More in Theory than in Fact

Following on the heels of last Friday’s essay, The Daily Reckoning PRESENTS: a DR Classique, originally aired June 1, 2001…

Dear reader,

I return to Friday’s painting theme – if only to introduce my method. You’ve heard of ‘taking a broad brush’ to a subject? Well, today, I have gotten out a spray rig – with a wide nozzle. Using this heavy equipment I intend to put a thin gloss over 2000 years of Western history in less time than it would take a Republican congressman to sound out the word so-li-da- ri-ty.

The question on the floor – still lying on the carpet like a smear of cheese dip after last night’s party – is this: why has the idea of laissez-faire economics taken hold in Anglo-Saxon countries, but not in the country of its birth?

On Friday, I reported that French workers were entitled to 4 weeks of vacation. I was wrong.

In 1981, in the name of ‘solidarite,’ the Mitterand government decreed that, henceforth, every French worker would have the right to 5 weeks of paid vacation.

There is no word in English that conveys the sense of the French word ‘solidarite." Socialists and agit-prop demonstrators occasionally try to use an anglicized version of it – solidarity – but the word has neither meaning nor emotional power in English.

"Solidarite means nothing in French either," explained a very bourgeois dinner companion a few months ago. "But it is like the word ‘racism’ in English. It is used to shut people up. No politician in France wants to risk being ‘contre’ solidarite."

What a wonderful world we live in, dear reader. So full of intricate, subtle meaning. So marvelously complex… and so entertaining.

There is no better place for an American to enjoy this fascinating world than in France. You don’t have to listen to people charging one another with being ‘racist’ – a pre-occupation of American politics. Instead, you listen to arguments about ‘solidarite’ – and you are amused.

The French still imagine that they are one people, with one language, inhabiting one distinct place. They may have competing ideas…but their interests are in harmony. What’s good for the truck drivers is good for all Frenchmen. When the drivers went on strike, blocking major highways and causing a 100-mile traffic jam, people were overwhelmingly sympathetic. They felt the need to stay in ‘solidarite’ with the drivers.

America is different. It is a collection of different peoples. We recognize that different groups not only have different ideas, but different interests that compete with one another. Many people might be sympathetic to truckers, but few would feel they had a right to snarl up the entire nation’s highway system. If they have a beef it is with their employers, not with the rest of us. Let them sort it out themselves. Laissez faire.

"Why has the ‘laissez faire’ concept been lost in France?" Mark Skousen writes. "Perhaps it is a question of faith," he suggests. "Adam Smith’s idea was that things would work themselves out for the public good, guided by ‘an invisible hand.’ Smith was a moral philosopher. He saw the ‘invisible hand’ as the hand of God."

America has more churchgoers than any other developed nation. It has always had higher levels of religious participation. Looking around the U.S., region by region, the higher the level of church attendance – the more likely the voters are to favor the ‘invisible hand’ of the free market over the iron fist of government. It is rural areas, and especially, the evangelical, super- church regions of the south and southwest that vote for the free-market. With little faith in the ‘invisible hand,’ the Chardonnay drinkers of Manhattan and latte swillers north of the Housatonic look for the hands of Hillary and Jeffords to set their vacation policies.

Before Caesar, the Roman Republic was a bit like the American Republic before Roosevelt. People took their vacations according to tradition, consensus, the give- and-take of the market, family obligations and so forth. But when the Republic gave way to an empire, the operating principle changed too. Emperors began to determine the character of life by decree. Power shifted from the clans and families of Republican Rome to the tyrants of Imperial Rome.

Neither the Frankish kings, Richelieu nor Napoleon could resist the lure of Roman power. Once a Roman territory, France became a kingdom, a republic, an empire (Napoleon actually crowned himself Emperor in a moment of unparalleled absurdity), and then a republic again. Whatever it called itself, France has always continued in the tradition of Imperial Rome. Paris is the center of power, as was ancient Rome, from which laws and roads radiate outward.

All over France, mothers rock their infants to sleep hoping that their children will do well in school and make it into the few ‘grand ecoles’ in Paris and thence into a government ministry. Perhaps they will help set interest rates…or rig bids for Air France contracts…or determine vacation policies. However much they might retard progress, they will earn a good living and enjoy the feeling of superiority that you get from being ‘inside the beltway’ – at the center of power.

In America, things are not so different. But at least we all know the regulators are morons. And women do not wish a bureaucratic job upon their infants. Instead, they imagine them as respectable professionals – lawyers, doctors, or university professors – or, if they can’t make it into the professions, as successful businessmen.

Yet, in America, the idea of an ‘invisible hand’ is widely known and widely accepted. This is not because more people have read Adam Smith; it is because the intellectual traditions of the U.S. are different.

While Nero and Caligula were proclaiming holidays, persecuting enemies, murdering relatives and destroying the economy…providing bread and circuses to the Roman mobs…and otherwise acting like modern American democrats, the Saxon tribes on the north cost of Germany were already developing a system of evolved rules which would become know as "common law."

Rather than relying upon a written legal code (such as the Roman law…which was the basis for the Napoleonic Code), common law was an attempt by judges and juries to find the essential principles that allowed people to go about their business without doing too much harm to one another. Once a principle was discovered, subsequent judges would continue to refine it and apply it until it was replaced by a better one. No decrees or edicts…no centers of power…no bureaucrats were necessary.

This common law tradition – in which people decide for themselves when to work and when to take a holiday, or how much to charge for a pound of potatoes, or how high short term interest rates should be – was exported to America, as well as to the other Anglo-Saxon colonies.

‘Tis a pity it exists in today’s America more in theory than in fact.

Your editor,

Bill Bonner
August 19, 2002

Poor Jack Grubman. The celebrated analyst resigned under fire last week. We’ll miss him…as we do all the connivers and hallucinators of the New Economy era. (Only Alan Greenspan remains…as entertaining as ever with his productivity mumbo jumbo…but his days are numbered too, we believe – see Eric’s comments, below.)

Grubman had the good sense not to take his own hype too seriously. Unlike Ebbers and Gilder, Grubman sold the stocks he was touting while they were still worth something.

But now – even though he stole it fair and square – the spoilsports are threatening to separate him from his loot. A Newsday editorial expresses what must be the national sentiment, suggesting that "crooked corporate chieftains" be deprived of their ill-gotten gains by means of a corrupt little legal device used on drug dealers – "civil asset forfeiture."

"And because it’s a civil action," chirps Newsday hopefully, "officials don’t even have to convict the owner of a crime."

Oh la la…after every revolution, they change the rules!

Stocks are in a bear market. But we predict that the bull market in resentment and jealousy has barely begun.

"Two years ago, when we were here last time," said my brother-in-law over breakfast this morning, "I could have paid off my mortgage with my stock market gains. I was never richer. But now, my stocks are down more than 50%…and my mortgage is about the same. And now, if I lose my job…I lose my house too."

Losing a job is on his mind; my sister’s husband works on Wall Street at Goldman.

"I know a lot of guys who have been laid off. There is nowhere for these guys to go; no one is hiring. They are just waiting it out…"

How long will they have to wait? And what if the industry doesn’t come back before their savings run out?

"Well, they think they can always sell their houses…" my brother-in-law explained. "Everybody in the New York area has a couple hundred thousand in equity. Trouble is…they’re all thinking of selling at the same time. I think it’s a bubble…and I think it’s getting ready to burst."

When the housing bubble bursts…a bubble in resentment will take its place…

Eric…over to you…

******

Our man on Wall Street, Eric Fry:

– The bears extended their well-deserved vacation to a fourth straight week, leaving the bulls in charge of the shop. The Dow and S&P 500 both advanced for the fourth week in a row – a feat that the S&P had not accomplished since April 2001!

– Despite slipping 40 points on Friday to 8,778, the Dow held on to a 43-point gain for the week. The S&P gained 2.2% over the five-day span to finish the week at 928. Meanwhile, the Nasdaq jumped 4.2% to 1,361 – its highest level since mid-July.

– Unfortunately, four winning weeks does not begin to make up for two and a half miserable years, according to Northern Trust economist, Paul Kasriel.

– "The cumulative decline in the stock market since the first quarter of 2000 is finally starting to take its toll on consumer spending. In other words, now that the ‘new economy’ is dead, folks are going to have to build up their net worth the ‘old-economy’ way – by spending less and saving more."

– Hmmm…spending less and saving more?…Sounds odd, but I suppose we could try it for a while. – "Although a bear market in stocks has existed since the market started losing altitude in the second quarter of 2000," Kasriel continues, "this year’s downdraft shocked households out of denial that their net worth had, indeed, fallen significantly."

– Therefore, says HSBC’s Stephen King in a recent interview with Welling@weeden, if equities fail to recover, or worse, continue losing ground, Americans will have to save more and/or continue working longer into their golden years. "How many people actually forecast declining equities as part of their likely investment portfolio performance in the future? Virtually no one, I would think…People who have been looking forward to their retirement at 60 or 65, aren’t going to be retiring then. They’re going to be working much longer."

– Ugh…No more easy stock market profits and lots more years of riding the commuter train…Is this the New Economy that Greenspan keeps talking about?

– "With New Economy icons falling all around," writes William Greider in the Washington Post, "the next one may be the Federal Reserve and its hallowed chairman, Alan Greenspan. When anxieties subside and people examine what caused this debacle, they may grasp that the Fed’s policies and proclamations are centrally implicated…Greenspan became a cheerleader for the financial-market optimism and implicitly ratified its excesses. The chairman failed to take the timely actions that would have instilled more caution in investors, believing as he does that markets can work things out on their own. Well, they have."

– Yes indeed, by destroying $7 trillion of stock market paper wealth. Was it for this particular feat that the Queen of England bestowed knighthood on Alan Greenspan, wonders Andrew Kashdan of Apogee Research?

– "The honorary title was bestowed on our No. 1 central banker for his ‘outstanding contribution to global economic stability,’" Kashdan cynically observes. "Would that be the ‘stability’ of the boom period, which saw the buildup of an unprecedented U.S. current account deficit, a stock-market bubble of epic proportions and a collapse in consumer saving? Or is it the ‘stability’ of the current bust period, during which investors have lost trillions of dollars of wealth amid a futile slashing of U.S. interest rates and a downturn that is now hobbling economies around the world?"

– Jim Grant, who sits a stone’s throw from Kashdan in our offices at 30 Wall Street, is equally derisive of Greenspan’s new honorary title. "On July 24, Harvey L. Pitt modestly proposed that the Securities and Exchange Commission be accorded cabinet status and that he, the chairman, be named a cabinet officer," writes Grant. "Two weeks later, the British Treasury announced that Alan Greenspan would be made a knight of the British Empire. The Pitt proposal brought hoots of derision, as it should have. Greenspan’s promised knighthood elicited, for the most part, a respectful silence, which it should not have.

"Almost 21/2 years into the bust that followed the boom, the chairman of the Federal Reserve Board is still a global icon," Grant observes. "We take it as a given that the government employee most complicit in the bubble will no longer be a hero to the queen of England on the day the S&P 500 reaches fair value (or wherever it may come to rest). By then, her royal highness will have recognized that the New Economy was actually the old economy but with much higher stock prices. She, too, will have seen that the so-called productivity miracle was no such thing…At this moment of clarity, she may commence de-knighting procedures against ‘the greatest central banker in the history of the world,’ to quote Sen. Phil Gramm.

– Grant concludes: "Greenspan is, professionally, a bubble, and, therefore, at risk of bursting." See:

Apogee Research

******

Back in France…

*** Retailers are announcing weaker sales and lowering forecasts. Best Buy and Federated Department Stores both said sales were flat. Ultimate Electronics said it would only earn about half of what it had expected for the 3rd quarter.

*** "US Consumer Confidence, Home Construction Fall," says a Bloomberg headline. New house starts fell 2.7% in July…the second drop in a month.

*** The smart money – the people who buy bonds – are getting worried. Distressed junk bond totals surpassed their post-Sept. 11 high last week. Yields hit 60-year lows before bouncing back slightly at the end of the week.

*** "Maybe…" was the answer. The question, put to Edward and his cousin, both 8 years old, was "Did you break the window?" Your editor wasn’t born yesterday. He took "maybe" for a "yes.’ But after a series of leading questions, he decided that the deed was not vandalism, but accidental property damage.

"I was trying to kill the bee," Edward explained.

"Where was the bee?"

"On the window…"

*** Swaaat…Swaaaat…

"Oops…"

*** French windows have no screens. So flies are a big part of summer life in the farm kitchen. Elizabeth’s little niece, Lizzie, was helpfully swatting flies when a dead one bounced into her uncle’s coffee.

*** "Don’t worry about it Lizzie," he replied. "I love dead flies in my coffee, doesn’t everyone?"

*** It is day 5 of our annual Daily Reckoning vacation. Tune in tomorrow…