"This sucker could go down", quoth the President,
Quoth the Secretary of the Treasury, "Nevermore".
The Vice Presidential candidate peers through her trademark glasses and exclaims: "Putin rears his head and comes into the airspace" while grown Congressmen change their votes because of the tone of a speech by the Democratic leader. Hold you Nose! Everybody kinda sorta agrees that maybe throwing a trillion unfunded dollar sponge to soak up the (toxic) waste will somehow unplug the overflowing toilet. We've got "cow patties with marshmallow centers", car wrecks galore and the greatest inflation of unfortunate metaphors in the country's history. This truly is a national nadir commensurate with the waning days of the eight-year Bush reign.
$85 billion, that's your money. I mean, it's all of our money. I don't know where they get it. It's really interesting. They just print it or something.
Mayor Richard Daley Jr.
Too Big to Fail, or Uncreative Capitalism
The Fed and the Treasury move blindfolded across the countryside followed by a gaggle of lobbyists shouting out the path from behind the trees. In their wisdom they have quickly created three large supernational banks, surely too large to fail. So much for the creative destruction of capitalism that the fundys love to invoke. "Take a sharp left to that $25 billion carmaker bail-out then....."
This is truly a test of the power of the US Treasury's virtual printing presses. The immediate crisis will be averted if only enough money can be beamed at it fast enough.
The taxpayer response should be simple enough: Equity, interest, fees, whatever, we want our money back with interest. Give us a new agency: The Department of the Portfolio, with requirements to report back to us every three months. All profits go the Social Security Trust Fund
Bail-outs Are US
We're used to seeing the media lunging at the meme du jour like a flock of pigeons on a telephone pole. Their target line being the trail of talking points sprinkled like a string of directional clues through the semi-dark labyrinth they forage in. Each nibble, of course, leaves them more clueless as to the real way out. But there's solace, there will always be new bread crumbs. Lunch is assured.
Candidate in a Telephone Booth
We've been having a like spectacle among the political leaders with one party's candidate suspending all campaigning as he emerges from telephone booth and leaps into a situation he knows virtually nothing about. His hope, it seems, is that by some odd chance he will manage to get the politics right, thereby winning the favor and respect of the citizenry readying to cast their votes. It's hard for us to tell if this is a strategy or a tactic but in any case it is meant to appear decisive.... at least, up to the point he has to make a decision. Unfortunately for this gray-haired chap, whose left eye may just be sagging under the strain, he found himself, with no legs, unblinkingly leaping into the mother of all political and economic quagmires.
Sorry but folks out there have little clue how this whole mess came about but they sure don't trust what their leaders are telling them, particularly those leaders who were spoon-feeding them up to just a week ago a taste of "the fundamentals are sound".
Beam Me Up A Virtual Depression, Hank
We know, of course, that the fundamentals are NOT sound and moreover that they have not been sound for a very long time, so long, in fact, that the most dynamic underpinning of the private sector house of cards has all but collapsed. We've reached a point in the evolution from molecules to bits, where only outliers dare dispute that what's good for Wall Street is good for America. We are a country that has gone into the Transporter Booth only to be fleeced as our money is beamed around the world in bits and bytes. The transporter is located in the south end of Manhattan Island and must be saved. If not, of course, the whole sucker just might go down. Thus, in typical eloquence, are we rallied on by our leader.
Real Time Central Planning
By beaming those dollars to all round edges of the globe, Wall Street genius has managed, in Greenspan's words to "spread the risk" so thoroughly that there is no one left willing to take any of it, ergo the urgent plea to the Congress to crank up the printing presses. It is the ephemeral soundness, the vibrating beams of money we know is in the ether, that still makes this a virtual depression rather than the kind that sends folks into public bread lines. The next phase, the one that is being passed in Congress today is to further spread the risk out to every single taxpayer in perpetuity as an ever larger chunk of the ever more virtual budget goes not to arms or wellbeing but to debt service, the province of which is controlled by, well, Wall Street, of course. In a virtual depression; we are much more likely to see the citizenry on their way to the grocers with real time credit limits being reevaluated on their plastic between the time they enter the store and leave. We'll be kept abreast on our iPhones.
The Wal*Marts of Treasury Bonds
Another way to look at it is to view the US economy as it manufactures fewer hard goods replacing that lost productive activity with the production of Treasury Bonds. Quite simply, we can assume that as the world economy falters there will be a rush to US Treasury bonds. And the good news is that business is jumping, so this week, even as the US economy dangled on the breach, the smiling yellow face went up and US T Bills flew off the shelves. The oil bubbling Russian stock market, for one, simply collapsed, Asians saw German and French road-kill, sold off Euros and the Yen, setting off a rush for dollars! Rates dropped to 1/20th of 1% on short term T-Bills.
For those customers with too many dollars around the world, and derivatives they couldn't move limit-free on E-bay, there is a happy outcome to all this. The Treasury Secretary, tired of merely spawning M&A deals in a down market, has moved to Washington where money need only be printed. He now rolls out the greatest deal of all time, an $800 billion whopper. Doors open bright and early next Monday morning, the line forms in front of the White House, forget the lead boxes, just bring the toxic waste.
We call this a virtual depression because its fundamentals are hidden in plain site: there is now a seemingly endless all too real war being fought on borrowed money, one that has coincidentally cost up to now approximately $800 billion. Another major factor, is the supply of imported petroleum costing hundreds of billions. This money is sent East to gadget maker and oil producers alike who must re-circulate it, into something other than the now proven toxic collateralized debt objects and the Agencies issued by Fannie Mae and Freddie Mac.
We have turned the country's principal market into one vast junk money market with headquarters in Washington: Employees around the country, throw off your assembly line gear and don the uniform of the big banks. In virtual America you'll be flipping T-bills for minimum wages until someone here can figure out how to gin up the next bubble.
A vast moat of debt is being built around the capital for the next Administration to grapple with. In it, Paulson is creating an ever deeper pool of US T-Bills and one can imagine, as the mechanics of the bail-out get put in place, new classes of Agency bonds backed, once again, by the full faith of the US government. Conceivably, with a little help from Congress, Paulson will have kicked the ball down the field until that ever looming day, the virtual dollar, itself, faces collapse. What has been beamed away will reappear.
Bernanke et al. know that the dollar manufacturing monopoly provides an enormous cushion, years, at least. Monopolies don't break easily. Unfortunately, the endless War will not go away, that's the clear logic of Iraq and Afghanistan where costly troop deployments, will have to be augmented by even more costly (aid) giveaway programs. After all, spreading dollars like manure worked in Anbar Province. Obama's hands are tied before he even gets there. This is Bush's parting gift, he thinks, while all he has really done is pull the cloak off the virtual dollar machine, the great transponder.
The (Private) Debt Party is Over?
Meanwhile, back in that part of the USA outside the Beltway, where molecules still make sense, the party is temporarily suspended. The bad news folks is that, like in 1932, the bottles empty, we've bubbled out. We have, after all, been tripping the light fantastic from bubble to bubble since the 70's and given the costs piling up for real world War and the onset of shockwaves from Peak Oil,, the end of this one has had a fate, perforce, no better than Steve Fossett's.
It will take years to dig out from under a borrowing blizzard that has been going on for decades. This is not just bad residential and commercial mortgages but leveraged buy-outs, credit card debt, auto loan debt multiplied thousandfold by layer upon layer of big bets in the shadow banking system. While the Administration was keeping the cost of the War off the books and running up steeper and steeper official budget deficits in synch, the public was doing its bit on the helium of borrowed money and spiked smoke in the stock and housing casinos. Such is leverage in every day spiked Bubble World.
Human Nature, or Leveraging Leverage
Had the borrowing frenzy been restricted to the above confines, we'd be in the process of winding down from a serious binge but there'd be only the usual casualties, the hogs, the foolhardy, and the suckers. Over time we'd work our way out of it. But this is a different story that has been brought on by the accelerating logarithms of what's come to be called the shadow banking system. Ultimately. what goosed the lending frenzy was a financial industry where the hogs had gobbled up the pigs. These porcine magos took all manner of loans, good, bad and otherwise, and bundled them and sold them as CDO's or MBS's or Swaps or whatever device they could use to pile leverage on top of leverage. To be quaint, they labeled them "toxic waste" and like their smokes from another generation they consumed them with even more gusto.
Importantly, in a souped up low interest environment, they found they could move these "securities" that paid very little better than T-Bills at enormous margins. In a creative flurry, equal they imagined to the one that brought us the Internet, they took to bundling the bundles themselves into various classes of so-called derivatives, quantifying so-called tranches of loans into various levels of risk for anyone who wanted to make believe he understood them. And as this market grew, they created a class of insurance policies they called credit default swaps, designed to back up the derivatives. We wrote a few months ago that the CDS market totaled the astounding sum of $57 trillion, though lately we've heard it calculated at 62 trillion (no one really knows) or, 4 years of the total US economy! We concluded that it was little more than a Vegas kind of side bet industry since there was no open market for the swaps nor were there any requirements for set aside reserves. It was, every hog for himself. We also predicted it would end up in the taxpayer's lap!
Meanwhile the regulators in Washington were no where to be found. Greenspan's Fed did not raise its rates to slow things down nor did it urge Congress to institute new rules that might curb the activities of the security issuers by requiring transparency, marketability or reserves to back up their promises.
In order to keep this market going, long after every not so eligible borrower had exceeded their ability to ever pay back their loans, the banks began eating more and more of their own toxic waste, trading more and more of the stuff among themselves to the point, today, that they no longer trust the books of any of their counterparties or peers. Today's bailout sponge is meant to take all of this massive mess off their hands
The reason we have seized up is that there are no markets to trade these derivatives and swaps and no way to know what they are worth given that no one knows what the underlying loans look like or how they are actually backed up. For this, and a host of other suspicions, the banks have stopped lending to each other making it hard to satisfy their legitimate customers.
Washington Truce and Consequences
Back in the 1980's the Reagan Administration introduced what has turned out to be one of the two basic seeds of destruction for the modern Republican Party. For Reagan, who promised to "get government off the backs of the American people", the Administration would embrace a theory called supply side economics (the other seed, of course, is the creation of a Christian fundamentalist base that can get ecstatic with having the likes of a Sarah Palin as President) as a substitute for the prevalent Keynesian approach that both parties had adopted, as Richard Nixon famously said. Hitherto, conservative orthodoxy had been closely associated with a cloth coat, business-like fiscal conservatism intent on balancing the budget.
Put, perhaps too simply: for Keynes, the government had a roll in stimulating the economy in a crisis through the creation of infrastructure: money put into highways, bridges, parks, etc. directly generating jobs and economic activity while contributing to the common wealth. For supply-siders, the individual taxpayer becomes the net beneficiary since the government, in essence, finances its projects through debt rather than taxes, something that Reagan's Republican primary opponent, George HW Bush, dubbed "voodoo economics". Supply-siders argued then and still try to make the case that by leaving the taxpayer off the hook to spend and invest as he/she wishes, economic activity is stimulated and over time limited level tax revenues actually increase. This was a wondrous no-pain solution for the wealthy that better fit the mood of Americans moving from the Rustbelt to the South and West. For high bracket Americans, it was "the shining light on the hill". Unfortunately, for future generations it was debt service.
It was a novel idea that also had its roots nourished by an emerging rightward libertarian tilt of the party whose proponents also advocated truly risible nihilistic thoughts of "starving" government of its lifeblood, through choking the tax stream. Reagan would abolish government social programs --for instance, it was at one time committed to abolishing the Department of Education-- while greatly increasing the Defense Department budget. In the end, Reagan left office with the largest non-wartime deficit in history; nonetheless, his presidency was seen, particularly among his co-conservatives, as a success, and the basis of a winning coalition. Since then Republicans have never looked back on this smorgasbord of voodoo economics and politics that would have horrified many of their Eisenhower era colleagues.
For a bookend, the hapless Bush II who never ran a profitable business, of course, does the same thing, only with no-blink attitude. He greatly expands the Defense budget through his new endless War and Homeland Security, he puts little or no restraints on government growth or on the mega-pork-barrel spending of a Republican Congress and he cuts taxes on high earners well below the levels Reagan wrangled out of the Democrats. There is no longer any doubt he will leave office having run up more debt than all the previous presidents combined, with the exception of Franklin Roosevelt, who merely had to dig the country out of the Great Depression and finance the Second World War. Ironically, he will, as a result of the Wall Street Bail-out Bill, also be associated with the largest government takeover of private assets in the country's history.
The End of the Bretton Woods Era?
What Reagan had inadvertently tapped into --and what makes the theory of starving the government so risible-- was the built-in advantage the US had over its trading partners, the almighty reserve currency, the now virtual dollar. Since Richard Nixon had delinked the dollar from silver, the dollar had become strictly a piece of paper backed up only by the credit and faith of the US government. It was in old parlance a "fiat currency" that also happened to be, by international agreement, acceptable as a reserve currency for central banks around the world, with the same status as gold. The US printing press would become the engine churning out decades of debt absorbed by a willing South Asia Middle East.
Back in 1999, as the Wikipedia puts it: "shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act."
What Gramm and the banking lobby behind him accomplished with this Act combined with a preceding Gramm-Leach-Bliley Act removing the bounds between thrifts, investment houses and insurance companies that governed the financial industry since the 1930's, provides the stage for the present meltdown on Wall Street. The Act quite specifically opened the door to a whole new classes of completely unregulated investment vehicles we're calling the shadow banking system. Gramm, of course, is the same unfettered market fundamentalist who had been John McCain's campaign head and chief economic guru until he had the misfortune to speak his mind on TV a few weeks ago. As we all remember, he got in trouble for saying that the American economic problems were psychological and that Americans who saw it differently were whiners. Another enormous irony: should McCain be elected, Gramm may by his Secretary of Treasury and therefore in charge of spending the money that Congress has just allocated.
Revolutionizing the Debt Republic
It's pretty easy to guess why all these financial wizards could play make believe with trillions of dollars: quarterly profits on Wall Street boost investment house stock prices, enriching option holders and annual profits feed into enormous bonuses for those fortunate enough to be in the game. So, for several years this decade, as the housing market pushed upward investment house stocks soared and paydays on Wall Street were the envy of the world. It would not be uncommon for a middle level executive to take home an 8 figure bonus. These were heady times and the Bush tax cuts meant that less would go back to the government coffers and the more to penthouses, second and third homes and breakfasts at Tiffany's and the pockets of armies of lobbyists and political donations to the pliant. Are we whining yet, Evita?
Billions of "excess" dollars flowed into the shadow banking system as exemplified by the plethora of hedge funds that sprang up like mushrooms around the big Investment Banks. For hedge funds there were no limits on leverage, they could borrow as much as the Merrill's etc. would lend them and the Gramm Act had removed reserve restrictions on these guys as well. Mighty Bear Stearns fell partially on the weight of its lending to its own in-house hedge funds. Where restrictions did apply, the created entities called special investment vehicles, or SIVs to skirt the laxly enforced rules on public companies. After all, the SEC was now being run by industry lobbyists weaned on Enron accounting.
Off With Their Heads!
For those yearning for the public stripping of wealth, the symbolic guillotine, the place to start might be with the hedge fund managers who not only pulled billions off the top of their funds as they gamed the derivatives game but also found a highly questionable loophole that allowed them to declare their managerial fees as capital gains, rather than wages, thereby paying a lower tax rate than the guy who emptied their wastepaper basket, as Warren Buffet famously pointed out. A simple IRS ruling under the next administration might be made to apply to this billion dollar loophole So far, we've heard no one call for this one.
Of Bubbles and Bail-outs: The Saga Continues
$85 billion here and $400 billion there and $800 billion there and before long you are talking about real money: and so, alas, this story only gets worse. Yes, Lehman Brothers was allowed to crash on its own but even there in the background the Fed was making moves to goose up its lending capital and is now accepting not only bad paper but the collapsing stocks of the other investment houses as collateral for its back window short term loan facility that not too long ago was restricted to the thrifts it oversees and which must maintain verifiable reserves. Paulson's transparently phony line in the sand on socializing loss at Lehman didn't stay visible even for the 24 hours it took to blow off AIG.
Enron Accounting Goes to Washington
For 6 years Bush has been able to keep the annual $130 billion cost off the books as he fights his "temporary" war. No surprise, then, when Paulson let it slip that he wasn't going to put the $29 billion he laid aside for Bear Stearns on the books, either. Our point, as this virtual depression started to unwind last year has been that when this story of unbridled lending fueled by insane greed got to the end, the taxpayer would pay and pay big. We have no doubt that eventually the government will find it necessary to directly intervene in the national housing market to stabilize prices there too as well, after all it is at the very root.
A real bail-out of the housing market will indeed cost real money, much more than the $1 trillion already pumped in, and on the books, or off, depending on how transparent or eventually profitable the results are --are we getting laughable?-- taxpayers will be paying for it for years to come. There are also reasons, given the takeover of Fannie Mae and Freddie Mac, to believe we may have actually already doubled the national debt by the time this crisis finally blows over.
The Deficit is not the Deficit is not the Deficit
What we are seeing this month of September is the meltdown of the entire Wall Street elite of independent investment banks either through merger with big old style banks or through collapse as in the case of Lehman Bros, that waited too late to make a deal.
Not every one of the regulated thrifts is going to make it through this meltdown (117 were already on the regulator's watch list even before the collapse of Lehman, Wamu, Wachovia and AIG). It was also very likely, as the unwind plays through, that the FDIC, the agency that insures depositors' money, would run out of cash. It didn't take too many IndyMacs to get to that stage. The Senate, in its version added on this facility for the Treasury as well, in exchange for the "temporary" raising of insurance limits to $250,000 per depositor. FDIC is funded by the banks in normal times. The $250K limit will no doubt be made permanent despite the objections of the banking lobby.
It's the Mortgages, Stupid!
Well, maybe not just the mortgages and the national housing market. But continuing lower prices for houses is at the core of much that's gone on so far. But the profits brought on by the issuing of a pyramid of paper based on these loans also extended to all manner of commercial and consumer loans. Mortgages and house prices are particularly insidious because they amount to the plus and minus side of Americans' largest class of assets. If your house is worth less than you owe on it then you are probably underwater all the way around. After all, on the minus side, most Americans have carried credit card debt, and auto loans, not savings accounts. Where mortgages look particularly bad in the coming year is not so much in the sub-primes that were so flimsy that many collapsed at the first downdraft and are being cleared off the books. But many ordinary Americans with better that bottom of the barrel credit and looking to move up, or simply to refinance their credit card debt-- took out something called Alt-A mortgages that didn't require strict income documentation and that were characterized by very easy terms during the first couple of years. These Alt-A's or "liar loans" were more than the majority of loans issued in 2006 and many will require refinancing in the coming months. That's bad news in a declining market because borrowers will face significantly higher monthly payments on houses they cannot sell for anything near what they owe. How many just walk away depends very much on just how low prices on these houses go. House prices during the Great Depression fell over 30%, Depending on how you measure it, we may have reached about half or two thirds of that grim statistic but no one can guarantee that 30% is a magic number. The ratio of debt to savings that Americans customarily carry today was nowhere to be seen back in those more innocent days; home ownership was more limited and job mobility hardly existed.
These increased loan payments are coming due just as the job market begins to crumble. In the past decade wages had remained below growth levels but there were jobs. Now, those jobs are starting to disappear. This is bad news for already shaky families who may no longer have a choice about staying in homes that are underwater. They may have to move to where the jobs seem to be, despite school and community ties.
After all, in the days of easy credit, homeowners were bombarded with offers to refinance, in other words, use their houses as ATM ;machines every time they maxed out their credit cards or wanted that bigger SUV flashing across their TV screens Ah for the life of off the road, clean family fun, or sex drugs and rock n' roll or great adventure. In that world, you could, with no money down, drive all the way to the top of the most pristine mountain peak and gaze out at a pollution free world with nary another SUV in sight or drive up the swankiest night club in town in your V-8 Ram tough.
Such is the magic of the American dream, as easy as flipping your keys to the parking valet!
Or Maybe, It's the Taxpayer, Stupid!
It's hard to mark just when we morphed into our present system of jobless, bail-out capitalism, was it the Saving and Loan bubble when everybody and his brother opened a bank with a lending window marked: No Developing Country Will Be Turned Away? Since then the series of bubble and busts have followed one another like Atlantic hurricanes in September.
Like those single-eyed monsters, the intensities and trajectories can be different but damage is left in the wake for the clean-up. FEMA gets called in and taxpayers foot the bill. Hurricanes, of course, are acts of nature, while economic bubbles are acts of human nature. Still, in the end, it's the taxpayer, stupid! --we'll resist the temptation to reverse the word order, or shedding a tear for that matter.
Many people marvel at the breadth, scope, flexibility and velocity of the world economic system as it shifts trillions of dollars from Hong Kong to London to Tokyo to New York in a 24 hour cycle. And it truly is a marvel but like any very large and constantly changing system it is open to ever more sophisticated forms of manipulation.
For some it's a necessary mechanism of doing business, a streamlined way to finance and pay for their every day business transactions. But for many more, it is an opportunity, a way to game a few basis points more out of their capital investments. And it is this very greed that is at the bottom of every bubble. It's easy to say that if losers don't get to pay for their greedy mistakes, another bubble will be on the way even before this one is wound down. But bubbles are much easier to stimulate than hard work, productivity and inventiveness, the stuff of real growth.
Alas, Say it Ain't So!
In the end, the ultimate target is always the ordinary gamer who gets sucked into the pyramid scheme just as it begins to hit its height and who is destined to get burned as the scheme begins to collapse. But often, perhaps to prove their existence, the Gods of Fear and Greed see to it that the very perpetrators of the scam get caught up in their own webs and end up taking the biggest falls of all. And so, welcome to Bail-out World, where they get to use the leverage of their power and wealth to drag in those who stayed completely clear of the whole process and never dreamed that it would be their money that would be used to get the big guys off the hook.
The mantra of course is "too big to fail". It explains why those who profess the religion of maximum gain for those who invent, work hard and risk, find it necessary to "suppress" their own core belief in moral hazard for the "good" of society. During the brief time-out, everyman will now be allowed, for the greater good, to step in and once more mop up the blood on the floor.
Last month, as the Treasury Department stepped in to bail-out Fannie Mae and Freddie Mac, we may have just witnessed the largest one-day Federal takeover in US history but certainly only the prelude to this tragicomedy.
The Tragedy of Fannie and Freddie
Like all Atlas-like epic fiascos there is a long and complex story with many more sinners than saints for main characters across the generations. In the end there is a complete failure of the system as a cynical move was made by Greenspan's Fed to shift the bubble away from the stock market after the tech bubble blew up.
In 2002, the extensive lowering of interest rates in the wake of the tech bust and 9/11 actually priced money at a negative interest rate. Banks and investment houses were encouraged by the Fed to get into the game, mortgage rates fell to historic lows and homeowners were encouraged to refinance, take cash, trade up, take on second homes and to take a plunge into real estate speculation. The flourish in activity had the effect of driving up housing prices the same way the stock market soared during previous bubbles. As housing prices rose much faster than people's salaries, encouragement in moving up hinged on the proposition that house prices would continue to move up for the foreseeable future. Greenspan assured Congress in public testimony that there was nothing to fear from rising home assets, no irrational exuberance, this time around in this Fed induced and abetted bubble.
Wall Street, on an unfettered lending and borrowing binge of its own, roared into the game by greatly widening the market for sub-prime and Alt-A mortgages through the issuance of all manner of derivatives based those mortgages. But as we noted, it was just too profitable a game to voluntarily put the brakes on. If ever there was a need for adult supervision, it was here. It is, of course, just another gambling at Ricks, moment when politicians exclaim they were caught unawares.
Meanwhile in Washington, the GSE's, that is, those hybrid privately owned Government Sponsored Agencies, commonly known as Fannie Mae and Freddie Mac, who were the backers of most ordinary mortgages issued in the country, were basically frozen out of this new market for bundling sub-prime mortgages into securities, by their own regulators. Undaunted, they found a climate in Washington ready to open the ways for them to get around their own regulations by getting leave to buy up the Wall Street derivatives to hold as their required reserves. And they borrowed heavily, leveraging 60 to 1, to get at the "profits" in this burgeoning market. Needless to say, as hybrids that made them public or private when it suited, they had grown accustomed to paying their own executives massive bonuses as well, based on the same short-term criteria as Wall Street. As a Washington creation with roots back to the New Deal, they had become masters in the game of lobbying and thus in getting their way no matter the Administration.
The Bell Tolls for Fannie and Freddie
Of course, sooner or later, someone would have a reality moment and sell off some of the growing mountain of toxic waste. That finally occurred with a couple of hedge funds run by one of Wall Streets most savvy and ruthless bond trading houses, Bear Stearns. When people began to pull money out of the funds back in summer 2007, the managers were forced to offer up their securities to the market and when Bear, itself, wouldn't fully step in, there were no other takers. Then, Bear Stearns, themselves were forced quite publicly to only sorta back up their own funds, letting the more highly leveraged one slosh noisily into oblivion.. The emperor's clothes had now to be hung out to dry. With the sweep of a wand, less than 7 months later, venerable, savvy, Bear, itself was toast and banks all around the world were nervously digging into their balance sheets to determine just how much waste product they were holding. True they had hedged up by buying things called credit default swaps to insure against losses but they now were forced to take a hard look at who it was that had issued these totally unregulated insurance policies and just how much in reserves there were to back them up. Bear's hasty demise, greased by Paulson's Treasury, told the sad story.
Credit ratings, based on the possible toxic reserves, were suddenly being reevaluated. Reserves were based on the face value of securities with no market and the regulations required they be marked to market, or priced at what they might actually bring in a sale. Many swap and derivative agreement also had clauses in them that required issuers to firm up reserves as their credit ratings were downgraded. This set off a spiral, as the entire financial world began to grock that there was no real market for the derivatives of the swaps. Mark to market, or give a real value to a security, had no meaning and too much meaning at the same time. SEC regulations required this accounting. The commercial banks would be forced to begin making real write-downs of billions in losses to meet their requirements. The operative word was "write downs' but these were losses that had to be put on the balance sheets. It was a signal to the other banks that their best customers might just be insolvent.
A Hosing in Housing
Meanwhile back at the subdivisions of California, Nevada, Florida, etc., as those houses in real America went into foreclosure, it drove the price of surrounding houses down as well. People who had been convinced that they could borrow beyond their means for houses they couldn't afford now found themselves owing more than their houses were worth. Many of them had no choice but to pack up, leave the keys under the mat and take off. Home builders found themselves with developments full of unsellable houses worrying about the cost of plugging roof leaks and cutting down weedy front lawns. Their stocks tumbled as did the stocks of the big banks as it became clear they were holding mountains of debt based on an inflated value of the same sinking home market. For a while, there was denial then a belated effort by some of the big regulated banks to unwind their worst losses. Along the way IndyMac bank suffered the first public run since the 1930's as it shut its doors. The spectacle was taking an ugly turn.
Government Bail-Out Phase 1, a mere $29 billion
The problem was becoming national and then international. Each quarter major banks around the world would announce the write-off of billions of dollars, $10 billion for USB, one quarter, $8 billion for Merrill Lynch, another. Foreign buyers were invited in to take big pieces of these International financial trophies. And then one winter weekend Bear Stearns fell off the cliff. The losses were mounting into the hundreds of billions and the Asian and Arab nouveau riche bowed out.
Here then was Treasury Secretary Hank Paulson, a Wall Street poobah, himself, announcing a deal in which the old, hard knuckled investment house that had assured every one that it was fully capitalized, would be sold off over a single weekend before markets in Asia opened on their Monday morning. It was highly unseemly, not only wasn't there adequate capital, the entire $multibillion firm was actually less than worthless, an estimated $29 billion less than worthless! Paulson took $29 billion out of the Treasury, and gave it to JP Morgan to make the problem disappear. And for a while, the markets quieted down. The crisis was averted! But now there was the potentially politically damaging spectacle of a Republican Administration using public's money to shore up Wall Street, the paradigm of excess, while millions of Americans were facing foreclosure on their rapidly devaluing homes and collection agency calls on their lump sided plastic debt.
Are We Whining Yet?
For years the Wall Street wing of the Republican establishment has wanted nothing more than to stick a stake in the heart of the two largest (when combined) financial institutions in the United States, Fannie Mae and Freddie Mac. And then when the housing bill passed Congress before the summer recess, Treasury Secretary Paulson, a Wall Streeter himself, was given the green light to do the deed as part of a what then appeared probable bail-out of the two hybrid giants. Still, he hesitated, there was too much at risk to the broader economy.
And yet, it had become clear to knowledgeable folks who looked over their
holdings that a collapse at Freddie and Fannie was inevitable. There was a
tactical question as to whether they could hold out until after the election,
which seemed to be why Paulson and the Administration kept holding back
from doing the deed. A financial crisis as large as a Fannie and Freddie
collapse, would certainly turn the public's attention back to the economy and
probably spark the big run on the banks.
It's Not Just Housing, Stupid!
But in a tightrope act, the Treasury under Paulson was active in other pre-election areas as well. Towards the middle of July, the dollar suddenly jerked upward and the price of oil moved in the opposite direction. Until then, for months, the dollar had been trading in a range between 1.55 and 1.60 Euros. As we write this, it has gone down well below 1.40. Meanwhile, oil, which peaked near $140/barrel has fallen back to less than $95. It was as if, somewhere way behind the damask, the Administration had decided they had to bring the price of oil down before the election and had set in motion the gears that force the dollar up. By doing this, they would with the benefit of a little lag time, sacrifice gains made in exports, for what would be an immediate stop to the oil price bubble that had powered the speculation market in the early summer.
At first the strengthening of the dollar and the even bigger drop in oil prices appeared to provide a boost for the US stock market already reeling from the sub-prime mortgage crisis, but which had reached a bottom in the middle of July just as the price of oil peaked. Then the sucker started to go down!
AIG and then what?
For mortgage lenders and a number of banks and investment houses of all sizes, the subprime debacle has been an ongoing disaster. Two of the largest lenders in the market, had already gone belly up, and many observers believe that the nation's largest bank, Washington Mutual would soon follow suit. Morgan Stanley, one of the last of the 4 independents seemed likely to go the way of Merrill Lynch, in some shotgun deal and that might even have dragged down the last, Goldman Sachs, Paulson's own alma mater.
Credit, Credit, Everywhere and Not a Drop to Drink
This --the latest chapter-- in what has come to be our first virtual Depression-- was breathtaking in the number of ironies that got rolled up into what is still unfolding as the greatest rescue package of all time..
In retrospect, it might appear to more sanguine viewers that the consolidated goal of the Bush Administration, its Fed and the bankers became to strip Americans of their one asset, their house, and turn it into spending money. With a little luck, they might also have succeeded in diverting social security into Wall Street's maws.
There was a rather lengthy list of major players in the scheme all with their own, sometimes coinciding, sometimes antagonistic agendas: There was the Administration that was intent upon replicating and outdoing the Reagan years by running up the national debt; there was Alan Greenspan's Federal Reserve that was equally intent upon experimenting with substantial deregulation of the financial markets and stimulating growth through low interest rates, there was Wall Street, with its bonus system of big insider payoffs, ready to pick up the Greenspan's challenge of "innovating" and new types of unregulated investment entities we'll lump under the rubric of hedge funds; there were the commercial banks that were being rolled up into giant national financial entities as banking laws were repealed; there were the building and building supply industries, obvious beneficiaries of a residence construction boom; there were foreign governments running enormous trade surpluses with the US looking for creative ways to park their dollars, there were millions of Hispanics ready to risk all to cross illegally into the country for low wage building jobs, there were the mortgage brokers who sold the loans; there were, of course, the homeowners who could tap their equity and, sometimes, move up and eventually lots of new homeowners who were offered deals on homes that might never have dreamed to get into, the flippers, or the speculators who jumped in to fire the upward pressures on the market as house prices spiraled higher, and now, of course, the guy who thought he was staying clear of the shenanigans, who's just getting the mop up bill.
Pigs Get Fat While Hogs Get Slaughtered (Tom Delay quoting Texas wisdom)
The trouble with virtual depressions is that they always leak over into the real world. Recent government moves have proved once again that while the gains may be private, the risk must be socialized; on that both political parties are in agreement as are all the governments in the G8. All that bad paper sloshing around the world financial system will eventually be absorbed by the governments and the great international banks themselves, when it suits them, as the price they pay to soak up pesky competitors. The next couple of years will be full of sound and fury as the politicians realize they will have no choice but to pull out all the stops to stabilize the housing market as a first step. This will not be a pretty tug of war nor a shining day for moral hazard. But in financial crises as in war, the truth is always the first casualty.
The taxpayer, alas, will not get his Department of the Portfolio.
In life, they say, timing is everything. Here in Dymaxia, in deference to
some of the Russian novelists we love so much, we have another take on that; we
say: coincidence is everything. Take this week at that august body, we call
Congress. Our representatives --as D.C. residents we have to say that
figuratively, since we don't really have a Representative-- were busy crafting a
bill that would make it easier for credit card companies to come after us,
should our fortunes take a sudden dive.
We are, of course, not great advocates of debt. We think the credit card companies should stop sending us all those invitations to roll up whatever debt we might have so that we can comfortably go out and spend more. Instead, we think they should be sending us warnings explaining that even a single missed payment can double or even treble the interest we'll have to pay going forward. Quite frankly, every time we read that the average US family owes $38,000 in credit card debt, we wonder if any of the poor souls are ever going to dig themselves out. Harvard professor Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their book: The Two Income Trap, have demonstrated that most of those unfortunate Americans who end up in bankruptcy, get there, not because of their profligacy, but because of life events that can happen to anyone. Often, it is the death or disability of a spouse in the two-income family that throws the family into a debt spiral, or the loss of a job, or a grave health crisis, or a divorce that leaves someone holding the bag. Most frequently, that person brought under, is now a single mother who has played the game by the rules all her life.
Congress by its actions has proved once again, that in Washington, lobbying is everything, To make that plain they managed to keep a loophole in the bill that makes it possible for people with very high net worths, to shelter their assets in certain kinds of Trusts, while in the same bill, ordinary folk are forced to cough up shelter and wheels. Our Washington legislative leaders also managed to kill any provisions that would have limited the rate of interest the credit card companies can legally jack up and charge their customers. President Bush, a prime supporter of family values, has promised to sign the bill.
To get back to our opening, we say that for us coincidence is everything because we like to think that the laws of the universe, at least that universe bounded by the Beltway, have their roots in irony. Take this week, just as Congress was clamping down on debtors, the US trade deficit figures came out for March and for the umpteenth time in a row they set a new, even more unbelievable record. This last month the US bought 60 billion dollars more goods and services from the rest of the world than it sold. And not just from China and Japan but from just about every country and trade bloc in the world.
In other words, just as Congress was expressing its displeasure at laws that allow ordinary citizens to get out from under possibly life crippling debt burdens, the US was in the process of borrowing from foreigners another 60 billion for the month, or three quarters of a trillion for the year, and that is, of course, on top of a crushing overhang of trade debt that goes back for years.
If they weren't such willful actors in the theatre of now you see it, now you don't, these Representatives of the people might have noticed that after three years of policies aimed at lowering the value of the dollar and artificially pumping up the economy on the backs of borrowers, the trend is supposed to be turning around. In other words, the trade deficit should be shrinking; a cheap dollar should mean that US goods and services are cheaper while foreign goods get pricier. What they should be worrying about is the amazing shift that has seen US manufacturing, and now service jobs decimated as plants, facilities and know-how head off to Asia never to return. Do they wonder what it means when no one is about to open a big furniture manufacturing facility in North Carolina while other facilities still operating there pack up lock stock and barrel and head off over the Pacific horizon?
Congress, of course, doesn't have to look abroad to see debt. They are operating this year, as they did last year and the year before that, on their own massive deficit and they will operate that way for as far as the eye can see as long as they continue to push to reward their buddies with their unreal tax policies.
This month, just as last month, the unbacked dollars we print and spend abroad have once again been soaked up by the oil producers, and the exporting nations led by China, Japan and Korea, then recycled back into the system. Foreign institutional and private bankers continue to perform this spiral-like, hypnotic dance, hoping against hope that the center will not collapse.
In this don't ask, don't tell scenario that has served to freeze our gaze: The indefatigable US consumer, undeterred by debt, rising fuel prices, rising housing prices, stagnant wages, a weak job market, a sinking stock market, continues to run up more debt in their eternal quest for more tchotchkes. The foreign bankers, undeterred by the flow of ever greater mountains of greenbacks fresh off the printing presses, continue to fill their coffers with more and more US T Bills, pushing long-term interest rates down even as the Fed tries to push short-term rates up, while Congress and the Administration make believe everything's hunky dory and the public worries just a little more... well, about paying their bills.
Bankruptcy is an issue. The President in a speech in West Virginia pushing his plan to privatize Social Security made the point that the system could go broke since the surpluses it has built up over the years have been converted as loans to the government, in the form of Treasury Bills. The President warned that those Treasury Bills, held by the Social Security Administration, might just turn out to be worthless paper. Were any of those bankers from China, Japan, Korea and Saudi Arabia who routinely buy those same T-Bills listening when he said that? We hope not.
Two weeks ago, it was the late night whisper by the Bank of Korea that they might start diversifying their reserve holdings --in central bank jargon, this means holding something (Euros) other than dollars -- that sent currency markets in a tizzy. But then the BOK cleared its throat and said that it really wasn't changing anything at all, folks had misheard. Once again, yesterday, some noises came out of the Bank of Japan that they, the world's largest holder of dollars, might be rethinking the composition of their reserve position and markets started to move. By nightfall in Japan, the BOJ made its denials heard loud and clear and dollar slippage stalled.
So what's going on around here? Let's start by calling it the dollar hot potato game and it's being played all over Asia. John Mauldin in a piece called Why Trade Imbalances Really Do Matterr compared it to playing the card game Old Maid. In Old Maid, if you remember, the idea is to get rid of the Queen of Spades. In each round the players pull a card from the hand of the player on their left. Pairs are discarded as the hand is narrowed down but there is no other black queen to match the old maid.
The Asian central banks hold several trillion dollars in their coffers. Since 1992 those dollars have lost more than 35% of their value in world markets. But these same Asian countries' economies are dependent on selling goods to the US. In some ways it's not the bloated old maid they're holding but the goose that laid the golden egg. The problem is that egg is getting less golden every day the dollar sinks against the value of the euro and, more literally, gold. The old maid analogy works because it becomes something of a nightmare for the central bankers in Asia to lose value on a day to day basis as the US trade imbalance widens. Nobody wants to end up holding all the dollars but at the same time nobody wants to be seen as sloughing off the queen.
This leads us back to today's news that once again, for the umpteenth time the US trade balance for a single month --January 2005) has hit close to a new record high. This time the deficit was 58.3 billion dollars. On an annual basis this would be close to $700 billion. What should be ringing warning bells is that this trade imbalance occurred after years of US dollar devaluations. Normally, when you devalue your currency it makes foreign goods more expensive and your own goods cheaper vis a vis the rest of the world. Over time that's supposed to bring the deficits down and a country's trade back into equilibrium with the rest of the world.
So as long term interest rates finally (we say, finally not because we want them to move but because as the dollar falls US Treasuries will get harder to sell to those sleepless Asian bankers we talked about and they will demand higher rates of return) start to move up and mortgage rates start to follow, the housing well will dry up leaving a lot of debtors holding an empty bucket.
Of course trade deficits and budget deficits haven't mattered much up to now nor has rising consumer debt --and BTW, it too was way up in January-- so perhaps they won't matter going forward. No one can say. Perhaps we in the US can just go on borrowing and spending forever. After all, the US is the world's strongest economy. As Treasury Secretary Snow said today, when faced with the trade figures, it's the rest of the world that's not pulling its weight.
Manhole covers on Pennsylvania Avenue are welded tight. Street light poles are removed for fear they may have been packed with some nefarious element while passersby within a 100 square block area get frisked as they walk to their homes. Hundreds of thousands of police, para- and military forces have their assignments. The routes to and from a score of more or less monumental sites are being scoured and sealed for the post event revelries. From Tuesday on, DC will be closed off to traffic and flights in and out of Dulles, BWI and Reagan National will grind to a complete halt by Thursday morning Next week, in the DC Green Zone, they will be partying.
Like the jumbo screens scattered down the Mall, what is truly eerie about this event is it's made for TV DNA. In reality, the Presidential armada rarely ventures out on the streets of Washington. Thursday's price-tag for the short 16 block trip up Pennsylvania Avenue to the West side of the Capitol and then back to the White House will come in well over $50 million. To cover the $17.3 million in increased police coverage, the erection of ultra-secure parade stands, demonstrator barriers, etc, the federal government has asked the District of Columbia to use up funding it received for Homeland security infrastructure. In other words, even as the sponsors charge $60 and up for seats in the grandstand for invitees, DC is being asked to use civil defense moneys.
As you know, we wouldn't have mentioned this piece of local chicanery here in BlowBack if there wasn't some wider tale to hang upon it. And to put your mind at rest, no, we do not underestimate the importance of the symbolism: even as the country folk wage distant wars to protect the petroleum supply, er.... bring freedom and democracy to a corner of the Persian Gulf. There is purpose in the great continuity of a presidential swearing in. Of course, for those of us old enough to remember Presidents casually walking down Pennsylvania Avenue after making their oath, this hermetic event hardly strikes the chord of business as usual. But yes, for the vast TV audience, the President must stand--or at least appear to- at the foot of the West Capitol steps with the great flags hanging below the dome as his backdrop, while he takes the oath of office.
But television appearance is fungible. So why not, in recognition of the war's toll, or in recognition of the Government's budget troubles or the great impracticality of trying to make believe the President of the United States can still venture out in an automobile a few blocks, forgo the most wasteful aspects of this great expense?
Because, of course, at this pivotal moment in the evolution of the world economy, we have a President who has absolutely no recognition of waste or even the peril he is putting us all in as he continues to enjoy the cost-free life. As in the case of this inauguration ceremony, bills are for other people to pick up and, anyway, they, won't come due right away.
As we've mentioned many times before, the United States occupies a unique place in the world when it comes to money. As a result of monetary agreements made in the wake of World War II, Americans have actually been getting things for nothing for a long time. The dollar, by agreement, gets stored in the coffers of foreign government central banks as a so-called reserve currency. In this sense, it is treated by the official world economy as something akin to the gold deposits that once were the required backing for paper money. But gold, for all its limitations (and we'll avoid arguing with you true gold bugs out there), has one great virtue when restraint is called for; it is limited by its rarity.
Throughout history, every time a country managed to break away from the shackles of backing up its paper money with gold, that paper money has ended up as wallpaper or garden mulch. In the latter part of the 20th Century we have managed to break that sad record (remember the Weimar Republic) by relying on the greenback. And as long as the US remained an unparalleled engine of economic growth, the world has been willing to store its wealth in dollars. Of course, this has been a great boon to the United States. Whereas other countries have to be careful about how much they import compared to their exports, the United States has had a blank check. All told, the US has been able to print money, spend it on gadgets and raw materials from around the world and not worry that the errant dollars would ever come back for redemption. This is, of course, a privilege and a responsibility.
Just last October, the US spent 70 billion dollars more than it took in. This was yet another in a series of record monthly trade deficits that add up to a series of record annual trade deficits (over 650 billion in 2004). It's not hard to figure out what's going on, we merely have to pull into the parking lot of the nearest Wal-Mart or fly over L.A. harbor to get the picture. Asia makes, we buy, they take more dollars.
For countries like the Asian titans and tots, this is a little like the goose that laid the golden egg. They may be getting paid in ever riskier and less valuable dollars but they are working, exporting and getting paid. None of these countries wants this good thing to stop and so they have set up a kind of subsidy ring in which they use their extra dollars to buy up the debt the US issues in the form of T-bills. It would appear that they have too much as stake to let us falter.
What's to worry? you might ask. Maybe, this can go on forever or, at least long enough for us to come up with the next big thing. And, perhaps it can and perhaps we will. Nobody knows just what straw it will take to break the bank. And so the Administration talks about fighting the war off this year's budget. On paper, that means the deficit will not be as big as it really is. And, perhaps, we can pull a few trillion more out of the air to fund a scheme to pump up the stock market with private savings accounts; money that otherwise would have gone into government coffers through payroll taxes.
And yes, the Fed can always let the dollar float downward against the currencies of countries that have managed to save more and run up lower trade deficits. And so we continue to bet that important numbers of private and public foreign financial interests will forgo the higher returns they can get by buying instruments denominated in euros or Swiss francs, say, ( some of the currencies that float up as the dollar goes down) to instead get dollar denominated gild-edges that will be paid off with negative returns as the dollar continues to devalue.
We, of course, don't know what is going to happen to markets or to vulnerable paper currency systems. We do know, however, that even in topsy-turvy Bushworld , most people will seek to boost their profits. Countries that go into debt to arm themselves to the teeth and then have to depend on the kindness of strangers for their daily bread, have not fared well in the past. But perhaps, as stock market cheerleaders remind us all the time, when it comes to counter-indicators like today's historically high P/E's, this time it's gonna be different.
And so Bush will have his Green-zone inauguration, even if it costs an extra $50 mil or so. Like DC picking up part of the tab, up to now it's proved true, we can always beggar our neighbor.
Regular Readers of DW may have noticed that the contributions from this department have fallen off considerably in the last few weeks. You should all be reassured that this lack of editorial activity in no way reflects a lessening in our ongoing dedication to the mission of bringing studied, knowing, perhaps fanciful but always alternative views of reality to light. The mission of the Dymaxion Web is, through a combination of enhanced communication, sophisticated probing and deep searching, to create an information dimension faultline; a direct echo on the screen, we'd like to think, of the dynamic that our patron saint, Buckminster Fuller, found in the physical world.
We are, of course, also in this for the fun of it. And if getting our hands greasy tinkering with the nuts and bolts that connect the nodes seems like fun for the moment, then so be it. Yes, we have been tied up not in some exotic adventure at a posh watering hole but rather in the extension of the structure that we are attempting to build here in cyberspace. All this to say that in the coming weeks and months we expect to begin realizing our goal of creating a very special opportunity for a multiplicity of participants to bring clarity to what are highly fudged over macro and micro- economic areas.
In other words, despite the lack of surface activity, things are moving along here at DW even though it seems that sometimes our efforts better resemble a bird moving a desert to another solar system one grain of sand at a time.
There are so many areas of significance to talk about after this hiatus that is hard to settle on just one. First off, the dust hasn't quite settled around the currency wars but after several weeks of confusion some things seem to be clearing up. The last time we talked about the greenback was when it had reached its nadir vs. the euro of 1.30 to 1. Since then, the dollar has rallied a bit and as we stand today one euro can now be had for a mere $1.21. For a while it has also looked like the Japanese had finally given up on their program of throwing billions of good dollars after bad in an attempt to keep the Yen from getting too strong.
Not that the confusion has been completely driven from the picture, particularly today, when rumors of a drop in the key European Central Bank interest rate, helped to further dampen the collective European currency. From our perspective, the fundamentals have not really changed and we are, of course, personally pleased to see that the gold bugs have finally figured that out and put the yellow metal back on its ascendant course.
The problem, of course, is that the Europeans and Japanese were supposed to take the brunt of the cheaper dollar in Alan Greenspan's scenario so that the US economy could get back on track and fulfill its dominating role of being "the world's engine of economic growth". Instead, what had been a slow but steady emergence of growth in Europe has been nipped in the bud as German industry had to shoulder the burden of a rising euro. In other words, VW, Audi, and Mercedes sales in the US will be down this year as, more generally speaking, German-made goods get priced out of the market.
But the "great engine of growth", despite the most massive stimulus program in history with resulting record domestic and trade deficits, has been doing a bit of its own sputtering. And now, even the Fed is hinting that they will have to raise rates at some point fairly soon (once the election is over, we guess) as the price of gasoline at the pump, for one instance, shoots off the charts. It's been noted that each penny rise per gallon sucks $1 billion out of consumers' pocketbooks. Yes, as we have noted, money gets printed as fast as the presses can go, and there is no one in the maxed out consumer class left to take it, except, of course, our Chinese purveyors. Yes, Virginia, the Chinese will not hesitate to take those much diminished bucks; after all, they've got a whole bunch of internal bad debt sinkholes that can be papered over with them.
Gold, which somewhat slavishly followed the euro up and for a while seemed to be following it down, now seems to have come unhooked from that anchor.
And now for our main issue of the day:
Competition and the Deep Web
Two phenomena have come together in the last couple of years that have already had an amazing impact on how much information we can get at with a little persistence. Let's first acknowledge that Google is the potent information gathering weapon ever devised. If you don't believe us, watch out, you may one day find some memo you wrote in confidence that it would never be seen by more that the eyes it was addressed to, all of sudden show up in a search you (or somebody tracking you) do. Even if its been estimated that Google only touches about 10% of what's accessible on line, that 10% already represents the most massive library of flotsam and jetsam ever conceived.
The second factor is the phenomenon we are participating in here, the weblog. Yes, weblogs are searchable and while there are millions of people out there writing their own brand of inanity, there is also the opportunity for some very interesting posts. Imagine, for example, someone knowing a thing or two abou
t what Richard Clarke had to say this week, who might be sitting at a keyboard right at this moment, adding even more fuel to the story of how we got to this very costly, in every way, occupation of Iraq.
Do a search on a few key words and you may just find one of these postings on the subject you are digging into. The implications are somewhat mindboggling going forward. Spinmeisters in control of the megaphone will always dominate the debate and serve to muddy the waters by cancelling each other out but Google-like engines can serve to act like that old magic trick where the man in a tux pours some clear liquid into a colored cocktail and changes it back to the transparency of a gin and tonic.
Somebody wrote yesterday, and we apologize for not having a link and for our weak paraphrasing, that if one of the main political parties announced tomorrow that the world was indeed, flat, not round, the headline in the New York Times would read something like the following: "Parties Debate Merits of New Theory Regarding Earth's Shape". We could then expect to have the weekend talk circuit loaded with advocates shouting talking points over each other.
Competition was very much on the minds of the Europeans this week when they came down hard on Microsoft for monopolistic practices that the Seatle giant has been getting away with for years. Microsoft has successfully snuffed out competition for desktop products and threatens to grab the same level of control over the web. MS, ironically, argues that they need the ability to bundle their own strategic products into the operating system in order to foster innovation. In other words, in their own monopolistic world, innovation is okay as long as it comes from the goliath. Let all other players get squashed, they say, that's show business! And indeed, show business has to be grateful for the European Commission ruling. The media player, of course, acts as a gateway between the producers of entertainment products --ever more digital-- and the consuming public. The system of payments for such products will take place on the "desktop" (substitute set-top for the emerging home network reality) and who controls that set-top will have enormous muscle in determining what happens to different products.
We should bear in mind that even as NASDAQ rocketed back up to about half of where it peaked during the bubble, MSFT has remained flat. The Redmond guys desperately need another huge source of revenues beside the golden goose they now own. The Europeans, in their ruling, also tried to keep MS from forcing companies that want to use Windows on the desktop --nearly everybody-- to start using MS on their servers, as well. In other words, build the operating system in such a ways that it talks best to a MS server product. Time will tell how successful the agency will be.
So now that we have affirmed that MS, like IBM before them, tries to snuff out competition wherever it can, and of that there should be no doubt, we have a bit of good news on the competition front. And it comes, of all places, from MS, themselves, who have announced today that they are planning to compete with Google in the search engine space. This, of course, comes on the heels of the announcement by Yahoo that they were dumping the Google engine for their own effort.
And so we hopefully can look forward to some real competition in this really critical area. Let's hope that Google, Yahoo and MS go at it, feathers flying everywhere. The result just might pull the kimono off some significant piece of the hidden 90%. Here in the nosy reaches of the Dymaxion Web, we just can't wait!
Copyright 2004 Richard Mendel-Black All Rights Reserved
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We've said often here that these are strange times for predicting markets and besides the normal curveballs thrown by the market gods there are other huge distorting factors stemming from the activities of the Federal Reserve under Alan Greenspan, the countermeasures of foreign central bankers and the bitter infighting of a presidential election year. This week has been no exception.
For those who are of the persuasion that this is a sustainable recovery there was more bad news on the job front last week. We've been saying all along that it is impossible to reckon how a consumer driven economy (over 70% of GDP) with its great reliance on debt financed spending can somehow hold up as fewer and fewer people find good jobs. One of the most striking facts has been the continued depression in real wages for American workers who haven't really shown any gains since the 1970's.
You only have to read the many articles that have come out of Elizabeth Warren and Amelia Warren Tyagi's book "The Two Income Trap" to get a good idea of what's going on in a lot of American homes. The authors have looked carefully at personal bankruptcy cases over a fairly long period of time and found a number of so-called counterintuitive facts: Their main point is that personal bankruptcy is much more likely to happen to families where both spouses work and there are children in the household. As the authors put it, and we paraphrase, it's those people who do all the right things, who work hard and who have an abiding interest in finding good schooling for their offspring and invest in a home of their own who are most likely to fall into economic ruin. In other words, these people tend to be striving for what they and most of their peers regard as the life any American couple who play by the rules ought to expect.
What happens is that in order to get their kids into a "good" public school district these parents pay a major premium for the price of their home. And because they both work, they are required to have two cars and the overhead of daycare.
Since real wages have stagnated in real terms and there has been an enormous inflation in the cost of housing it now takes two salaries to keep pace. So when one wage earner loses his or her job the debts begin to mount. Yet there is little way to cut back. American family saving is at its alltime lowest following a long pattern downward. Credit is, of course, abundantly available, and may provide a short buffer but at some point either a job gets found --impossible if one of the two gets seriously ill-- or the family flounders.
The authors point out that in the old days the stay at home mom was a kind of reserve player who could enter the job market, albeit at lower wages, but provide back-up support. The reality is that it now takes two wage earners to carry pretty much the same burden as it used to take one.
And so when with a grindingly monotonous rhythm the job figures came out last week several things occurred. For one, interest rates dropped back to record low levels and consumer confidence also fell a notch or two. Now, when interest fall like an ice cube on Jupiter you can usually expect some other things to follow suit. You might have expected the dollar to head into its own Jupiterian free fall while the price of gold made its way up over the moon.
Instead, the dollar actually firmed against the euro and gold, well gold managed to just barely hand onto its $400 an ounce price level until dipping Friday to slightly below where it's been stuck for the last few months.
As we've also said many times over in the few months we've been writing this letter, that the US is dependent upon the kindness of strangers, mainly Japanese and Chinese, who must make up for the huge trade imbalance by buying US T-Bills as they are issued to cover domestic debt. These Asian central bankers can put their excess dollars to work for much higher rates in more stable currencies by merely looking around. But they have decided that they are going to subsidize their American customers even if it means giving back their hard earned profits in the form of poor rendering US paper. These guys are clearly not crazy so they must have a good reason for their actions and that, of course, is, we'll hazard, that if the US consumer ever decides they've had enough in Wal-Marts there would be no where else to turn to sell their goods.
The present US economic fix has sometimes been compared to the long dive of the Japanese economy that started in the late 80's and is only now starting to turn around. Many economists have pooh-poohed the comparison. The economies, they say, are just too different for comparison. So when someone points to the recent bulge in the stock market that brought the NASDAQ back to 45% of where it peaked at over 5,000 in 2001, as similar to a move in the Japanese market that occurred 3 years after they peaked, critics find the whole thing risible.
And of course there are vast cultural differences in the two leading economies. For one thing, Japan runs a trade surplus and for another, the Japanese are still basically a very frugal bunch who have one of the world's highest savings rates. Americans, of course, have believed that their innate creativity, flexibility and capacity to absorb foreigners give their economy a level of superiority over the Asian islanders.
But still another factor is that the US is the only country in the world that can print its own money and get away with sending it abroad where it is kept in bank coffers as an official "reserve currency". America got that unique advantage back in the 70's when Nixon caught off the dollar from any last links it still had with the price of gold.
Europe, of course, would like to substitute its euro for the dollar as a second reserve currency. And the world economy would be a lot more stable if Europe, taking the pressure off the US, started growing again at the rates it did up into the 80's but, alas, that hasn't happened. For a number of reasons but we should not overlook the effect a weak dollar has had on world trade in the last year as it went from 83 cents for one euro to a peak of $1.30. In effect, while the Bank of Japan literally sank 100's of billions of dollars to keep the Yen from not diverging too drastically from the dollar and the Chinese held tight to their lockstep with the dollar, the Europeans could see their euro making strong gains.
But at what cost? Recent figures point to a slowdown in Germany and France just as their economies were beginning to take on new life. And so, you might say, as US interest rates took a dive back down last week (meaning you get less money when you invest in US T-paper) the dollar should have taken a dive. Instead, it actually stiffened against the euro and the yen.
Does this mean that the bonfire of Japanese and Chinese dollars on the altar of the American consumer will now also be fed by the European central bankers as they scramble to soak up dollars before they become worthless to keep Volkswagen et al. competitive?
Never before have massive interventions like the ones going on right now, or potentially contemplated, ever been able to hold back an imbalance forever.
There's a potential avalanche out there and you would be wise to take some precautions.
Copyright 2004 Richard Mendel-Black All Rights Reserved
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As 2004 approaches investors should bear in mind a few salient trends and keep a sharp eye on cracks in the structure of things.
First off, it's human nature for some of us to be optimistic, especially on the eve of a New Year. It's what keeps us going in the face of heavy odds. And so we shall try, while keeping in mind that all the optimism, faith and trust in history that we imagine permeated the inhabitants of Bam, Iran couldn't keep their walls from crashing down. To make a point, itís easy to see that Bam literally had a structural problem: non reinforced masonry being particularly susceptible to the kinds of swaying movements produced by earthquakes. And yet, Bam had a long historical record on its side, since it was a very ancient city and unlike, say, Pompei, no such disaster had befallen it before.
And so, even as we look ahead, we wonít entirely lose sight of the possible tectonic movements of the vast monetary imbalance we so mundanely term the US current accounts deficit, which today is measured in little more than a gradual shift in dollar value of assets worldwide. No one knows (and I wager that includes Alan Greenspan) whether the daily erosion of $1.5billion mainly to the Far East is little more than a cyclical ebb and flow or whether there are more dire movements brewing in the mindseye of the market gods.
We wonder how a consumer driven economy --nearly 70% of GDP results from consumer activity-- can be sustained as those very same consumers steadily lose decent paying jobs (2.5 million in the last 3 years). Not to worry, say the chattering class," the ingenuity of the American people has never failed before. Jobs get lost and new jobs get invented."
How, we wonder can a debt-ridden public continue to rack up even more debt (per family non-mortgage debt averages nearly $8,000, up 7-fold since 1960) when real wages hold steady or even decline. For George Will on ABC yesterday, there was little to worry about. For George, "losing your job nowadays is just not such a big deal anymore." We have to wonder when George got this insight. It's hard to imagine he's run into any laid-off factory workers as he made the round of Washington cocktail parties this Christmas season, talking points at the ready.
Now, if the consumer weren't such a critical part of the economy; and if, instead, savings were being poured into new plants and equipment in this country (not Asia) then George might be right. But, we're afraid here, that indeed we have become a country of consumers spending dollars we haven't yet earned that flow mainly into the hands of entrepreneurs and poorly paid workers living half way around the world. But, to worry, we will try not.
The dollars, of course, are cheap to print and are backed with nothing more or less than the good faith and credit of the United States of America. Foreigners are welcome to invest those dollars back into our economy and up to now they have continued doing just that even though they could earn more interest Ėnot to mention gains-- if they converted them to say, Euros or the Aussie dollar. In fact rather than earning less than 4.3% on a 10 year T-Bill, in dollars that have lost nearly 40% of their value in the last few years, these same investors might have found better ways to recycle them. But, perhaps they havenít yet noticed.
We, as Bill Bonner of the Daily Reckoning www.dailyreckoning.com likes to echo Blanche in saying, "are living off the kindness of strangers."
And then, of course, there is that little matter of the domestic deficit. Our government in its own lack of kindness to generations to come, insists on creating more spending programs while collecting fewer taxes, with the neat result that we are running deficits as far as the eye can see of more than a half trillion dollars per year. But, of course, we only pass those down to our children.
And then there is that even littler matter of the reconstruction of Iraq in the face of popular hostility among those who would benefit from our generosity. How much will it really cost us now that we know that there is little chance Iraq's vaunted oil reserves will come back on line any time soon?
But just as the American consumer is undaunted in his never ending quest for more gadgets and SUV's, so too is the American stock market investor in the face of valuations to earnings ratios that are normally only seen at a bubble's peak.
This time itís different, we are reassured. Not because things are structurally so hot, no one would really argue that.
And so that brings us to our newly invented election year theory. Perhaps the American investor in his great wisdom is betting on the following scenario: with George the Secondís future at stake the Fed will not do anything to raise interest rates even if it means letting the dollar sink to around $1.50 to a Euro. China and Japan will support this by continuing to recycle at a loss because they have everything to lose should the dollar crash (their reserves are in US dollars, not gold) and the Europeans will stand idly by clasping their collective hands in wonderment of how their socialized economies had gotten so rich without having to give up any of their paid holidays or social benefits. Meanwhile, US multinationals will report higher profits as they measure their European business in fattened Euros and that will improve P/E ratios andÖ.. you get it. The bet is that prices will hold still, interest rates will remain low, Americans will continue to run up debt and a lowering dollar wonít rock the boat.
Meanwhile, Saudi Arabia (and the rest of the OPEC) will stand still and keep pricing their oil in sinking dollars because they know first hand what happens when you cross the Bushes. And US manufacturers will finally have a price edge over their ritzy Euro-competition and theyíll finally start hiring American workers at top wages!
Yes, this is an election year, Virginia, and the amount of hyping and huffing and puffing on the sidelines will make the usual legions of Wall Street hypesters seem like a bunch of bookies in the face of the Parimutual. Why just yesterday we heard from Bushís former chief economic advisor, Larry Lindsey, that "Tax rebates are the antidote to lower wages."
This may indeed be the year in which we turn around, start creating real jobs, bring down the the foreign and domestic deficits and defy the law of gravity when it comes to stock prices.
Our advice: Hold on to your wallet!
Dollar Vs. the World. What Me Worry?
If anyone came up to you and asked the question: Right now, you and your doppelganger in, say, Fredonia, both have equal net worth, without you or she doing anything different, with less than 2 years your savings will total 40% less, how would you feel? Would you want to change places, maybe? Of course, if that question had been posed about 3 years ago, and Fredonia switched for, say France, the above result would have been pretty much what has happened. This means that our European friends, without working any harder (in fact, they probably had more than twice as many paid vacation and holidays) and without doing anything wiser than participating in the right currency zone, in this case that of the Euro, have achieved these amazing results. Beats smart investing, doesnít it?
Of course, if you live in the States and havenít thought to travel to the Old World, you probably wouldnít have noticed. Of course, being here in Rome, Iím faced with the situation on a regular basis, every time I open my wallet or go on line to check my credit card account, Iím looking squarely at the fact that it costs me about $1.20 for every Euro I spend. No big deal, I suppose, when youíre talking espresso or even a pizza but something a lot more meaningful as you bring up your hotel bills on the in house TV screen. Iíd rather be bored by the BBC than face that music.
The reason stateside you hardly notice the exchange rate changes has something to do with the fact that most of the goods you buy are manufactured in countries that tie their currencies to the dollar, like China, and in the desire of my companies not to lose market share in highly competitive markets. So Toshiba or Sony arenít likely to raise the cost of their gadgets because they are taking in less Yen on every sale. Instead, they too have shifted manufacturing facilities into the ďdollar zoneĒ countries while their central bank, the BOJ, actively tries to push down the Yen by buying up dollars on the open market flooding it with Yen, instead.
In Wal-Mart, prices stay the same and even as the Bush government tries to push up the price of underwear by slapping tariffs on the Chinese and has pushed up steel by protecting that industry from the rest of the world, despite a ruling to the contrary by the World Trade Organization. For Bush votes in the keystone state, youíll just have to pay higher steel prices, at least until after the election or if a trade war breaks out, as the Europeans are threatening.
Japan and China are the major props keeping the dollar from falling even farther. But again, I ask the rhetorical question, why should any American worry about the value of the dollar? Wine? Cheese? Italian shoes? I donít think so. Pride? Interest rates that may be forced to rise?
A cheap dollar, we are told, if ever anyone brings up the subject, is a way to stimulate the economy. It makes American goods cheaper when sold in places like Europe and Australia. So, can we expect major gains in exports in the coming year? Again, I donít think so. Will Boeing beat out Airbus on a major contract? I donít think so. Will Telstra go Motorola over Nokia? I donít think so. Some American tourists may stay away from the Continent; some more Europeans may visit Niagara Falls. And up there at the Falls, maybe, a few more Canadians will stick their noses across the border. Prices do matter to them. They can compare head to head.
But a weak currency is first and foremost a symptom of something larger. A loss in the greater wealth of the country as we squander it on ever-greater quantities of Asian made tchotckes, is like a long-term disease that strikes the immune system. At first, you donít really feel it, you may even look better as you lose a little weight, not, of course, until, there is finally a crisis. The problem is that we are living on the kindness of strangers. As long as the Chinese and Japanese continue to buy treasury bonds denominated in an ever less valuable currency to prop up their own internal economies (what a deal, low interest rates on a bond denominated in a falling currency), we have nothing to worry about. We can continue to run up more and more foreign debt, encourage our own plastic-bound consumer class to give it the old college try by going deeper and deeper into personal debt, and the government can merrily print more money than it takes in through taxes. What a deal!
As the man with the uncanny resemblance to Alfred E.Newman, might be heard to murmur: ďWhat Me Worry?Ē
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Linux is to Gold as ............................
From an investing perspective, the problem with gold is a little like betting all your marbles on Linux. For the simple reason that no matter how good the arguments might be, you are somehow going straight into the wind.
First, a little light on the yellow metal, that, by the way, I know a lot more about than I do about the stuff they call open source. If you've never hung out with anybody who's been to graduate school to study the dismal science (not the jumpingest bunch in anybody's book), you wouldn't know what funny looks you can get when you mention what, after all, has been treated like money for as far back as recorded records go, the shiny, yellow stuff. To these enlightened ones, gold is truly a relic, in the religious sense, left over from the altar of pagan rituals. Money, they will tell you, is anything that people believe is money. So if everybody believes that seashells are money, then buy what you will with seashells. After all, no one dared laugh at Caligula when he returned victorious from a campaign against the sea god Neptune and opened before the senate his spoils from the campaign, trunks full of seashells. Of course, that was the same Senate in which he made a horse one of its stellar members.
Thus, hardly anybody in that august community batted an eye when Richard Nixon cut the final link between the greenback and gold back in the early 1970's. At which time, he was quoted as saying, ďWe are all Keynesians now.Ē The dollar, as we all know, is backed by the full faith and credit of the US government. And dollars to doughnuts, if things started collapsing all around us, the place investors from all over the world would rush to stow their hard-earned pesetas, would be in US T-Bonds. That kind of behavior in the face of massive deficits Ėthatís when the government spends more than it takes in and makes up the difference by simply printing more bills-- is a compelling argument that tends to overwhelm all but the most obtuse.
Further, our dismal practitioners argue, where would the modern global economy get the liquidity (money) it needs to sustain the growth that's required? Must countries wait until somebody strikes it rich in nuggets before they can issue more money? Better, they imply --because that's the way it is-- to let one country print as much money as anybody needs as long as it continues to be the engine that propels the very world economy we all want to see expand. And so, the US gets a special kind of pass. We print them and the rest of the world takes them (reminds me of the sign on the bridge in New Jersey: ďTrenton Makes and the World TakesĒ.
Okay, that deal Ėnot the Trenton one which we all know is an anachronismó might seem a little unfair to the rest of the world, who have to live off of what they save but that's the way it goes. After all, who's got Wal-Marts every 10 miles and a bunch of worthy citizens who are willing to get up and out and fight their way into the aisles to buy whatever tchotckes catch their fancies?
By this time, if you've stuck with me, you're probably wondering what this has to do with gold or even more, if you're a techie, what the hell this has to do with Linux. Allow me a deep breath, a little more patience, and on I go: But first let's put the economists aside by appeasing them; when, by the way, since LTCM (Long Term Capital Management, a scientifically run hedge fund that almost brought down the world economy in 1998) did any of them make any money?
Gold, after all, is just a nice shiny metal with some very endearing and enduring properties. It used to be money but outside of a few coins that don't really circulate, it isn't really money any more. Judged by its track record over the last couple of decades, it's certainly not a good store of value. At one point in the 70's it was up over $700 an ounce (that's the way it's priced), which, if it had stored value properly, would make it worth approximately $3,500 an ounce in today's dollars (if you don't remember yourself, ask somebody what house's like yours cost back then).
Instead, gold has been in the doldrums trading last year in the $200's and most recently still pushing to get up to $400 an ounce. What's that all about? Has somebody found a way to synthesize it, like they have diamonds? Are there mines cranking it out of the ground all over the world at rates that exceed the industrial, medical and decorative demands for it? Answer to all three questions, a resounding nope!
Zohhh? What's wrong with the yellow stuff? First off, I have to admit that too many of us have gotten college educations and had to take economics 101. We know it's just a pagan holdover. But what about all those people who haven't been to college wearing all those weighty gold chains? Is Wal-Mart able to get its gold in China mined by guys willing to work for wooden nickels? Nope, try again!
By this time, if you are at all like me, you have probably started to wonder what's wrong with this picture. Either the spider in the dymaxion web is just shoving us a line of bull....., or there has to be another explanation. Conspiracy....? Did I whisper conspiracy? Nope, not this spider. Not that there aren't a bunch of guys out there who aren't, but I'm not convinced by them, at least not yet. But then again I haven't been in the trenches taking the salvos the way these guys have for the last couple of decades.
And this finally gets me a little closer to Linux. You see I am assuming that there are a lot of techies who read these submissions. And they know Linux and its plight a lot better than I do.
Here's the equation. Yes, gold is not money any more, at least technically! Most of us can agree on that. But it is a kind of special commodity, I mean when you compare it with something like flax seeds or pork bellies. It's not just any commodity. I hope we can all agree on that, too. It's shiny, itís rare, itís malleable, it can be easily melted down, it canít be synthesized, it doesn't corrode, and everybody treats it as something valuable that can be hocked no matter how old it is or where its been (I'm thinking about false teeth but take your choice).
But there are some interesting facts that have to be treated: First, yes, world demand is consistently higher than supply. There aren't a lot of mines out there sitting on the great mother loads and that have already committed to deliver based on options they wrote at last year's prices Ėthough, there were times during the long price drought when the latter was the case.. The stuff is hard and costly to extract and few are the mines in the world that can just step up production at will, even if they were foolish enough to want to dampen prices. Now, add to this the upsurge in the production of ever cheaper and thus more affordable electronic gear in places all around the far east where gold is a component. On top of that, think about all those newly minted disposable incomes in places like China and India where they still like gold jewelry a lot and where, some people at least, are still primitive enough to believe that gold, even as jewelry, stores value. Add to that, the Chicken Littles, who think the twin deficits are going to pull us all down with the dollar. You might surmise that demand for gold is rising pretty quickly; at least it certainly ought to be even further outstripping supply. So how come gold is still being priced in what look like early 1970's (before the bubble) prices?
And oh by the way, I forgot to mention, the biggest holders of gold in the world are the central banks of the most developed countries, including the good old US of A. We all know about Fort Knox, where they have tons of the stuff stored. Not to back the dollar, mind you, but they still store it. Maybe, after all, they are the flies in the ointment? Maybe, having concluded that gold isn't money they have also concluded that they should probably sell it while itís cheap and keep the price down, since they hold so much of it. Or maybe some of those other countries would rather sell their stashes rather than tax their citizens. That's pretty reasonable, given the need for politicians to get re-elected and gold teeth and all that.
But wait a minute, there is something called the Washington Accord --it was signed here in 1999-- that has all the major central banks, except the US Fed, agreeing to not sell more than a small amount of the stuff. So it can't be them being the party poopers, can it? In case, of course, you are thinking, Linux, Microsoft, gold, the Fed, voila', I get where he's going with this.
Let me clear my throat. According the Greenspan, I'm not sure when the last time he made this pronouncement, the Fed isn't selling off its gold either. Whew! Big sigh of relief! The Fed ain't selling either. Not them, not those pesky folks in Euroland, nobody is dumping to dampen.... so, why isnít everybody jumping in to buy the bloody stuff?
Before I get off this, I have to talk a little about currency devaluation. A lot of people say they don't care if their money buys less wine in France or sushi in Japan. If a cheaper dollar keeps jobs here and makes it easier to sell US goods abroad, then it's practically painless. Next vacation, why I'll head for someplace in the dollar zone, say Venezuela. And so what used to be worth 1.20 Euros a year or so ago is now worth around .80. Iím talking about the dollar, of course, and the same goes for the dollars value in Japanese Yen. And yet our leaders are out there trying to push the Japanese and Chinese to raise their prices by cheapening our dollar even further (store of value, anyone?). Who cares if prices go up 20% in Wall-Mart?, they ask. That will get us all excited and we'll just spend more, heating up the economy by inflating, they say! And, in case you havenít heard, inflation is good. It stimulates us to act now before our money buys even less.
If all this manipulation begins to sound somewhat diabolical. Believe me, Iím not making it up!
Okay, had to get that off my chest.
Linux: here goes, sorta. The dollar is the standard. Everybody takes it, even if it has a few bugs, especially on the security side. Half a trillion internal debt, half a trillion trade deficit: Don't worry we will just keep issuing fixes, weíll make the other guy pay more. For starters we will just let our biggest customers know that even if they think about switching to some other system (is Finland in the Eurozone?) they will pay a pretty price. We won't let them know exactly what upgrades (read, devaluations) are in store down the pike. Further, we'll create some secret code (derivatives, in this case) that nobody understands and make sure they are so deeply embedded in the source they canít be extracted. You want to travel anywhere to do business, your passport better confirm to the standard we set, otherwise you can't even pass through our domain. You want to sell your oil, you'd better price it in dollars or who knows, you might see a cruise missile or two before you get a chance to duck.
All to say, folks, the dollar is the standard, gold isnít. And having the dollar as a standard benefits all those who would spend now and pay later and those who sell to them. At least, for now, in the latter case. So the next time you think about putting your hard-earned tintbacks into the yellow shiny stuff, remember, there's more to this equation than meets the eye.