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The Daily Reckoning | Wednesday, April 25, 2012 Forgetting lessons learned and on the path to war, The destructive wake left by the US paper dollar system... Plus, Bill Bonner on how politicians have left the financial system disabled and underemployed... ------------------------------------------------------ The Smartest Investing Expert I Know Doesn’t Work Anywhere Near Wall Street In fact, he just released a report on THREE bombshell events set to explode in 2012. He’s also ready to share his research on TWO unusual and lucrative investment opportunities. Today you can get ONE year of free access to some of the greatest investment minds around. You can’t afford to miss this shocking forecast. Click here before the first bombshell hits.   Lest We Repeat   Joel Bowman Reckoning today from Buenos Aires, Argentina... War doesn’t determine who is right — only who is left. — Bertrand Russell Is the world marching off to battle, Fellow Reckoner? If history is any guide, the answer would seem to be a categorical, “always.” “US may have to strike Iran: Republican VP prospect” reads a headline from the wires this afternoon. Apparently Marco Rubio, one of the contenders tipped to fill Romney’s presidential ticket, said a unilateral “military solution” from the United States may be needed to stop Iran acquiring a nuclear bomb. “America has acted unilaterally in the past,” gloated Rubio, “and I believe it should continue to do so in the future — when necessity requires.” Ahh...did you see that, Fellow Reckoner? The ol’ “When necessity requires” clause. Phew! Now we feel better. What could possibly go wrong with an administration constrained by such watertight definitions? There’s trouble in Syria too...and across the Middle East. And the financial crisis in Europe has left the continent smouldering with discontent. All that’s required is a breeze from the right direction and the whole thing could go up in flames... Reports in from France show the far right gaining political ground in the face of widely unpopular austerity measures. From France 24/7: Far-right National Front candidate Marine Le Pen obtained a surprising 18% of the vote in the first-round of France’s presidential election Sunday night... “When things are going well, people vote for the status quo,” observed Bill in yesterday’s issue. “When they aren’t going so well, they move farther out on the political spectrum.” And it’s at the fringe of that political spectrum where the war drums usually start beating... Of course, history is not always a reliable forecaster of future events. Men had never before taken to the skies...until they did. Never had they been drunk on wine...until, merrily, they were forever after. And never had they placed their trust in central bankers...until they let the bastards rule the world. Indeed, the history of mankind is mostly one of dull and bromidic humdrum...perforated by short and blinding instances of a truly disruptive nature. War, as far as we can tell, belongs firmly to the latter category...at least as much as it does to the former. That probably depends on whether you’re “in” it or not... We were thinking about this yesterday, during our afternoon stroll home from the office. Half a world away, at around the same time, back on that great red hunk of land whence we came, millions of antipodeans bowed their heads in an oddly collective silence. Dawn Paraders marched the sun scorched streets. Dewy-eyed onlookers uttered, in sad unison, “Lest we forget.” News anchors reported the ghastly affair with pregnant pauses and tawdry emotion. ANZAC Day is a day of remembrance in Australia and in New Zealand too. The occasion is set aside each year to honor those fallen in the disastrous WWI campaigns, into which their ashen bodies were hurled in sacrifice to the Empire. They were boy soldiers of the Australian New Zealand Army Corps., sent to kill unfamiliar boy soldiers of another state with whom their own Empire had a beef. This was a war, lest we forget, to “end all wars.” But only a fool ignites a tragedy in the hope of ending one. And only a knave would claim the hand of history on his shoulder, thrusting him forward into the bloody breach. The ANZAC boys should have been at home, the extent of their gentlemanly combat restrained to scuffles at the local pub. Lads will be lads...and all that. Instead, they were cut down at the knees in Somme mud, left agape and lifeless on the beaches of Gallipoli, annihilated by the tens of thousands in missions at once idiotic and pointless. Likewise the lads’ “enemies,” themselves child puppets of the opposing state, were slaughtered en masse...by “our boys.” The difference between the Victoria Cross and an Iron Cross is not the “degree of courage,” but the color of the flag sewn onto the victim’s uniform. Their missions were pointless. Disastrous. The outcome a heretofore unprecedented massacre of human life and its vast, ultimately unrealized potential. It’s tradition...whatever that means. So too was the precursor to ANZAC Day; Trafalgar Day, when long-removed convict descendants of the old empire would gather to commemorate Admiral Lord Nelson’s naval victory over Napoleon in that infamous namesake battle. Children in Queensland state schools were subject to such ridiculous war glorification rituals until 1918...a few years before the terrible event was replaced by its modern equivalent. Then, of course, there was Empire Day...another commemoration foisted onto young, impressionable minds during the late 19th and early 20th Centuries. Reads the strangely proud description on the Queensland Education website: Empire Day was a formal commemoration of the British Empire and its member nations. The day itself and the accompanying celebrations throughout the Empire acted as symbols of unity, supremacy and philanthropy and commemorated the Empire’s birthday. Loyalty and patriotism were encouraged. Of course, only the sparse of scepticism would swallow the “philanthropy of the empire” hogwash without chewing. Half of Ancient Cairo currently resides in the City of London...along with treasures from all over the once conquered world. There by the grace and benevolence of an eleemosynary crown! Continues, without so much as a hint of shame, the propagandist offal... On the appointed day, usually in late May each year, teachers in Queensland schools gave special lessons on the growth, freedom, rights and privileges enjoyed by the Empire’s citizens. Through these lessons, children were reminded of the vastness of the British Empire and the rights Australians as members experienced as a consequence. The lessons were also used to stimulate patriotic sentiment among pupils. May we all, friend and foe alike, forever and with courage resist the “freedom” of being owned by any Empire, be that Empire celebrated or not. War isn’t something to make the chest swell, Fellow Reckoner. It’s something to make the stomach sink.    If You Own Any of These Gold or Silver Stocks*... Then you may be eligible to instantly collect a cash payment of $784, $1,324, or $2,345 — without having to sell your shares. (*List also includes technology stocks, retail stocks, and more. For a complete list of all 3,097 participating stocks, see this report.) The Daily Reckoning Presents Ben Bernanke’s Paper Dollar Embodies Systemic Risk   Charles Kadlec The paper dollar is now the single most important source of systemic risk to the financial system, the world economy, and the security of the American people. That is the lesson of the past 100 years that Federal Reserve Chairman Ben Bernanke did not teach during his four lectures at George Washington University’s Graduate School of Business. Instead, he celebrated the importance of the extraordinary powers he and his fellow governors have to manipulate interest rates and the value of the dollar in the name of economic growth and stability. In so doing, he ignored completely that the ever growing need for heroic interventions by the Fed is itself being created by the paper dollar system he celebrates. This failure is all the more telling because Mr. Bernanke states up front that central banks perform two critical functions: The first is to “achieve macroeconomic stability.” By that, he generally means “stable growth in the economy, avoiding big swings, recessions and the like, and keeping inflation low and stable.” The second is to provide “financial stability” by either trying to prevent or mitigate financial panics or financial crises. On both counts, the paper dollar system in effect since the final link between the dollar and gold was broken in 1971 has failed and failed miserably when compared to the results produced under the gold standard. Let’s begin by stipulating that we agree with Chairman Bernanke’s point that the gold standard is not a perfect monetary system. What is? The more important question is which system, the gold standard or the paper dollar, provides more macroeconomic stability and fewer financial crises. To answer this question, let’s examine the historic record beginning with the most difficult example, the Great Depression, which supporters of the paper dollar invoke to discredit the gold standard and thereby avoid defending the abysmal record of the paper dollar. As Professor Brian Domitrovic pointed out in his recent Forbes.com column, the officials running the Federal Reserve in the critical period between 1928 and 1933 chose to ignore the rules of the gold standard, which would have forced them to increase the money supply in response to inflows of gold. Instead, the Fed exercised discretion and tightened, thereby making the deflation of the early 1930s worse than it otherwise would have been. Explains Domitrovic: “Rather, as (Richard H.) Timberlake has shown, we know what guided Fed thinking in this period, and this was the doctrine that the Fed would refrain from issuing money unless it clearly would go to financing end-point economic transactions, as opposed to things like stock-market speculation and even investment. Whatever you want to say about this doctrine, it has zip to do with the gold standard. And it was at the root of the Fed’s weird decision-making 1928-33 where it presided over a radical narrowing of the money supply.” What about the claim that, while the gold standard maintains a stable price level over longer periods of time, in the words of Chairman Bernanke: “over shorter periods, maybe 5 or 10 years, you can actually have a lot of inflation, rising prices, or deflation, falling prices.” After the largest gold discovery of modern times set off the 1849 California gold rush the price level in the US rose 12.4% over the next 8 years. Under the paper dollar, that 8 year cumulative increase was exceeded in 1974, 1979 and 1980 alone. Moreover, an 8 year increase of 12.4% is equivalent to an average increase of 1.5% a year. By contrast, current Fed policy calls for inflation to average 2% a year which equates to a 17% increase in the price level over the next 8 years. Since abandoning the last vestiges of the gold standard in 1971, inflation has averaged 4.4% a year. Nevertheless, various sectors of the economy have suffered Great Depression like deflations. For example, between 1980 and 1986, the price of oil fell 60%, and the price of agricultural commodities and farm land fell by double digits. Those deflations led to the major bank failures of the mid and late 1980s. And, of course, the most recent financial crisis was triggered by a 30% decline in home prices, a disaster for American families, banks and investors alike that ranks right up there with the hardships experienced during the Great Depression. The net result is that without the guidance of the gold standard, the Fed and the paper dollar have become the leading sources of economic and financial instability. Since 1971, when President Nixon freed the Federal Reserve from the strictures of the gold standard, recessions have become more frequent, longer and deeper. From 1971 through 2010 (under the paper standard) unemployment averaged 6.3%, much worse than the 1947-67 (gold standard) average of 4.7%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and now above 8% for three years and counting. Under the post-World War II gold standard, there were no financial crises that presented a systemic risk to the US economy. Since 1971, we have experienced the: 1973 oil shock and international monetary crisis 1979 oil shock and dollar crisis 1982 Latin American debt crisis 1984 banking crisis and effective nationalization of Continental Illinois Bank 1987 stock market crash 1989-91 S&L crisis and bailout 1990 Japanese bubble collapse and banking crisis 1994 Mexican peso crisis 1998 Asian currency crisis 2001 dot com crash 2007-09 Housing collapse and international financial crisis 2010-2012 European sovereign debt crisis In addition, the massive increase in the Fed’s and other major central bank balance sheets since the first quantitative easing in 2009 has coincided with the slowest recovery ever — even worse than the recoveries experienced during the 1930s — and the fear of yet another break out in inflation. Under Chairman Bernanke’s leadership, the extraordinary steps taken to contain the financial panic in late 2008 and early 2009 by fulfilling its “lender of last resort” role to banks and, under emergency powers granted to it by the Federal Reserve Act, to non- bank institutions, may well have avoided a complete collapse of the world’s financial system. But to use that success as justification for a discretionary monetary policy and a defense of the Fed’s ability to manipulate interest rates and the value of the dollar is to miss the greater point. The growing instability of the macro economy and the financial system is itself a product of the paper dollar system. The most important thing the Fed could do now to fulfill its two fundamental roles of providing for a stable economy and preventing financial crises would be to begin an orderly transition back to a dollar whose value was once again defined by a unit weight of gold — that is to make the dollar once again as good as gold. To do otherwise is to leave in place the fundamental source of systemic risk that no amount of increased regulation or oversight can correct — the inherent instability of today’s monetary system based on a paper dollar whose future value is unknown and unknowable. Regards, Charles Kadlec,  for The Daily Reckoning Ed. 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.   How You Can Live Smarter, Happier and Wealthier... Right now you have the chance to become one of the first to claim a package of actionable ideas, technology, and private enterprise.  All could help you live a smarter, happier, and wealthier life. How? The details are revealed right here.  But hurry, this offer ends April 28. Maybe never to be seen again. Click here.   Bill Bonner Disabled by Leadership How Employment and Economic Growth are Hindered by Politics   Bill Bonner Reckoning from Baltimore, Maryland... Nothing special in yesterday’s financial news. So let’s turn from farce to fraud...that is, to politics.  President Obama has to defend his policies, pretending that they have brought a real recovery. One of the pillars of his case, say the papers, is that unemployment has gone down.  The trouble with this as a re-election strategy is that the people who need to vote for Obama are the people who know it isn’t true.  Washington Blog reports: There are 243 million working age Americans. There are 142 million employed Americans. Only 101 million of the employed Americans are working more than 35 hours per week. This means that only 41.6% of all working age Americans have a full-time job. According to the government drones at the BLS, 88 million Americans have “chosen” to not be in the labor force — the highest level in US history. The percentage of Americans in the workforce at 63.8% is the lowest since 1980 and down from a peak of 67.1% in 2000. The difference between these two percentages is 8 million Americans. The BLS reports there are only 12.7 million unemployed Americans in the country, down from 15.3 million in 2009. The BLS reports the unemployment rate has dropped from 10% in late 2009 to 8.3% today. Over this time frame the working age population grew by 5.7 million, while the number of employed Americans grew by 3.6 million. Only a government drone could interpret this data and report a dramatic decline in the unemployment rate. Since 2000, the working age population of the US has grown by 30 million. But the actual number of people with jobs has grown only by 12 million.  And if they reported the unemployment rate today the same way they did during the Great Depression, unemployment would be at 22% — only slightly below the level of the ’30s.  So, what happens to all the people who don’t find work? They go on disability!  The Wall Street Journal reported yesterday that Social Security’s disability trust fund will run out of money in four years — in 2016. It will be amazing if it lasts that long. Because the disability rolls are growing twice as fast as the employment rolls.  Yes, dear reader, since the recession ended, officially, in June ’09, for every new person who has found a job, two supposedly have been disabled. At least, they’ve been added to the list of people receiving SSID benefits. Could you get on disability, dear reader? Maybe. We went to the website to see if we could qualify. You just have to show that you have a condition that will prevent you from working for at least a year. And you must show that you’ve been employed in the past. If you’re 60 years old, for example, you need to show 9-1/2 years of previous employment.  During the Nixon administration, approximately 2% of the labor force was disabled. Now, it’s over 6%.  Disability, not employment, is Obama’s real achievement. Since June 2009, he’s added 4.7 million people who are judged too crippled, too stupid, too fat, or just too lazy and depressed to find work. Of course, you can’t blame them. The feds set up a zombie economy. It protects and rewards zombie industries — healthcare that doesn’t really make people healthier, education that doesn’t make them any smarter, defense that doesn’t make them any more secure and finance that takes the feds’ money and pockets it.  It turns both rich and poor into parasites.  And more thoughts... Europe is turning against its elite austerity pushers. Sarkozy lost the first round to the socialist candidate. The Dutch government of Mark Rutte handed in its resignation to Queen Beatrix. The “technocrats” in Italy and Greece wonder how long they can hold on. America, meanwhile, is settling down to a presidential election. On the one hand is a candidate who seems to have no firm convictions and no real ideas about how to move the country out of its post- crisis funk. On the other hand, is...well...the same thing.  As usual, the candidates are disappointing. But politics is a tawdry profession that invites hustlers and hollow men. No matter what kind of system you think you have, it is always the same. It is always dominated by the same fellow — grasping, status-hungry, ambitious... He is a world improver...a bully...a scold...a power-broker... He is a fixer...and a user. He uses the power of the government — that is, the power to force people to do what you want, at the point of a gun if necessary — to fix himself, his friends, and, he often believes, the entire world. At best, the politician is a conniving opportunist. At worst, he’s a madman or a mass-murderer.  In a democracy, the candidate himself is often just an empty shell...ready to be filled up by a clever scalawag or rich donor.  In a monarchy, sometimes the king is real power...often it is a dark figure peering out from behind the dolt in the purple robes.  Even in a dictatorship, the real ruler may not be the dictator himself; it could be a group of powerful men.  The more power at stake...the harder the man-on-the-make works to get it. In extreme cases, he will stop at nothing...neither at assassination nor theft nor fraud.  Yes, occasionally a decent man gets into office, usually by accident. Rarely does he last long. And when he is gone, the historians tell us was a failure he was. “He didn’t do anything,” they say. Of course, every society has its limits...its norms...its traditions. A man whose ambition is too naked or whose methods seem too ruthless won’t get what he is after; people won’t stand for it. But, under pressure, the limits stretch. People welcome his clumsy lies. They ignore his crimes and excuse his ham-handed techniques. Later, they get fed up with him...but often not for many, many years.  On the whole, people are not very smart. They’ll believe almost anything. Washington Blog warns: The next six months leading up to the November elections will surely provide a shining example of the degraded society we’ve become. Both parties and their propaganda machines, SuperPacs, and corporate media sponsors will treat the igadget distracted masses to hundreds of hours of lies, spin, and vitriol, designed to divert the public from the fact that both parties act on behalf of the same masters and have no intention of changing course of the U.S. Titanic to avert the iceberg dead ahead. We will be treated to storylines about race, gun control, the war on women, energy independence, global warming, the war on terror, the imminent threat of Iran and North Korea, Obamacare, Romneycare, and of course the economy, stupid. The New York Times reports that shoppers in oil-rich Venezuela wait in long lines to buy common foodstuffs; it doesn’t seem to occur to them that their inconvenience is a by-product of Hugo Chavez’s price controls. Instead, they blame greedy businesses...and wait. In America, more than a decade after 9/11, they wait in long lines as crippled 90-year-olds get felt up by TSA agents. “You can’t be too safe,” they say, as if their lives were put at risk by Lutheran grandmothers.  In Spain, Greece, Ireland...and practically all modern countries...they wait for government to figure out how to give them retirement incomes, healthcare, and full employment. Of course, the politicians can’t solve economic problems for a very simple reason: they are the cause of them.  Who set up the euro? Who set interest rates and lending standards? Who caused the bubbles by lending too low for too long? Who then ‘fixed’ the crisis — by lending more, at even lower rates, to the very institutions who had just proven such bad custodians?  Who spends more than he makes...year in and year out? Who promises even more spending — even as he is facing bankruptcy? Who counterfeits money — printing trillions of dollars with nothing more behind them than the “good faith” and “full credit” of an insolvent government? Who starts ‘wars’ that cost trillions of dollars and hundreds of thousands of lives...and then, standing over the wreckage, announces victory...and slithers away? That’s right. The feds...the fixers...the world-improvers...do all these things. But how could it be any different?  A decent man is too busy — improving his business, his home, his family — to take much interest in politics. Besides, he knows it is a flim-flam. He’s seen how hard it is to make any real improvement at home, even when you are close to the facts and on the job full time. Imagine trying to improve things far away, where you don’t really know what is going on! An honest man knows better than to interfere in other peoples’ business. His own business is tough enough. He cares deeply about the things around him...and tries to make his world better in every way he can. But he would be embarrassed to pretend to solve other peoples’ problems. Even if he is only offering advice, he does so reluctantly...carefully...and tentatively. If he is smart he knows that you can’t really make things better by bullying and threatening people. An economy works best by doing the one thing that the fixers can’t allow — letting people make their own deals, find their own jobs, and solve their own problems.  It’s the one thing the fixers can’t do, and the one thing every candidate regards as political suicide — just getting out of the way. Instead, the successful politician needs a plan, a program, a tax credit, a spending proposal. He needs to be in charge. He needs to be an activist, promising to reward enough voters to get elected. He can’t have no answer. He can’t have no interest. He can’t have a trace of modesty or a realistic assessment of the situation or his ability to understand it, let alone do anything about it. Instead, he must pretend to care about the sick, the lame, the blind, the fat, the shiftless, the one-armed, tongue-tied, sex-addled wonton- turning immigrant from Taiwan...and have a program, right in his back pocket, that will make that poor man’s life better. The last thing he can be...is the very thing you most want in a politician... ..someone who doesn’t really give a damn.  Regards, Bill Bonner for The Daily Reckoning