 | | The Daily Reckoning | Wednesday, March 16, 2011 |
- Why the "flight to safety" will land on a runway of worthless paper dollars...
- The important distinction between "greed" and "enterprise"...
- Plus, Bill Bonner on why Japan is turning to money printing, and the increasing importance of owning a family stronghold...
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|  | | | Short-Term Safety, Long-Term Problem | | Why the Current Strength of US Bonds Will Be Short-Lived | |  | | Joel Bowman |
Reporting from Salta, Argentina...
Stocks down...gold down...bond yields flattened...world markets roiled...
And yet, all this pales in comparison to the very real world horror going on right now in a small group of islands in the Pacific Ocean. Tens of thousands of people in one of the world's most developed economies are without access to clean drinking water tonight and without power in sub zero temperatures. Families huddle together, not knowing if or when the next disaster might be visited upon them.
Millions more around the world watch on with sorrow, horror, perhaps even guilt, at what they see unfolding across Japan. Some will point to the failings of man...others to the mystery of a god...and others still will simply sit and scratch their heads...
"What's the reason?"..."What does it mean?"..."Why there and why now?"
Before we begin to assess the financial implications of Japan's 9.0 monster earthquake, we first offer our heartfelt condolences to those who suffered this most recent expression of nature's blind wrath.
Callous as it must surely seem, sometimes the only thing to do in these situations is to keep on keeping on. Carpenters keep building...engineers keep designing...scientists keep searching for cures...doctors keep administering them...
And reckoners? Well, those of us with little better to offer than our thoughts and words...well, we keep on reckoning...crude and searching as our words must at this time appear...
So we return to our post; to stocks, gold and bonds. Where to from here?
To be frank, it's probably too early to comprehend the extent of the damage wrought by the quake in Japan with any measure of certainty. We'll have to see what comes of this in the weeks and months ahead.
However, it's probably not too early to begin trying to understand what Japan's crisis might mean for long-term US bond yields. Dan Denning, the Daily Reckoning's "Man Down Under," pondered this very question in his Aussie DR musing this morning.
"The Japanese are one of the largest holders of US Treasuries and continue to buy them," observed Dan, before adding, "That capital might be put to a lot better use in the coming years rebuilding from the quake and tsunami damage."
Dan raises a very important point. We're seeing a flight to "safety" right now, no question. US Treasuries rallied yesterday, more or less in sync with the horrific images coming from the Fukushima and Sendai newsreels. The yield on the benchmark 10-year note briefly touched 3.2%, its lowest level this year, reflecting the "safe haven" appeal of bonds. (Bond prices and yields move in opposite directions.)
But what happens when the dust settles a little and Uncle Sam wakes up to find one of the go-to buyers for his ever-accumulating debt has put in a no-show? What happens, in other words, when the second largest holder of US debt discovers he has his own, 9.0 earthquake-sized problem to deal with? According to data released by the Treasury on Tuesday, Japan held $886 billion worth of Treasuries at the end of January, the second largest foreign holder behind China. That's a big gap to fill...even by fractions.
"Of course in the short term, the 'risk off' trade is bullish for US bonds and the US dollar," continues Dan. "People are cashing in their chips and storing up their cash. But longer term, the US may find it a lot harder to fund deficits without the help of at least one major foreign buyer. This will put more pressure on the Fed to monetize debt right away."
What then will the Fed do? Well, exactly what the Fed always does, of course; precisely that which it shouldn't. The Fed will, as Dan points out, continue its attempt to "monetize" (read: print) away its debt.
It goes without saying that this strategy is a complete non-starter, as far as any measure of logic is concerned. Academic types like to argue that a weaker currency and/or more liquidity are great ways to jump- start flailing economies. They argue that a flaccid currency gives exporters an edge abroad and that a blast of paper money stimulates spending back home. In reality, all this does is perpetuate a weakening confidence in that particular currency as a store of value and, thereby, discourage those with whom the offending government might wish to trade from wanting to accumulating them. Who, after all, wants a vault full of Zimbabwean dollars, Hungarian pengos or US Continentals?
And lo! Always on the ball, Addison writes in this morning's edition of The 5, "Easy money is already having its affect in the US. Wholesale prices, which trotted upward in December and January, reached a full gallop in February."
The upward-trot-to-record-gallop to which Mr. Wiggin is referring is, at least according to a story we saw coming across the wires this morning, the steepest rise in food prices in 36 years.
Continues Addison, "The producer price index (PPI) rose 1.6%. Even after the usual statistical sleight of hand applied by the Bureau of Labor Statistics, the number is more than double what the Street expected. Annualized, it's 19.2%.
"That's for finished goods. If you move further back in the production chain, prices for crude goods rose 3.4% last month. And February was no fluke. PPI for crude goods has risen 20.7% over the last six months.
Of course, the Fed's own measure of inflation - that nebulous, periodically redefined, terminally elastic non-statistic - remains, according to the Fed itself, "subdued."
Hooray!
Alas, this news comes to us from an institution that actually admits - with a straight and serious face, no less - that it actively targets a 2% erosion in the value of your money per year. The Feds guarantee, in other words, that they will steal, or do their best to steal, via inflation, 2% of anything you earn or own every year for the rest of your life...or for its. That is its stated "sweet spot."
It's enough to make one think of the term "greed" in a whole new light...which is exactly what today's guest essayist offers in today's column, below. Please enjoy...
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| | The Daily Reckoning Presents | | Enterprise, Not Greed, Creates a Better World | |  | | Charles Kadlec |
Greed: The word itself has become central to the political debate over the budget, taxes, union benefits, what constitutes ethical behavior, and the shape of our society.
The problem is the indiscriminate use of the word has blurred its meaning.
Those on the left use the word as an epitaph against the successful as epitomized by Sen. Bernie Sanders "When is enough enough?" he asked in his impassioned plea for raising tax rates "on the rich."
But at the same time, those on the right embrace "greed" as vital to the functioning of our economy. Economist Walter Williams, for example, wrote in his essay "The Virtue of Greed," "It's greed and not compassion that gets things done."
This lack of moral clarity threatens our liberty. It destroys our ability to distinguish between theft and the pursuit of happiness; between vice and virtue, and undermines our ability to be a self- governing people based on the norms of ethical behavior.
We instinctively know that greed is bad for society and see it in its original meaning as a vice, an action that should be condemned in all of its forms. What, then, should we make of 13th century theologian Thomas Aquinas' claim: "...one man cannot over-abound in external riches without another man lacking them"? Is the desire for wealth, or the accumulation of wealth, per se, evidence of greed?
In the time before capitalism, the aristocracy for the most part lived high by taking from the poor. Even today in some countries such as North Korea where the "dear leader" does not lack any human comfort while most of his country faces starvation, this statement holds true.
But many of the world's richest - such as Microsoft's Bill Gates, Google's Sergey Brin and Larry Page, and even the NBA's most valuable player for the past two years, LeBron James - gained their wealth by making valuable and/or unique contributions to society, either through the products they invented, or the entertainment they provided. They became rich, not at the expense of others, but through voluntary commercial exchanges.
Calling those who are wealthy "greedy," solely because of their wealth, or to suggest that the human drive for a better life is the same as greed, muddles our thinking. Muddled thinking is dangerous because it can lead to policies that punish both virtue and vice, that interfere with our inalienable right to pursue happiness, and lead to more, not less, poverty.
For guidance on what class of actions constitutes greed, we can start with three of the Ten Commandments, which prohibit killing, theft and lying. These "shalt nots" deal with the use of coercion or deception to advance one's well-being at the expense of another through involuntary or fraudulent exchanges.
This more narrowly focused notion of greed is coherent with the law, which since antiquity has penalized murder, theft, embezzlement, extortion and fraud.
I could find no similarly evocative word for virtuous behavior that may generate extraordinary wealth for those who contribute to our society and gain their riches through voluntary exchanges. The word enterprise, however, is appropriate because it acknowledges the hard work and commitment required to achieve extraordinary success, and is therefore worthy of our praise.
This distinction between greed and enterprise is consistent with the powerful negative implications associated with greed. Greed is a charge that implies sinfulness, a morally corrupt character, a crime against society at large. It should not be used to demonize the desire or drive for wealth, per se. Rather, it should be reserved for those who use coercion or deception to gain their wealth by reducing the wealth of the community at large.
Greed implies a negative sum game.
By contrast, enterprise implies a positive sum game. Those who achieve their goals through enterprise contribute to the wealth and opportunities, incomes and living standards of others.
Google's founders realized their wealth through the hard work and creativity necessary to transform their vision of making all of the content on the web easily accessible for free into reality. In the process, they have created a company with a market value of $200 billion and enriched the lives of not only their employees, but also millions of people who use their search engine every day. They have earned our praise and honor. Their wealth is a just reward for their virtue.
Knowing the difference between greed and enterprise empowers us to distinguish clearly between those who achieve wealth through theft and deception, such as Bernie Madoff, the perpetrator of the largest Ponzi scheme in history, and those who achieve their wealth by expanding the opportunities of others, including those who are successful in their chosen profession or field of play.
It is also consistent with the observation that greed is demonstrably bad for capitalism. The fraud and deception - e.g. greed - associated with the collapse of WorldCom and Enron in 2001, for example, were associated with a sharp decline in the stock market as investors began to question the integrity of financial statements in general.
With this distinction, we also can see that politicians too can be greedy - if not for money through corruption, then for the power to impose their will through the coercive power of the state. Taxes, rules and regulations, corporate bailouts, subsidies, protection from competitors and transfer payments are all one-sided exchanges and when excessive, reduce the wealth of our society.
Finally, this distinction warns that enterprise can morph into greed. Sometimes the desire for success or wealth can cause us to cheat, whether it be an athlete who uses performance-enhancing drugs or an executive who uses accounting tricks to overstate short-term earnings in order to increase his bonus. Companies that use political connections as part of a strategy to cripple their current or potential competitors can also be considered greedy because their success is now at the expense of customers in that market.
We can test the distinction between greed and enterprise by substituting the word "enterprise" for "greed" in the fictional character Gordon Gecko's famous speech from the 1987 movie Wall Street:
"Enterprise, for lack of a better word, is good. Enterprise is right. Enterprise works. Enterprise clarifies, cuts through, and captures, the essence of the evolutionary spirit. Enterprise, in all of its forms; enterprise for life, for money, for love, knowledge, has marked the upward surge of mankind and enterprise, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."
Ask yourself: Doesn't this make more sense than the original?
Regards,
Charles Kadlec,
for The Daily Reckoning
Joel's Note: Mr. Kadlec is a member of the Economic Advisory Board of the American Principles Project, an author and founder of the Community of Liberty.
| | | | | | | Bill Bonner | | Why Japan Feels the Need to Print Money | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
More problems. More fixes.
The latest from AP:
NEW YORK (AP) - Stocks fell sharply Tuesday as the nuclear crisis in Japan weighed on global markets.
The stock market dropped at the start of trading on news that dangerous levels of radiation were leaking from a crippled nuclear plant. The plant was damaged in last week's earthquake and tsunami. Japan, the world's third-largest economy, accounts for 10 percent of US exports.
Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners, said fear had taken hold in the market.
"It's a situation where you sell, and you ask questions later," he said.
After falling as much as 297 points, the Dow recovered and ended the day down 137.74, or 1.1 percent, to close at 11,885.42.
Investors sought the relative safety of US Treasurys, sending prices higher and yields lower. The yield on the 10-year Treasury note dropped as low as 3.20 percent in overnight trading. That's the lowest yield on the 10-year note this year.
Treasury prices soared as stocks plunged during the financial crisis. What is especially interesting is that in a pinch...Treasurys went up. Gold went down; it lost more than $30, to close under $1,400.
So what gives? Revolutions and civil war in the oil-producing countries. Earthquakes, tidal waves, and nuclear blow-ups in one of the world's leading oil importers. Problems. Problems. Problems.
The feds called out all available hands. Over in Japan, they injected another 21 trillion yen into their economy. You understand why, of course. You don't?
Well, let us explain it. The east coast of Japan got smacked by an earthquake and tidal wave, see? And this caused 10,000 deaths...and hundreds of billions worth of property damage, see?
So, naturally, the central bank is printing up more money and distributing it through every channel available to it.
What good does more paper money do? You still don't see the connection, do you?
Well, neither do we, really. The idea of adding paper money is to "stimulate" people to buy, invest and spend. But you'd think the Japanese would have plenty of incentive already. Their towns, roads, cars, pipes, businesses, houses and harbors were destroyed. They have to rebuild.
And they've been champion savers for many, many years; so they must have plenty of money saved, ready for an occasion like this. They were saving for a rainy day; they got a flood.
But what's that you say? The money was put into Japanese government bonds.
Okay... Well, just sell some of the bonds...
No? That won't work? You say, the money isn't there? You say, the Japanese government spent it? And now they'll have to borrow more in order to pay off bondholders? And so, if the Japanese sell their bonds, it'll make the bonds go down...yields will go up...bond prices will fall...and the higher interest rates will stifle the reconstruction? And that's why they have to put more money into the system! Once you start fixing...it's hard to stop. You've got to add more fixes to keep the past fixes from coming un-fixed.
What the he...?
What good are savings if you can't pull them out and use them when you need them?
And what good is the safety of US Treasury bonds now...if the money won't be available when it rains?
The feds in the USA have been putting an extra $4 billion per day into the US economy since last November. Why are stocks up? Why did oil go back over $100? Why did grain prices hit record highs? Hey, the money has to go somewhere!
But the program - QE2 - is set to expire in June. Then, the economy that has gotten used to $4 billion per day will have to do without.
And it wouldn't be too surprising - given all the excitement in the world today - if the Feds decided that they too needed to add more money, rather than take some away.
And more thoughts...
"...little electricity or gasoline..." reports an eyewitness from The Washington Post, visiting Sendai, Japan. "Nearly all restaurants and shops are closed...roads blocked...supplies depleted...the devastation is catastrophic."
"Fuel almost non-existent...survivors will spend a fourth night in near freezing temperatures without food or water..."
We were elaborating on the benefits of having a family stronghold...a retreat...a bolt hole somewhere. When the going gets tough, you need a tough place to go to.
Oh yes...dear reader...the world is a dangerous place. Just so far this year, we've seen two big blow-ups - one in the Arab countries...the other in Japan.
Neither was expected. What's next?
Obviously, we don't know. If it's a big, nasty surprise, we hope we're not here in Bethesda, Maryland, when it comes.
Why? Because the supermarkets would be cleaned out in minutes...the gas stations would run dry...and we'd be trapped in a hostile environment. We're only here temporarily, while our youngest son finishes high school nearby. We have no family. Few friends. And none of the deep roots you need to survive a prolonged period of crisis and breakdown. Here, we are just anonymous passers-by... We would have to depend on the kindness of strangers and the competence of government officials.
What do you need to survive a disaster? First, you need access to water. As we've seen in Japan, even the most developed and sophisticated infrastructure in the world can collapse when it is struck by an earthquake and a tsunami. Public water pipes break. It can take weeks or months to replace them - assuming the government and local utilities are still functioning.
That's why it's a good idea to have your own private source of water - a spring, a well, a small, clean stream. Failing that, you should have enough water stocked up to last at least a couple weeks.
Then, you need to worry about food. How long could you live on what is in your refrigerator? We could make it for about 24 hours. Then, it would be slim pickings. And what if the supermarket were closed? What if the 7-11 were stripped bare? What if trucks couldn't make deliveries?
Well, surely the president would call out the National Guard. Yes, if everything is working as it should...and the National Guard doesn't have more important things to worry about.
Just as a precaution, you should maintain a stock of canned goods and dried food. Enough to last two weeks is the minimum. A month is better. Then, rotate your stock - don't leave it untouched for so long it goes bad.
Having an inventory of basic foodstuffs and water is essential. It will keep you calm. You won't be in desperate straits. It will give you time to carefully assess the situation and choose your best option.
Option?
Well, yes. What if the breakdown stays broken down for months? War...hyperinflation...a full collapse of the financial or political system - the crisis could take many months to run its course. In the meantime, supply and distribution systems may be severely or completely interrupted. You need a strategy.
And that's where the family stronghold comes into play. First, you must be able to get there. When we were confronted with the Y2K crisis more than a decade ago, we lived in Paris. Maybe the French bureaucrats would be able to maintain order...and maybe they wouldn't. We just kept our tank full of gas, just in case. It only took one tank of gas to get out to our country house. We figured we'd wait for the desperate mobs to leave the streets. Then we'd drive out of the city and make our way to the country. Once there, we had food stockpiled in the pantry and firewood ricked up to the eves in the barn. There were cattle on-the- hoof in the fields and chickens in the henhouse.
Your stronghold should be a place where you can live almost indefinitely - on local resources. It doesn't mean you have to have everything you need on your own property. But you have what it takes to trade with your friends and neighbors to get what you need. You may have to barter for a cow...or vegetables...with the local farmers, for example. You may have to improvise with tools and machinery. You will almost certainly get your hands dirty. And you should keep on hand some small gold and silver coins. They could be useful.
Of course, your standard of living will surely go down - at least in money terms.
But some people actually yearn for simpler, more "authentic" lives. Some find genuine satisfaction in small community life, with heavy emphasis on self-sufficiency and survival skills. As for us, we're never happier than when we're cutting firewood or planting a garden. Keep your laptops and your hard drives. Give us a wrench and a hammer! Dining "al fresco" on "dinde aux groseilles" at a fancy restaurant is fine...but we're just as happy eating a turkey sandwich outside in the yard.
A breakdown in complex civilization? Bring it on! Well, maybe not...
Regards,
Bill Bonner
for The Daily Reckoning
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