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The Daily Reckoning | Thursday, June 17, 2010 Markets rally...all the way to where they were 11 years ago, Five more reasons you might want to consider getting outta Dodge, Plus, Bill Bonner on Floridian real estate and the trouble with thinking like a Nobel Prize winning economist... The changing face of the American experience Surrounded by bursting bubbles in the land of opportunity Eric Fry Reporting from Laguna Beach California... The Dow Jones Industrial Average added five points yesterday to close at 10,409 - almost exactly where it closed eleven years ago. Amidst giddy fanfare and high fives, the Dow closed above 10,000 for the very first time on March 29, 1999. One month later, amidst even giddier fanfare and high fives, the Dow closed above 11,000 for the very first time. The economy was booming, the federal government was running a budget surplus, and Alan Greenspan was becoming an economic demigod. Whenever he wasn't walking on water - or congratulating himself before Congress - he was pulling just the right monetary levers at just the right time to ensure the nation's prosperity. Over in the stock market, therefore, the sky was the limit. Unfortunately, as the new millennium advanced, the tech stock bubble burst, the housing bubble burst, federal finances deteriorated from hundred-billion dollar surpluses to $1 trillion deficits, and Alan Greenspan's omnipotence dissolved like the low-budget hologram it had always been. With the benefit of hindsight, it became obvious that Greenspan's "benevolent control" over the US economy was a myth. A lie. He was the Munchausen-by-proxy Federal Reserve Chairman - continuously poisoning the economy with recklessly low interest rates, then rushing to its aid with a cocktail of rate hikes and econo-babble, hoping to counteract the ill effects of financial bubbles that he, himself, had nurtured. Greenspan's legacy is not the only American myth that is suffering a harsh de-mythologization. Many long-standing perceptions of America's legendary economic prowess are - How should we say? - "Under review for possible downgrade." Many of the most enduring and iconic components of the "American dream" are succumbing to nightmarish realities. The "Land of Opportunity," for example, has not produced a single net new job in more than a decade. At the end of 1999, 131,402,000 Americans were drawing paychecks. Today, 131,198,000 Americans are drawing paychecks. Meanwhile, the pride of home ownership has become the shame of mortgage default. As home prices nationwide languish at seven-year lows, an astonishing 14% of mortgage-holders are delinquent or in foreclosure. What about the value of a college education? Surely, a four-year degree retains the caché and power to elevate aspiring capitalists from the limitations of blue collar labor to the rarefied air of white collar opportunity! Think again. As we noted in yesterday's edition of The Daily Reckoning, a college education is "one small part of a vast American myth." As the US economy continues its non-recovery from the credit debacle of 2008, the dubious utility of a four-year degree is becoming painfully obvious to the nation's recent college graduates. Unemployment rates for all college graduates - both recent and ancient - have doubled from 2% to 4% during the last year. But this statistic greatly understates the problem because it fails to include the legions of graduates who return to their parent's houses, apply for the Peace Corps, work at Starbucks or "take a year traveling." According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Statistics like these do not inspire confidence in a college degree, but they may have inspired a recent posting at Nakedlaw.avvo.com entitled, "8 Reasons College Tuition is the Next Bubble to Burst." Reason #1 is that "tuition is, and has been, increasing at triple the rate of inflation." Accordingly, therefore, "the number of college students graduating with over $25,000 in student loan debt has [also] tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt." But this "new math" isn't working as well as the old math. For one thing, as of 2005, a student loan is no longer dischargeable in bankruptcy. (So gone are the days of borrow, default and forget). For another thing, as of 2010, a college degree is no longer an automatic entrée into attractive employment opportunities. As a result of these challenging realities, many young Americans are disdaining the mythological virtues of a college education in favor of tangible paychecks. "Fed Up With the Economy And White-collar Drudgery," a recent Washington Post headline declared, "College Grads Turn to Trades." The story that followed cited several fascinating examples of college graduates who shunned traditional post-collegiate career paths to become electricians or plumbers or whatever else puts dirt under the fingernails. "Armed with a bachelor's degree in theology from Notre Dame," the Post story relates, "Adam Osielski was pondering a route well traveled: law school. He watched his friends work long hours as paralegals while studying law and weighed the all-encompassing commitment. That was five years ago. Today, Osielski, 29, is a journeyman electrician rather than a law firm associate... Osielski is among a small but apparently growing number of the college-educated who are taking up the trades... Ultimately, many earn as much or more as they would in jobs requiring a college degree. Licensed journeymen [plumbers] can expect to be paid $65,000 to $85,000 a year, depending on overtime." But even this blue-collar sliver of the American dream provides more nightmares than success stories. "Local apprentice programs, which typically last five years, are swamped with applicants nowadays," the Post relates. "The electricians' union program, for example, has 2,500 applications for 100 slots. And nearly 4,000 want to get one of the 300 slots at plumbers and pipe fitters school... Nationwide, 550,000 people are enrolled in registered apprenticeship programs, according to the Labor Department, and the number of students in unregistered programs might be almost as high. "Brian Jones...studied physics on an academic scholarship to McDaniel College in Westminster, Md.," the Post continues, "hoping to get a job as an engineer with NASA or an aviation company after he graduated in 2002. He watched friends with lower grades land jobs through family contacts, but he couldn't find one. Then a friend suggested that he could make as much money as an electrician. He just finished his third year as an apprentice. "Rateeluck Puvapiromquan, 30, the daughter of two schoolteachers who immigrated to Baltimore...become an electrician when the only jobs she found after graduating from St. Mary's College in 2001 with a degree in the philosophy of religion were in coffee shops and hotels." These non-traditional success stories illustrate very poignantly that the Land of Opportunity is offering fewer opportunities these days. Maybe the legendary American economic engine can dust itself off and resume powering the kinds of entrepreneurial activities that generate significant employment growth and national wealth. But we aren't holding our breath. And neither are foreign nationals who obtain post-graduate degrees from American universities. In the recent past, Ninety-two percent of Chinese Ph.D.s in science and engineering would remain in the United States for at least five years after their studies...and 85 percent of Indians. But according to a recent survey of more than 1,200 foreign-born Ph.D. students, the percentage of Chinese who plan to stay in the US after graduation has tumbled to just 54%, while the number of Indians who expect to remain is only 58%. What's more, only 7% of Chinese students surveyed and 25% of Indian students believe that the American economy's best days still lay ahead. But overwhelming majorities of both Indian and Chinese students believe their home countries' best days still lay ahead. These survey results do not guarantee that America's best days are behind her, but neither do these statistics inspire much confidence that America's best days lie ahead. [Eric's Note: When confronting these vignettes of modern American economic life - as we mentioned in yesterday's edition of The Daily Reckoning - some folks merely shrug their shoulders and say themselves, "Hey, it ain't so bad. Life is still pretty darn good here in the US of A." Other folks, still a distinct minority, offer an opposite perspective. "It's time to get out of Dodge," they say. But we'd like to hear what our dear Daily Reckoning readers have to say on the topic [email us here: joel@dailyreckoning.com]. We'd like to hear about the virtues or flaws of the American economy that you have experienced first-hand. Tell us about the personal successes America has nurtured, or about the potential successes the American system may have impeded. At the same time, feel free to share first-hand experiences - good or bad - from any other economy around the globe. This exercise is designed to elicit helpful insights from our unique group of readers. So please refrain from hyperbole or gratuitous America-bashing. Instead, please offer first-hand accounts that may shed valuable light on the American economy past, present and future.] The Daily Reckoning Presents Ten Benefits of Expatriation, Part II Casey Research Team In yesterday's edition of The Daily Reckoning, Casey Research shared five of the 10 benefits of expatriation. Today, we share the second five: 1) Freedom to invest without tax distortions that encourage capital misallocation. The US tax system encourages misallocation of your investment capital. It obscures the act of buying and selling securities based on a rational assessment of their value. For instance, you end up not selling a security you otherwise would simply because you don't want to trigger taxes yet. Or you hold on longer than you might otherwise to get long-term capital gains treatment. Or you sell securities you normally would keep - for "tax loss harvesting." Moreover, you're incented to give an artificial value premium to municipal bonds simply because they aren't taxed, despite their negative real return after inflation. And your assessment of real estate's value is warped too, by mortgage interest deductions and capital gains exemptions. The phrase "letting the tax tail wag the dog" encapsulates these distortions. Expatriation instantly liberates you from them. 2) Freedom from being crushed by the fiat currency landslide. If you pay attention to the world's major currencies, you'll notice they fluctuate, often dramatically, against each other. In a year's time, the price of an item can increase or decrease 20%, 30% - sometimes more - solely based on which currency you use to pay for it. The same item! Regardless of the reason for the volatile swings in the value of currencies, there it is. Reality. So what's the risk for you? For one thing, you can have all your money in one currency, earn a positive investment return on paper (that you're taxed on), but actually lose purchasing power. Think about it this way. The US imports goods from all over the world. When the US dollar drops in value, it takes more of them to buy those goods. That makes you functionally poorer, no matter what your account statement says. It's that simple. Every time the dollar drops, you get the short end of the stick. The value of your savings erodes. Your money is like ice cubes. The longer you wait to use them, the more they melt. According to the government's official "inflation calculator," the dollar has lost 95% of its purchasing power since 1913. See for yourself here. When you're out of the global US tax net, you can freely diversify the currencies you own to protect your purchasing power from being diluted. If you do this as a US citizen and the dollar drops, you're taxed on the paper gains from those other currencies. In other words, you're taxed for simply preserving your purchasing power. And if you choose the monetary metal, gold, as a fiat currency hedge, you're taxed even more heavily. No matter what you do to try and preserve the purchasing power of your dollars, one way or another you're slowly being bled. That ends on the day you expatriate. 3) Freedom from the accountability for how the US government spends your money. I sleep much better knowing I no longer fund the military- industrial-banking complex. Anybody can get mugged, but every US taxpayer is a constant patsy for the political establishment. The rip- offs are so unthinkably big and endemic, there's nothing an individual can do to stop them. If you step back and take an honest look, you'll see that the unfortunate state of affairs in America has resulted from the reign of both political parties. Don't fall for the divide-and-conquer strategy that politicians use to corral people into "red" and "blue" sports teams. Donkeys and elephants are sold as team mascots pretending to be in mortal conflict. In reality both parties work together to advance their agendas in lockstep...logrolling...and when necessary, one side "takes the hit" whenever the illusion of accountability is needed. The system depends on the delusion that people can "vote the bums out." Meanwhile, every government failure becomes the pretext for more government growth. If you don't get distracted by the spectacle, it's impossible not to notice the pattern: Every political solution to any problem involves more regulation of your life and more taking of your money. What are the consequences of this vicious cycle of growth through failure? Most Americans are familiar with the oft-chanted phrase, "We're #1!" Humor me for a minute and try this exercise. Mentally separate yourself from the government you're paying trillions of dollars to fund. Then, consider that the US is: #1 in government debt and deficits; #1 in unfunded liabilities, most importantly Medicare and Social Security; #1 in building and maintaining the biggest WMD stockpile in the world; #1 in weapon sales to foreign governments; #1 in bombs dropped and missiles fired on other nations; #1 in causing civilian casualties and property destruction; #1 in "defense" spending; #1 in lawyers per capita, with over 1.1 million total; #1 in law suits filed; #1 in political lobbyists, special interest groups and campaign donations; #1 in taxpayer bailouts of the politically connected "too big to fail" corporations; #1 in people imprisoned - "The United States has 4% of the world's population and 25% of the world's incarcerated population," according to Wikipedia. I've avoided citing sources for these claims (save the last one) because I'm hoping you'll be moved to verify them for yourself. The process is eye-opening. If you fall for the political fallacy that "the government is the people," you end up with the faulty conclusion that America must be overrun by war-crazed, lawsuit-happy, debt-addicted criminals. How could anybody buy this after even a moment of clear thought? There's certainly no resemblance to the American people I know. These problems stem from the military-industrial-banking complex, the dark heart of the US political machine. Why continue being the stooge that supplies the money to run it? Looking at the world with fresh, open eyes isn't easy. One of the great benefits of liberating yourself from the grip of the US political system is that the world becomes your oyster. You're free to embrace places that welcome individuals who seek to live peaceful and prosperous lives. 4) Freedom to radically increase your charitable giving. Individual liberty sparks our charitable instincts. If you care deeply about philanthropy, expatriation frees up vastly more of your capital to give away. Also, your philanthropic impulses are no longer distorted by the IRS. You can give to any charitable cause worldwide without being penalized if it's not anointed as a tax-deductible entity. The human impulse to help another in need is older than any government. Your judgment about how to contribute your capital to best help others will forever be superior to that of bureaucrats. Expatriation opens up new possibilities for you to reach out and help others in need. 5) Freedom from the risk of getting trapped. Politicians don't like it when the people who pay their salaries, fund their pensions, and fuel their jets close their wallets and walk away. As the number of renunciations continues to rise, it inevitably will turn into a political hot-button. The media will set the stage for politicians to denounce renunciation, paving the way to make exercising the right more difficult and costly. Wealthy people who renounce will be called greedy and unpatriotic. "Turning their backs on their fellow Americans" will be the sound bite wielded by politicians to conjure up the demand to "do something." When that happens, I expect the exit tax to become dramatically worse. Instead of taxing unrealized gains at their regular rates, it may function more like the death tax. Add up everything you own - then cough up half. Otherwise sit down and shut up. The other timing consideration is that getting a second passport is becoming more difficult, more lengthy and more costly. You need a second passport to expatriate, and countries are increasing the number of years it takes to gain citizenship. There are only two countries left in the world that have an economic citizenship program, which is by far the fastest way to get a second passport. If these two programs are pressured to fold, escaping the US political combine will take most people five or more years, instead of less than one. You can bet on this: No matter what happens, it won't get any easier. Whether you're planning to stay right here in the US or get out of Dodge, you might want to know about gold, the one "currency" that is accepted at more places than either Visa or the American Express card. Jeff Clark, the editor of Casey's Gold and Resource Report, has been saying it for years: Buy physical gold and silver. And if you want even greater gains, invest in solid, undervalued gold producers that can provide leverage of up to 4:1 to gold itself. Read more in our report, here. The Casey Research Team, for The Daily Reckoning Lifetime Income Report Reveals... Legally Collect Thousands of Dollars Each Year... From the Other Government-Backed Retirement Program Starting September 30 this year, America's Social Security "safety net" will officially shrink... So why not let this other government-backed "pension program" pay you thousands of dollars each year instead? Bill Bonner No Quick Recovery for the US Economy Bill Bonner Reckoning from Baltimore, Maryland... Stocks were flat yesterday. Gold fell $3. The news was mixed. The big debate is between those who think the authorities are being too tight and those who think they are being too loose. Broadly, Europeans are on one side. Americans are on the other. The Europeans are tightening up. The Americans are letting rip. They're both wrong, as far as we're concerned. It's all nonsense. Just goes to prove our dictum that people come to think what they must think when they must think it. The Euro-feds can't afford to think they can loosen up. Their lenders have already laid down the law: 'Keep spending like the Greeks and we'll hit you with Greek-style interest rates.' Just a few weeks ago the Greeks were forced to pay 16% interest. At that rate, borrowing is out of the question. You're effectively cut off. Because the more you borrow, the higher your interest rate. Soon, you run out of money. As Nouriel Roubini put it, 'austerity is not optional.' Since it's not an option, but a necessity, there's no point in thinking anything else. You might like to spend more money, but you know you can't get away with it. The US doesn't have to think about austerity. Not yet, at any rate. They've got the whole world ready to lend them money. 'Here, take a drink of rice wine,' say the Chinese. 'Here is some champagne,' say the Europeans. 'And here's a bottle of whiskey,' say the jokers in the back of the room. It is only a matter of time before Americans fall down. Not so, say the Keynesians - led by Paul Krugman and Martin Wolf. They say it's just a matter of managing the situation. Enjoy the party. You can pull yourself together later. "The best policy is to put together measures that sustain strong growth in demand in the short run," writes Wolf in yesterday's Financial Times, "while constraining the huge deficits in the long run. It's like walking and chewing gum at the same time. Why should that be so hard?" Meanwhile, Richard Koo probably knows more about this sort of economy than anyone. He's lived with it in Japan for the last 20 years. So, what does Koo think? He says you can forget about a quick recovery. Japan has been hoping for a quick recovery for the last 20 years. It's been following the Krugman-Wolf approach - stimulating demand with fiscal policy. That is, it spends more than it collects in taxes, counting on the extra government spending to light a fire under the private sector. But that won't happen, says Koo. The private sector won't start spending again until it has finished de-leveraging. Paying off debts takes a long time - especially when the government keeps bailing you out. So prepare for a long slump in the private sector economy. So far, so good. But then Koo takes the classic Keynesian line. Like Krugman and Wolf, he believes the government should replace private spending with spending of its own. It sounds logical enough. At least if you don't think about it too much. An economy is the sum of spending and investing. If the private sector goes into a funk and stops spending and investing, the economy shrinks. So why shouldn't the government step in and help out a bit? Koo thinks so. Krugman, who won a Nobel Prize in economics, thinks so. Wolf, who heads up the worlds' most influential financial journal, thinks so. Well, count on us, dear reader. We don't think so. A real economy is much too complex for such simpleminded management. It is an organic system that delivers to people what they want (markets give them what they deserve). An economy doesn't necessarily correspond to what academic economists think it should be...or necessarily do what they think it ought to do...or sit still long enough so they can tell what the hell it is doing. A real economy has a mind of its own. It doesn't care about their GDP growth rates. Whether people lose their jobs or not is not its problem. And it certainly doesn't intend to help politicians get re-elected. Sometimes people want to spend. Sometimes they want to save. Keynes identified this "propensity to save," as though it were an unpardonable sin. If the people won't spend, we'll spend for them, he said...or words to that effect. But why shouldn't people be allowed to save money rather than spend it? 'Because the economy might collapse,' says the Krugman-Wolf-Koo crowd. 'So what?' answers The Daily Reckoning. (More on this tomorrow...) And more thoughts... Florida was hot. By day, the streets were deserted. Floridians must be like zombies; they only come out at night. We wondered how the local property market was doing. "It depends," was the answer we got from a knowledgeable local. "Prices are down. And they're still going down. But it's hard to generalize. Some of these expensive places are not much different than they were before the crisis. Prices are high. But they're not selling. You usually have to give a buyer a big incentive to buy if you want to close a big deal. "So it really depends on how motivated sellers are. Probably most places around here are down about 50% from their peaks. A lot of this stuff was built just at the wrong time - in '05 and '06. It got sold at the peak with mortgages that were 100% and more. These buyers are hurting. They know they can only get about half the price they paid. But since they didn't put up any money, it's all a little abstract. What really counts is cash-flow. The banks work with them to keep the payments low. But eventually, the debt either has to be restructured or the buyers default. Then the condos are foreclosed and put back on the market...which drives down prices even further. "Smart investors are now finding some good situations. You can buy cheap units, finance them, and pay all your costs. But you have to buy well. And you need a motivated seller. "A lot of people here are waiting for the market to come back. Florida property has been going up ever since the end of WWII. People are conditioned to think it always goes up. But there's so much inventory - ready, and potential - that it doesn't seem likely that there will be a general uplift in prices any time soon. In fact, there may never again be a real boom in Florida property. Everyone who was going to get a place down here may have already gotten one. There are other states with low taxes. And the idea of retiring to Florida may be out-of- fashion by the time the inventory is worked off." Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- 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 at joel@dailyreckoning.com US Economy in a Self-Made Vise American politicians are facing up to the phony challenge in a phony way. That is, they are pretending to create jobs. The Europeans, on the other hand, say they are cutting deficits. They have to; lenders said they wouldn’t give them any more money. As Nouriel Roubini put it, in the Old World, “austerity is not optional.” Mortgage Market Mayhem Continues in the Economic Downturn Japanese Debt Crisis to Mirror that of Greece? Euro Declines on a Sea of Bankruptcy and Paper Promises Do you ever get the feeling that you are in some kind of weird dream, where someone is holding a pillow over your face so that you can’t breathe, and you can dimly hear your children asking, “Is he dead yet, mom?” and I am thrashing around and yelling out, “No, I’m not dead, you morons!” but nobody is paying attention? Me, too! The Correlation Between Morons and Government Debt Insufficient Silver to Supply China’s Growing Demand A New and Convenient Truth Given the proper motivation... well, actually... there’s no better reason for Uncle Sam to change his tune than convenience. China may be buying up resource rich countries while the US has its own strategy. This cartoon came to our attention via talented artist RJ Matson. Russia’s Veers Huge Reserves Away From Major Currencies Avis Budget Group (NYSE:CAR) — Room For Downgrades The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor