic Mumbai experience. We went out the front door, around the corner, and a half block down the street to a restaurant called Indigo. We would have taken a taxi but the only thing worse than walking in Mumbai is taking a cab. Taxis are everywhere...small black and yellow cars. They are banged up veterans of many years on Mumbai's chaotic roadways. If the car doesn't break down or get in an accident, you merely suffocate. This morning, our driver sounded his horn, then started the engine. Cars are never taken in for repair in India unless the horn doesn't work. You can drive without brakes, but not without a horn. Maybe that's why 110,000 people die on India's roads and railways every year. We were on our way to CNBC, where we were being interviewed. For some reason, your editor has achieved minor celebrity on the subcontinent. The announcer told his audience that we were a "venerated western economist." Other interviewers ask for autographs. Many have read our books. All want to know what we really think. This is probably because our views flatter them. Unlike the US, India is not at the end of a 50-year credit expansion. It's only at the beginning. Investors might look forward to many years of growth. "In the West, the situation is very different," we explained. "The Western economies - especially the Anglo-Saxon economies, and particularly Britain and America - have been on a spending binge for many years. That reached its zenith in 2005-2006; now, it will be very hard for these economies to grow. They can't do it by expanding consumer spending and consumer credit. In the first place, consumers already have too much stuff. In the second place, the consumer has neither the income nor collateral to justify more debt. So, the economy needs to find a new model to move forward. "In India, on the other hand, people don't have so much stuff. There are people sleeping on the sidewalk outside my hotel room. They have nothing except the clothes they are wearing. And they certainly don't have credit cards and home equity lines. So India can grow for many, many years simply by providing basic goods and services to its own people. And the nice thing about it is that India doesn't seem to be capable of central planning...or any planning at all. The country can expect a long spell of prosperity, until the central planners get in position to lead. Then, you're in trouble." CNBC didn't like what we had to say. Even if we were generally optimistic about India, we were definitely not cheerleading for world economic growth. And CNBC...along with most of the other mainstream financial media...like to keep viewers smiling. "Sorry that you are so gloomy," said the interviewer, adding to the audience that "those are just his views." Of course, dear readers know we're not gloomy at all. Around the office they call us Mr. Sunshine. Why? Because we welcome a depression in the economy like we welcome a hard freeze in the winter; it kills off the parasites. Regards, Bill Bonner, for The Daily Reckoning