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The Daily Reckoning | Friday, August 20, 2010 
On the Importance of Vacation Living life somewhere between working hard and hardly working 
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Bill Bonner
Friday 20 August 2010
The Daily Reckoning Presents ----Deutschland Uber Alles Grasshoppers
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Government Retirement Headed for Broke - Shocking New Presentation...
It's not in the news. The government wants to keep it quiet. But your retirement "safety net" officially begins to shrink this September 30.
That's why you simply must watch this shocking new presentation - and get all the details on the "other" government-backed pension program that can pay you thousands of dollars each year.
Reckoning today from Ouzilly, France...
What's the score from yesterday? Dow down 144. Gold plus 4.
The stock market looks like it wants to roll over. Whether it will or not, we don't know. We'll just have to wait to find out.
In the meantime...
"Dad... I guess I should be back in LA working..." said Maria, after we reviewed her finances.
She earns her living as a model and actress. But it is not a great living. Her chosen career is like that of a professional athlete. A few of them make big money. Most struggle to make ends meet.
Maria does okay.
She has learned from her father not to borrow money. So when she bought a car - a spiffy Mini Cooper convertible - she wanted to pay cash. She went to cash out some of her stocks, but a broker talked her into leaving the stocks in the portfolio and taking a cash advance against it.
This was great for the broker. He earned a fee from the loan. But it only made sense for Maria if her stocks rose more than the loan charges. Not a good bet in this market. Besides, if she wanted to borrow money she would be better off borrowing from dear old dad.
"I probably should have stayed in LA...because I need the money. It's expensive to come over here. I mean, there's the airfare...but also the money I don't make."
"Don't worry about it," said Dad. "Most people are far too busy in general...and too busy earning a living to make any real money. They get caught up in it. Their incomes go up. So they increase their expenses. The more they earn, the more they have to earn. And it just goes on and on...with no time to really think...and no chance to do anything that takes a long time. Most people can't take a year off from work. Many can't take a week off. They can't afford it.
"But it's probably a good idea to take some time off. I've become very suspicious of busy-ness. You know, all those fellows who earned their MBAs or their Ph.Ds. in finance and business? They went to Wall Street and worked liked devils. Dashing to Cleveland to do a deal...rushing to London for a meeting...a cell phone in one hand...a Blackberry in the other...working until 1AM...feverishly churning paper.
"What good was it? Wall Street is supposed to allocating capital efficiently so that the free market economy can make progress. What they were really doing was creating a kind of Bubble Finance - trying to make as many deals as possible in order to earn fees. And all the deals involved adding debt to the system.
"And they were so busy doing it that they didn't bother to notice what was really going on. You should read some of the transcripts of testimony by the people running big Wall Street firms. Or just talk to some of the people doing the deals. They were going at it like demons. But they never stopped to reflect on what they were really doing or what good it was doing. So, when the crisis came, they didn't know what was hitting them. The dumbbells discovered that not only did they monger a lot of debt, the also bought it...and held it in their own vaults. Of course, Lehman didn't survive. The others only made it through by leaning on the taxpayers.
"The whole thing was comical and absurd..."
"Dad, are you getting off-topic here?" Maria interrupted.
"No, no... This is my point. Here were the best educated, smartest, highest-earning people in the country. And they couldn't see that they were on the edge of bankruptcy. Why not? Because they were too busy earning money!
"The average fellow does that too. He works so hard...and he spends so much money...that he can't see that he's always right on the edge of going bust. He has no margin. No cushion. He doesn't take the time to think through what he is doing and why.
"I work hard most of the year. From 8 in the morning to 8 at night, more or less. I've done that for the last 40 years. But when August comes around, I try to downshift. Instead of racing down the highway...I want to take a little back road and meander a bit...see where it leads.
"I might even stop for a picnic...or sit in a chair and read a book I wouldn't ordinarily read...or think about what I'm doing...about who I am and what I really want...about what is important and how to get it... "
"Dad, you are a big BS-er. You know perfectly well you never slow down. You come here and you work all day, just like at home. And you get mad when someone interrupts you. You're just painting shutters and fixing doors, rather than working in the office."
"Yeah...but I can think while I'm painting..."
*** Next week...a house you can build for peanuts...and then be free of utility bills forever! But first, today's column...
It has been 65 years since Europe's last major war. Still, when Germany gets up off its knees, the continent trembles.
Last week, the Berlin government announced the best results since the wall fell in '89. From the first quarter to the second one the republic's GDP rose 2.2%. At that rate - about 9% a year if it continues - Germany is running neck and neck with China. Compared to France and the US, Germany is flying nearly 4 times as fast. Greece meanwhile is backing up. Its economy shrank 1.5% last quarter.
The Teuton tribes are an aggressive lot. The Usipetes, Tenchteri, Batavi, Cherusci, Chatti, Vandals, Goths, Franks, Alans, Suebians - all jostled each other for centuries. They must have gotten a taste for competition. And when Rome wheezed her last gasps they fell on her like French tax collectors on a widow's estate. The Vandals pushed all the way across Gaul and Iberia, crossed to North Africa, and from their new base in Carthage, continued to tickle the old Empire until it rolled over on them. Everybody has his elbows out. But competition takes many forms. Better to build Audis and Mercedes than Tigers and Messerschmitts. Better to race for market share than for the Champs Élysée. Whatever form it takes, competition isn't likely to stop. Happily, most of the time, it is a boon to everyone - even to the losers. That's why Germany's current success is only a threat to the economists and commentarists who've been giving her advice. The rest of us hold our breath and hope for more.
It was only a month ago that Martin Wolf led a "great debate" on how governments should react to the financial crisis. Of all the ideas to come out of financial crisis of '07, Wolf proposed one of the most remarkable. He illustrated it with the fable of the ant and the grasshopper. He saw two types of economies. There were those that produced and those that consumed. The trouble, according to Wolf, was that the two didn't compete at all. Instead, they lived in a kind of symbiotic parasitism. The grasshoppers lived off the labors of the ants. Not only did the grasshoppers make the things that the ants used, the ants took the grasshoppers' money and lent it back to them, so they could buy more. The grasshoppers were ruining themselves. But the ants were making a mistake too. They were building up capital, but what could they do with it? There was no point in expanding output capacity; arguably, they already produced too much. And what could they buy? The grasshoppers had nothing to sell.
That was not the worst of it. When the grasshoppers had spent too much, said Wolf, both bugs were trapped. If the grasshoppers in Spain and Greece were forced to spend less, the ants in Düsseldorf were condemned to sell less. Their economies were doomed to go down together, like galley slaves chained to a sinking ship.
In any case, it looked like the sort of thing the fixers could fix. Germany is all make. Greece is all take. The system was out of whack. Trade flows must balance out to zero, so Wolf et al concluded that the problem could be corrected on either side. Germany could stop working so hard and exporting so much stuff it didn't want. Or, Greece could stop spending so much money it didn't have. Since any slowdown in spending threatens the "recovery," it would be better for Germans to do more spending themselves. They should raise wages and encourage their own people to buy more Audis...more ouzo...and more pointy shoes with curled up toes. This was no time for austerity.
They misunderstood the problem. Imagine two men marooned on an island. They barely survive. One works hard, hunting, gathering, and planting. The other dances on the beach like Zorba, depending on the kindness of his companion for his daily rations. The problem is not the lack of balance. The problem is the slacker. You could redress the balance between them by getting the productive one to slack off too. But then, they'd both starve.
The euro was seen as part of the problem, too. It was either too low for Germany or too high for Greece, said analysts. In the good old days, Greece could have pulled a fast one, devaluing its currency to make its citizens poorer, and their labor and exports cheaper. But now, there is no cheap and easy solution.
Which set us to a-wondering about how the world possibly got to where it is. For the hundred years from the end of the Napoleonic Wars to the beginning of WWII, Europe was rarely happier, more prosperous...or more at peace. Yet during that time, money was even more inflexible than the euro. Governments did not commit premeditated murder of their own currencies. Instead, the value of paper money was protected by gold. People competed by working harder, saving more, and figuring out how to produce more with less - just as the Germans are doing now.
This week, the Merkel team followed up. "The lady's not for turning," Ms. Merkel might have said, taking a line from Margaret Thatcher's 1980 Brighton speech. With the pressure off its budget, the commentators thought the Germans might be tempted to ease up on their austerity program. Instead, the German government will continue to pursue cuts to military and social spending, she said. Success will not distract Germany from its austerity program. Whether failure will send it off the rails is a question to be answered later.
Regards,
Bill Bonner
for The Daily Reckoning
Joel's Note: "Long suffering readers," as Bill jokingly refers to them, might like to know exactly what the author of this column is doing with his OWN money. Well, now you can get the specifics...the investments...the inside contacts Bill has built up over the past three decades in the financial publishing business. For details on how to become part of the Bonner & Partners Family Office, check out this invitation.
Yes, Dear reader, the Great Correction continues...with the US middle class "on the way down," says Der Spiegel. Here's what Germany's leading newsmagazine has to say on the subject:
The Erosion of America's Middle Class
While America's super-rich congratulate themselves on donating billions to charity, the rest of the country is worse off than ever. Long-term unemployment is rising and millions of Americans are struggling to survive. The gap between rich and poor is wider than ever and the middle class is disappearing.
Finley calls them "the new poor." "That is a different category of people that I think we're seeing," he says. "They are people who never in their wildest imaginations thought they would be homeless." They're people who had enough money - a lot of money, in some cases - until recently.
"The image of what is a poor person in today's day and age doesn't fly. When I was growing up a poor person, and we grew up fairly poor, you drove a 10-year-old car that probably had some dents in it. You know, there was one car for the family and you lived out of the food bank," says Finley. "In the past, you got yourself out of poverty and were on your way up."
It was the American way, a path taken by millions. "Today the image is you're getting newer late model cars that at one point cost somebody 40, 50 grand, and they're at wits end, now they're living out of the food banks. And for many of them it takes a lot to swallow their pride," says Finley.
Today the American way is often headed in the opposite direction: downward.
Two weeks ago, Microsoft founder Bill Gates and 40 other billionaires pledged to donate at least half of their fortunes to philanthropy, either while still alive or after death. Is America a country so blessed with affluence that it can afford to give away billions, just like that?
Gates' move could also be interpreted as a PR campaign, in a country where the super-rich sense that although they are profiting from the crisis, as was to be expected, the number of people adversely affected has grown enormously. They also sense that there is growing resentment in American society against those at the top.
For people in the lower income brackets, the recovery already seems to be falling apart. Experts fear that the US economy could remain weak for many years to come. And despite the many government assistance programs, the small amount of hope they engender has yet to be felt by the general public. On the contrary, for many people things are still headed dramatically downward.
In a recent cover story titled "So long, middle class," the New York Post presented its readers with "25 statistics that prove that the middle class is being systematically wiped out of existence in America." Last week, the leading online columnist Arianna Huffington issued the almost apocalyptic warning that "America is in danger of becoming a Third World country."
More than a year after the official end of the recession, the overall unemployment rate remains consistently above 9.5 percent. But this is just the official figure. When adjusted to include the people who have already given up looking for work or are barely surviving on the few hundred dollars they earn with a part-time job and are using up their savings, the real unemployment figure jumps to more than 17 percent.
In its current annual report, the US Department of Agriculture notes that "food insecurity" is on the rise, and that 50 million Americans couldn't afford to buy enough food to stay healthy at some point last year. One in eight American adults and one in four children now survive on government food stamps. These are unbelievable numbers for the world's richest nation.
Even more unsettling is the fact that America, which has always been characterized by its unshakable belief in the American Dream, and in the conviction that anyone, even those at the very bottom, can rise to the top, is beginning to lose its famous optimism. According to recent figures, a significant minority of US citizens now believe that their children will be worse off than they are.
Many Americans are beginning to realize that for them, the American Dream has been more of a nightmare of late. They face a bitter reality of fewer and fewer jobs, decades of stagnating wages and dramatic increases in inequality. Only in recent months, as the economy has grown but jobs have not returned, as profits have returned but poverty figures have risen by the week, the country seems to have recognized that it is struggling with a deep-seated, structural crisis that has been building for years. As the Washington Post writes, the financial crisis was merely the final turning - for the worse.
Enjoy your weekend,
Bill Bonner
for The Daily Reckoning
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