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The Daily Reckoning | Friday, June 18, 2010 Victory for the zombies and the ghosts of Florida's real estate present, Apologies to misled fashionistas interested in our "shirt" report, Plus, Bill's notes on where all America's money is heading, a new theory for the same old world and much more... The Slow Decay of a Healthy Economy A new theory that pits producers against parasites Bill Bonner Reckoning from Baltimore, Maryland... Today, we boldly announce a NEW THEORY about the way the world works. Yes, dear reader, you are the first to hear it. But before we get to that, let's talk about what's going on in the markets. Stocks continued shuffling along like zombies...the Dow rose 24 points. But gold shot up to $1,248 - a new record. Makes you wonder. Inflation is no threat to anyone...at least, not now. The economy is recovering - at least, that's what everyone says. So why is gold hitting a record high? Something must be wrong. Something is wrong. Gold buyers are probably just like us. They're not sure exactly what is wrong. But they know something is rotten in the state of Denmark. And Greece. And Spain. And New York. And California. In Washington, DC. And in the Gulf of Mexico. We just had the biggest financial crack-up of all time. Even under ideal conditions, it will take people a long time to rebuild lost savings...to get rid of houses they can't afford...and to restructure debt they can't pay. While this restructuring and adjustment is going on, you'd expect the markets to be a little punky. But instead of letting people get on with it, the zombies have moved in. At first, you hardly notice. An arm here. A leg there. Pretty soon, you're dead! The percentage of the economy controlled, guaranteed, or paid for by the government is increasing. Since the feds were already deeply in debt themselves, the only way they could spend more money was by borrowing more. You can't cure a debt problem by borrowing more money. Net debt is going up. So, there's something wrong. The economy isn't recovering... It's just not possible. Which brings us back to our new theory... Many are the ideas about how the world rumbles and trundles along. Most have some sort of dialectic at the center of them...some tension between one thing and another that causes them to oscillate to and fro...some yin and yang of opposing forces, constantly battling it out for control. Good vs. Evil. Progress vs. Backsliding. The proletariat against the bourgeoisie. The moneyed elite vs. the people. Democracy vs. Totalitarianism. Freedom vs. Slavery. Here we offer a new and improved theory with a dynamic of its own: the producers vs. the parasites. Yesterday, we read in the local Washington newspaper that the parasites gained more ground in suburban Maryland. It was a minor issue on a minor page of a minor section of the paper. But that's the way the parasites work. Little by little...an arm here...a leg there. In the present instance, people who live in trailer parks can now feed on the people who own the ground beneath their feet. The state government has added a term to their contracts that neither party agreed to. Henceforth, if the trailer park owner wishes to close down his business, he cannot merely honor the terms of his contract with his lessees. He must also pay them off according to a formula decreed by the legislature. Trailer park residents have been zombified. A bigger illustration can be found on the front page of yesterday's paper. BP has agreed to provide the zombies with $20 billion dollars of raw meat: "BP backs $20 billion spill fund," says The Financial Times. BP is a producer. It makes something valuable. In fact, it makes the thing that is the pentagon's most valuable and most important resource - liquid energy. It does so at a profit, also rewarding all the little old ladies, lonely orphans and rich sons-of-a-gun who own its shares. BP normally pays dividends; those dividends are currently suspended, as BP diverts cash to the spill fund. Yes, it also makes mistakes, for which it must pay. But circling BP today is an army of parasites. Zombies who toil not. Neither do they spin. Instead, they file lawsuits and try to get something from the producers without paying for it. BP's Gulf disaster is a godsend for them. Like a busload of plump English tourists delivered to a bad neighborhood... The Democrats have always been the recipients of big donations from tort lawyers. Many lawmakers of both parties are lawyers, which is to say they were probably parasites even before they entered public service. It is not surprising that their instincts are the same - to leech onto productive businesses. Remember the giant tobacco settlement? In 1998, the tobacco companies lay down and opened their veins. A quarter of a trillion dollars was paid out in a huge class action settlement. The money was supposed to go to redress the damage done by smoking. But $19 out of every $20 found its way, instead, into the pockets of the lawyers, the activists, and the bureaucrats. That is to say - the zombies got it. Will the oil settlement be any different? Not likely. The zombies will take most of it. Much of the rest will be used to turn honest working people into zombies. Instead of finding new work in new areas, for example, Gulf-area residents will be encouraged to stay put and collect checks. If they take up new work, the measure of their 'damages' will go down! Here is our theory: in the beginning, an economy, a business, a nation...or even a family budget...is fresh, clean and dynamic. Over time, little by little, the parasites encrust themselves -like barnacles on a ship. Then, they grow. Eventually, they become as fat as ticks on a hound in the summertime... At first, they are just nuisances. The economy can support them. 'The masses want bread? Sure why not. Give them a circus too. And give my lazy brother-in-law a sinecure.' Gradually, more and more people get their teeth into it. An unnecessary department in a thriving business. A subsidy to one group. A special favor to another. A make-work job...a handout...a bailout... An expense here. An extravagance there... When things go well, the parasites take more blood. Heck, the economy can afford it. When they go badly, they grab the weakened host and pull it down in a feeding frenzy. BP, are you ready? They succeed because in most cases it is generally cheaper to go along than to fight. Without hardly noticing, the living become cooperative zombies too. The cigarette companies become tax collectors for the feds. The oil companies too. Doctors go along with nationalized health care. Teachers get their lifetime tenure. Ordinary citizens stand in line to be inspected at airports, counted by census takers, interrogated by tax collectors. Soon, the whole nation is zombified. The zombies win. And then...there is collapse, war, revolution, bankruptcy... The zombies are killed off...new life begins. That's why the feds fight so hard to prevent a financial collapse. The last thing they want is a fresh, new, healthy economy... The Daily Reckoning Presents It's June in Florida Bill Bonner "You can get wood. You can get brick. You can get stucco. Boy, can you get stucco." - Groucho Marx In the Florida land boom of the '20s, promoter Carl G. Fisher hired a huge, lighted billboard in Times Square in New York. It advertised that "It's June in Miami," a claim that was fraudulent 11/12ths of the year. In June, it was just too bad. South Florida is entering its fourth year of a property slump. Places sell for about half of what they brought three years ago. The retail building across the street is half empty. Signs are everywhere: "Office for rent." "Ocean front lot for sale." "Commercial space available." Here in Delray Beach, the sun is shining. The grass is growing. Waves caress the shore. But our hotel is nearly empty. Many restaurants on Atlantic Avenue are closed. The streets are so quiet the city seems like a ghost town. Then again, it's so hot and sweaty, even the ghosts wilt. But the ghosts talk: "There was nothing languorous about the atmosphere of tropical Miami during that memorable summer and autumn of 1925," wrote Frederick Lewis Allen in 1931. " The whole city had become one frenzied real-estate exchange. There were said to be 2,000 real-estate offices and 25,000 agents marketing house-lots or acreage...the city fathers had been forced to pass an ordinance forbidding the sale of property in the street, or even the showing of a map, to prevent inordinate traffic congestion." The boom of the 1920s came to an end in 1926. Henry S. Villard, reported what he saw two years later: Dead subdivisions line the highway, their pompous names half- obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side-walks, where grass and palmetto take the place of homes that were to be... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death. For three years, Florida's property market died, even as the rest of the nation danced the charleston. It did not recover until after WWII - 20 years later. And now, it is out of season once more in Florida. The subject of today's note is why it may never be high season again. There are no houses for sale here. A house is a tangible thing. Its paint peels. Its roof leaks. Its a/c needs to be replaced. But a home is an agreeable abstraction. So great is the local realtor's distaste for tangibility, that houses have all been replaced by mansions, estates, compounds, retreats, and most importantly, by 'homes.' We find, for example, a "spectacular Palm Beach Estate Home," with a separate 2-bedroom oxymoron - a "guest home." It must be a house for guests who refuse to go home. Or perhaps a home for people who refuse to be guests. And if we looked for a home in the country, we would probably find one with a dog home in the back yard. "This palatial home features over 20,000 square feet of living area," says a current listing. "Built with entertaining in mind, this home features 9 bars, 2 walk-in wine coolers, 3 outside grilling areas, a 75' pool surrounded by a 400' marble dock and patio...summer kitchen with complete with outdoor fireplace...no detail has been overlooked." Well, maybe one detail. Who would want to pay $11.5 million for a jumped-up mock-Tuscan relic from the bubble era? Even in the best of circumstances, a major property bust can take decades to fix. In Japan, property collapsed after the stock market bubble popped in '89. All around it, the world economy kept bubbling away. But Japanese property sank to the bottom anyway. Twenty years later, prices are still down as much as 80%. The Hoover administration helpfully turned its back, neither causing the bubble of the '20s nor attempting to repair it. This week, Sheila Blair, chairwoman of the Federal Deposit Insurance Corporation, admitted that the feds now are more involved. Too bad, again. Like Florida in June, government support is not always what it pretends to be. The New York Times: "For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers," Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes. She mentioned Fannie Mae and Freddie Mac too. Along with the other federal subsidies, the two agencies largely financed America's real estate bubble. Now, with their help it could be a long time before the market recovers. Maybe forever. Fannie and Freddie stand behind $5.5 trillion worth of mortgages. More than $1 trillion of them were written during the height of the '05 -'06 bubble. Those houses, many of them in Florida, are probably underwater now - worth less than the value of their mortgages. Most will go into default...leaving Fannie and Freddie, and indirectly the taxpayers, on the hook. The foreclosed properties will cause properties to sink deeper. And by the time the inventory is finally worked off, circumstances may have changed. Buyers may look to Cuba, Nicaragua or the moon for their retirement havens...leaving Florida to the ghosts forever. Bill Bonner, for The Daily Reckoning Bill Bonner Yankees Seek Tax Refuge in the Deep  South Bill Bonner With the rest of today's reckoning... Florida seems to have been invaded by zombies. "Injured in a workplace accident? Treated unfairly? Call 1-800-A- LAWYER." The signs are along the highway...on the radio...and in magazines. Chasing ambulances must be good business in Florida. The advertising must pay. We got back from Florida on Wednesday and immediately got stuck in a traffic jam. The Washington, DC beltway must be one of the worst traffic areas in the US. Later, we went to dinner in Bethesda. The downtown area has been spiffed up - like a mall. Restaurants have been replaced with noisy, crowded eateries where you stand in line to get a table...and then wait to get an entree scarcely more refined than a McDonald's Happy Meal. Meanwhile, Forbes Magazine tells us that people with money are on the move - from the North to the South. Why? Taxes. Cost of living. Lifestyle. Judging from what we've seen in the Maryland suburbs, it's not surprising that people are moving out. It's surprising that anyone is left: Where America's Money Is Moving Topping the list: Collier County, Fla., which includes the city of Naples. Tax returns accounting for 15,150 people showed moves to Collier County from other parts of the country in 2008, the latest year for which IRS data is available. Their average reported income: $76,161 per person - equivalent to $304,644 for a family of four. Although slightly more taxpayers moved out of Collier County than into it, the departing residents' average income came out to just $26,128 per person. Households that moved to Collier County principally came from other parts of Florida, with Lee, Miami Dade, Broward, Palm Beach and Orange counties leading the list. Big northern cities also sent lots of migrants: Cook County, Ill. (home to Chicago); Oakland County, Mich. (near Detroit); and Suffolk County, N.Y. (on Long Island) each sent more than 100 people to Collier County during 2008. In second place is Greene County, Ga., with a population of just 15,743 at the Census Bureau's last estimate. The IRS data show that in 2008, 788 people moved to the county, about 75 miles east of Atlanta. Rounding out the top five: Nassau County, Fla., near Jacksonville; Llano County, Texas, 70 miles northwest of Austin; and Walton County, Fla., 80 miles east of Pensacola. The dominance of the list by Florida and Texas - the former has eight of the top 20 counties, the latter four - makes sense to Robert Shrum, manager of state affairs at the Tax Foundation in Washington, D.C., since neither state has an income tax. "If you're a high-income earner, then that, from a tax perspective, is going to be a driving decider if you're going to move to one of those two states," Shrum says. After accounting for property taxes, Shrum's analysis shows that Texas has the fourth-lowest personal tax burden in the country, and Florida has the eighth lowest. Shrum also points to eight states that have targeted wealthy households with extra-high tax brackets: California, New Jersey, New York, Maryland, Hawaii, Oregon, Connecticut and Wisconsin. Six of the top 10 counties the rich are fleeing are located in those states. 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 No Quick Recovery for the US Economy 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. US Economy in a Self-Made Vise Mortgage Market Mayhem Continues in the Economic Downturn 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 Call for New Taxes In Roman times, the elite aristocracy paid no taxes but was expected to build walls, aqueducts, or other public works periodically, while the populace was mercilessly taxed. What is the difference between the modern structure wherein foundations are a tax dodge, and the taxes of small businessmen are higher than they otherwise would be to subsidize the deification of the über-rich through monuments to their generosity, or worse, their political ideals, especially when these are anti-American? 26 of 27 Nations “Pose a Threat” to Wider EU Economy Insured Lives Sometimes Commit Suicide